Innovation and creativity are perhaps words that do not easily fit with the traditions of the PSF. 'If it isn't broke, don't fix it', are the words that most professionals live by and if customers are not complaining, then everything must be fine. Hopefully, if you have got this far in the book, that myth has been firmly laid to rest. The late Peter Drucker once said that a firm has only two functions: marketing and innovation, the rest are costs. This book has already laid out the importance of marketing as the lead driver of firm performance and innovation is not far behind. In reality, the two are strongly interlinked as innovation is a process that is driven both by the market and within the firm.
When we talk about innovation, we are not necessarily talking about radical new services or change. There are in fact many types of new service innovations as described by Valerie Zeithaml and Mary Jo Bitner in their book on Services Marketing:
- Major innovations: these would be new services for yet undefined markets. Ernst and Young's EYO service would fit here.
- New services for a currently served market: offering existing clients services that maybe offered elsewhere but have not been offered by the firm.
- Service line extensions: augmentations of existing service lines such as a CPA firm adding tax advisory services to its audit services.
- Service improvements: changes in features of a service that are already offered that improve the service such as a law firm allowing clients to access documents online to speed up approval.
Clearly, developing a major innovation represents the greatest risk for a PSF as client acceptance is highly uncertain, yet it is often these types of innovations that provide the greatest return in terms of revenue growth as well as providing the firm a competitive advantage and a way to differentiate itself from competitors. Introducing new services is not easy, the failure rate of new services exceeds 50% and in the process costs the firm substantial time and resources. Additionally, a firm does not want to develop new services without serious thought as to the market need and fit with the firm's overall strategy. Excessive service proliferation can dilute the firm's capabilities and create confusion for both internal and external market places. Hence it becomes important for the firm to have some understanding of the new service development process and the key success factors for new service innovation.
I New Service Success
If you take a look at the product marketing literature, there is a substantial amount of information on the key success factors for new products. Unfortunately, there is little evidence beyond anecdotal that defines the reasons for success or failure in the professional services field for the development of new services. One of the very few studies that has looked at this area was conducted by Brentani and Ragot (1996) who looked at a wide variety of professional service firms including accountancy and consulting. They found 8 factors to have a significant impact on the success of new services in the PSF, some being external to the firm with others being internal issues:
Fig 8.1 Determinants of New Industrial Professional Service Success
(NSD = new service development. See de Bretani, U. and Ragot, E (1996) Developing New Business to Business Professional Services: What factors impact performance? Industrial Marketing Management, 25, pp.517-530)
Figure 8.1 identifies 8 variables that the authors found to have a significant impact on the success of new services in the B2B professional services sector. The factors identified in grey circles are external to the firm whilst those in blue are internal ones.
External Factors:
Service superiority – this was found to be the most important factor in explaining the variance of successful new services. Those services that were unique in the market place and offered real benefit to the client over existing services had the most chance of success.
Market and marketing fit – this is a combination of both meeting client needs as well as capitalizing on the resources and competencies of the firm.
Customer participation – since professional services are highly customized and clients are an integral part of the service equation the research shows that having clients participate in the development of new services is important.
Market size/potential – having potential for volume sales was found to be somewhat important.
Internal Factors:
Effective new service development (NSD) culture – top management support and active participation from different levels of the firm as well as functions was the most important internal issue. This includes encouraging and rewarding innovation.
Service expertise – having specialized knowledge beyond what the client could do themselves is probably common sense due to the complex nature of professional services.
Service newness to firm – those services that require the firm to generate new capabilities or serve new markets were the most risky. In other words, this has a negative correlation with success.
Planned NSD experience – having a formal process that includes proper planning and market testing was another factor that merited some attention.
The results of this study show that it is a mixture of both external (market factors) and internal (firm factors) factors that determine whether new services will be successful or not. Of all the variables identified, service superiority was found to be the single most important factor. Again, this has its roots in the marketing concept and the acceptance of a marketing culture. It is imperative for a firm to take an outside-in perspective and scan the environment in order to search for the latent needs of clients that may not even have been expressed yet. In many cases, clients are not adept at expressing their needs or have yet to recognize a need. It is here where the PSF can act proactively and look at changes in the environment (both their own as well as client industries) in order to develop services that will be valued by the market place and in the process allow them to differentiate themselves from their competitors. A good example of this type of innovation is when top US law firm Wachtell, Lipton, Rosen and Katz developed the poison pill to deter hostile takeovers. Much of what has been described here can be thought of as the innovators dilemma. In his book of the same name, Clayton Christensen (a Harvard professor) found that when incumbent firms listened to closely to their existing customers they often failed to capitalize on new opportunities and were surpassed by new incoming firms. This dilemma is can be thought of as the dynamic between market driven and market driving. A market driven firm (which is akin to client driven) pays close attention to the needs of its customers and the market place and creates new products and services to meet those needs. Often these types of changes can be described as incremental and whilst beneficial do not provide a platform for a leap in firm performance. Market driving on the other hand is where the firm sees a yet unexpressed need in the market place based on both a deep understanding of the market as well as its own intuition (consider the Sony Walkman) and develops new services that creates a market that essentially did not exist. This type of radical innovation allows the firm to reach new levels in performance. Clearly, radical innovations do not come along very often and in reality, a firm should seek a systematic development of new services that fit with the descriptions of new services given at the beginning of this chapter. It should be pointed out that new services which fit under the label of major innovations also present the most risk, particularly if the service area is beyond the current competencies of the firm. Hence the PSF should take a structured approach to developing new services that is based upon the objectives of the organization and its overall strategy.
According to Harry Mills (The Rainmakers Tool Kit), there are 6 criteria which a new service should be tested against:
- Target market – who and how will they purchase the service?
- Need – what is the real value?
- Unique advantage – what are the unique advantages?
- Speed – can we launch to gain first mover advantage?
- Sustainability – is the service easily copied, can we maintain our advantage?
- Management commitment – will top management commit the needed resources?
Some of these fit the research cited in figure 8.1 and provide an easy reference list for firms wishing to consider the introduction of a new service.
One question that I am often asked in my work with professionals is whether there is a need to change when business is good and things are going well. This links into the strategic management of the firm. Strategic management and a long term orientation is often at odds with most professionals but it should not be. Looking ahead and considering new services when business is good is probably the best time to do it as the firm will be able to commit the necessary resources and take a hit if the service does not work out. The business world is filled with firms that were leaders in their field only to suddenly evaporate due to short sighted management. In fact, in his book Practice What You Preach, David Maister shows that a long term orientation is one of the key factors for success of the PSF.
II Managing Innovation and the New Service Development Process
Developing new services of any type should not be a hit or miss process, such innovation should be built into the fabric of the firm whereby compensation is linked to development of new ideas and the overall firm culture supports the necessary processes and activities for successful new service development (NSD). The PSF must consider the rationale for NSD in terms of meeting both internal (staff) and external customer needs as well as fit with the overall strategy of the firm and its objectives as well as capabilities. The PSF competes in two markets, one is for clients and the other is for talent. Whilst a firm maybe happy providing standardized services for the same clients in the same industries over a long period of time, this may lead to stagnation amongst professionals within the firm which could eventually lead to a lack of intellectual stimulation and higher staff turnover. On the other hand, developing services in areas that the firm lacks expertise may give professionals the chance to learn new skills but will require the firm to import those competencies either through additional hiring or joint ventures. This can disrupt the culture of the firm and create other types of problems. It is therefore crucial for the professional firm leaders to consider carefully the NSD process and the impact it will have on the firm overall. These types of considerations tend to be unique to the professional service industry.
Having taken into account these considerations, the professional will still need some type of framework and guidance as to how to decide on what new service development direction to take as well as managing the process. The NSD direction will be based upon the growth strategy of the firm (assuming it has one). Essentially, there are two growth strategies that are related to new services:
Service development – offering new services to client markets currently served. For example, a CPA firm may wish to start offering management consultancy services to client markets that it already serves for tax and audit services.
Service diversification – offering new services to new client markets. For example, a law firm decides to target the commercial real estate market when it previously only focused on family law.
These two approaches could span any number of the new service innovations identified at the start of this chapter. Clearly, service diversification with a major innovation would be the most risky type of NSD as there would be little precedent both within the firm or market and the chances of success are unknown. What type of approach the firm takes will largely depend upon its risk culture and its overall growth strategy. This growth strategy should be based on the strategic plan of the firm which in turn is largely based upon the firms competencies it has and wishes to develop (and of course the market environment). These issues are dealt with in other chapters.
In terms of managing the NSD process, Valerie Zeithaml and Mary Jo Bitner provide a framework which is specifically designed for the service firm. This framework (fig 8.2) describes an iterative process by which a firm can consider the stages in the NSD process and integrate these into the overall strategy of the firm.
Fig 8.2 New Service Development Process
(See Zeithaml, V.A, and Bitner, M.J (2003) Services Marketing: Integrating customer focus across the firm. 3rd Ed. McGraw Hill, Irwin)
Front End Planning
Initially, the firm must determine its strategic direction within which its new service strategy will fit. If the organization develops aggressive growth plans that involve entering new markets then that will predicate its need to engage in some type of diversification. This in turn will make the firm consider how it will acquire the competencies to serve those markets.
Idea generation is the first step in developing a new service. Ideas can come from many sources including staff, changes in the operating environment, competitors and internal brainstorming. However, probably the most powerful source of ideas will be the business problems and issues that target clients face. Having a deep understanding of your client industries and the challenges they face will provide a lens with which to view the idea generation process. Once ideas have been screened and initially accepted, they can refined in order to be tested. The service can be tested with key clients but will require input from multiple stakeholders in order for something concrete and specific to be developed. The intangible nature of services makes them much harder for customers to visualize hence the benefits, value proposition, and how it works will take a number of iterations before it is viable as a concept to be tested properly. Once a service concept passes this stage then its feasibility and profit potential needs to be examined. This will include costs of development and managing the service as well as demand potential and overall revenue forecasts.
Implementation
Now the fully developed service can be tested on a larger market and further refinements can be made based feedback received. Again, the difficulty involved in implementing new services suggests that multiple stakeholders should be involved in order to assess and critique the service from both a delivery and usage perspective. You can also gauge the demand to some degree from the response of clients who were included in the test and see whether your financial estimates are accurate. If response is poor you may have to go back several steps in the process or abandon altogether. At the launch and commercialization stage you are basically going live and can examine all aspects of the service process including the interaction with other services already offered by the firm as well as the degree of acceptance by the market place. One can still make changes here based on feedback if the overall response is positive but requires some changes to the design of the service, its benefits or the process. Many firms create service blueprints that depict in substantial detail the service process, interaction with clients and the evidence of service as the client experiences it. Launching takes careful consideration of timing and markets as well as extent. In other words you can launch a service with much fanfare and at many markets or you can take a low key approach and steadily increase the activity associated with the service as acceptance grows and success seems more likely. Whatever is chosen, it is crucial that the firm has the resources ready to capitalize on the opportunity it has created. Do not create a need then fail to fulfill it as your competitors will benefit from all the work you have done!
III Conclusion – measuring success
In manufacturing firms the use of financial measure such as ROI dominate the landscape when measuring success of new products. In the professional services sector there is a strong case for a wider criteria when measuring success. Firstly, using ROI as the major indicator of success maybe inappropriate for the PSF for a number of reasons such as the need of the firm to develop critical competencies as well as the fact that the major assets of the PSF are human, intellectual and social. Hence other factors should be considered such as the impact of new projects and services on the competencies of the firm, its image, and its relationship with clients. Peter Drucker called measuring organizational performance only by financials a fallacy. For the PSF, this may be particularly so.
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Nice article. I've worked with law firms on product development, and one of the challenges is to help the firm stay market focussed: http://intelligentchallenge.wordpress.com/2010/08/29/inside-out-lawyers/
Posted by: Mark | 11/03/2010 at 05:38 PM
Thanks Mark. A market orientation is certainly the key but not the strong point of many professional service firms.
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