Why are entrepreneurs failing to disrupt the Professional Services industries?

There is continuous disruption in almost every industry today. So it’s amazing that the professions (lawyers, accountants, auditors, architects etc.) have escaped so unscathed.

Ok so every week we hear about attempts to disrupt one or other professional service. And yes the names on the top of the doors have changed around a bit, yes it’s much more competitive, and yes there have been some tweaks to the operating model, but relatively speaking they march on relentlessly, without any worries. Certainly for most customers, whether consumers, small businesses or Corporates, little has improved.

So what has changed?
The legal industry has seen some important changes, even if most of the effects haven’t been felt widely. These include the following:

1.      The legal industry has deregulated. By 2014, 3 years after this event, there were over 300 applications for Alternative Business structures to run legal services, Including Saga, DLG and PWC.

2.      There are new companies trying out different business models like Riverview Law, which offers a fixed-rate contract, rather than billing by the hour. Riverview Law charges clients an annual fee for all their legal needs up to the point of litigation.

3.      Technology is being used to reduce costs whether this be legal templates like Rocket lawyer, Epoq, or simply-docs or paid Q&A like Just Answer or online compliance checking like Cerico set up by Pinsent Masons. But legal comparison services remain in their infancy and the consumer has yet to engage fully

4.      Private equity has moved in to try to aggregate high street firms into consumer brands like Quality Solicitors.

The truth is that in spite of all of this activity, for most individuals or businesses outside of Legal Aid, access to legal services remains remarkably expensive. Even fairly average solicitors demand a minimum day rate of £1600. It is far easier to get a high quality engineer for less money than a relatively junior solicitor. Frankly it’s a scandal that entrepreneurs haven’t had a greater impact on the professional services. And I can say this as an entrepreneur who raised external investment to disrupt the legal industry, but hasn’t cracked it yet.

Why is this?

Well the main topics of discussion in the legal industry are whether the Partnership structure should survive and whether law firm profitability should be calculated before partner costs as they are currently or whether they should be treated as a cost of sales as in a traditional P&L. This was a core part of the discussion at the Business Leadership Summit organised by The Lawyer in London in September 2015. This is as good as it gets!

The conversation isn’t about what the customer wants and why trust in the profession is in rapid decline. The Legal Services Consumer Panel and YouGov found that only 42% of consumers trust lawyers to tell the truth in 2014, down from 47% in 2011. The decline is mirrored in other professions, the research acknowledges. Lawyers remain more trusted than accountants, bankers and estate agents, but less trusted than teachers and doctors. This is an industry unlike many others, that continues to get away with ignoring the voice of the customer.

In Management consulting, some things have changed in a similar way. There is pressure to reduce costs, there is much more competition and some of the names on the doors are different, but the core principles wouldn’t look out of place in 1980.  So what has changed?

1.      The classic strategy consulting giants have all moved downstream into more executional or implementation work. For example in 2007 Mckinsey launched Mckinsey solutions. This was based on software and technology-based analytics and tools rather than the traditional human capital business model.

2.      As Clayton Christiansen stated in Harvard Business Review in 2013; “the share of work that is classic strategy is now about 20%—down from 60% to 70% some 30 years ago.”

3.      There are more agile competitors like Eden McCallum and Business Talent Group

But in some ways there has been more consolidation and less choice amongst the big consulting groups. The old “Big 8” has been reduced to the Big 4 including PWC, Deloitte, EY and KPMG. This means that an increasing number of companies are having to use these giants for services from audit, assurance, tax, consulting, advisory, actuarial, and corporate finance to legal services.

Fundamentally it remains extremely hard to buy any form of consulting that is based on value generated or results achieved. The industry remains stuck on outdated day rates and continuous selling cycles that actually reduce value for clients.

 

What hasn’t changed?
In spite of all the razzmatazz, the key principles are undisturbed:

  • Most professional services remain as partnerships
  • Most believe that the day rate model should not be changed and have no intention of changing
  • A majority of lawyers and accountants believe that they should charge for every minute from the time they pick up the phone to a customer.
  • There is no sense of customer service.
  • Many of these professional services are so bound up with the establishment that they believe it is their divine right to be paid a high salary. This is particularly true of organisations like the Law Society.

 

Why hasn’t more changed?
Professional services are critical to the success of the UK economy, representing 15% of UK GDP, 14% of employment and 14% of exports source PWC. So it is no surprise and indeed in many ways a good thing, that it is highly respected and that much effort is expended in defending all aspects of the sector. Since 1979 Nuffield election studies show that no less than one in ten MPs from the three main parties have been barristers or solicitors. So although legal services only account for 1.7% of the UK GDP, it has considerable support at the heart of government. This ensures that the industry is well protected.

In the same way that business people used to say “you don’t get fired for choosing IBM”, you now don’t get criticised for selecting Clifford Chance, PWC, Spencer Stuart or McKinsey. And no Non-Executive Director will argue with you on that. This in turn creates a guaranteed market for the traditional professional service firms and little impetus to innovate more than is required.

The Professional services continue to claim that every argument, every problem, is different and requires an unique answer. The reality is that this is no longer true, if it ever was. Technology, outsourcing and business model change can transform the way that challenges are met and answers are given.

 

What should change?
As You Gov polled in 2014, “British people want fewer lawyers and more doctors, scientists and factory workers in Parliament. The professional services are over-represented in all aspects of government. And in spite of the well intentioned deregulation in legal services and other area of professional services, the end customer has not reaped any rewards yet, either in better service or lower costs.

The professional services will only change fundamentally when the following principles are ripped apart:

  • A dependence on hourly and daily rates. This should be replaced by value-based pricing
  • A belief that partnership structures benefit the customer. Firms should become proper corporate structures with standard financial accounting.
  • Traditional Corporate dependence on the big audit firms. This should be opened up to the wider market.
  • An unpreparedness to be judged on results.

The artificially high costs of most professional services keep them out of reach for most SME’s and consumers. This remains an incredible business opportunity for an entrepreneur. In addition very few professional services firms understand the power of the brand to engage the customer and disrupt an industry. It’s only a matter of time before someone builds a professional services brand that rapidly gains trust and takes market share, by improving the service it provides and changing the business model that drives it. Let’s hope that more entrepreneurs take up the challenge