Michael Smets Aston Business School Economics and Strategy ...

ORCHESTRATING FOR A WINNING PERFORMANCE:
RE-THINKING STRATEGY IN PROFESSIONAL SERVICE FIRMS
Michael Smets
Aston Business School
Economics and Strategy Group
Aston Triangle
Birmingham B4 7ET
M.SMETS@aston.ac.uk
Tim Morris
Saïd Business School
University of Oxford
Park End Street
Oxford OX1 1HP
tim.morris@sbs.ox.ac.uk
Stuart Carroll
Saïd Business School
University of Oxford
Park End Street
Oxford OX1 1HP
stuart.carroll@sbs.ox.ac.uk
Namrata Malhotra
Tanaka Business School
Imperial College London
South Kensington Campus,
London SW7 2AZ
n.malhotra@imperial.ac.uk

ORCHESTRATING FOR A WINNING PERFORMANCE:
RE-THINKING STRATEGY IN PROFESSIONAL SERVICE FIRMS
“Expert knowledge is the basis of success” has become a much-repeated mantra
among professional service firm strategists. We think the idea that firms in
accounting, law, consulting, engineering or advertising can exclusively or even
primarily compete on the basis of their knowledge is outdated. It does not do justice to
the competitive landscape in general and to clients as discerning buyers of
professional services in particular.
We argue that most professional service firms (PSFs) cannot build competitive
advantage on their expertise alone, but need a set of four interrelated resources:
expertise, service, reputation and relationship. Individually, these form the necessary
basis of a strong competitive position in the marketplace, albeit one that remains
assailable. It is the combination and mutual reinforcement of these four resources that
produces a truly winning performance. Professional service firms must orchestrate
their resources so they feed off each other to occupy a market position that clients
value and competitors cannot imitate. Orchestrating is the key to a winning
performance.
I. Competitive Advantage in Professional Service Firms
Strategy in professional firms is beset with the mistaken assumption that concepts and
models developed for product-based organisations, from Kodak to Sony to BMW, can
be applied to professional service firms. Take, for example, cost leadership, which
may well offer some professional firms a form of advantage. However, the problem is
that it is relevant only to certain services where scale and commoditisation rule. In
most areas of professional service, the benefits of cost minimisation do not lead to
competitive advantage. While cost control is an important issue for PSFs, this is
different from arguing that being the lowest cost producer is a compelling strategic
position for most firms.
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If cost leadership does not win clients, performance leadership must do so. In a
service-based industry, a winning performance must rely on some form of valuable
expertise, so the conventional wisdom about strategy in professional service firms
says. The idea behind this expertise-focus is that professional firms compete in two
related markets: one for clients and one for expert labour – professional staff.
Professionals embody the expertise that their firms apply to produce valued solutions
to client problems. In other words, expertise is the key input that PSFs use to produce
their output, customised solutions to complex client problems. Maister differentiates
three types of firm, based on the type of expertise they use to compete and the ways in
which they organise and deploy it: The procedural firm deploys highly codified know-
how to deliver relatively standardised solutions to well-established problems; the
experience based firm draws on the ‘grey hair’ of its professionals, their experience
with similar problems, to suggest solutions for ill-defined issues; and the expertise
based firm competes on the great analytical horsepower of its professionals, building
and using knowledge that offers bespoke, ‘rocket science’ solutions to tricky and new
problems. Even though it comes in different forms, expertise is nonetheless the sole or
at least dominant source of advantage in Maister’s view of PSFs. What drives their
market strategy and competitive performance is the type of expertise they sell.
The problem is that for most firms, their expertise, however broadly defined, is simply
not something that distinguishes them and confers long-term competitive advantage.
Their expertise is not unique in any substantial way and is susceptible to imitation or
replication. Generally, the professional service marketplace is such that rivals either
know what other firms know, or can develop expertise sufficiently easily, or can
appropriate it from other sources to compete away any existing advantage. As
expertise diffuses in the marketplace, it becomes increasingly commoditised and fails
to justify premium fees.
A small number of firms may lay claim to unique knowledge, but they are few and far
between and even they would find it very difficult to keep their expertise proprietary
and sustain a competitive position solely based on their know-how. This is simply
because for PSFs, knowledge is both input and output. Its diffusion among clients and
competitors is an integral part of their business. Strategies for manufacturing
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usinesses warn that competitors can re-engineer the technology and knowledge
embodied in tangible products and turn them into ‘me-too’ products, but traditional
PSF strategies seem to overlook that the same may to some extent be true for the
expertise underpinning professional services. For example, the legal expertise, market
knowledge and commercial judgement that lawyers invest in designing a sophisticated
financing structure, become known to a whole syndicate of banks buying into the
structure and to their lawyers.
At the same time, think about clients. The extent to which expertise can confer
competitive advantage depends not just on whether competitors have what you have,
but also whether clients need what you have. Many views on the value of professional
expertise go back to the days when clients sought advice to cope with problems
beyond their comprehension. Doctors treating patients, accountants assisting with
family finance and solicitors advising on the status of the law are classic examples.
However, these classic examples no longer reflect the reality of today’s professional
service firms serving sophisticated institutional clients who wield substantial expertise
themselves. Management consultants regularly face clients with substantial
management knowledge and experience, because they are themselves managers, or –
often enough – former management consultants. Corporate law firms advise banks
whose in-house legal departments match mid-sized law firms in size, and whose
members may well be recruited from these firms, and individual lawyers may end up
across the table from seasoned investment bankers whose legal, let alone market
knowledge, may easily rival theirs.
In this changed professional service landscape the key question is to what extent
professional expertise can be an effective differentiator. With clients raising the bar
for what counts as valuable knowledge and competitors mounting a challenge as to
how long knowledge remains proprietary, it seems unrealistic that professional
expertise is the only, or even the best way to strategically differentiate a professional
service firm. We argue that traditional notions of expertise must be broadened and
that, however broadly defined, expertise is a necessary, but by no means sufficient,
basis for a truly winning performance.
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II. Beyond expertise
So, how should we think about strategic advantages for professional service firms?
The best starting point is to look beyond expertise and recognize four pillars on which
firms can build competitive advantage. These are expert knowledge, services,
reputation and relationships. Individually, they may translate into a temporary
competitive advantage, but, if skilfully combined, they jointly provide a basis for a
winning performance and lasting success.
Product
Process
Engagement
Expertise
Technical Knowledge
Know How
Experience
Expertise
Service Relationship
Reputation
Expertise
Experience
Engagement
Current Clients
Potential Clients
Other Constituents
Expertise is the first necessary resource, which – as discussed above – has received
wide-ranging attention. By definition, expert knowledge held by individuals or groups
within the firm forms the basic input of its services. This expertise may come in one
of three forms. Firstly, some expertise is technical, like management concepts, legal
norms, or laws of mechanics. Some of this ‘know-what’ may be codified in
precedents, methodologies or models, while other parts are ‘personalised’ and
embodied in individuals, but not written down. Secondly, ‘know-how’ is less content
based, but procedural, including communication, negotiation, or project management
skills. Both types are commonly used interactively in most professional work as
technical expertise is put to use. However, thirdly, in most cases clients do not want
novel solutions or unique knowledge. They want a professional to demonstrate
familiarity with their problem. They seek competence as demonstrated through
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experience. And they frequently know that there may be many providers who fit that
category, the best of which they seek to identify using criteria other than expertise.
Thus, on its own, expertise is rarely the route to success.
Service
Expertise is only of use to clients and PSFs to the extent that it translates into service.
Service is more than the simple delivery of a knowledge product. It encompasses a
process of implementation and a strong element of social engagement. The success of
professional advice undoubtedly depends on the quality of the product that
encapsulates the firm’s expertise, but it also depends on the processes in place to
define, analyze and address client problems. Moreover, effective delivery and
implementation depend on the professionals’ skills of working with, instead of merely
for, a client. The ability to engage with clients at an intellectual and social level can
enhance information exchange, reduce tensions and make eventual crises appear more
manageable. The “feel” of the transaction is often considered as distinctive a service
feature as the quality of the product and the efficiency of its delivery process.
Reputation
Reputation is the third necessary resource on which PSFs can compete. Reputation
signals to clients and others, such as potential employees, about the characteristics of
the firm. It is important because the intangible and complex nature of the products of
professional firms means that their quality is difficult to sample before purchase.
What buyers can easily sample is previous clients’ quality assessments as they
coalesce in the firm’s reputation, reflecting a firm’s successful track-record in the
marketplace. It translates the competence displayed in one specific instance into a
perceived general capability that can be replicated or applied to other contiguous
problems. Reputation is therefore a necessary signal of competence which firms have
to develop over time in order to survive.
As a first step to move from mere survival to creating a winning performance, PSFs
must develop a broader awareness of their reputation. Because services not only
comprise product, but also process and social elements, PSFs must try to build a
distinctive reputation in all of these areas. Clients rarely choose their advisers
exclusively based on the perceived excellence of their product, especially when
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products are easily imitated and comparable amongst competitors. Clients often care
about the how as much as about the what of service delivery. They are concerned with
how quickly results can be achieved, how efficiently service delivery can be managed,
and how engaged advisers are in achieving results together with their clients.
Imagine being at the receiving end of technically excellent legal advice that comes
along as an academic treatise with minimum application to your situation. Or think of
a banking lawyer who designs a sophisticated financial structure for you, but fails to
have all documents signed by the right people by the right time. Professional advisers
are often called when big bets are at stake and clients and advisers are forced to
“spend the night” and resolve the most pressing issues. In all these situations, a
reputation for sheer excellence is unlikely to win the PSF the deal. Instead,
reputations for down-to-earth applied advice, for the ability to project-manage and get
things done, or for being “good people” who understand the clients’ concerns and are
fun to work with even when crunchtime comes, may sway clients in the firm’s favour,
because technical competence is taken as a given. In a professional service landscape
where a differentiation on sheer technical grounds is difficult to establish and losing
importance in clients’ decision-making, ignoring those additional reputations puts any
PSF at risk.
Even with this broad view, though, reputation on its own remains insufficient to
provide any sustainable advantage. Reputation does little to nothing for performance
unless it is put to use to build relationships. Reputation provides the means to create
lucrative relationships with clients and with gatekeepers who can open up market
opportunities. The fourth necessary condition for professional firms to prosper is to
build on expertise, services, and reputation to establish and extend their relationships.
Relationship
Relationships are usually started after the parties have made some estimate of
advisers’ competence and experience based on their track record. Over time, they
enable clients and others to build familiarity and trust in each other’s intentions and
competence. They create value by providing clients and advisers with opportunities
for learning and adjustment that make future interactions more efficient.
Simultaneously, from the PSF’s perspective, entrenched relationships raise switching
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costs in terms of time, money and risk, increasing the likelihood of repeat custom with
longstanding clients. In other words, expertise and reputation facilitate the building of
relationships; in turn, the experience and deep client knowledge gained from
relationships provides opportunities for refreshing or developing expertise.
III. Orchestrating as capstone capability
Firms should think of expert knowledge as a foundation stone of competitive
advantage in conjunction with services, reputation and relationships. Individually,
each of these resources is assailable and for most firms most of the time, their
knowledge, reputation and relationships can be matched, appropriated or imitated.
However, things change if expertise is strategically viewed not just as a resource in its
own right, but as starting point of a cycle, in which knowledge permits the
development of services, the creation of reputation and the forming of lasting
relationships. Firms that understand the inter-connectedness of their resources must
reflect this in their strategy. Like instruments in a music ensemble, expertise, services,
reputation and relationships must be orchestrated to get the maximum effect from
each one. In modern PSFs, orchestrating is the capstone capability that transforms
expertise, services, reputation and relationships into a set of inter-connected
resources, creating a sustainable competitive position.
Product
Process
Engagement
Technical Knowledge
Know How
Experience
Expertise
Service Orchestrating
Relationship
Reputation
Expertise
Experience
Engagement
Current Clients
Potential Clients
Other Constituents
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Orchestrating acts as the central driver of competitive advantage where it is not
simply taken as coordinating isolated resources, but connecting them in a dynamic
process. A well-orchestrated firm naturally sets in motion a creative swirl that
continuously updates each resource and rejuvenates the firm as a whole. Advisers
apply organizational and individual expertise to design and deliver their service,
adding another line to the firm’s track-record and building its reputation. A
continuously reinforced reputation protects the firm from being seen to live on past
glories and allows it to develop relationships with current and potential clients, as well
as other gatekeepers. The learning opportunities that arise within these relationships
then allow the PSF to update and refine its expertise, starting another cycle. The
“faster” the swirl spins, the more quickly resources are updated and developed,
helping the firm to stay ahead or at least abreast of a chasing market.
To make sure this creative swirl stays in motion, PSFs should not rely on the natural
dynamics between expertise, services, reputation and relationships, but actively
orchestrate them to maximize competitive advantage. Therefore it is important to
understand what it takes to create a well-orchestrated organization.
IV. How to orchestrate successfully
In every quadrant of the cycle, PSFs can institutionalize practices that give the swirl
new momentum. The firms building sustainable competitive advantage are those that
are templating, communicating, associating and innovating.
Product
Process
Engagement
Technical Knowledge
Know How
Experience
Expertise
Templating Innovating
Service Orchestrating Relationship
Communicating Associating
Reputation
Expertise
Experience
Engagement
Current Clients
Potential Clients
Other Constituents
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Templating
Templating involves any activity to make explicit or codify the firm’s expertise for
accurate and quick application in service delivery. Much of a firm’s expertise,
especially in PSFs, is developed and held by individual professionals. The technical
knowledge they bring from their training as well as the experience and know how
they build at work must be made widely accessible to maximize its effect on the
firm’s bottom-line and its long-term competitive position. While the commodification
of knowledge in the marketplace is the firm’s nemesis, internal templating may be its
salvation. This is not to suggest that any expertise should be standardized and the firm
should try to compete on cookie-cutter solutions. However, the basis from which
highly customized solutions are developed can be strengthened so that innovative
services can be rolled out more accurately and quickly to a larger population of
clients. Templating allows PSFs to appropriate a larger share of the market, solve any
teething troubles, build a reputation for the specific product and cash in before
competitors catch up with re-engineered ‘me-too’ service offerings. For example,
consultants or accountants can make explicit the methodologies by which client
problems are defined, analyzed and addressed, speeding up the delivery process. A
banking lawyer can design a bespoke financial product for one client, but then take a
step back, codify its basic mechanisms in a template document that colleagues can
leverage to offer their clients similar products within much shorter deadlines. In sum,
templating enhances the speed, consistency and reliability of service delivery and
allows the firm to exploit its expertise more exhaustively before competitors catch up.
Communicating
Professionals delivering their services naturally leave a track-record for their
experience and expertise. However, this record is mostly contained among those who
experience the service; that is, clients and possibly other service providers involved in
the project. While word of mouth or media coverage may carry their perceptions into
the market, they primarily reflect individual rather than organizational capabilities
and, hence, not what professional firms want to rely on for strategically developing
their reputation. Instead, they want to thrive on a reputation that signals existing
organizational capabilities and how they can be leveraged in future work for existing
and new clients.
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Firms must focus on strategically training track-record into a corporate reputation.
They must be communicating. This involves the definition and transmission of
information and image to a network of clients, potential clients and other gatekeepers
who can make favourable judgements about the firm’s competencies and how they
translate into future services. Reputation-focused communicating does not pitch for a
specific project or market specific services, but focuses on translating individual
track-record into a perceived general capability. In practice, communicating exceeds
traditional marketing and advertising to include website pages and client newsletters,
but also seminars, conferences, speeches and published articles. While it is essential
to occupy specific topics of concern to clients, it is also critical to communicate about
all aspects of reputation, focused around products, processes and service experience.
Associating
Reputation by itself, however, does not add to the bottom-line. It only impacts the
firm and its competitive position if it is reflected in the firm’s relationships. Again,
this transition is far from natural, but has to be strategically managed through a set of
associating activities. Traditionally, this has been described as client relationship
management, business development or, in more vernacular terms, client schmoozing.
Associating is a more encompassing and integrated approach to relationship
management, trying to forge a lasting link between advisers and clients as business
associates. Firms aiming to associate clients approach the relationship and any
activities to manage it with their reputation, expertise, and services in mind. This type
of communicating can involve a plethora of activities to institutionalize or develop
client relationships by providing learning opportunities and strengthening interfaces.
Seconding professional staff to key clients is one example of associating, because it
creates better understanding on both sides and facilitates future interactions. Other
examples are client briefings on current industry trends and future scenarios or joint
training. These communicating activities strengthen client relationships based on the
firm’s reputation and expertise. Most importantly, they create added value, which may
give the client an interest in maintaining the relationship.
Innovating
Finally, this dynamic process of continuous renewal comes full circle, when
relationships are exploited to update existing expertise through innovating. Because
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expertise becomes commoditised and clients face new problems, innovating is vitally
important for professional firms. Generally, clients sense the direction of incremental
innovation, take themselves a leading role in it, or even initiate more radical change.
In any case, they send signals to their advisory firms or individuals within them as to
where and how to update their expertise. These signals, however, are mostly sent to –
or picked up by – those advisers with longstanding relationships. With them, clients
may even engage in the co-production of new expertise. Therefore, innovating firms
must maximize learning opportunities that yield new expertise which is valuable
within the relationship from which it is created, but also beyond.
Because of the importance of orchestrating for the creation of long-term competitive
advantage, it is essential that in the process of orchestrating expertise, services,
reputation and relationships, they are not managed individually, but in terms of each
other. Managing each component on its own may temporarily move the firm ahead,
but leave it vulnerable to competitors catching up. A firm that orchestrates its
resources through the activities described above generates creative momentum that
allows it to take the “next step”, as its competitors catch up with the previous one. As
soon as this momentum is interrupted, because individuals in the firm focus on one
resource to the neglect of others, standstill looms and competitors are given the
chance to catch up.
V. Orchestrating for a winning performance
The biggest competitive potential of an orchestrating firm, however, does not lie in its
ability to take the next step around the cycle, updating its existing expertise, services,
reputation, and relationships, but in the ability to take a step “out of” the existing
cycle and start a new one – from any given position in its current creative swirl. These
“spin-offs” allow an orchestrating firm not only to run the same track as its
competitors, just faster, but also to change tracks quickly and possibly run against
fewer competitors for a while.
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New Product
Product
Process
Engagement
New Expertise
Technical Knowledge
Know How
Experience
Expertise
Templating Innovating
Service Orchestrating Relationship
Communicating Associating
Reputation
Expertise
Experience
Engagement
Templating not only facilitates the application of existing expertise in service
delivery, but allows the creation of new products. Very different from expertise,
templating recombines different knowledge components and packages them in a way
that addresses existing client needs in a new way.
New Market
Communicating turns a service track record into reputation, but also creates new
expertise, which can grow the market. As firms communicate their expertise,
experience, and track record to external constituents, they also alert competitors to
these capabilities and, in a sense, “educate” the market about cutting edge services.
Given the concerns about imitation and commoditization, it seems paradoxical why
any professional firm would want to educate a market that not only includes clients,
but also competitors. The answer is that by spreading knowledge of innovations, firms
can more quickly and efficiently develop a market. Take the example of the banking
lawyer once again: A top firm designing a cutting edge financing structure for a
borrower needs a competent counter-part to advise the bank to get the deal done.
Dealing with an “uneducated” adviser who is unfamiliar with market practice is likely
to raise unnecessary questions, delay negotiations and eventually jeopardize the deal.
Thus, it is advantageous to educate the market, including competitors, because it
grows the market and, by consequence, the value of the firm’s share within it.
Current Clients
Potential Clients
Other Constituents
New Client
Associating translates reputation into relationships. Well managed, associating with
current clients attracts new clients to the firm’s services and interests existing clients
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in new services. How did accounting firms grow? They used their reputation for
excellent accounting services they enjoyed with existing clients and started to offer
consulting services on top. Similarly, they poached tax advisory work from law firms,
growing their business by associating more clients and more work from existing
clients. New clients buying the firm’s services offer more opportunities to build track
record and update expertise, starting a new creative swirl in its own right.
Finally, innovating exploits relationships not only to update existing organizational
expertise, but also to open new markets. New markets can be defined by product or
region. Entrenched client relationships give professional firms a number of
advantages. These can be leveraged when clients push their boundaries and decide to
take along their advisers of choice. Internationalizing firms are likely to seek host
country advice from their trusted advisers at home, rather than sampling local
providers on such critical decisions. Global accounting and law firms are classic
examples of professional firms following their clients around the globe and
continuously expanding their radius of action. Similarly, clients will consult their
trusted advisers on novel problems and use them as sounding boards for new business
ideas. In both cases, they ask their advisers not only to update existing expertise, but
to develop radically new knowledge and push the frontiers of their profession. In this
sense, close, longstanding client relationships are not just critical for securing repeat
business and updating existing expertise, but are the entry ticket to move the firm
beyond its existing boundaries. As no two professional firms share identical histories
with the same client, their relationships are unique, as are the opportunities for
innovation that flow from them.
To summarize, orchestrating is the capstone capability of the modern professional
service firm. It ensures that current expertise is constantly updated and periodically
revolutionized. Without this dynamism expertise atrophies and effectively sends firms
backwards in a chasing market. Like expertise, reputation has been assumed to be a
basis of competitive advantage, but only good for a while. While both are necessary,
they are by no means sufficient ingredients of lasting competitive advantage. This
ultimately rests on the orchestration of the firm’s expertise, services, reputation and
relationships. Continuous inter-linkage and renewal of these resources ensures the
firm moves with the market – and ahead of it.
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