innovation in professional services in a context of disruption

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The theory of disruption is an attempt to explain how well-managed,

successful companies can be disrupted by innovative new entrants.

Disruptive innovation is differentiated from sustaining innovation.

S U S T A I NI NG I NNOV A T I ON improves performance on the dimensions the most

profitable customersvalue(e.g. a faster computer processor).

D I S R U P T I V E I NNOV A T I ON competes on different dimensions initially (e.g.

lower cost, more portable) before improving rapidly on the dimensions the

mainstream value.

The insight the theory offers is that incumbents arent disrupted because of an

inability to keep up with improvements for mainstream customers (the technology

mudslide effect). They get disrupted by new entrants who often initially offer a lesser

product with inferior performance on the attributes the m ainstream values, serving a

market generally unattractive to incumbents. Disruption occurs when the new entrant

takes this foothold and rapidly improves to invade the mainstream.

The Theory:

1.0 SummaryThe Theory

T I T L E

Innovation In

Professional Services In

A Context Of Disruption

T H E G O A L O F T H E R E S E A R C H

Rapid technological and business model change and the potential forthese to disrupt powerful incumbents is a trending topic in both the

popular press and management literature.

This research explores how large professional services firms in N ew Zealand are

responding to this challenge. It looks at relevant management literature for suggested

responses to potential disruption and compares these with the a pproaches adopted in

practice, as reported by senior managers at large professional services firms.

C L A Y T O N C H R I S T E N S E N

"If innovation doesnt allow them [incumbents] to make more money

in the way theyre structured to make money, they cant do it. So that

was the big idea. It had nothing to do with technological change".


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Disruptive Innovation:Christensen

Disruption:More Than Low-end?

Innovation In Professional Services In A Context Of DisruptionAndrew Bailey Disruptive Innovation1.1

PERFORMANCE

ONT

RADITIONAL

ATTRIBUTES

C O S T

HIGHER

LOWER

L O W E R H I G H E R

HARD DISK DRIVES

SiGe CHIPS

CELLPHONES

Disruptiveinnovation definedby Christensen

Over time, incumbents improve performance on the attributes most valued by the m ost

profitable clients. As they do so, a market of those over-served can open up for new

entrants. These new entrants establish a different performance trajectory - for example,

the cell phone was initially poorer performing on sound quality, price and reliability, but

was more mobile than the landline.

Disruption occurs if the new innovation can rapidly improve on the performance

attributes valued by the mainstream (i.e. move from the low-end). Incumbents find it

hard to respond because they are not set up to make money according to the new rules

and generally face costs in that market that new entrants dont.

L O W E R C O S T / L O W E R P E R F O R M A N C E Q U A D R A N T

Traditional disruptive innovation as defined by Christensen. New entrants get a foot-

hold at the over-served low-end but rapidly improve up the market.

H I G H E R C O S T / L O W E R P E R F O R M A N C E Q U A D R A N T

Others argue high-end disruption can take place when products or services performlower on traditional attributes and cost more, but still disrupt by starting at the top of

the market and coming down.

L O W E R C O S T / H I G H E R P E R F O R M A N C E Q U A D R A N T

When an innovation makes a product/service both cheaper a nd better performing on

the attributes mainstream customers value, the entire industry will have to adopt the

new innovation overnight. Generally these come from incumbents, so are not disruptive

in that sense.

PRODUCTPERFORMANCE

LOW

HIGH

LOWEND

OF THE MARKET

LEASTPROFITABL

E

MOSTPROFITABLE

T I M E

HIGH END

OF T H E MAR KET

MAINSTREAM

ENTR

ANTS DI

SRU

PTIV

E IN

NOVA

TION

S

INCU

MBE

NTS SU

STAININ

G IN

NOVA

TION

S

PERFORMANCE CUSTO

MERSWILLPAY FOR

S U S T A I N I N G I N N O V A T I O Nfavours incumbents: they possess the

resources and skills to succeed here.

D I S R U P T I V E I N N O V A T I O Nfavours new entrants because

incumbents arent set up to make

money according to the new rules

of the game for example, they

may be hamstrung by their cost

structures or market positioning.

Destructiveinnovation

Disruptiveinnovation

The Theory


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How To Respond:What The Literature Says

Innovation In Professional Services In A Context Of DisruptionAndrew Bailey What The Literature Says On How To Respond1.2

There are a range of responses available to firms as they innovate

in response to disruption. Importantly, the best course of action will

depend on whether they facing truly disruptive new entrants.

An innovation is not disruptive just b ecause it shakes up the market: many so-called

disruptive innovations are really about a better version of what the mainstream values.

Incumbents find this easier (but not necessarily easy) to deal with than true disruption.

The distinction is important because if an innovation is truly disruptive it requires a

different response to normal competition. Getting the diagnosis wrong can be costly:

firms can move too early and forgo profit, or move too late and get disrupted.

R E S P O N D I N G T O D I S R U P T I O N :

1 . D U A L A P P R O A C H 1

Firms set up a new business model under the umbrella of the existing firm, while

recognising that legacy operations may have years of profitability left in them. Firms

must understand that:

a. The extendable core advantages disruptors have which they can maintain

as they improve performance

b. Where incumbents advantage persists:

i. Momentum barrier (customers used to the status quo),

ii. Tech-implementation barrier

iii. Eco-system barrier (business environment would need to change)

iv. New-technologies barrier (technology doesnt exist yet)

v. Business model barrier (disruptor would have to adopt incumbents cost

structure).

2 . D U A L T R A N S F O R M A T I O N S

One transformation repositions the core business to where it can still compete and a

second, separate transformation creates a disruptive business for future growth. The

two should be kept separate, as if survival depended on each individually.

3 . H Y B R I D S

Hybrids help firms stave off disruption for long enough to transition into other

markets (e.g. electric lighting disrupted gas lighting, but gas lighting producers

bought themselves a decade to move into the adjacent heating business).

W H E N D I S R U P T I O N I S W E L L U N D E R W A Y :

1. Blocking hybrids which can offer a short-term appealing price/performance

trade-off,

2. Bottleneck hybrids can use complementary technology to extend the life of the

old technology,

3. End-state hybrids combine features of old and new technologies to create

a permanent new category (e.g. digital SLR cameras still dominated by

incumbents).

W H E N D I S R U P T I O N H A S J U S T B E G U N :

4. Bridging hybrids allow incumbents to learn about a new technology they intend

to employ themselves (e.g. the Prius),

5. Niche hybrids serve customers whose needs are not met by the disruptive

technology.

W H E N D I S R U P T I O N I S S T I L L A L O N G W A Y O F F :

6. Exploratory hybrids help firms learn with a view to explore the future, rather

than build a bridge to it (though they may end up as bridging hybrids)

7. Optimising hybrids combine an element of the new technology, when it

isnt clear if it will catch on, to the old technology to significantly improve

performance.

4 . D I S R U P T F R O M W I T H I N T H E F I R M

While some argue disruption cant be addressed from within the traditional structure,

there is a large body of research on enabling innovation from within the firm. Human

resources, organisational culture, resource allocation and organisational structure of

the firm are all prominent in the literature as key enablers.

The Theory


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ThemesFrom Interviews:

Innovation In Professional Services In A Context Of DisruptionAndrew Bailey Themes From Interviews2.0

N E W W A Y S T O E N G A G E

The way firms engage with clients is evolving as much as products and services.

While there are new products and services, e.g. dashboards and apps sold as-a-

service, much of the innovation is coming in the skills offered by firms, partnering

relationships and at risk fees although it is still early days in NZ.

E N A B L E R S

Innovation enablers include the work environment (e.g. physical layout, technology,

culture), talent, flexibility, and new methodologies such as design thinking,

innovation techniques and learning from the start-up ecosystem.

B A R R I E R S

Barriers to innovation include organisational structures (people can be

incentivised to work within their service line and, given partners are the business

owners, innovation can be seen as spending the partners money), traditional

revenue models and culture.

M A R K E T C O N T E X T

The New Zealand and Wellington market context is important clients are more

likely to consider themselves fast followers than leading edge and may be

less demanding of new services. But does this suggest a niche of over-served

customers?

I N N O V A T I O N I S T O P O F M I N D

Innovation and disruption is a big focus for professional services firms but there

are varied definitions and views.

C L I E N T S S P U R I N N O V A T I O N

Innovation drivers for firms both follow client demand and lead them but

building from client relationships seems to play a more influential role

T H I N G S A R E C H A N G I N G

Firms are likely to increasingly play a service aggregator role and resource projects

more flexibly in general. Acquisitions and partnerships are a go-to for innovation.

R E L A T I O N S H I P S

The deep relationships large professional services firms have built with the

largest and most lucrative clients through traditional service lines are seen to be

transferrable into new, innovative opportunities

Practice


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Innovation In Professional Services In A Context Of DisruptionAndrew Bailey Conclusions & Implications2.1

The traditional organisational structure and revenue model may

make it challenging to respond to true disruptive innovation if it

arose. There are incentives to stay close to key clients and, arguably,

the partner model may increase the potential for this.

T H E R E S P O N S E H A S B E E N :

Firms are investing at a corporate level in internal

innovation services, which provide (or will provide) the firm with methodologies or

thinking about how they might innovate either to disrupt their current models

or simply to work in a different way with clients. This isnt a silver bullet most

respondents reflected on the challenges of innovating internally, but ma y help address

some challenges, simply because an investment has been made at a corporate l evel. Yu

& Hangs (2010) observations on the importance of resource allocation such as using

strategic buckets to separate sustaining and disruptive innovation and not using overly

structured methods to evaluate projects are also relevant here.

T H E I M P L I C A T I O N :

An innovation portfolio needs to be managed at both local and

corporate levels: the cultural and environmental drivers for innovation mentioned by

participants are best managed at a local level, with everyone responsible for innovation,

but corporate funding and expertise for innovation, particularly disruptive innovation, is

also important to reduce the impact of the kinds of incentives that Christensen outlines.

The bulk of innovation appears to be sustaining, built off the back

of client demand, however firms are also trying to set up more

disruptive practices.

Innovation built off client demand is, almost by definition, sustaining innovation

because it advances improvements in services for the ma instream customers. This is

a good thing (as one respondent said, "build it and they will come" is not a particularly

good business plan) but leaves gaps for new entrants at the low-end if following

lucrative customers causes firms to either lose sight of potential niche or adjacent

markets, or if they are unable to follow there due to the implications for margins or cost

structure. This neednt lead to disruption: the second part is that any new entrant would

need to improve quickly enough to invade the m ainstream.


There is a debate in the literature about whether truly

disruptive innovation can be enabled from within the firm (most writers advocate

keeping these new businesses separate to avoid resource contentions and keep both

businesses honest): large professional services firms seem to be aiming to develop

disruptive products and services generally from within the firm. Setting up a new

practice or service line could conceivably be seen as somewhat separate depending on

the understanding of the rest of the firm; more likely, they are closely integrated with

the rest of the firm and, by extension, its business model. Some of the new hiring and

service aggregation models might contribute to a fresh feel for a new practice, but not

to the extent sometimes advocated (that is, different physical location, different people,

resources, business model, and so on). It appears that in the local market new practices

employ a relatively similar business model, and are just pointed at a different market

segment.

T H E I M P L I C A T I O N : Firms must decide if their incumbency, coupled with sustaining

innovations, is likely to continue to be sufficient, and, if not, whether the current method

of building disruptive innovations is avoiding the challenges described in the literature.

There may be some scope for smal l bets on disruptive practices which are kept m ore

separate from the core business. It a ppears there is some evidence of this in the global

parent firms.

Conclusions &Implications:

Practice


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ConclusionsContinued:

Innovation In Professional Services In A Context Of DisruptionAndrew Bailey

There is scope for and some very early forays into dual business

model approaches.

The dual business model response advocated by some notably Christensen wa snt

a theme much mentioned in interviews, possibly because sustaining innovations have

continued to make good returns. However, some form of it could be embraced as a way

of de-risking and exploring alternative business models.

T H E R E S P O N S E H A S B E E N : There is some evidence that some new service lines

are tentatively interested in setting up what was a described as an exponential

organisation, which is kept separate and allowed to grow as a way of transitioning

through change, rather than trying to change the existing business. This is very early

days, but if it was pursued it would seem to fit with Christensens advocated dualbusiness model approach. A more subtle version can be seen in some organisations

new practices, where small scale experiments were set up to incubate and launch new

services, building the comfort of the firm as they went by ideating and staying low risk.

Although these have been about new service lines, not reinventing the business model

of the core, they allow firms opportunities to use these new methodologies and learn

from their experience. There are examples in the literature where large firms set up

start-ups and gave them a few months to try and disrupt an aspect of the business to

test whether they were susceptible to disruption.

T H E I M P L I C A T I O N :

innovative methodologies can be nurtured in order to learn more

about how to change and, if sensible, disrupt.

Some new products and services can be understood in terms of a

hybrid approach.


Several of the new products and services la unched by

firms can be seen as hybrid approaches, aiming at launching a new service which will

help them learn about a new technology or approach. One example an app aggregating

data from a number of external sources, overlaid with smart business and accounting

advice from the professional services firm is disruptive to a traditional fee-based

accounting or advisory service as it is sold as a service and is infinitely scalable, unlike

the people-heavy cost structure of traditional professional services. The hybrid element

to this innovation is that it also allows the firm to sell some traditional services as

extensions. Equally importantly it allows the firm to learn.

T H E I M P L I C A T I O N : Learning opportunities from hybrids should be sought in areas

where disruption is a possibility. Hybrid products shouldnt generally be seen as an

end-state they are a way to transition successfully where disruption is a factor. Large

professional services firms can use the literature on disruption (for example, to evaluate

whether the enabling factors are in place) to assess which service lines might be

more susceptible to disruption than others and then consider how hybrid approaches

would help them bridge or transition through the uncertainty. This will be particularly

important to avoid moving too early and is politically easier to do rather than something

which could destroy the existing business model.

Conclusions Continued2.2 Practice

innovation in professional services in a context of disruption

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