We are in the early stages of a transformation that will change how we work forever. In a recent report, Power Shift: The rise of the consumer-focused enterprise in the digital age, the Kellogg Institute documents how the digital revolution has created a power shift from sellers to buyers.
Introducing the Service Level Economy (The SLE)
This is driven by advances in technology that provide buyers with unprecedented access. Where once buyers had limited choice, now they have a great deal of choice. Where once they had limited information about sellers, now buyers can read others’ experiences at the click of a button. Where once innovation was slow, now it is disruptive.
Buyer Empowerment in the SLE
We have seen before what this kind of power shift can do to a market. In the early 2000s, ecommerce rocked the retail industry. Look what Amazon has done to big box retailers. Another example is what is happening in the transportation and hotel industries. Uber has been able to provide more convenient transportation for less, and as a result the company’s growth has been staggering. Uber has become a household name in a matter of a few years. Let this one resonate as well: Airbnb renters can stay at a variety of property types, for less than the average hotel room rates and walk away with better experiences. Now, hotel chains are suffering, whereas Airbnb expects revenue to surpass $6 billion by 2019. All of this change is fueled by innovation in business models that comes from the power shift from sellers to buyers.
While this disruption has had a strikingly similar pattern across consumer industries, the impact to business has been less visible and slower to transpire. Until now.
Today, the industries that serve businesses with professional or creative services is embarking on this same period of transition. Buyers, or clients in this scenario, are demanding greater speed, quality, and agility from service providers. At the same time, providers are facing more external pressure than ever before, which is materializing as increased competition, compressed delivery timelines, and tighter margins. Services firms are finding themselves in a place where they need to adapt — or risk getting left behind. As a result, some forward-thinking services leaders are designing new operating models that allow them to better connect, orchestrate, and optimize their businesses.
The Globalization of Services
Not too long ago, businesses valued owning their resources above all else. They did ever ything themselves. They hired and managed large workforces, assembled their own operational and recruiting capabilities, and built and maintained all of their own technology resources. Ownership created the perception of greater control.
Today's speed, complexity, growing competition, and global nature of business have rendered this approach inadequate and ripe for innovation. With rapid evolution in markets and competition, organizations must become continuously more lean and agile. They must scale up and down more quickly while simultaneously managing costs, resources, and margins more precisely.
An economy once dominated by global manufacturers and enterprise heavyweights is now increasingly supplemented by and reliant upon service providers.
We see the effects of this change in every industry. Marketing departments frequently employ external agencies and freelance talent. Businesses increasingly depend on outside IT firms and cloud providers to manage data and technology. And countless organizations rely on outside call centers, legal teams, fulfillment centers, engineering teams, and myriad other services providers to deliver their full workforce needs.
The benefits are clear. External service providers allow a business to tap the right skills and resources at the right moment, without the larger investments of time and costs associated with recruiting, training, and managing resources internally. Organizations can therefore stay lean and focus on their core business functions while leveraging highly specialized expertise that helps drive their businesses forward. It’s a model that maximizes flexibility and speed while optimizing costs — hallmarks of success in the 21st century.
The Challenges for Service Provides in the SLE
Clearly, it’s a great time to be a service provider. The globalization of ser vices represents a massive, $3 trillion opportunity today. And that opportunity is growing rapidly. The robust global services market is expected to reach $3.8 trillion by 2025.
However, taking advantage of the opportunity has proved challenging. Service providers — notably management consultants, IT services firms, professional service providers, and marketing agencies — are experiencing intense pressure to meet the increasing demand of their buyers.
Challenge One: Shift To More Short-Term, Project-Based Work
Long-term contracts are becoming rare. Instead, clients hire services providers for shorter-term, project-based engagements. In the recent US Agency-Marketer Business Report, 43 percent of marketing firms stated most of their work is project-based. To remain profitable, providers must carefully manage resources and projects. There is very little room for error.
Challenge Two: Difficult to Manage Surge Capacity
The ability to scale up and down on a projectby-project basis is incredibly valuable — and complex. Managing supply and demand impacts a provider’s ability to grow and remain profitable. Firms including Accenture, PWC, and Deloitte manage surge capacity by keeping a large number of strategy, planning, and execution resources on hand. Contact the resource desk at one of these firms and three consultants show up on your project by Monday. The economies of scale required to take this approach mean it’s very expensive for clients and, therefore, out of reach for most.
Challenge Three: The Demand for Quick Access to Highly Specialized Skills
Work is increasingly being broken into the highly specialized skills and expertise required to complete it, as explained in the Harvard Business Review article “The Age of Hyperspecialization”. What was once one person’s job now takes 40 highly skilled, hyperspecialized people. The market now demands this depth of skill, beyond almost any skill level previously required. This demand presents a real dilemma for providers already working with slim margins: They can’t afford to keep specialists on the bench, yet they also can’t turn away good work that demands such specialization.
Challenge Four: Increased Expectations for Performance and Transparency
Finally, service providers are being required to show results faster and with greater transparency. With tremendous competition and no guarantees of long-term client relationships, providers must continually prove and reinforce their value. Greater information access has created a more informed buyer, too.