Trusting Advice vs. Trusting a Business
In nearly every industry I work with, practitioners describe themselves the same way: “we are trusted advisors to our clients.” The “trusted advisor” model is seen as both an attained aspiration and a necessary part of doing business. But when I look across the professions, I see an interesting dichotomy where clients simultaneously trust the advice of the individual or team while growing deeply un-trusting of their firms’ business practices.
Consider the following examples:
Clients will engage lawyers for highly sensitive disputes and trust their guidance. But when it comes time to bill, the attorneys use inflated rates and time-billing practices so arcane clients literally have to buy software to understand them. Clients then push back on the total fee, agreeing to pay only a portion, and driving down collections and realization rates for the partners involved. After a period of negotiation, both parties eventually arrive at an amount they consider fair – somewhere between what the attorney would like to make and the client would like to pay. Yet because the process is so opaque, neither side leaves happy or really trusts the others’ business practices.
At the same time, the Association of National Advertisers (ANA), the trade body that represents major brands purchasing advertising and the American Association of Advertising Agencies (4As) routinely go back and forth on matters of trust. The most recent issue relates to the rebates and reimbursements agencies allegedly receive from publishers, but this is only the latest topic in a long-running conversation that pits agencies’ non-transparent business practices against advertisers’ procurement departments. During every contracting process, agencies feel like their teams are squeezed, while advertisers don’t understand what they’re getting for all the money they spend. Eventually, they arrive at a sort of a middle-ground, but neither side is happy.
The Light Bulb Joke
One way to see if this applies to your profession is to run the “light bulb” test on it:
Q: How many lawyers, advertising agencies, or consultants does it take to change a light bulb?
A: How many can you afford?
What’s going on?
In all of these scenarios we see a few commonalities:
- Clients generally trust the practitioner – otherwise they wouldn’t continue to hire them.
- Clients don’t think that the bills they receive from the firm, and the industry generally, are fair.
- The core issue with the bills is transparency. Clients don’t know beforehand what they’re going to get and they don’t know afterwards what they actually paid for.
- Clients feel like their advisors aren’t being honest, but providers feel like if they were honest, the clients would take advantage of the situation and drive profits out of the business.
- These issues are inherent in a business model that sells time, but that business model is profitable for incumbents and risky to shift.
The problem is that profitable industries with low trust are ripe for Disruption. If you want to see how, just take a look at Blockbuster video. Blockbuster generated massive profits for years, mostly on late fees. But customers felt nickel-and-dimed by all those fees, which felt capricious and unfair. One customer went so far as to found Netflix, a company that aligned their business model with how customers wanted to pay for movie rentals. Blockbuster struggled to react, and even when they offered a superior product at a superior price, customer distrust was so strong that they refused to use the service. In 2002, Blockbuster was worth $5 billion. Less than a decade later, it was bought out of bankruptcy by Dish Network for $277 million.
In the age of information, businesses that lack transparency are setting themselves up for disruption.
What can you do to prepare?
Default to strategic transparency
Clients today have unprecedented access to information before they engage with an outside advisor, whether through the internet or their own experience. Yet transparency is still seen as risky. There’s the possibility that clients will take advantage of the new information to drive down your profitability, or that competitors will take advantage of it to maneuver against your firm. Transparency makes you vulnerable, but vulnerability builds trust. Clients are making themselves vulnerable by coming to you, and you build trust by not taking advantage. That works both ways.
Strategic transparency doesn’t mean sharing everything, it means sharing the right information to make the client confident in both your work and your business practices. Even before you rethink your business model, there are some quick changes you can make to the way you approach your existing work that will strategically infuse transparency into your business:
- Before the start of an engagement, let clients know what they can expect in terms of total cost, specific work output, and where there are areas of uncertainty.
- Identify your value-adding activities, what they produce, and what they cost at a more granular level to involve the client in designing the right engagement for their needs.
- Be up-front about where your incentives align, where they don’t, and what you’re going to do in order to remove the clients’ doubts.
Add structure to the business
One challenge in advice businesses is that your unit of cost, billable time, is different than the client’s unit of value, the outcomes you produce. While time is easily measurable, value is highly uncertain. Nevertheless, billing for time creates an incentive alignment problem: firms are rewarded for inefficiencies. In response, firms are looking to add structure to their business in order to better communicate their value and improve how they deliver it.
At a basic level, firms are improving their project management capabilities in order to better manage complexity, make their successes more repeatable, communicate expected costs to clients, and balance internal resources. In some industries, project management is already a mature discipline, but in law firms it can be revolutionary. Firms can build a basic competency with simple training or a few strategic hires, and clients will see the benefits immediately.
The most cutting edge firms are packaging their services into discrete units and starting to think of them as a portfolio of products, rather than a collection of billable people. The more you can package value, the easier it is to communicate value to clients, and the more you can streamline your processes to deliver it.
Bet on new business models
Implementing a new business model isn’t just about flipping some contracting language, it’s a learned skill that your firm needs to practice. When disruption finally arrives, the winners will be the firms that have the most mature practices for things like fixed-fee arrangements, project-based work, or productized services.
But to have those processes in place, you need to have experience with pricing, estimating costs, efficient processes, and more efficient staffing models. Experience only comes from actually doing the work and adjusting based on your information or the feedback you get.
Being ready doesn’t mean you have to change everything today. Instead, seek out new opportunities to strategically implement new business models, especially with new clients or mature relationships where there’s a high degree of trust and collaboration. That way, when the whole industry starts to shift over, you’re ready with the right approach and credible when you present alternative fee structures.
Disruption is Coming
Disruption is coming to professional services firms. Clients have more information when engaging with outside experts, technology is changing how firms deliver value, and new competitors are arising in unexpected places. Businesses that undermine client trust will be profitable in the short term and will disappear in the long term. If you want your firm to survive the shift, you need to be ready when it comes.