Time and again, people ask me candidly: “what is your ‘digital strategy’?”, and I can’t help confusing them a little bit by answering: “there is no such thing as a digital strategy!”. Digital is simply the new normal of any business and as such it should be an integral part of strategy, full stop, not a separate object.
The digital revolution brings new opportunities and threats, but it does not change the timeless questions of strategy brilliantly summarized by Michael Porter in the ‘five forces’ way before the Internet was even invented: How does the digital revolution change my position vs. clients, competitors and vendors? Does it create a risk of seeing new entrants and/or substitutes in my core market?
Equally, I am always amazed how much the word ‘disruption’ is used and how little of it I have been able to witness in professional services in the last ten years, be it in engineering or legal services. We all know (or should know!) of the Gartner hype cycle which basically states that there is a time lag between the moment a new technology is hyped beyond reason and the moment it makes a real difference to your business, if it ever does. Technologies like generative design, additive manufacturing, blockchain, natural language processing and most recently chatGPT, just to name a few that I had the chance to observe first hand, were or are expected to ‘disrupt’ the engineering and the legal sectors respectively … well, none of them has so far and yet the ‘D’ word is still being used every time a new promising technology pops up.
Don’t get me wrong, I am not discounting the power of new technologies, some of them will have a profound impact on professional services, I am just stressing that the hype is leading decision makers misled by self-serving digital evangelists to overestimate their impact in the short term, and to underestimate their impact in the long term which leads to erratic stop-and-go and sometimes irrational resource allocation decisions instead of following a rigorous analytical approach and playing the long game.
I tend to follow a rather simplistic approach to frame the strategic response of a professional services firm in the context of the digital revolution:
Where does value come from?
Where could this value be at risk or on the contrary be increased?
Three factors come into play here: (1) the substitution of labor by technology, (2) the rise of augmented services driven by AI and (3) the increased possibilities to test and scale new business models.
“Software is Eating the World”
Let’s start with the obvious one, “software is eating the world” as once said Marc Andreessen, which practically means that in professional services labor is being slowly replaced by software resulting in a double value destruction, since clients are often billed by the hour and technology costs increase faster than top line revenues.
In short, value is shifting from professional services firms to software companies, year in, year out. A simple illustration of that is the stock price development of Autodesk compared with the industries it “serves”, and I am convinced that once consolidation is complete in legaltech in a few years’ time, the same will happen in the legal sector.
The good news is that incumbents have domain knowledge that technology companies lack, and this knowledge can be powered by AI to create new value propositions that answer unmet needs of clients and generate new revenue streams for professional firms.
The bad news is that the time to market and the success rate of these new digital solutions are such that they rarely offset the value destruction of the labor-technology substitution, at least in the early years. In addition, these digital solutions are often incubated instead of being excubated (i.e. grown outside of the main business) which brings about complicated cannibalization dilemmas and lots of resistance from the legacy business.
Opportunities for Experimentation
Finally the digital revolution creates an environment where it is relatively easy and inexpensive to try alternative business models, target new or underserved market segments, generate profitable revenues in new ways and change the economics of client delivery, in short try and test alternative business models. This combined with the power of AI can lead to the transformation inside-out of incumbent businesses that used to be earmarked for ‘Disruption’.
The example I love to take, which is surprisingly rarely mentioned, is the breathtaking transformation of Elsevier’s dusty publishing business into a vibrant AI and decision support business which is both bigger and more profitable than the legacy business. This transformation took almost two decades though, which is the bridge to my next point.
Winning in the Digital Era Requires Playing the Long Game
Resource allocation is the name of the game when it comes to strategy, everything else is literature.
The question is then how to allocate resources when the digital revolution increases the tension between short-term profit and long-term success, when it forces relatively low-risk businesses to revisit their traditional risk appetite, when the digital level playing field is creating capability gaps in businesses that are excelling in their core business, when the corporate or partnership structure stands in the way, and last but not least when clients’ expectations are shifting rapidly because everything in their life as individuals and professionals is screaming digital and frictionless consumer experience.
To navigate this complexity, the most effective framework that I have come across in a long time was crafted more than 20 years ago in a seminal book called The Alchemy of Growth and has been since widely popularized by McKinsey: it is the ‘three time horizons’ model. Simply said, this model stipulates that investments should be spread into three distinct buckets to maximize the chances of an incumbent business for seizing digital opportunities, mitigating digital threats, and managing the dilemmas between one and the other.
The three horizons, sometimes referred as ‘now, next, new’, work as follows: investments in the first horizon (‘now’) aim at using digital technologies to protect the incumbent business model, investments in the second horizon (‘next’) leverage technologies to grow in adjacent markets and expand the legacy business model, and investments in the third horizon (‘new’) target entirely new business models that potentially cannibalize the existing business model.
The allocation of financial resources and management time across the three horizons is a function of the digital maturity of the sector, the entry barriers for tech companies and the specific organizational maturity of each professional firm. A split that is often mentioned is 60% in horizon 1, 30% in horizon 2 and 10% in horizon 3; but this ‘standard resource allocation’ can be hugely misleading because if the organization is relatively mature and entry barriers are low, the allocation should be skewed towards horizon 2 and 3, and vice versa: in short there are no short cuts and each business needs to embark in a rigorous strategic analysis and resource allocation process.
Each of these three horizons also has very different success factors and organizational requirements which I will detail in my next article : ‘execution is not a dirty word’.