Segmenting services: Ensure your firm's services target client needs

 

Four things you will learn from this Masterclass:

1. How to understand the segment(s) your firm operates within

2. The business development challenges posed by each segment

3. How to ensure your firm competes successfully in its core segment

4. How your firm can work successfully across multiple segments

 

Much has been written about how professional service firms (PSFs) win business, especially in today’s tough times. However, most commentators fail to address the unique challenges that most firms face in positioning their services and subsequent business development efforts when they provide services of differing complexity targeted at very different client needs.

The conclusion of this very limited research and, critically, all of the anecdotal evidence associated with this dilemma, is absolutely clear: to be successful, firms have go to market in substantially different ways depending on which market segment each service is competing in.

Some firms address this issue well, but most firms do so poorly. The successful ones always start by being absolutely clear about which segments they are competing in and how their offerings are differentiated from their competitors. So, how can you ensure you know which segments your firm is competing in?

Segmentation models

There are a number of segmentation models in use, but we will use the one that Rob Lees and Jack Gabarro created specifically for PSFs. In this model, the services offered by PSFs can be divided into four segments, the main characteristics of which are listed below. A simplified version of the segmentation matrix is also provided in Figure 1.

 

 

1. Standardised services

In this segment, clients are looking for an efficient and low-cost solution to a common problem. They are in the opportune position of having many potential suppliers to choose from and can negotiate hard for the lowest price. The selling proposition, therefore, is ‘better, faster and cheaper’ than any in-house or competitor firm’s offerings.

With this reality, firms operating in this segment need to drive profitability through the deployment of established methodologies, models and processes, as well as efficient and low-cost delivery systems. Leverage is high while margins are low, making service-line profitability a function of volume.

2. Customised services

One of the theories associated with service segmentation (which is also supported by anecdotal observations) is that, over time, an increasing number of suppliers are able to replicate specific service offerings and, in conjunction with this greater supply, clients change their expectations of value for money.

The question for firms facing the move towards standardisation, therefore, becomes how to prevent their services from becoming commoditised, with all of the margin and profitability issues that brings. There is only one way to respond successfully: to customise services for those clients who, while still looking for
an efficient solution, are willing to pay
more for a solution tailored specifically to their needs.

To generate an acceptable level of profitability, firms need to have all of the delivery expertise necessary in the ‘standardised’ segment, plus very good relationship skills and, critically, the ability to keep sales costs under control. This last point is especially important as part of the tailored offering is support through the purchasing process, both before and after – which, of course, is one of the ways to build trust and keep competitors out of the game.

3. Expertise-driven services

Expertise-driven services are a direct response to situations in which clients have a complex (and often ill-defined) issue, which they have little or no experience of and look for outside help in resolving it. The selling proposition in this segment is ‘trust us, we’ve seen similar problems before and will help and support you in coming up with a solution that works for you’.

To be able to provide these services effectively and retain a reputation for doing so, firms need high levels of technical/functional knowledge as well as experience of similar problems, typically in multiple sectors, from which they can draw in responding to the client’s specific issue. A high level of analytical skill is also a prerequisite for success in this segment, as is the ability to quickly build trust
and confidence.

So, while brand is important in this segment (as it is in all segments), so too are the personal brands of lead partners.

4. ‘Rocket science’ services

When clients have a major ‘bet your company’ issue that they have little or no experience of and want external support, they typically turn to firms that have an outstanding reputations and track records of delivering solutions based on the highest level of diagnostic skills and the ability to create innovative solutions through their state-of-the art knowledge and pioneering concepts.

As with ‘expertise driven’ services,
a firm’s brand is important but, with
these services, it is ultimately the quality
of the partners leading the work that will be the deciding factor in a client’s purchasing decision.

Unsurprisingly, there are a limited number of firms capable of providing ‘rocket science’ services, which, inevitably, yield the highest fees and have the lowest leverage, as clients are paying for the expertise of the principals.

BD by segment

Some firms make the mistake of believing that money can only be made in the ‘expertise driven and ‘rocket science’ segments, but this is absolutely not true.
It is possible to make money in all
of the segments. The key is to ensure
that the delivery model is appropriate to the service offering. So, what are the business development challenges posed by each segment?

1. Standardised

We referred to the importance of the firm’s brand in the ‘expertise driven’ and ‘rocket science’ segments, but it is equally important here. While the buyers of these services are rarely the company’s top management, they are usually important players at their level.

With access to a multitude of suppliers basically offering the same product or service, buyers typically look for suppliers with a proven track record, which they believe will deliver without causing any internal problems and will instantly generate internal acceptance across the business. They want confidence, which comes from selecting a strong brand.

So, the business development challenge is an obvious one: to build brand credibility. The service has to do ‘exactly what it says on the tin’ every time without fail or the likelihood of another supplier winning (or taking over) the business is extremely high. One of the ways to build additional credibility is through making the service appear more relevant in a particular market, by referring to the expertise that has been built up through working in specific sectors or geographies (a reality that applies in all segments).

The processes, methodologies and supporting technologies which are fundamental to low-cost delivery can also be used to generate the key performance metrics, which can be used to monitor performance and build confidence and credibility. This is critical in building brand credibility and the results must be continually integrated into updated performance data, which then become one of the messages used to reinforce credibility. Examples of metrics could include quality measures like rework percentages and end-user feedback,
as well as efficiency metrics like turnaround times.

Given that buyers are buying a known ‘corporate’ brand, the service can be promoted via targeted advertising and direct marketing and sold by people who do not actually deliver the service. The people selling the service, though, must have a detailed knowledge of the service in operation and convey absolute confidence in its ability to do the job requested.

2. Customised

When competing in this segment, firms are trying to put some ‘stickiness’ into their relationship with the client’s personnel by helping them think through the customisation and implementation process. So, the business development challenge is to know who the client’s key personnel are and to select fee earners who will develop an effective relationship with them, as the deliverers. This makes identifying the client’s key personnel the number one task, alongside gaining a clear understanding of what drives them and what they personally need to achieve in order to be seen to
be successful.

One of the associated activities that can yield significant benefits over time is, when appropriate, to use the customisation process as an opportunity to collaborate with and educate the client’s personnel. People tend to reach out to those who have helped them in the
past, as reciprocity is central to most enduring relationships.

Using the customisation process as educative and part of the relationship-building process reinforces the collaborative nature of the task and the importance of both parties to its success. Business development only succeeds if the firm’s people have the right capabilities – making the development of the firm’s people central to the success of all of its activities, including business development.

Another key judgement call in the process is to assess what a reasonable fee is for the customisation: how important is the customisation to the client and
how much is that in monetary value over and above the cost of buying a ‘standardised’ solution?

3. Expertise driven

This is a segment in which a firm’s brand is critical (who can forget the famous line from one CEO, whose business was in trouble, “no one ever gets fired for hiring McKinsey”). Brand strength is the business development challenge, which means creating, and making known, success stories which add to an already-proven track record.

Of course, success stories rarely have clients’ names attached to them (that piece of information is usually shared discretely between CEOs and chairmen), but what firms have to be very savvy about is using the knowledge they generate from undertaking a series of similar assignments to create a point of view that resonates with their main board buyers.

But, that is typically not enough. Firms operating in this segment have to develop their own evidence-based research (often referred to as thought leadership or white papers) on issues that, again, resonate with their potential buyers. And, of course, their lead partners have to be outstandingly good at developing and sustaining relationships in the boardroom.

Alumni are also very important in this market and, typically, are a source of significant work for most of the firms competing in this segment. And, of course, traditional reputation-building activities like speeches at key forums and evidenced-based research can help to build the
firm’s brand.

 4. Rocket science 

To be successful in this segment, firms need to establish a position that results in them being approached by the client (often before the need is in the public domain). Requests from individual businesses for help are unlikely to be frequent yet, when they do occur, their impact on the company will always
be significant.

At the extreme, the outcome of how the issue is resolved can literally make
the difference between the life and death of the client’s business. In all cases,
the successful resolution of a ‘rocket science’ issue will have a significant impact on the client organisation’s economic health.

Given this reality, what all of the issues have in common is the undivided attention of the company’s board and top management. The issues have their attention, not just because of the issue’s importance to the business, but also because, if the issue is not resolved satisfactorily, one or more of the board members may lose their jobs.

To be ‘top of mind’, firms need to be highly networked across the top management of all of the major players, not just in the company’s sector but also industry-wide. But, before that, they need to demonstrate a proven track record. The names and reputations of the partners involved in creating innovative solutions must be known by the top players, as these situations usually demand prompt action and they need to know who to go to. The partners may not be on their speed dial, but the top players must always know how to access them, no matter where they are.

So, in these circumstances, how can firms influence opinion and compete successfully with the (albeit few) firms who play in this segment? Besides being personally known in the boardrooms of the top companies, firms must have strong relationships with potential intermediaries like merchant banks, hedge funds, accountants and lawyers.

The positioning challenge for all firms, to quote Marty Lipton in the Harvard Business School case on Wachtell Lipton Rosen & Katz, “is to be part of our clients’ institutional memories; we want them to turn to us when a serious problem arises”. It is a tough challenge, but the rewards and prestige are high.

Competing across segments

While most firms do not compete in all four segments, a lot compete in two or, increasingly, three (the standardised, customised and expertise-driven segments) – an approach which can
bring with it the challenge of brand stretch and credibility.

Although the buyers can be the same in the standardised and customised segments, they are distinctly different in the expertise-driven segment, and it is the perception of these senior buyers that is the issue. Do they want the firm they select to help them resolve organisationally-important issues to also provide basic standardised services?

There is no definitive answer to this question, although there is no doubt that the top management, who purchase expertise-driven services, do not expect standardised services to be delivered
by the partners and professionals
they are interacting with. Nor will they countenance paying the same fees
for work of significantly different
strategic importance.

These increasingly sophisticated buyers are easily capable of attributing value to the individual services they purchase. They have a very clear view of where services fit within their own version of the service segmentation matrix.

So, what do firms need to do to work successfully across multiple segments? It is clear that success starts from knowing which segment the services are in and tailoring marketing, business development and service delivery efforts to each segment (see box).

These points do not specifically address the issue of whether firms should create a separate brand for their standardised services, as the critical point is clear decoupling in the client’s eyes. A number of firms have created separate legal entities and brands to deliver such services. There is no right or wrong answer; the key is managing market and client perceptions as clients will always know (or find out) the ultimate owner of any firm they employ.

 

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Tailoring efforts by segment(s)

• Be absolutely clear about which segment(s) each of your firm’s services fall within

• Organise the service delivery process and have the appropriate resources for each segment

• Develop the internal capabilities applicable to each segment

• Don’t expect the same people to work across the standardised and expertise-driven segments, as they demand different capabilities as well as organisation

• Communicate the different service offerings to clients and be completely honest about the differences

• Communicate the differences internally, explain the type of work the firm does within each segment and then let everyone know how the work is delivered and the mechanisms for getting it to market

• Be clear about the business development challenges of each segment and incorporate them into your firm’s strategies

• Know who the buyers are in the different segments

• Manage the client or target’s perceptions of value, both organisationally and with the different buyers

• Tailor the firm’s business development activities to the different buyers

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A quick reminder

Commercial success is a function of many factors (one of which is winning business), but it starts with a clear understanding of which market(s) the firm is competing in. Only with that understanding can the firm go to market effectively. Some firms do this well, others less so. The challenge for the firms that fall in the ‘less well’ category is to copy those that do it well.

In today’s unforgiving markets, no firm can afford to not be clear about which markets it competes in and how it can differentiate its services from its competitors. Winning business is difficult at the best of times; the smart firms that have the necessary clarity go to market with a much higher chance of succeeding than those that don’t.

Rob Lees and Derek Klyhn are founding partners of Møller PSF Group and consultants to PSF leaders worldwide (www.mollerpsfgcambridge.com)