Business growth: Leverage technology in the service sector
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Professional service firms in consulting, insurance, accounting, law, marketing, engineering, and medical billing have traditionally been limited in growth due to the direct relationship of their labor costs to revenue. In other words, if you wanted to grow your top line, you had to hire more people. In the services sector of today, however, technology can play a huge role in helping to reduce those costs.
Before the advent of modern technology, service firm margins were based primarily on the difference between billings on the one hand, and the labor cost of the professional doing the work. According to Mohanbir Sawhney of the Harvard Business Review, that direct approach has gone by the wayside in favor of reducing other costs, including labor, by automating routine duplicative functions using technology.
Sawhney observed from his extensive research that many professional services firms deal with gross margins of around 40%. Yet, product based companies, albeit software products like Adobe and Google, have 60-90% gross margins. His systematic approach for helping service firms reduce their costs takes a three pronged approach.
He recommends that a firm discover new ways to automate areas that require minimal knowledge and have a lot of repetition. He then suggests they develop a program that automates and/or replaces the repetitive tasks using tools that are readily available in the marketplace. Finally, the firm needs to provide a way to monetize those new opportunities by implementing them in their operations to achieve improved efficiencies and develop a means by which those efficiencies can be incorporated into their billing process to the customer.
The discovery process includes looking for areas that can be automated by looking for routines or patterns of tasks that require little knowledge. Sawhney indicated, “The tasks that meet two criteria—they’re performed frequently and they require little sophistication— are low-hanging fruit for productization.”
The development part of the approach is to develop products using software, statistical analysis, algorithms, or even artificial intelligence to help bring clarity to the identified areas. The firm can then develop an automated “product” that can be quantified in the third and final step.
The final step in the process is to monetize the product that has been developed. This step provides you with a means to transition away from strictly billable hours and go to a task level billing process which will include a transaction based charge for the ‘product’ you have developed.
Deloitte, one of the world’s largest accounting and consulting firms, has developed Argus, a technology tool. According to Sawhney, it “makes use of machine learning techniques and natural-language processing to analyze electronic documents for auditing purposes.” The program has the ability to build upon each transaction processed and become even more knowledgeable and efficient over time. With reference to Argus, he went on to say, “These incremental product improvements have broader business implications….For example, Deloitte is now applying the platform behind Argus to its consulting business.”
Sawhney also described what EXL, a firm which deals with medical claims management did with their processes. Several years ago, the firm did all of their processing manually. The author went on to describe employees looking for incorrect codes, errors in payments, nonbeneficial services, and overpayments. “After processing millions of claims, EXL began to recognize patterns in the circumstances that surrounded instances of overpayment. It discovered that certain procedure codes, diagnosis codes, providers, patients, locations, and other variables were systematically associated with fraudulent or erroneous activity.”
Based upon those patterns, the company was able to create a process that would predict and flag a claim for more intense review. “By productizing this service, EXL was able to significantly increase the number of claims it processed, reduce the costs of handling them, increase the amount of money recovered, and prevent overpayment on new claims. In fact, for one client, EXL’s payment integrity tool recovered $50 million in three years and prevented an estimated $20 million in further overpayments.”
Most service related firms have developed a level of expertise in their specific fields. In effect, those firms create a “product” when they can automate some portion of the services they provide. When they are able to “productize” a portion of their services, they can then monetize and ultimately bill for it. It takes a commitment along with time and money to accomplish, but the possibility of increased revenue is a benefit that can help take their firm to the next level of growth.