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Value Creation versus Operational Efficiency

I refer you to a recent Harvard Business Review Blog post by Jack Hughes called What Value Creation Will Look Like in The Future that was published on May 17, 2013.  Hughes makes the point that during the last 100+ years organizations have focused on the efficient management of work to the point where the marginal gains from further improvements are not likely to be game changes or sources of sustained competitive advantage.

He suggests that traditional task-orientated work is rapidly becoming commoditized as technology assumes a larger share of the production function. That is, if you implement highly systemized, technology rich, operations to “draw value [by] optimizing repetitive work, you’ll find it will be increasingly difficult to extract that value.” Take note that Hughes is referring to WORK is becoming commoditized not “products or service” i.e. he’s referring to the input side of the equation not the output side. This is a novel thought (at least it’s novel to me.)

I see this playing out in accounting firms. Over the past 40 years there has been virtually no change in average CPI-adjusted profitability of firms in the industry despite a massive increase in the demand for the services of the industry and a massive injection of productivity-enhancing  technology. In other words, if you accept that profit is a surrogate for customer value created then there is no evidence of technology contributing to an increase in value created over the past 40 years. I call this the technology paradox.

Because technology (which typically would be a tool or a work process) will generally improve productivity, meaning that work can be done faster, one outcome is that higher level people are now able to do lower level work simply because they can do it nominally cost effectively.

For example, when word processing was introduced, management of professional service firms quickly realized that there was now no need for “typing pools” (if you don’t understand that term you’ll need to talk to an old guy in your office) but instead of asking themselves ” how can we utilize the talent in the typing pool or how can we use word processing to create more value for our clients?” most of them simply said “we can save costs by eliminating the typing pool because now we can cost-effectively do this ourselves.”

Hughes goes on to suggest that the most successful firms in the future will be those that dramatically change their organization structure to facilitate the process of value creation that will lead, for example, to increasing revenue from new services or from old services delivered in a way that results in more value (other than through a lower price.)  He talks about the need to become “obsessed with value” and raises several questions you should be asking:

  • How do you define value and how do you measure it?
  • How do the changes you are thinking about create value?
  • What new capability, product, or service will your organization bring your customers that they will value?
  • How will this make their life better?
  • How will it amaze them?

Start getting your people together regularly to think about how to add value to your customers and to your organization. Make this time sacrosanct.

What would your answers be to these questions? Those answers and the changes you make to the way you organize your firm will, I suggest, put you at the leading edge of firms in the future.

I think Hughes has given us an important insight in that it lends support to the argument that superior financial performance for firms in the knowledge industry does not go to those firms with the highest level of productivity, the highest revenue per billable hour or the lowest level of expenses. It goes to firms that exhibit a superior capacity to delegate internally and create “value” that clients can see and understand which reflects management innovation of the type Gary Hamel talks about in The Future of Management.  I will discuss this in more detail in a research report I have nearly completed on the performance characteristics of over 300 firms that will be published soon.

When I read articles like the one Hughes has written I get a sense of Deja Vu. Going back to 1992, this is one of the slides I used to summarize the fundamental strategic proposition we were sharing with participants at the Accountants’ Bootcamp program – I believe it’s as relevant today as it was back then:

Our Fundamental proposition …

  1. Build on your skills and existing clients relationships
  2. And harness technology
  3. To provide clients with knowledge-based support using smart systems and rich networks
  4. That will significantly more valuable than generic, look-alike, un-differentiable, compliance services
  5. And for this reason your clients will be willing to pay significantly for access to your service
  6. And competitors will not embrace change which means you will have a source of real and sustainable competitive advantage.

I can say without any hesitation EVERY person who took this advice to heart and implemented it in his/her firm have realized the competitive advantage I refer to.

 

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