What's the Optimal Business Model for a Professional Services Firm?

Source: VeraSage Institute

In this installment of their continuing podcast series on implementing value pricing, Ron Baker and Ed Kless discuss a business model for the “firm of the future,” a model Baker believes is more optimal. He describes it as follows: Profitability = intellectual capital x effectiveness x price. That's not to say that there's some scientific or mathematical solution to designing a business model that maximizes a professional firm's performance. There are many successful business models out there.

In the formula, “profitability” doesn't refer to the firm's profitability in the accounting sense. Rather, it refers to the firm's profitability to the customer. Maximizing the customer's profit will, in the long term, maximize the firm's profitability. “Price” means an amount set before a customer buys, not an hourly rate, which generates the price after the customer buys. Value pricing, therefore, is based on the maximum amount a customer is willing to pay for a service before the work begins.

Baker defines “intellectual capital” as knowledge that can be converted into profits. It consists of three components, the most important of which is human capital (workers). It also includes social capital (customers, referral sources, external knowledge sources, etc.) and structural capital (tools, resources, processes, strategies, etc.). Interestingly, only structural capital is “owned” by a firm. Thinking of your firm's resources in terms of intellectual capital, Baker says, opens up a “myriad of ways to create wealth,” as opposed to the billable hour, which is far more restrictive. 

To listen to the podcast, visit “Podcast: Touring IVP – Chapter 2 Part 1 – The Firm of the Future.”

From VeraSage Institute, September 30, 2013, http://www.verasage.com/index.php/community.