Re-thinking traditional business models


How to get your business model ready for growth

They say there are only two things certain in life: death and taxes. For business owners, we can add a third – that one day you will no longer be part of your business. The terms under which you retire, sell or transition your share to a new partner ultimately depends on the succession plan you put in place now. A succession plan is a blueprint for your eventual exit from the business, but it also helps you realise the value you’ve created. Like many professional service consultants, engineers, architects and consulting surveyors are often too busy running the day to day business activities to think about that possibility in the future – and some don’t realise just how much value their knowledge has created.

“A significant number of participants within the built environment are private firms, and their chief asset is their intellectual capital. This is true for all participants regardless of size, with a significant number of firms most likely representing some saleable value,” explains Danny Chung, National Head of the Built Environment with Macquarie Business Banking.

“At some point, the owner will need to cash out of the business, or transfer some equity to junior staff as part of their retention model. This process can take time, so it's important to start planning well in advance.”

The current market for acquisition

Whether you are planning to transfer ownership internally or sell to an external buyer, your business valuation will be tied up in future earning capacity – so current and future economic challenges need to be considered.

“The appetite for acquisition depends on a firm’s capabilities and disciplines, and its geographic location,” explains Chung. “For example, NSW is in the middle of a significant spend in infrastructure right now. But Queensland has some challenges and the Western Australian market is declining as investment in resources infrastructure eases.”

The barriers to entry for consultancy firms are minimal capital outlay but strong for relationships and networks. So if a firm wants to establish a position in a new geographic market to access larger projects it may find it simpler to acquire a business or existing teams that are already on the ground and have established relationships.

“For example, you may be servicing a client in NSW that is now building in Queensland. Sending a few people from your NSW office may not be practical Instead, you may poach a small team and fund their first few months,” explains Chung.

There are risks to this strategy, so the purchaser may want to lock those staff in for a set period of time and determine the impact of these new staff on the culture of the existing business.

Is it time to re-think your business model?

At the World Business Forum in May, the London Business School's Executive Fellow of Organisational Behaviour Tamara J. Erickson shared her predictions for the way knowledge workplaces will need to transform.

“Technology is an opportunity to re-think our organisations and ask, what do you no longer need to own? What could you just use when you need it?” she told the audience. This is not just about equipment or software, but includes staff. And it may mean fewer full-time resources, and a different approach to managing them.

It's not that different to Peter Drucker's prediction 20 years earlier: the future of HR would become similar to a staffing agency in the film industry, assembling people based on specific project needs.

Erickson also suggested the way we organise fundamental business units will change from fixed organisation roles to more short-term project or activity roles, and this will appeal to both millennials and older workers looking for meaningful work with flexibility.

Technology is the trigger

Technology will enable all the transactional work to be done within these predicted future models. Glotzer agrees it is also allowing firms to create completely new value propositions for their clients that at the same time boost productivity.

“For example, a new accounting firm with no legacy systems decided to only on-board clients through one platform. This turbo-charged their efficiency and workflow – there was no need to train staff on multiple systems, it was easier to share knowledge with their clients, and it’s scalable as they grow.”

The add-ons with this system allow them to create more advisory opportunities, such as projecting out cash flow or forecasting inventory levels. “Spotlight, Fathom and Crunchboards are just three of the apps we’re hearing about. Accounting firms are using them to help clients make better business decisions,” says Glotzer.

Bottom line benefits

So are these new models also more profitable? Glotzer says yes, they potentially can be.

“We’re not really seeing revenue lines change in accounting and financial planning. Where we see profit growth, it’s through better expense management and that’s typically through technology that can automate and redeploy staff to high value tasks.”

He says accounting firms still have a high margin compared with many other service businesses – typically 35 per cent to 40 per cent profit before partner salaries. “There’s an opportunity to maintain that through technology advances, but also by re-thinking your pricing models.”

New billing models at work

“We’re seeing less hourly billing or time based billing, and more of a ‘value-based’ approach,” Glotzer explains. “Internally, firms may assess how much time they spend with a client over a year, and then split into 12 payments. But from a client perspective you’re smoothing out cash flow for them while being transparent about the work you do.”

Glotzer says clients will get more value and be more satisfied because they know they can call their adviser more often, and they won't be hit by one bill.

“Plus, it also makes a massive difference to your cash flow and the way you manage workflow.” For example, you can plan staffing schedules and resources more efficiently.

To make this new ‘retainer’ approach to pricing work, it’s essential to provide a clear engagement letter that defines exactly what is and isn’t included within the scope.

“You need them to agree to this payment cycle upfront, and if possible set up a direct debit to save you both time. You certainly don’t want to chase 12 bills a year instead of one, and if they’re not seeing visible work every single month there may be push back.

Glotzer says it’s also important to encourage staff to call out ‘scope creep’ when they see it, or they may end up doing work that’s unbillable.

Looking at other industries for a new approach to pricing could also pay off – and create a proposition your competitors may not be able to match. For example, technology can make it possible to create dynamic real-time pricing for products based on client data, or even allow clients to ‘bid’ their price. Software providers already use performance or value-based pricing (pay per click, per number of users or functionality options) rather than large set-up fees. 

Before shifting your existing clients to any new business model – whether through technology, staffing or pricing – you need to demonstrate the value to them.

“Change the conversation at your annual client catch up from rear view reports to proactive planning,” suggests Glotzer.  “Give clients a taste for what your insights could provide. If they see some genuine value from it, they will be more prepared to pay for it.”

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.