Strong brands are more profitable

At face value this seems obvious and not in the least bit controversial — but how much better? And what evidence is there that this applies to the world of consultants and professional services as well as consumer-facing brands?

Our analysis, based on one sector with surprisingly transparent performance data, indicates that professional service firms with strong brands are 2-3 times more profitable than their peers, who have similar capabilities and serve similar clients from similar locations but have weaker brands.

Key points

  • The concept of brands having significant and measurable commercial value has become mainstream in consumer-facing businesses.
  • The world’s most valuable brand, Apple, is calculated to be worth more than $482bn.
  • Most professional service firms only have one source of sustainable competitive advantage — their brand.
  • Professional service firms with strong brands are 2-3 times more profitable than their peers.

First among equals

In many sectors, competing businesses end up producing products and services that are almost identical in all measurable ways that customers say they value.

Whether in smartphones, retail banking, or automobiles, when you look at the ‘spec’ of competing products and services, it’s hard to separate them.

The only things that distinguish these more or less identical products and services in the eyes of customers are their brands: the set of ideas, promises, and expectations that exist in the customers’ minds that complement the core functionality of the products and services.

CMOs of large consumer-facing businesses have found it much easier to answer the WHY question when it comes to persuading their C-suite colleagues of the strategic importance of investing in strengthening their brand.

Brand = $$$

Easy access to performance data for publicly traded companies has led to several annual surveys that attempt to measure the dollar value of these brands.

It’s possible to argue with the methodology of one survey vs another, but the overall pattern is clear; brands are recognised to be incredibly valuable assets these days, even by accountants!

Apple’s brand, usually measured as the world’s most valuable, is said to be worth about $480bn at the last count.

Since these brand valuation studies emerged, CMOs of large consumer-facing businesses have found it much easier to answer the WHY question (WHY bother?) when it comes to persuading their C-suite colleagues of the strategic importance of investing in strengthening their brand.

In fact, in any sophisticated business these days it’s not even a question. They already know WHY — to drive better performance and help achieve their strategic ambitions — the discussion moves on to HOW (HOW best to achieve it and HOW much to invest in it?).

Private – keep out

That’s great for these CMOs but what about those of us who operate in the world of marketing and branding for consulting and professional service firms, where the discussion is often still dominated by the WHY — in terms of seeing the brand as an enabler of strategy and driver of performance — and may not even progress to the discussion of HOW.

Some of the published surveys include a few examples of professional service firms. However, they are limited to only including the largest, publicly-traded companies and so don’t get very far into the reaches of the ‘professions’ or the vast swathes of consulting and advisory businesses around the world.

Many of these are privately owned, which makes accessing their global performance data much harder or impossible. Because of their lack of liquid market valuation metrics (i.e. stock prices), it’s also hard to put dollar values on these brands as the surveys like to do.

So, what can we do to find evidence to address the WHY question for professional service firms?

They do things differently there

What if we could find a privately-owned, professional services sector where accurate performance data was made publicly available for every firm on an annual basis?

If such a sector existed, maybe we could use it to analyse the performance impact of brands and demonstrate that firms with stronger brands are more profitable than their similar-sized peers, serving similar clients with similar capabilities.

Step forward the global legal industry.

With annual revenues in the region of $900bn, the global legal sector is a big enough beast to count as a proxy in scale and size for other professional services sectors.

Also, a feature of the legal industry is that whilst the big firms have certainly grown rapidly over recent years, the market hasn’t seen anything like the degree of concentration that has occurred in adjacent sectors, such as accounting, technology consulting, and management consulting.

As a result, there’s nothing like a Big 4/5/6 in the premium legal market, and even the names at the bottom half of the top 50 are still very well-known firms, with thousands of people doing premium legal work for Fortune 500 companies and financial institutions all around the US and internationally.

Whichever way you cut it, the data is clear.

Total transparency 

In 1985, the American Lawyer’s then-editor Steve Brill had the (brilliant?) idea of estimating and publishing performance data for the top law firms.

This survey, known as the AmLaw 100, quickly became an annual ritual recognised and supported by all the largest US-headquartered law firms as they grew and grew in size and international reach.

The inaugural survey in 1987 calculated that the top 100 firms generated $7bn in revenues — today, it’s over $100bn.

Today’s AmLaw editors have very little estimating to do because all the firms submit their performance data in an orderly way after the turn of the calendar year allowing the American Lawyer to publish the AmLaw 100 in the middle of Spring each year.

Miles better 

So what does a close analysis of this petri-dish experiment tell us about the impact of strong brands on profitability?

Whichever way you cut it, the data is clear.

The AmLaw firms with the strongest brands are 2-3 times more profitable than their peers — who are remember, similar-sized firms, with similar capabilities, serving similar clients from similar locations.

The difference in profitability is 3 times when you compare the top 10 firms to the bottom 10 (of the top 50) and 2 times comparing the top 25 to the bottom 25 (again of the top 50 firms).

Take your pick which feels the fairest comparison between the strongest and weakest brands among these otherwise very similar institutions.

This stark difference in performance is also consistent whether you measure the overall profitability of these firms or, as some lawyers like to do it, by comparing average PEP (profits per equity partner).

Level playing field

The reason it is rational to assume that the difference in profitability between one law firm and another is a proxy for its brand lies in the underlying dynamics of the global law firm market, which although quirky in many ways is, in economic-theory terms, a reasonably frictionless or ‘pure’ market (lots of competitors with relatively low market share, low barriers to entry/exit, similar products, and excellent price visibility).

In other sectors profits can be heavily influenced by ownership of critical IP (pharma), regulations and licences that thwart competition (telecoms), assets that bar entry (energy), effective monopolies or oligopolies (big tech), etc. none of which applies in any significant way in the premium legal market.

Firms only succeed commercially over time if they compete effectively year-in-year-out and because the purchase cycle is relatively short, clients can react quickly to any perceived changes in the relative competitiveness of any one firm.

Being a relatively ‘pure’ market, individual firms compete based on 3 components: reputation (How good their service is perceived to be by those that have experienced it), relevance (what problems they’re perceived to be best at solving), and visibility (how well known they’re known to clients who have those problems – and the budgets to pay for their services).

These three components added together comprise a firm’s ‘brand’ — arguably the only source of sustainable competitive advantage that law firms and most other professional service firms have.

Adopting a brand-led focus to strategy – i.e. a strong focus on drivers of reputation, relevance and visibility – is a powerful way to significantly, and sustainably, improve profitability.

Takeaways 

Just as the brand valuation data shows for publicly traded companies, this analysis shows that professional service firms with the strongest brands in their sector are 2-3 times more profitable than their peers with the weakest brands, all else being equal in terms of size, capabilities, clients, and locations.

So the insight for leaders of professional service firms is that adopting a brand-led focus to their strategy – i.e. a strong focus on drivers of reputation, relevance, and visibility – is a powerful way to significantly, and sustainably, improve their profitability.

Of course, this analysis is only undoubtedly accurate in the market for premium legal services (so-called Big Law). However, the level playing field in this market does suggest that there’s every reason to think that the same dynamic applies equally to other sectors such as management consulting, design, architecture, and other advisory businesses.

End.


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Ian Stephens

CEO and Founder of Principia, Ian is the trusted advisor on branding to leaders of many of the world’s most prestigious international professional service firms and knowledge-intensive B2B businesses across a range of sectors including law, consulting, strategy, technology, engineering, and innovation.