For many service firms, it is undoubtedly very tempting to act as a one-stop shop for clients to retain as much business as possible. So a law firm that handles a client’s mergers and acquisitions business might also offer services in intellectual property litigation or other areas. But one-stop shops may actually erode value creation because the firm’s expertise gets diffused, according to the paper, “Estimating Value Creation From Revealed Preferences: Application to Value-based Strategies,” by Olivier Chatain, a professor of strategy and business policy at HEC Paris and one of the Mack Institute’s academic senior fellows. His co-author is Denisa Mindruta, also a professor at HEC Paris.
Chatain joined Knowledge@Wharton recently to talk about the findings of their paper. An edited transcript of the conversation follows below.
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Knowledge@Wharton: We’re here with Olivier Chatain, a professor at HEC-Paris who is also an academic senior fellow at Wharton’s Mack Institute for Innovation Management. He is here to talk about his paper on value creation strategies.
Olivier Chatain: The paper is, essentially, a methodology to understand how firms in a buyer-to-buyer context are able to create value for their customers when they’re filling multiple lines of business to the same customer. Very often you have firms that are actually selling different products to the same buyer because the buyer is interested in having some kind of one-stop shop.
This is something that you see a lot with professional firms, like consulting firms or law firms. Actually, our paper is set in the context of law firms. But you would also see that, for instance, if you look at some equipment manufacturers who are going to be sending multiple types of parts to the same OEM [original equipment manufacturer], like you would see in aeronautics and in the automobile industry.
It’s very important to understand [whether] selling multiple types of products to the same buyer is actually creating value. And we realize that there are many reasons why you may be creating value by doing that, and our paper is an attempt at figuring out why that is the case. And we do that … by estimating what creates value for a given client.
“What we found was that actually, … it’s too difficult to add one more line of business.”
There are basically two reasons why you may be creating value. One, because you are … selling a good product individually. But we’re also interested in understanding when is it that selling multiple products is creating additional value on top of the value creation for each product.
Knowledge@Wharton: What are your paper’s key takeaways?
Chatain: One thing that surprised us is that when we started the paper, we had the notion that it’s necessarily good to sell multiple products to the same buyer. And that in the case of the firms we were looking into, it really made sense for them to sell multiple products because they would use what they learned in one area to … help provide a better service in another area. So we had this idea that well, if you are a lawyer at a law firm and you are helping your client, say, in mergers and acquisition, but also in capital markets and maybe in real estate — all at the same time, you can really cross-utilize those things.
So we started from that assumption. But what we found was that actually, even for a firm like this, it’s too difficult to add one more line of business and that the real hurdle is really to create relationships in the first place.
Knowledge@Wharton: And why do you think that is?
Chatain: So that’s something that we really had to think hard [about]. What we think is that — especially for the law firms we were looking into — … even though you may know a client well, each time [you provide a new service to him], it’s almost like [starting] a different subject. You really have to start over and learn a lot about the client.
An alternative explanation [for our results] is that some clients are very worried about having one supplier of service serving multiple areas. So even though you might be the best expert for me, if you’re already my best expert for two or three other subjects in law, I may want to deal with someone else because I might be afraid if I get all the information from the same supplier, I might be missing out on some important themes.
I might have a preference of diversity in terms of input, which was something that is apparently more important than the savings you can realize by bundling all these products together.
“Some clients are very worried about having one supplier of service serving multiple areas.”
Knowledge@Wharton: In that case, what should businesses and organizations do?
Chatain: In the end, what we find is that a lot of these firms still adopt the model of one-stop shop. Because even if it’s costly to add one more type of product — each time I want to supply you, it’s still expensive for me, so there’s value that’s destroyed there — it’s even more value-disruptive to create one more relationship from scratch. So firms have … to be very savvy about balancing the need to have multiple suppliers, knowing that the big cost is really to create one new relationship with any supplier.
They have to make sure that they have just enough suppliers … but at the same time, they need to be able to realize that even though these suppliers are there and we already know them, asking something else from a current supplier is not a free lunch, so we still are going to incur new costs.
Knowledge@Wharton: Is there an optimal way to execute a one-stop shop? Or you’re saying organizations should stay away from that?
Chatain: No, I think it’s a good thing in most cases. But it’s a bit more complicated than we initially thought. We thought that, ‘Oh, of course, one-stop shop, you create that relationship and then you leverage it and then you are able to really create synergies.’ But it turns out that synergies are harder to realize than one might have thought, at least in the setting we’re studying. And that it’s harder than we thought, essentially. … As a provider of a one-stop shop, it’s very important for you to show that you’re good in each of the areas the you want to provide.
So on one hand, you want to have at least one that is very good. So you can justify the cost of being qualified as a supplier. And then, you need to be good enough … in order to also be used and tapped into, once you become a qualified supplier. However, it turns out that being qualified is just the beginning. And it’s still very costly to use you. And as a buyer, you might underestimate the fact that the new supplier, even when you know them from one type of product in one area of work, will still need to be re-trained, even though it seems that we’ve been dealing with them for … years.
… So as a buyer, you still want to use them, but you should maybe lower your expectations in terms of how much they can deliver, at least initially.
“As a provider of a one-stop shop, it’s very important for you to show that you’re good in each of the areas the you want to provide.”
Knowledge@Wharton: It sounds like your conclusions debunk some widely held assumptions in the marketplace about one-stop shops. What sets your research apart from prior work in this area?
Chatain: I had prior work that assumed that things were maybe easier than we thought, so it was counter-balancing some of my earlier work and it came as a big surprise. Now, we want to put out a word about the methodology we are using here. For businesses, it’s usually very hard to understand what contributes to value creation. And managers don’t necessarily have a lot of data to do that especially in situations where you see multiple competitors. But when they are long-time relationships, it’s not clear. You know who’s working with whom, but you don’t necessarily know how much they pay for that and what services executives are getting.
But with our methodology here, we are able to use relatively sparse information just about who’s working with whom at the level of the market to really infer a lot about what customers value. And that’s something that is a bit new to strategic management as a method, and while there’s a lot of methods in economics that tend to require [knowing] prices, here we don’t need to know prices. We just need to know who’s working with whom and can already infer a lot out of that. So I felt that of all the methodologies, it’s the beginning of something that we are borrowing from econometrics.
Knowledge@Wharton: What will you do next as a follow-up to this research?
Chatain: Well, we are not totally done with it, so we are still pushing the paper towards publication. To some extent, it’s very innovative, I think, and it was very difficult to make the paper accessible, even to a research audience. One of the next steps … is to release some open source software that will be accessible in order to apply that methodology. It’s something that has already been done by one of the foremost academics, Jeremy Fox, on whose methodological prior work we base our research, but this is something that we want to be able to be used by most people.