Stay Profitable and Innovative: Use the Three Horizon Framework to Forecast Growth
It’s a familiar story: A couple of founders leave an agency or consultancy. They band together to deliver innovative work for cool clients. These leaders figured they could do better work on their own, so they developed unique methods and processes – great work started flowing. The first few years in business were busy, exciting, and fulfilling. The team gained a solid reputation, and the company grew organically from word-of-mouth referrals. This new team is at the top of their game.
Nothing is permanent, though. As the industry evolves (or catches up) that innovative work from the early days isn’t all that innovative anymore. With more commoditization and competition, profitability plateaus and profit margins shrink.
All of the sudden, these founders are facing a growth problem. Without thinking about the profitability of current services offerings while also planning for future innovation, that early excitement and once-innovative work feels like a slog.
Read on to discover how McKinsey’s Three Horizon’s framework can prevent this all-too-common growth problem.
What is the Three Horizons Model
McKinsey’s ‘Three Horizons of Growth’ framework helps businesses manage their current performance while maximizing future opportunities for growth. At Parallax, we’re big fans of this concept – it becomes a set of guiding principles to do good (and profitable) work today, while dedicating time to focus on the innovations and opportunities of tomorrow.
Here’s an introduction to the Three Horizons Framework and how it might apply to you:
Horizon Model – Step 1: The work that pays the bills
Horizon 1 is your company’s bread and butter work that pays your bills. It’s the kind of work that you know how to do well on a repeatable basis. You know how to market it, deliver it, and staff it. The goal of Horizon 1 is about profitability. You want to make this work as profitable as possible and extend the life of the work as long as possible.
Just like in the story above, Horizon 1 work eventually plateaus in value because it becomes commoditized. The cost of doing the work goes up (e.g., your staff needs raises), but, at some point, clients won’t be willing to pay more for it. Think about the impact that the rise of services like Squarespace and Shopify had on your ability to charge more for simple CMS or eCommerce websites. These services aren’t innovative anymore because so many people can do them well and quickly. To compete, companies need to sell these services based on their ability to do them faster and cheaper versus providing differentiated value.
The profitability of Horizon 1 work will always erode, but that’s okay. This is a natural business cycle, which is why investing in Horizon 2 work is equally important.
Horizon Model – Step 2: The work that keeps you relevant
Horizon 2 is the innovative work your company develops as it predicts what services clients will want in the future. It’s less important for Horizon 2 work to be profitable. Instead, it must be growing in demand. Are more and more clients asking for this work? Is it a service you can sell on your value versus price because of your unique approach and experience? Does it set you apart from competitors?
Horizon 2 challenges you to constantly think about innovation. As leaders see profit from bread and butter Horizon 1 work, they also need to predict what will be valuable to customers next and invest in developing the team’s capabilities to support Horizon 2 work.
Eventually, the work you develop and identify in Horizon 2 will become Horizon 1 work. This continuous cycle means companies must routinely assess how profitable and innovative its work portfolio is — and keep taking action to stay well-funded and relevant.
Horizon Model – Step 3: The futuristic trend-setting work
Horizon 3 work identifies future industry and macro trends — and considers how the business will be ready to address them. It’s an important consideration for many types of business, like global manufacturers and med device companies. But the reality is that most companies don’t have the luxury of thinking about Horizon 3 work. Most don’t and can’t think that far out, so this Horizon isn’t likely to drive any real behavior for services companies. While mastering Horizon 1 and 2 levels of work – continually evaluating how each type of work is performing – is key, having an overall vision for where the industry is headed is important to consider at some level, too.
How the Three Horizon Framework supports your growth
Adopting the Horizon Model helps you balance profitability and innovation — both of which are needed to keep you competitive and thriving today and for years to come. Identifying your Horizon 1 and 2 work also supports your business because it:
1. Encourages standardized services
Many services companies fall into the trap of treating every project as custom and making employees feel like only the new, innovative work is cool and exciting. This mindset can be dangerous for the business because it downplays the importance of standardized services and the bread and butter work that pays your bills and keeps your staff employed.
Standardizing this bread and butter work (Horizon 1) with repeatable processes, pricing, and delivery helps you deliver it as efficiently and profitably as possible. If you’re really good at standardized delivery, other things in your business will also be true. Your bid-to-sale ratio will be higher, project delivery will be on-time more often, and your project margin will be higher because you don’t waste time and energy reinventing the wheel.
Plus, you need this profitable work to fund the innovative work (Horizon 2) that keeps you in business in the future.
2. Informs hiring decisions and resource allocation
Not all employees are cut out for dreaming up innovative new services. Others aren’t cut out to extend the life and profitability of bread and butter work. It’s critical to recognize that different employees have different professional pursuits and skill sets. This can help you match employees to the Horizon that they can best support.
Horizon 1 work is often best for the employees we call Builders and Teachers. Builders like the challenge of figuring out how to do good work smarter and more efficiently. They also are effective bridge-builders between Horizon 1 and Horizon 2 work because they excel at finding concrete ways to create value for the business (i.e., making the innovative work profitable). Teachers are inspired by helping others succeed through training, coaching, and mentorship. Horizon 1 work is great work for Teachers to use as a training ground for new employees to learn the business.
Horizon 2 work is best for Explorers. These employees are future-focused, entrepreneurial, and creative. While Builders and Teachers focus on ensuring profitability for the company, Explorers can identify new customer demand trends and build innovative services to address them and support future growth.
Knowing which employees support which Horizon best can help your company allocate existing resources effectively and better hire the types of employees it needs.
3. Keeps your eye on the future
It’s easy to get bogged down in the day-to-day operations of services business. The Horizons model encourages leaders to continuously think about the sustainability, profitability, and longevity of the work they deliver.
How sustainable the work we’re doing today? Will it continue growing? Is profitability eroding? Has it plateaued already? The Horizons Model encourages you to get ahead of declining profitability to inform proactive, strategic, and innovative business decisions. It supports growth by maximizing the services of today while preparing for the demands of tomorrow.
Parallax is purpose built to support both Horizon 1 and Horizon 2 work for digital agencies and software development companies. It can help standardize services using repeatable project templates and resources plans we call “project shapes.” These shapes make it easier for teams to sell, deliver, and track Horizon 1 projects. It also gives employees more visibility into what’s happening across the business to spot concerning trends in metrics like project margin and profit. Keeping an eye on these metrics helps you stay on top of growth so you can innovate toward the second horizon.
A common challenge with growth – especially for services business – is that once-innovative work becomes commoditized and profitability lags. By embracing the Three Horizon’s Framework, organizations can optimize their delivery for great results today, while also making room for future innovation and growth tomorrow. Parallax is built to support this important cycle. We help you optimize performance, improve profitability, and standardize your core offerings, while also providing data and insight into new, innovative work on the next horizon. Want to see Parallax in action and learn more? Reach out to book a demo today.
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What is the 3 Horizons Model?
The “Three Horizon’s of Growth” framework from McKinsey is a concept for optimizing for performance today while keeping an eye on the opportunities for business growth tomorrow.
How should you use the 3 Horizons Model?
Services companies can partner with Parallax for insights into their delivery today to ensure that work in Horizon 1 is delivered as efficiently as possible. Parallax can also help identify ares of the business that can drive innovation in the future.
What are Horizon 1 innovations?
According to McKinsey, the core parts of a business that provide the greatest amount of cash flow and profits are considered Horizon 1 innovations. We call this your “bread and butter work”.
What are Horizon 2 innovations?
Horizon 2 innovations are the emerging opportunities for the business to offer new services or offerings, so they can grow into new areas and avoid commoditization.
Benefits of the 3 Horizon Framework?
Businesses that embrace the Three Horizon Framework optimize their focus and delivery around core offerings that are profitable today, while also having a sense of the work that will drive innovation in the future. This important cycle ensures businesses stay innovative and profitable long-term.