Managing the Professional Service Firm

Highlights

• Consider three kinds of client work: Brains, Grey Hair, and Procedure projects.
• In the first type (Brains), the client’s problem is at the forefront of professional or technical knowledge, or at least is of extreme complexity.
• Clients with Grey Hair problems seek out firms with experience in their particular type of problem. In turn, the firm sells its knowledge, its experience, and its judgment. In effect, they are saying, “Hire us because we have been through this before; we have practice at solving this type of problem.”
• The third type of project, the Procedure project, usually involves a well-recognized and familiar type of problem. While there is still a need to customize to some degree, the steps necessary to accomplish this are somewhat programmatic.
• Responsibility for the organization’s three primary tasks is allocated to these three levels of the organization: seniors (partners or vice presidents) are responsible for marketing and client relations, managers for the day-to-day supervision and coordination of projects, and juniors for the many technical tasks necessary to complete the study.
• For any given rate of growth, a highly leveraged firm (one with a high ratio of juniors to seniors) will offer a lower probability of “making it” to the top, since there are many juniors seeking to rise and relatively few senior slots opening up.
• By leveraging its high-cost seniors with low-cost juniors, the professional firm can lower its effective hourly rate and thus reduce its cost to clients while simultaneously generating additional profit for the partners.
• What we can say is that leverage should be as high as the requirements of the work allow).
• If the firm attempts to grow faster than target rate, it will be placed in the position of either having to promote a higher proportion of juniors, or to promote them in a shorter period of time.
• The ability to place ex-staff in prestigious positions is thus one of the prerequisites of a successful churning strategy.
• As we have seen, growth in a professional firm is driven primarily by the need to attract and retain staff, and is critical for that reason, but is not a guarantee of higher per-partner profits.
• If per-partner profits are to increase, then one of the two conditions must be broken. Either the firm must bring in a different mix of business commanding higher billing rates (i.e., find higher-value work for its people to do), or it must find ways to serve the same kinds of work with an ever increasing proportion of junior time, and a declining proportion of senior time.
• Perhaps the most significant management variable to be disclosed by the previous analysis is the choice of the mix of projects undertaken, and the implications this has for the (average) project team (i.e., leverage) structure.
• Competition in the market for the firm’s services will, over time, require the firm to seek out lower costs for projects of a particular type, and there will often be opportunities for an increasing proportion of juniors to be used on projects that, in the past, required a high proportion of senior time.
• The firm thus makes its most money by “leading the market”: being able to sell as a fully customized service (at a fully customized price) what increasingly becomes a service with reproducible, standardized elements.
• In any professional service there are three key benefits that clients seek: expertise, experience, and efficiency.
• In every profession, one can point to practice areas that, in only a few short years, moved rapidly from being frontier activities handled only by a handful of innovative firms to high-volume practices offered by increasingly large numbers of competent firms.
• In most professions, a consistent image in the marketplace is a valuable asset, which can be rapidly compromised if the firm attempts to serve too diverse a set of client needs.
• A second problem for firms attempting to understand their true market positioning is the natural temptation of all professionals to underestimate the progress of a practice area down the life cycle.
• In a partnership, the ultimate measure of profitability is (or should be) profit per partner, which is driven by three main factors, margin, productivity, and leverage.
• Unfortunately, in many firms, the reporting systems do not provide equitably for these varying paths to profitability. For example, charge-ability and realization reports are circulated more frequently and more broadly than reports showing how well partners leverage themselves.
• Rather than establish firmwide goals for margins, productivity, or leverage, firms should hold each practice (or partner) accountable for a profit per partner target and let the practice (or partner) figure out the best mixture of margin, productivity, and leverage necessary to achieve this goal.
• Some factors affecting margins are distinct from productivity and leverage—for example, space costs, equipment, and the like. These costs are hygiene factors. It is critical to avoid waste: we must not have too much excess space, too many computers, too many support staff. But once the “hygienic level” is achieved, it would be unwise to pursue profit improvement by pushing for even less space, even fewer computers, even less support staff.
• A firm’s average chargeability (or utilization), which most firms appropriately monitor very carefully, is predominantly a short-run issue. Each year, this is one of the first things the firm must take care of, like good hygiene. If the firm is below a “reasonable” chargeability, there is no point talking about long-run strategy.
• While firms could make more money by having people work Sundays, it is not the most creative of profit-improvement strategies. The real challenge is to figure out how to make more money without having to work so hard!
• “Managing” leverage means one thing: ensuring that the mix of skill levels on a project matches the true skill requirements of the engagement.
• Only increased fee levels or leverage move the firm forward. All else is hygiene. It is the nature of the work brought in, not just its volume, that contributes to profit health.
• Partners must be held responsible not only for the revenues they collect on an engagement, but also the precise costs to the firm that they incur by the way they get the engagement done.
• A push on operating efficiencies (better matching of work tasks to appropriate skill levels) will require renewed attention to a marketing program that focuses on high-value-added new business. It could be argued (and has been by many partners) that in some markets such work does not exist, or cannot be obtained in sufficient volume to replace the basic work pushed down. This very well may be the case, but this is not an argument to continue with inefficient staffing. Rather it suggests that in certain areas of practice the firm may be overpartnered.
• some firms have had success in tackling the underdelegation problem by being more aggressive in raising the fee rates of the firm’s more senior or experienced people, setting these billing rates individual by individual, and not by group criteria such as seniority.
• Professional firms must execute a full package of practice development steps covering five main categories of activity: Broadcasting Courting Superpleasing Nurturing Listening.
• Obviously, the firm that has a program of continuously soliciting, analyzing, and acting upon such input will be better positioned to capitalize on strategic opportunities than the firm that gets such input on an opportunistic, irregular basis.
• Focus groups work well, I have learned, particularly if the clients participating consent to be videotaped. A tape of clients expressing their needs, concerns, and challenges has a much greater impact on professionals than numbers on a page, no matter how statistically valid.
• Firms that provide legal counsel, tax advice, investment banking services, advertising services, and consulting services all share with our garage mechanic the need to service the client as well as the car.
• Because of the ambiguity that surrounds technical excellence (and the difficulty the client has in appraising it), the personal relationship between the client and the provider takes on great significance in all of the professions.
• The professional service provider is (or should be) as much in the business of managing the client’s experience with respect to professional services as in the business of executing technical tasks.
• Architects run the risk of falling in love with their artistic designs, lawyers with the elegance of their briefs, consultants with the sophistication of their analyses, all to the exclusion of consideration of what the client needs and expects or of how the client perceives the provider’s efforts.
• “People don’t care how much you know until they know how much you care”—a
• Improving the quality of work can be costly and hard to demonstrate. Improving the quality of service can be as cheap as instilling more responsive attitudes in professional staff, and it tends to be infinitely more visible to clients.
• What many firms have yet to learn is that the issue of improving client service is overwhelmingly a managerial one. They, and their professionals, know what good service is, but how do they make it happen? What does management have to do to provide the context within which firm personnel will actually execute and implement what they already know they should do?
• The test of a feedback system is thus not whether or not it measures successfully, but whether or not it induces changes in behavior.
• Training programs divide into knowledge transfer (“here are the elements of good service”) and skill building (“we’re going to give you practice at dealing with this client situation”). The former can be delivered as soon as the methodology described above is developed.
• The weaker (or more neglectful) a firm is at developing new business from existing client relationships, the lower the value (and hence the “return on marketing investment”) of getting new clients.
• Unless their skills are truly unique, unmatched by any competitor, professionals are never hired because of their technical capabilities. Excellent capabilities are essential to get you into the final set to be considered, but it is other things that get you hired.
• Once I have decided which firms I will consider in the final set, my focus of enquiry shifts significantly. I am no longer asking “Can you do it?” but rather “Do I want to work with you?”
• I’m feeling threatened. This is my area of responsibility, and even though intellectually I know I need outside expertise, emotionally it’s not comfortable to put my affairs in the hands of others.
• I’m exposed. Whoever I hire, I’m going to have to reveal some proprietary secrets, not all of which are flattering. I will have to undress.
• To avoid coming across as arrogant, patronizing, and pompous (common experiences with you professionals), turn your assertions into questions. By doing so, you convert possible signs of assertiveness into evidence that you’ll respect my opinions, involve me in the thinking process, and be sensitive to the need for a congenial relationship.
• Don’t start telling me how you can solve my problems until I have acknowledged that there’s a problem or an opportunity here.
• I do not respond well to someone who asks me right up front “What are your problems?” That’s too assertive and you haven’t yet earned the right to an answer. Similarly, don’t ask “What’s not going well?” I’m not going to answer that. But I might answer “What don’t you have time for?” I can answer that without feeling uncomfortable.
• The main goal of all marketing tactics should be to get away as soon as possible from “broadcasting a general message to a wide audience” and move to a highly individualized face-to-face dialogue between prospect and partner.
• Done well, a newsletter can be powerful. But like a good article, it must have real substance, a point of view, and offer an interpretation of recent events, not just an unprocessed reporting of them.
• I would have been better off, I realized, if I had worked for fewer clients, but done a variety of things for them so that they would have had a chance to see the range of my skills, and had had the chance to work with me enough to learn to know me and trust me when new things came up.
• Meeting a client need not mean working only in one industry, 100 percent of the time. It does mean being sufficiently well informed and experienced to stay current on industry developments, converse with the client about industry-specific issues, being able to offer your professional counsel in a way that does not require the client to do any “mental translation” of generalities or terminology into his or her specific situation.
• “The trouble is that some people have five years’ experience, and other people have one year’s experience five times.”
• The true added value of professionals lies less in what they know than in what they can do: interview clients effectively, win their trust and confidence, diagnose their needs, and make the myriad judgmental decisions as to how each matter should be handled.
• I’m not trying to train them to do, I’m trying to train them to think as I do.”
• If the atmosphere is truly ambiguous, and all nonpartners are kept equally in the dark, it is more than likely that it will be the best young professionals, the most marketable, who will leave to seek greener pastures, leaving behind the less-than-superior individuals. Clearly, to avoid this, professional firms must begin to make distinctions between the best and the competent at an earlier stage, and ensure that those the firm wishes to keep know that they are valued.
• The pattern of assignments will determine how functional or industry skills are built up. If the same individual is always assigned to the same functional topic, the firm builds a functional expert. If it wishes, it can manage the pattern of assignments to build an industry expert. Or it can not manage the process at all, and develop generalists.
• The link between assignments and compensation may be explicit, as in a system that ties an individual’s compensation to the person’s billability or utilization, or it may be implicit, when compensation is influenced by subjective determinants of performances.
• The pattern of assignments will influence an individual’s promotability through the variety of experiences they have provided, the exposure to different partners, and the staff member’s subsequent performance.
• There is no reason why equity participation need be synonymous with partnership.
• When there is more than enough to compensate everyone well, there is less pressure to compare and evaluate individuals.
• To believe that all partners can be trusted to perform well forever without being held accountable flies in the face of reality, particularly in a large firm.
• Where a service is so customized or complex that its execution remains more of an art than a science, organizations tend to be more free-form, less hierarchical, and less bureaucratic. Sociologists of business refer to these two extremes as “mechanistic organizations” and “organic organizations.”
• In all areas of practice, services that begin as the domain of the creative, experienced professional inevitably “mature” and can be delivered by using more junior personnel and relatively well-specified procedures.
• The one-firm firm, relative to its competitors, places great emphasis on its institutional history, broadly held values, and a reputation that all actively work to preserve.
• Within McKinsey, a new consultant learns within a very short period of time that the firm believes that the client comes first, the firm second, and the individual last.
• Unlike many of their competitors, all of the one-firm firms tend to “grow their own” professionals, rather than to make significant use of lateral hiring of senior professionals.
• Groups don’t cooperate, people do.