Generally two aspects of professional work create the
special management challenges to the professional service firm.
First, professional services involve a high degree of
customization in their work. Professional firms must manage customized
activities where nothing can be reliably made routine.
Second, most professional services have a strong
component of face-to-face interaction with the client. This implies that
definitions of quality and service take on special meanings and must be
managed carefully, and that very special skills are required of top
Both of these characteristics (customization and client
contact) demand that the firm attract (and retain) highly skilled
The Mission of most professional firms is:
- To deliver outstanding client
service, to provide fulfilling careers and professional satisfaction for
our people and to achieve financial success so that we can reward
ourselves and grow.
Simply put every professional firm must satisfy these
three goals of “ service, satisfaction, and success” if it is to
survive. Management of a professional firm requires a delicate balancing
act between the demands of the client marketplace, the realities of the
people marketplace (the market for staff) and the firm’s economic
AND THE CLIENT MARKETPLACE
The required shape of the organization ( the relative mix
of juniors, managers and seniors) is primarily determined by the skill
requirements of client work: the mix of senior-level, middle-level and
junior-level tasks involved in the projects that the firm undertakes.
SEGMENTATION OF SERVICE:
Consider where the client’s problem is at the forefront of professional
or technical knowledge, or of extreme complexity. Then the key elements
of this type of professional service are creativity, innovation and the
pioneering of new approaches, concepts or techniques.
This usually involve
highly skilled and highly paid professionals. Few procedures are
routine in nature. Each project is “one-off”. The opportunities for
leveraging the top professionals with juniors are relatively limited.
Consequently, the ratio of junior time to middle-level and senior time
tends to be low.
projects that they may require a highly customized output in meeting the
clients’ needs, involve a lesser degree of innovation and creativity in
the actual performance of the work. General nature of the problem to be
addressed is not unfamiliar and the activities necessary to complete the
project may be similar to those performed on other projects. Clients
seek out firms with experience in their particular type of problem. The
firm sells its knowledge, its experience and its judgment.
Since the problems to
be addressed are somewhat more familiar at least some of the tasks to be
performed (particularly the early ones) are known in advance and can be
specified and delegated. The opportunity is thus provided to employ more
juniors to accomplish these tasks.
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. The client may have the ability and resources to perform
the work itself, but turns to the professional firm because the firm can
perform the service more efficiently, because the firm is an outsider,
or because the client’s own staff capabilities to perform the activity
are somewhat constrained and are better used elsewhere. In essence the
professional firm is selling its procedure, its efficiency, its
usually involve the highest proportion of junior time relative to
AND THE PEOPLE MARKETPLACE
between a firm’s leverage structure ( its ratio of junior to senior
professional staff) and the people marketplace can be captured in a
single sentence: People do not join professional firms for jobs, but for
careers. They have strong expectations of progressing through the
organization at same pace agreed to (explicitly or implicitly) in
While the pace of
progress may not be a rigid one (“up or out in five years”), both the
individual and the organization usually share strong norms about what
constitutes a reasonable period of time for each stage of the career
path. Individuals who are not promoted within this period will seek
greener pastures elsewhere, either by their own choice or career
ambitions, or at the strong suggestion of the firm.
LEVERAGE AND PROFITABILITY
service firm’s leverage is also central to its economics. The “rewards
of partnership” ( the high levels of compensation attained by senior
partners) come only in part from the high hourly ( or daily) rates that
the top professionals can charge for their own time. Profits also come,
in large part, from the firm’s ability, through its project team
structure, to leverage the professional skills of the seniors with the
efforts of juniors.
leveraging of top professionals is at the heart of the success of the
professional firm. 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.
THE PROFESSIONAL FIRM LIFECYCLE
In any professional
service there are three key benefits that clients seek: expertise,
experience, and efficiency. However, even within the same practice area,
the relative priority that a given client places on these elements can
vary dramatically. A client with a large, complex, high-risk, and
unusual problem will appropriately seek out the most creative, talented,
or innovative individual or firm he can find-at almost any cost. Prior
experience in the clients’ industry, or past exposure to problems of a
similarly type, may be useful but are secondary to the client’s need for
professionals would like to believe that all client needs fall into this
category, such clients represent only a small proportion of the
aggregate fees spent in any given practice area. A much larger client
base exists for which different approaches to practice is required.
These types of client recognize their problems have probably been faced
and dealt with by other companies, require less complete customization,
and are probably not crisis issues. Accordingly, they will be shopping
less for the sheer brainpower of critical individuals and more for an
organization that can bring past experience to bear in solving these
problems. A high level of expertise is still required, and efficiency is
not irrelevant, but extensive experience with similar problems is worth
more to the client than an extra degree of intellect or extra savings
There will also exist
within the same practice area a third group of clients, who have
problems that they know can be handled competently by a broad range of
firms. Rather than looking for the highest possible expertise, or the
most prior experience, these clients will be seeking out a professional
firm that can meet their needs for a prompt start, quick disposition,
and low cost: They will seek the efficient firm.
Since clients of each
of these types exist within every practice area, it would be tempting
for a practice group to try and respond to all of these various needs,
particularly in these competitive days when professional firms are
hungry for increased revenues. However, accommodating the varying need s
of these different types of clients within a single practice group is an
almost impossible task. A group that wishes to attract the “high
expertise” engagements must organize its affairs and methods of doing
business in such a way that will make it an unlikely candidature to be
chosen by a client who places most emphasis on efficiency and, of
course, vice versa.
Rather than distinct
categories, the expertise, experience and efficiency labels are
obviously meant to describe only points along a spectrum of practice.
Every aspect of a practice group’s affairs, from practice development to
hiring, from economic structure to governance, will be affected by its
relative positioning on this spectrum. Increasingly, firms will have to
decide which type of client need they are attempting to serve and
organize their affairs appropriately.
TYPES OF PRACTICE
professional practice group ( or firm) that focuses its attentions on
serving the needs of clients with innovation problems. How would you run
such a practice?
True to the
professions’ traditional self-image of being elite practitioners, the
staffing requirements of this “ expertise-based” practice would be such
that the firm would need to seek out and attract only the top grade
graduates from the best schools, in order to generate top-notch
professionals who could meet the quality needs of the frontier
practice. Training would best be accomplished through an informal
apprenticeship system and since standards would be high a rigorous
up-or-out promotion system would ensure that the firm retained only the
best and the brightest.
large-scale engagements, might require large numbers of junior
professionals to draft documents, perform analyses, or conduct client
interviews, most expertise engagements would tend to require a high
percentage of senior professional time, due to the high diagnostic
component in the work. Accordingly, we would expect the expertise
practice areas to be relatively un-leveraged, with low fixed costs and
high margins. The firm would make its profits through high billing rates
or some form of value billing, justifiable and sustainable because of
the criticality, complexity and risk in the client engagement.
Since few clients
would have regular ongoing needs for top-flight critical expertise, the
client mix professionals practicing in this area would tend to be
diverse, and constantly shifting. With relatively low leverage and an
up-or-our system the internal pressure for growth would be less than in
other practice area types and ( appropriately) growth would not be a
major goal for the firm.
THE EXPERIENCE – BASED PRACTICE
Now consider a firm
whose practice – mix was made up predominantly of clients who, rather
than needing the profession’s most creative talent, wanted to find a
firm that had accumulated experience in handling certain types of
problems and would not take an expensive “start with a blank” approach
to the problem. Rather than relying on individual talents, the firm
would need to create more of an institutional reputation, based not only
on the talent of key individuals but on the ability of the firm to
bring to bear its collective knowledge derived from past engagements.
For such firms,
practice development would involve identifying, documenting and
promoting their specialized knowledge, through brochures describing
previous engagements, client newsletters or special seminars on topics
related to the firm’s particular area of experience. Experience based
practice areas would tend to have a more clearly focused and stable mix
of clients, with steady relationships becoming increasingly important.
In contrast to the “
frontier practitioners”, the work content of the typical engagement
would require less time spent on diagnosis and more on executing
increasingly predictable ( if still technically demanding) tasks.
Accordingly, the ratio of junior to senior professional time would
increase, with profits from increased leverage offsetting the generally
lower billing rates. It is in this middle experience stage of practice
area maturity that time-and-expenses billing practices would be (and
are) most relevant and common in all professions.
The firm’s hiring
needs would expand to include a major role for less skilled
professionals and more trainee professionals, since the increased
structuring of familiar engagement types would allow the firm to employ
an increasing degree of systems and procedures and hence require less
mature talent. Training approaches would become increasingly formal with
greater use of out-of-hours classroom sessions and practice manuals.
THE EFFICIENCY-BASED PRACTICE
Let us consider a
practice area that had high preponderance of clients who were mostly
interested in the efficiency with which the firm dealt with low-risk,
familiar types of problems. The firm would be squarely in the business
of demonstrating that it had established systems and procedures to
handle specific types of problems. Cost, reliability, speed, and other
such characteristics would come to the fore. The client mix in such
practices would tend to be focused around a core of high volume clients.
sensitivity would require that engagements be staffed at the most junior
level possible, including maximum possible use of trainee professionals
and increasing use of technology to substitute for professional labor.
Fee pressure would be offset by increasing use of staff and technology
leverage; and pricing would increasingly become a matter of fixed-price
contracts or bids.
with their relatively high fixed cost structure and many juniors, would
need to take a more studied, planned approach to growth in order to
capture the volume necessary to offset lower margins. The needs for both
management and administration would increase, in order to devise optimum
ways of dealing with familiar engagement types and to monitor and
supervise the project teams to ensure that the best procedure is indeed
being followed. Rather than the heavy use of judgment employment in
expertise-based practices, efficiency practices have high needs for
short-interval measurement systems both for quality assurance and
productivity. Rather than inspirational leadership styles, efficiency
based practices would need managers who are disciplined, organized and
PROFITABILITY AND GROWTH
It is interesting to
note that, the formula for profitability, growth and size do not appear,
it is essential that professional firms grow in order to motivate and
retain the firm’s best staff. Without growth, much of the dynamism of
the practice will be lost and morale will suffer.
For example, that a
firm successfully grew the practice by 25 percent in a given year, but
grew it in such a way that (a) the mix of business ( and hence the
realized fee rates) remained the same and (b) the firm’s method of
serving that additional volume of business used the same
staff-to-partner ratio currently existing. In this scenario, the firm
would need 25 percent more partners to handle that volume, and if the
realization rates were the same as the firm’s existing business, the net
profit per partner would remain the same.
Growing by 25 percent
and adding 25 percent more partners is not a bad result but it does not
further the goal of improving profit per partner To do that, we must
break one of the two conditions imposed; either bring in work that has
higher fee levels than the firm’s current average, or find ways to
service the firm’s work with higher leverage. This is the same
conclusion as that reached before: Only increased fee levels or leverage
move the firm forward. It is the nature of the work brought in, not just
its volume, that contributes to profit health.
This is not how most
firms control their practice development efforts. Many firms are revenue
driven or top-line oriented, taking the view that any new business is
In large part, the
lack of a good profitability reporting system that allows them to know
which work is truly profitable and which is not. Never measure
profitability at the engagement level (or do so with misleading
indicators such as margin or realization alone) it is hard to guide and
reward partners’ practice development activities properly. If profits
are to improve, this will only be done by improving how profitably
engagements are run: proper staffing, proper delegation, efficient use
of people’s time. Project leaders should be held accountable for
engagement success, considering revenues and the costs of resources
consumed (including the costs of partner time).