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 performers.

Both of these characteristics (customization and client contact) demand that the firm attract (and retain) highly skilled individuals.

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 ambitions.

LEVERAGE 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.

Consider where 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 availability.

Procedure projects usually involve the highest proportion of  junior time relative to senior time.

LEVERAGE AND THE PEOPLE MARKETPLACE

The connection 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 advance.

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

The professional 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.

The successful 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 skilled expertise.

While many 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

THE EXPERTISE PRACTICE

Imagine a 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.

While some 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.

Client fee 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.

Efficiency practices, 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 detail oriented.

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 good business.

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).

 Source: Good-Guy

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