Leadership challenges for Professional Services Firms – navigating the “Bermuda Triangle”
New Sam Wilko Advisory Blog by Peter Wilkinson
A recent Australian Financial Review article got me thinking about the particular challenges faced by Professional Services firms in Engineering, Law, Accounting and the like in effectively managing growth, as well as the role that great leadership plays in dealing with these challenges.
Joe Barolsky in “Avoiding the Bermuda Triangle of law firm management” outlined the results of a study of US Law firms carried out in the early 2000s by Professor Ashish Nanda of Harvard Business School.
Professor Nanda compared profit per equity partner of over 200 legal firms. The results indicated that profitability was relatively high for the very large firms and the small boutique firms focused on specific market segments. However, most mid-sized firms generated lower profit relative to both their smaller and larger peers. Two theories were proposed to explain this result:
- – The first was that many of the mid-sized legal firms found it hard to differentiate themselves and as a result were unable to secure a price premium.
- – The second theory concerned management and leadership practices. Small firms by and large benefited from quick, informal decision-making, whilst large firms had the advantage of more mature and formal management practices and leadership capability. Problems emerged when shifting from small to large, with medium sized firms being stuck in a growth pain zone referred to a “Bermuda Triangle”.
In relation to the second theory, it is fair to say that every business with a history of growth has inevitably suffered episodes of “growing pains” along the way. In my experience this most clearly shows up in the spaghetti-like organisation charts, that result from the reactive approach to hiring and firing that typically occurs when management time is short and spot fires many.
Significantly though, Professional services firms face a particular leadership and management-related challenge. This challenge progressively manifests itself as an intrinsic consequence of the Partner-ownership model.
Professional Services firms are typically owned by multiple Partners, with additional “owners” appointed as the business grows. Consequently, decision making progressively becomes more cumbersome. What this can look like day-to-day is extensive delays and lowest common denominator decision-making – doing what all can agree on rather than on what’s right – as well as creeping decision avoidance.
The most critical element in navigating through the mid-sized firm “Bermuda Triangle” is effective leadership. Good leaders implement the right decisions quickly, building trust among the partners who are then more prepared to cede many of their low-level decision rights.
Unfortunately, what leadership can look and feel like to a (sometimes reluctant) Managing Partner is a largely ceremonial and administrative role. This is particularly prevalent in Engineering Services businesses, where technical competence and reputation is the primary means by which firm recognition has been achieved in the first place.
To some extent this concern is indeed true. What can underlie this reluctance however is fear, borne of uncertainty as to where influence needs to be brought to bear in making a real difference to firm performance.
What indeed should be focused on once the admin is sorted?
What are the key challenges that professional services firms face in transforming from good to great?
Here’s a few thoughts to start….
At the core of typical Professional Services firms, is a close (sometimes myopic) management focus on chargeable hours. Regardless of what might be discussed in management meetings about workforce training, professional skills development and “work-life balance” the utilisation measure remains top of the list. This focus becomes even more prevalent when times get tough (read: the work starts to dry up).
At the end of the (traditional) day, revenue and therefore profit is fundamentally driven by chargeable hours and whilst “value pricing” is the holy grail of professional services, clients as a default position commonly assess the cost of an assignment – at least to some extent – based on time inputs to achieve the result.
Effective leaders of Professional Services businesses have an opportunity to constantly reinforce the value offered by their people via their client base relationships.
Firms finding themselves in the “Bermuda Triangle” of growth are increasingly seeking to reduce margin pressure by adopting automation-based technology. Engineering firms, by way of example, have virtually completely replaced manual drafting services with CAD and have moved significantly towards 3-D model-based design (although still limited by integration challenges across various design systems, documentation management platforms and communications media). Legal firms have more recently invested in “data scraping” services to automate the labour-intensive review of the typically thousands of documents associated with the Discovery phase of legal actions.
On the other hand, what is potentially lost in the race to implement best technology? Manual drawing production and documentation reviews have been the traditional means by which junior staff learnt basic skills and developed resilience to survive and thrive in a Professional Services environment. Juniors who are unfamiliar with hand-held calculators can lack the ability to “sense-check” the results of a spreadsheet. Engineering drafters relying on CAD-generated construction details have limited opportunity to develop a feel for construct-ability.
Great leaders of Professional Services businesses possess a deep understanding of and a keen interest in leveraging technology for efficient and effective client outcomes. They also recognise the need to invest in developing capable and experienced junior professional staff who can survive and thrive in a modern business environment.