At last here is a comprehensive text on the managerial problems of professional firms. David Maister, whose international consulting practice has gained him the reputation among his peers as "the guru's guru", brings together for the first time his most brilliant and penetrating work on virtually every management issue facing professional firms today.
Professional firms, he shows, are different from other business enterprises in two ways. First, they are in the business of providing highly customized services, and hence cannot apply many of the management principles developed for the mass production industrial world. Second, professional services are highly personalized and involve the skills of individuals. Firms must compete not only for clients, but also for talented professionals. Drawing on ten years' research amid consulting to these unique and creative institutions, Maister explores issues ranging from marketing and business development to multinational strategies, from human resource policies to profit improvement strategies, from strategic planning to the effective behavior of practice leaders. His concepts and practical advice have already become gospel to accountants, consultants, lawyers, public relations agencies, executive search, and many other professions.
Maister simplifies management issues by observing that "every professional service firm in the world, regardless of size, specific profession, or country of operation, has the same mission statement: outstanding service to clients, satisfying careers for its people, and financial success for its owners." Professional service firms, he shows, must practice "balance sheet" management by learning to develop their two key assets: client relationships and their stock of skill, talent, knowledge, and ability.
"David Maister's name is synonymous with the latest thinking in professional service firm management. This book suggests why."
--James L. Heskett, Professor, Harvard Business School Co-author of "Service Breakthroughs"
"synopsis" may belong to another edition of this title.
David H. Maister, one of the world's leading authorities on the management of professional service firms, is the author of several successful books, including Managing the Professional Service Firm, True Professionalism, and Practice What You Preach, and coauthor of The Trusted Advisor.Excerpt. © Reprinted by permission. All rights reserved.:
A QUESTION OF BALANCE
One of the most interesting discoveries in my consulting work has been the fact that (apparently) every professional service firm in the world has the same mission statement, regardless of the firm's size, specific profession, or country of operation. With varying refinements of language, 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.
The commonality of this mission does not detract from its value. 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.
Many factors play a role in bringing these goals into harmony, but one has a preeminent position: the ratio of junior, middle-level, and senior staff in the firm's organization, referred to here as the firm's leverage. To see the importance of this factor, we shall briefly examine, in turn, its relation to the three goals of the firm.
LEVERAGE AND THE CLIENT MARKETPLACE
The required shape of the organization (the relative mix of juniors, managers, and seniors) is primarily determined by (or rather, as we shall see, should be determined by) the skill requirements of its work: the mix of senior-level, middle-level, and junior-level tasks involved in the projects that the firm undertakes. 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. The key elements of this type of professional service are creativity, innovation, and the pioneering of new approaches, concepts or techniques: in effect, new solutions to new problems. The firm that targets this market will be attempting to sell its services on the basis of the high professional craft of its staff. In essence, their appeal to their market is, "Hire us because we're smart."
Brains projects usually involve highly skilled and highly paid professionals. Few procedures are routinizable: Each project is "one-off." Accordingly, the opportunities for leveraging the top professionals with juniors are relatively limited. Even though such projects may involve significant data collection and analysis activities (normally performed by juniors), even these activities cannot be clearly specified in advance and require the active involvement of at least middle-level (project management) professionals on a continuous basis. Consequently, the ratio of junior time to middle-level and senior time on Brains projects tends to be low.
Grey Hair projects, while 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 than would a Brains project. The 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 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."
Since for Grey Hair-type projects 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 procedures, its efficiency, its availability: "Hire us because we know how to do this and can deliver it effectively."
Procedure projects usually involve the highest proportion of junior time relative to senior time (and hence imply a different organizational shape for firms that specialize in such projects). The problems to be addressed in such projects, and the steps necessary to complete the analysis, diagnosis, and conclusions are usually so sufficiently well established that they can be easily delegated (under supervision) to junior staff. For Procedure projects the range of possible outcomes for some steps may be so well known that the appropriate responses may be "programmed."
The three categories described here are, of course, only points along a spectrum of project types. However, it is usually a simple task in any profession to identify types of problems that fit these categories. The choice that the firm makes in its mix of project types is one of the most important variables it has available to balance the firm. The choice of project types influences significantly, as we shall see, the economic and organizational structures of the firm.
Consider what will happen if a firm brings in a mix of client work such that its "proper" staffing requirements would be for a slightly higher mix of juniors, and a lesser mix of seniors than it has (i.e., the work is slightly more procedural than the firm would normally expect). What will happen?
As Figure 1-2 suggests, the short-run consequence will be that higher priced people will end up performing lower-value tasks (probably at lower fees), and there will be an underutilization of senior personnel. The firm will make less money than it should be making.
The opposite problem is no less real. If a firm brings in work that has skill requirements of a higher percentage of seniors and a lesser percentage of juniors, the consequences will be at least equally adverse: a shortfall of qualified staff to perform the tasks, and a consequent quality risk.
As these simple examples show, matching the skills required by the work to the skills available in the firm (i.e., managing the leverage structure) is central to keeping the firm in balance.
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 some pace agreed to (explicitly or implicitly) in advance.
The professional service firm may be viewed as the modern embodiment of the medieval craftsman's shop, with its apprentices, journeymen, and master craftsmen. The early years of an individual's association with a professional service firm are, indeed, usually viewed as an apprenticeship, and the relation between juniors and seniors the same: The senior craftsmen repay the hard work and assistance of the juniors by teaching them their craft.
The archetypal structure of the professional service firm is an organization containing three professional levels. In a consulting organization, these levels might be labeled junior consultant, manager, and vice president. In a CPA firm they might be referred to as staff, manager, and partner. Law firms tend to have only two levels, associate and partner, although there is an increasing tendency in large law firms to recognize formally what has long been an informal distinction between junior and senior partners.
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. The three levels are traditionally referred to as "the finders, "the minders," and "the grinders" of the business. The mix of each that the firm requires (i.e., its ratio of senior to junior professionals) is primarily determined by the mix of client work, and in turn crucially determines the career paths that the firm can offer.
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.
This promotion system serves an essential screening function for the firm. Not all young professionals hired subsequently develop the managerial and client relations skills required at the higher levels. While good initial recruiting procedures may serve to reduce the degree of screening required through the promotion process, it can rarely eliminate the need for the promotion process to serve this important function. The existence of a "risk of not making it" also serves the firm in that it constitutes a degree of pressure on junior personnel to work hard and succeed.
The promotion incentive is directly influenced by two key dimensions: the normal amount of time spent at each level before being considered for promotion, and the "odds of making it" (the proportion promoted). These factors are clearly linked to a firm's leverage structure (and its growth). 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. A less leveraged firm, at the same rate of growth, will need to "bring along" a higher percentage of its juniors, thus providing a greater promotion incentive.
LEVERAGE AND PROFITABILITY
A 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. As demonstrated below, a significant portion of partnership profits derives from the surplus generated from hiring staff at a given salary and billing them out at multiples of that salary. 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 market for the firm's services will determine the fees it can command for a given project; its costs will be determined by the firm's abilities to deliver the service with a cost-effective mix of junior, manager, and senior time. If the firm can find a way to deliver its services with a higher proportion of juniors to seniors, it will be able to achieve lower service delivery costs. The project team structure of the firm is therefore an important component of firm profitability.
The relationship between a firm's leverage structure and its three goals is illustrated in Figure 1-4, which shows the principal forces tying these elements together.
GURU ASSOCIATES: A NUMERICAL EXAMPLE
To explore further how these items interrelate, let us consider a numerical example. Guru Associates, which engages in a variety of projects, nevertheless has a typical project which requires 50 percent of a senior's time, 100 percent of a middle-level person's time, and the full-time efforts of three juniors. No one is expected to bill 100 percent of each's available time. Nevertheless, if the firm is to meet its economic goals, it will require that seniors and managers are engaged in billable work for 75 percent of their time, and juniors 90 percent.
Guru Associates currently has four seniors. If it is to meet its target of 75 percent billed senior time, its available senior time will be four times 75 percent, or the equivalent of three seniors working full-time. This implies six projects, if the typical project requires 50 percent of a senior's time.
With six projects, the firm needs the equivalent of six full-time middle-level staff, according to the project team structure. (Each project requires 100 percent of a middle-level person). At 75 percent target utilization (billed hours divided by available hours), this means that the firm must have eight middle-level staff. Similarly, at three juniors per project, the firm needs eighteen full-time juniors, or at 90 percent billability, twenty juniors.
Simple calculations such as these show that, with eight seniors, the firm would need sixteen managers and forty juniors. The proportions remain constant: one senior to every two managers, to every five juniors. Unless there is a change in either the project team structure (i.e., the types of projects the firm undertakes), or the target utilization (matters which will be discussed below), the firm must keep these ratios constant as it grows.
This seemingly simpleminded calculation, relating the staffing mix requirements of the work to the staffing levels existing in the firm, is in fact of extreme importance.
If we know the salaries of the staff members and their billing rates, we can construct the pro forma income statement of this firm at full utilization. The role of leverage is amply illustrated by Guru Associates. The four seniors (partners) personally bill a total of $1.2 million, or $300,000 apiece. At per-professional overhead costs of $40,000 (including the costs of all secretaries, administrative staff, space, supplies, etc.), this would result in a per-partner profit of $260,000 if these seniors were totally unleveraged.
With a healthy seven staff members per senior, partner profits now total $420,000 apiece. About 60 percent of each partner's profit comes not from what he or she bills, but from the profit generated by the nonpartner group. Thus the benefits of leverage!
(It should be immediately stressed that high leverage is not always good. As we have already observed, having high leverage is completely inappropriate if the firm has a high level of Brains work. What we can say is that leverage should be as high as the requirements of the work allow).
We now turn to Guru Asso...
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