7 MIN READ
Professional Services Organizations
Understanding How They Work
What type of organization sells no products, and yet charges some of the highest prices anywhere? Where can the "items" a company sells simply walk out the door? And what kind of company finds it almost impossible to achieve economies of scale on the "cost of goods sold"?
The answer: professional services firms. The unique nature of these organizations creates management and leadership challenges that many other companies do not have to deal with.
In this article, we look at some of the characteristics of professional services firms – and some of the common management challenges they face.
The Typical Work Model
Professional services firms exist in many different industries. They include lawyers, advertising professionals, architects, accountants, financial advisers, engineers, and consultants, among others. Basically, they can be any organization or profession that offers customized, knowledge-based services to clients.
In his influential book "Managing the Professional Service Firm," David Maister compares the professional services organization to a medieval craftsman's shop. Today, just as in the Middle Ages, there are "apprentices" (junior managers or new hires), "journeymen" (mid-level managers or experienced professionals), and "master craftsmen" (senior partners or upper management). Some call these levels the "grinders," "minders," and "finders" of a firm, respectively.
Most professional services firms use a leveraging system to maximize profitability. For instance, junior employees usually earn a relatively low salary. They accept lower pay because they want to gain experience, and have the opportunity to work closely with senior partners ("finders") to acquire their valuable knowledge.
When clients hire a firm, they generally do so because of that firm's credibility and reputation. But clients don't necessarily get the direct expertise of the senior managers. It's the lower-paid juniors who often perform most of the hands-on work. Clients then meet for a limited time with higher-paid senior managers, who oversee quality and offer advice. This allows the firm to charge a high fee to clients, and still keep a high profit margin. This way of working is typical of the partnership model, where the senior professionals are managers as well as producers. Not all professional services organizations operate this way, but many – particularly the larger firms – do.
The Unique Challenges of Intangible Products
Unlike other types of organizations, professional services firms sell knowledge and expertise – not tangible, physical products. So these firms have different needs, and face different challenges.
For example, consider a manufacturing plant. Once a product has been designed, mass production can create units 24 hours a day on machinery that's monitored by low-wage workers. Manufacturing managers emphasize the importance of standardization, quality, and productivity in their teams.
But how does this compare with an accounting firm? While managers should still stress quality and productivity, they can't standardize or "mass-produce" their services. Their profitability comes from "face time," or billing hours, with clients – all of whom have different needs and demands. If team members don't meet with clients or work on specific projects, they don't earn money for the firm.
If you're a manager at a professional services firm, it can be difficult to balance high productivity, personalized service, and knowledge management. And one of your primary tasks is to maintain your "human capital" – in other words, keep your staff motivated and productive. Manufacturing plants spend a lot of effort maintaining their machinery and warehouses. Services firms must spend time and energy coaching their teams – and actively ensuring that the most talented workers stay with them (more on this below). Without expert professionals and a strong reputation, the firm may fail.
This is a simplistic comparison, but it shows just how different professional services firms are from other types of businesses – and why managing these firms needs a different approach in order to succeed.
Motivation can be a major problem, especially for a team of junior professionals, and it's becoming tougher for many firms to retain their top talent.
In the past, the goal of most junior managers was to become a partner. This usually created a competitive environment that, in turn, led to high-quality work. As time passed, the "stars," or strongest workers, were promoted – and the weaker team members either left or gave up.
These days, however, partnership is not always the ultimate reward. Younger professionals sometimes question whether the extra work is worth it. Long hours, heavy workloads, and difficult clients are often unappealing to people who are seeking work-life balance.
And today, young professionals in the services industries have far more options than they used to. It's no longer considered unethical for a young lawyer or financial adviser to change firms every few years in pursuit of better opportunities.
Because of this motivation challenge, professional services firms must create ways to attract – and keep – the best and brightest workers. After all, their people are what they sell. So if those people aren't fully motivated and producing top-quality work, then the firm is at a competitive disadvantage.
Scheduling and Billing
Professional services firms are profitable only when their team members bill hours to clients. Therefore, new work is often assigned to the person who's currently not working billable hours. Although this maximizes revenue in the short term, it can often lead to a decline in quality and client service.
For example, imagine that your law firm has a 'superstar' who is particularly skilled at tax fraud cases. If the firm gets a new tax fraud case, and your superstar is involved in another case, then chances are high that the new case will be assigned to someone who isn't busy. Keeping everyone productive, billing their time to clients, is extremely important. But if you don't schedule people in the right way, it can have a negative impact on client satisfaction.
The future holds even more challenges for professional services firms. Due to the impact of retiring older professionals, and an increasing number of younger professionals choosing work-life balance, firms will have to compete more to keep the best staff. Because their 'human assets' are limited, these firms must develop strategies to attract, motivate, and retain key talent.
Professional services firms have many unique challenges. They must focus on creative ways to keep staff motivation and morale high, and they should develop strategies to attract – and keep – the best and brightest professionals. Without talented human capital, firms are not likely to survive in this competitive field.
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