Professional Services Organizations

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.
Staff Motivation
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.

Key Points
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.