MANAGING THE PROFESSIONAL SERVICE FIRM EBOOK
Editorial Reviews. Unknown. Frederic W. Gluck former managing director, McKinsey Managing The Professional Service Firm Reprint Edition, Kindle Edition. Editorial Reviews. Unknown. Frederic W. Gluck former managing director, McKinsey Managing The Professional Service Firm by [Maister, David H.]. Managing The Professional Service Firm by David H. Maister. Read online, or download in secure EPUB format.
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Read "Managing The Professional Service Firm" by David H. Maister available from Rakuten Kobo. Sign up today and get $5 off your first purchase. International . Professional service firms differ from other business enterprises in two distinct ways: first they provide highly customised services thus cannot. While these issues can be complex, Maister simplifies them by recognizing that “ every professional service firm in the world, regardless of size.
In essence, the professional firm is selling its procedures, its efficiency, its availability: 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.
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.
What will happen? As Figure 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: As these simple examples show, matching the skills required by the work to the skills available in the firm i.
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: 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. 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: 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.
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 , which shows the principal forces tying these elements together. Guru Associates, which engages in a variety of projects, nevertheless has a typical project which requires 50 percent of a senior's time, percent of a middle-level person's time, and the full-time efforts of three juniors.
No one is expected to bill percent of each's available time.
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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.
Managing The Professional Service Firm
Each project requires 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: Unless there is a change in either the project team structure i.
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. 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 Associates' position in the market for staff. Guru Associates has the following promotion policies. It considers that it requires four years for a junior to acquire the expertise and experience to perform the middle-level function, and it expects to promote 80 percent of its candidates to this position.
A lower percentage would be insufficient to attract new juniors, and a higher percentage would imply that insufficient "screening" was taking place i. From middle-level to senior is also expected to take four years; but because fewer candidates develop the critical client relations skills that Guru Associates requires, on average only 50 percent of candidates make it. We shall now trace the evolution of Guru Associates over time.
Among the eight middle-level staff, we may assume that, since it takes four years to make senior, one quarter of them i. If Guru Associates is to abide by its promotion policies, then it can expect to promote 50 percent, i. Whether by firm policy or by the personal decision of the individual, the nonpromoted candidate will leave the firm. Note that this result tends to happen in most professional service firms regardless of whether the firm has an up-or-out policy.
Middle-level staff may, if allowed, hang on for another year or two, but most eventually leave if not promoted. As we shall see, there is a strong incentive for the firm to encourage them to leave, since they are occupying slots eagerly sought by the juniors coming up behind them.
Counting both those promoted and those leaving we have reduced the number of middle-level staff by two; and increased the number of seniors by one.
Since we now have five seniors, we require ten middle-level staff unless the mix of project types changes and have six remaining. We must seek out four new middle-level staff from among our juniors. Of the twenty in the firm, we assume one quarter five will be in their final year as juniors. Since our expectation or policy is to promote 80 percent at this level, we will, indeed, promote four out of the five to fill our four available slots.
The fact that these figures match is not, of course, fortuitous. The percentage that can be promoted at a lower level is determined by the shape of the professional pyramid. Like the "passed over" middle-level staff person, the fifth junior may reasonably be assumed to leave the firm.
We now have fifteen juniors left. However, with five seniors, and ten managers, the firm requires twenty-five juniors: These changes are summarized in Table , which follows the same logic for years 1 through 9. In year 5, the first batch of middle-level staff that were promoted from junior in year 1 will be ready to be considered for promotion to senior.
It will be recalled that there are four of them. If promotion opportunities are to be maintained, then two will be promoted i. This creates a total of ten seniors. With a total of ten seniors in year 5, twenty middle-level staff are required.
Of the sixteen in the firm the previous year, four have been promoted or have left, meaning that a total of eight juniors must be promoted. Fortunately but not fortuitously ten juniors who were hired in year 1 are to be considered for promotion.
The expected 80 percent target may be maintained!
Managing the Professional Service Firm
What must be stressed at this point is that we have arrived at these staffing levels solely by considering the interaction of the firm's leverage structure with the promotion incentives career opportunities that the firm promises. What we have discovered by performing these calculations is that the interaction of these two forces determines a target or required growth rate for the firm. As Table shows, Guru Associates must double in size every four years solely to preserve its promotion incentives.
If it grows at a lower rate than this, then either it will remove much of the incentive in the firm, or it will end up with an "unbalanced factory" too many seniors and not enough juniors with a consequent deleterious effect upon the firm's economics.
If the firm attempts to grow faster than target rate, it will be placed in the position of either having to promote a higher proportion of juniors, or to promote them in a shorter period of time. Without corresponding adjustments, this could have a significant impact on the quality of services that the firm provides.
We have seen that the leverage structure and the promotion policies together determine a target required growth rate. It should be acknowledged, however, that there is another way of looking at the relationship between these variables. An equivalent way of stating the relationship would be to observe that if given a growth rate and a leverage structure, the promotion incentives that result can be specified.
We may see this by examining Table once more. Suppose that we had constructed this by specifying the growth rate and the project team structure.
We would then have discovered that we could afford to promote only four out of five juniors and one out of two managers. We would also have discovered that we would have a "built-in," or target, turnover rate averaging over 4 percent two resignations per year for the first four years while the average number of nonsenior staff was In this example, Guru Associates can achieve what would be considered an extremely low target turnover rate if it achieves its optimal growth.
However, the norm in many professional firms is a much higher rate than this, often reaching as high as 20 to 25 percent for example in some CPA firms. The key point to note here is that, given a growth rate and an organizational structure, the target turnover rate of the firm can be specified. This does not, of course, tell us what the actual turnover experience of the firm will be. We are considering here the turnover that the firm requires to keep itself in balance.
While it may be able, through its promotion system, to ensure that the actual rate does not get too low, it may have to use other devices to ensure that the actual turnover rate does not get too high through too many people quitting.
In most professions, one or more firms can be identified that have clearly chosen a high target rate of turnover. Partners or shareholders can routinely earn a surplus value from the juniors without having to "repay" them in the form of promotion.
This high turnover rate also allows a significant degree of screening so that only the "best" stay in the organization. Such firms must therefore compete not only for clients but also for talented professionals. Drawing on more than ten years of research and consulting to these unique and creative companies, David Maister explores issues ranging from marketing and business development to multinational strategies, human resources policies to profit improvement, strategic planning to effective leadership.
While these issues can be complex, Maister simplifies them by recognising that 'every professional service firm in the world, regardless of size, specific profession, or country of operation, has the same mission statement: A Question of Balance.
Solving the Underdelegation Problem. The Practice Development Package. Listening to Clients. On the Meaning of Partnership. How Practice Leaders Add Value. How to Create a Strategy. Partner Performance Counseling. The Art of Partner Compensation. Patterns in Partner Compensation. A Service Quality Program. Marketing to Existing Clients. How Clients Choose. Attracting New Clients.With six projects, the firm needs the equivalent of six full-time middle-level staff, according to the project team structure.
The knowledge, expertise, and basic approaches to the problem that have already been developed often through a significant personal and financial investment can be capitalized upon by bringing them to bear on a similar or related problem.
If some person has worked with another person in another unit, there is a greater chance that help with be forthcoming.
Per-partner profits have not increased! 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. We have seen that the leverage structure and the promotion policies together determine a target required growth rate.
Nassim Nicholas Taleb. This book provides practical frameworks for emerging operational managers and future project leaders to prepare them to successfully manage these firms and deliver such projects in the face of new and often disruptive technologies and shifting corporate landscapes.
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.
Consider three kinds of client work: