How Partner Compensation Affects Strategy in Professional Services Firms

The way the partners are rewarded in professional services firms can have a dramatic effect on the development and, more importantly, the implementation of their strategic plans.

Why?  Because in the same way that ‘what gets measured gets done’, ‘what gets rewarded gets focused on’.  The reality is that the two – measurement and reward – run hand in hand. Consequently. getting both correct is critical to the success of the firm’s strategic plans.  Information about which activities are most rewarded affects the firm’s culture. Importantly, it also influences how partners choose to spend their time.

While this is true to some extent in all businesses, it is particularly problematic in the professional services sector. This is because the responsibility for the management and development of the business lies in the hands of the same people who are responsible for delivering the service. This dichotomy, along with its issues and possible solutions, are discussed in the following articles:

“The Unique Challenges of Developing Strategic Plans for Professional Partnerships” and

“Creating A Better Business Structure for Professional Partnerships“.

How reward systems affect the performance

This article looks at how reward systems affect the performance of a traditionally structured professional services firm.

In many professional firms, the billable hours are the primary measure of performance. This is because they are considered to be directly proportional to the revenue earned. Conversely, time not spent on billable work is seen as wasted.  However, such methods fail to reward many important non-billable work that can’t be easily measured. Time spent on non-billable work could, for example be spent on improving the efficiency of the business. While the time spent on this can’t be charged out, it will result in better performance which will have a positive impact on the bottom line.

Focusing on billable hours creates a short-termist philosophy in the firm. This often results in many people adopting an “I will look after myself and to hell with everyone else” attitude.  This means that there is little or no focus on the future. Consequently, these firms tend to lack direction and structure. This can have a negative impact on the firm as a whole as people end up pulling in different directions, In addition, there is little or no cross-functional cooperation.  The net result is that the firm does not achieve its full potential, Consequently both the firm, and therefore the partners, make far less money than they are truly capable of.

Another consequence of this type of structure and reward system is that partners are reluctant to take responsibility for managing their team. They also resist taking on a larger managerial role in the business as a whole. The reasoning is that this would take time away from their ability will do billable work, This in turn can have a negative impact on their reputation within the firm and perhaps even in their remuneration.

Solving the issues.

These issues can be solved by aligning the firm’s compensation system to its strategic objectives. This means rewarding non-billable time that is spent working on the activities that are important to implementing the business plan.

When designing the firm’s compensation system, it is important to strike the correct balance between recognising billing performance and the contribution to the firm’s future.  For example, if the strategic plan sets the objective of getting the name of the firm known in a particular target market, then people should be a recognised for undertaking that activity. If this is not done the message delivered to partners is that the activity is not valued so they will not pursue it.

In fact, non-billable time spent by partners and fee-earners often impacts the success of the firm’s strategic plan.  Every partner and fee-earner will have non-billable time. The key question is how do they spend it? They should be encourages to spend it constructively, helping to develop the firm.

Examples of this type of activity includes the following:

• Researching future client needs,
• Developing new services that meet client needs
• Improving administrative systems
• Developing their professional skills
• Training junior staff, etc.

Adjusting the compensation system

It is important to note that as professional firms grow, individuals will tend contribute in different ways. As a result, the compensation system needs to be capable of being adjusted on a partner by partner basis.

For example, more emphasis will tend to be placed on billable hours for newer partners while more experienced partners will tend to have more weight placed on business development and management activities.  It should, however, be noted that this is not a hard and fast rule, It is possible that some new partners will have a natural ability to generate new business so their compensation should focus on that strength.

Furthermore, different groups of professionals might have different goals (see our article entitled “Practice and Sector Focused Strategies In Professional Service Firms“). Therefore, the compensation system may have to be adjusted to ensure that it is aligned with the different strategies employed by each group.

Summary

In summary, a firm’s performance measurement system should be aligned with its strategic plan. This clearly communicates the value the firm places on achieving its objectives and goals. In these circumstances the partners and senior fee-earners will be more likely to share in the firm’s vision, align their actions with the firm’s objectives. They will also be more willing to share their knowledge and expertise. In this sense, the compensation system can affect a firm’s strategic direction.

What is a Practice Group in Professional Services?

A practice group is a group or team within a firm that specialises in a particular area of service activity and will normally have at least one partner who is an expert in that field.  For example, a legal firm may have practice groups in litigation, commercial, property, planning, criminal law, etc.

Practice groups can had both advantages and disadvantages when it comes to strategic planning.  The disadvantages are mostly related to a ‘silo mentality’ in the firm where partners are so focused on their own practice group that they have no interest in investing time or effort in developing the firm as a whole.

On the positive side, they can allow a firm to build practice-specific strategies, creating objective, goals and activities that are designed to make the most of the firms strengths (e.g. expertise, clients, reputation, etc.) in the practice area.

Understanding the nature of the practice groups and the way that they are structured within a firm is, therefore, critical in the strategy development and, more importantly, implementation of strategic plans.

Practice and Sector Focused Strategies In Professional Service Firms

In our article “The Unique Challenges of Developing Strategic Plans for Professional Partnerships” we looked at how the structure of partnerships can cause problems with developing a strategic plan for the firm as a whole.  The main reason for this is that partners can adopt a what we call the ‘bunker’ mentality where they jealously guard their autonomy to use their own time (billable or non-billable) as they see fit, and will tend to resist giving authority to anyone on such things as how they will staff their own jobs or what practice development activities they will conduct.

Consequently, is it difficult to persuade partners to act collectively and make joint decisions (with mutual responsibility to each other) on strategic issues such as practice development, operational activities, knowledge management, etc.

In these circumstances, unless the partners are willing to accept that the way that they are working in not in the best interests of the firm as a whole, traditional strategic development tools will not work on a firm-wide basis.  Consequently, if the firm still wants to develop a strategy that will help it succeed we need to look for other ways to create workable strategies for these types of professional service partnerships.

Loosely organised individuals, accountable only for their own performance, are less likely to succeed in this area than would a well-managed team engaging in collective activities with collective responsibilities.

Our experience of working in this situation has lead us to believe that the best way to create a strategy that will work is to accept that partners will continue to work in their bunkers and use that to the advantage of the firm as far as is practical.  There are two strategies that can be employed here which can be applied independently or in conjunction with each other.

1.    The Practice Area Strategy

Here we create a separate strategy for individual practice groups within the firm.  By focusing of the practice group we enable the individual partners to develop their own strategy for the future of their area of expertise. Normally, however, a practice group will have more than one partner specialising in the particular area of expertise.  One would hope that these partners, who have a common purpose, would be more likely to be willing to work together to set objectives and create and, more importantly, implement a strategy for attaining them.

2.    The Sector Focused Strategy

In some firms the partners are unable to work even at the practice group level.  In these circumstances it is possible to reduce the size of the group (i.e. the number of partners involved) by taking a sector focused approach to strategy development.  Here we create a strategy for each group who work in a particular sector – which is a more specialised area of work that is normally contained within a particular practice group.  For example, in the legal profession there may be a team within the corporate team that have particular skills, clients and reputation in the Intellectual Property sector or within the Franchising sector.

If the firm has a strong skill set, client base and reputation in certain market segments then a sector focused approach to strategy development may be appropriate.  With this type of strategy we focus on building the strength of the firm in those sectors, setting sector-specific objectives, strategies and plans.

Market sectors are more likely to be services by a single partner with a support team so the inter-personal and professional barriers are less of an issue.  However, it is possible that a sector may be services by more than one practice area, in which case cross-practice cooperation and communication would be required for this approach to succeed.

Creating the strategic plans

In both the practice area and the sectorial approaches, the essential first step to creating the strategy is that the members of the group must decide whether they are prepared to make the shift from a loosely affiliated group of independent practitioners to acting as a team with a common purpose. They must make an informed, conscious decision to give up a few degrees of autonomy in exchange for the benefits that are to be gained (see below).

It should be noted that there is no requirement that each and every practice or sector group in the firm selects the same set of objectives or strategy.  Indeed since different groups may be at different stages of development and will have different priorities, it is likely that each group will have different objectives and different ideas on how to attain them.  It is, however, important that each group’s objectives are clear both to the group but also to the firm.  By aligning the objectives and strategies of each group we can effectively create a strategy for the firm as a whole.

No matter which type of strategic option is chosen, each group should elect a leader who will be responsible for ensuring that activities are coordinated and agreed activities are carried out in order to attain the objectives set out in the group strategy.

There are many benefits to having of a well managed, coordinated teams,  including:

1) More effective practice development efforts through pooling and coordination of individual efforts

2) Better utilisation and development of junior professionals through collective decisions on staffing of client work, allocation of resources and mentoring

3) Collective development of tools, templates, databases and other practice aids to benefit everyone

4) More rapid and effective dissemination of expertise and skills among the group

5) Better client service through greater ability to put the right people on the right job

6) Better market image through development of a collective reputation, not just the sum of individual reputations

7) Comfort of “belonging” to a small group rather than being “lost” as one member of a very large group of professionals

8) Improved profitability from focusing as a group on ways to enhance billing rates and leverage

9) Critical mass of time and resources created to develop innovative service offerings, which no individual could afford to do alone

Summary

A ‘loan wolf’ strategy of allowing every partner to operate as an independent business is unlikely to produce the results for the firm as whole that they would be working together.

If the structure of the firm and/or the personalities of the partners of such that working together as a collective unit is not feasible then a practice area group or sectorial approach to strategy development are potentially viable alternatives as the require buys-in from smaller groups and allow the partners to retain more autonomy than they would in the large firm structure.

In addition, there are distinct advantages to be had from these approaches to strategy development which include improved client service and reputation, improvements to efficiency, increased profits, more skilled staff and better morale through creating a set of common goals that everyone is committed to achieving.

No team can succeed without a leader so not only must the goals of the practice group be written down and agreed upon, a suitable leader should be appointed who everyone respects and trusts to coordinate the activities required to enable the group to achieve its objectives.

Finally, linking the objectives of the different groups together will help find commonalities in goals as well as in activities that will be more effectively carried out across the firm as they will benefit all of the groups.  Over time the groups will see the benefits of working as a team and this will naturally change perspectives and opinion of the key people in  the firm which will translate into a firm-wide strategic plan and shared vision for the future.

Creating a More Effective Corporate Structure for Professional Partnerships

In our article entitled “Unique Challenges of Developing Strategic Plans for Professional Partnerships” we discussed the difficulties that they way that professional firms are structured causes when developing and implementing business strategy and implementing business plans for professional partnerships.

This main issue is that in partnerships the ownership, management and service provision roles tend to overlap which means that the partners have to wear may hats, not all of which fit very well!  I have experience of both working in these types of firm, as well as working with then to develop strategic plans and have seen first hand the problems that this type of company structure causes.

The problems are intensified when there are a large number of partners as there are simply too many decision markers involved in the process, making it inefficient and difficult to make any serious decisions, including strategic decisions relating to the future direction that the firm should take.

In addition partners are given roles that they have absolutely no skills or experience in.  A common example of this is in the Marketing role where many firms put a partner in charge of the marketing function even though they have no marketing training.  Similar situations exist with IT, HR and the normal functions that one would see in a traditional board of directors.

In recent years there has been a change in this attitude with many professional partnerships employing ‘Directors’ with skills in these specialised fields.  The problem is, however, that they tend to be director in name only and their decision-making power is limited since a partner remains on overall charge of the function.

If we look at this dispassionately, other than the legal structure of the firm, a partnership is not really any different to a normal business if you substitute the word shareholder for partner.  That is effectively what a partner is – they own a proportion of the business and take the profits our as remuneration rather than dividends as would be the case in a traditional business structure.

Can you imagine what would happen if a load of shareholders turned up at a business demanding a seat on the board!  They would be shown the door pretty quickly! So why to most partnerships, especially in the professional services sector, continue to operate in a structure that would simply not be tolerated in a traditional business?   If you ask partners they would be able to give you plenty of reasons, many of which would seem legitimate, some may even have some legal implications, but mostly they would relate to the need to feel in control and perhaps a bit of ego.

The question, therefore, is not is there a better way? There is most definitely a better way.  The real question is would the partners in the firm would have the foresight and courage to agree to implement it?

Having worked in and with various professional services firms, including partnerships, I have seen first had what works and what does not.  Partnerships where there are a small number of partners (2 or 3) supported by experts in the specialist fields needed to run the business (e.g. IT, Finance, Marketing) work very well as decisions can be made quickly and are able to be implemented by people who know what they are doing.  I have also worked with partnerships with over 25 partners and even though they have a CEO, chairman and are supported by specialists they still suffer from slow decision making and, more importantly, from a strategic perspective, they lack focus and direction.

In my opinion, partnerships that have a large number of partners should adopt a more traditional structure for their business.  Partners should be seen as shareholders who happen to work in the business but should not be responsible for day to day running of the business or for creating and implementing the strategic plans.  That should be left to a board of directors who have the necessary expertise and experience required to successfully run a business.  It can be useful to have one or two partners on the board to represent the interests of rest of the partners.

In partnerships that operate in the professional services sector this model is especially effective as it allows the partners to focus on what they are good at – dealing with clients and delivering services to those clients.

I realise that in some types of business professional bodies dictate how their members should structure their business but this should not be seen as a deterrent or used as an excuse not to implement the structure that is best for the firm.  There are always ways to create a proper company structure while fulfilling and professional or other regulations.

If you are a partner in a firm that is ‘top heavy’ think about what is best for the firm as a whole and not just for you as an individual.  Remember if the firm performs better then you will reap the rewards while being able to concentrate on the work that you are good at.  It is a win-win-won situation for everyone involved.

The Unique Challenges of Creating Strategic Plans for Professional Partnerships

The way in which Partnerships in the Professional Services Sector are structured creates unique challenges when it comes to creating and implementing strategic plans.

This article looks at some of the reasons for this and forms the basis for future discussion on how we might go about building effective strategic plans for partnerships in the professional services sector.

The reason for this is that each partner has an equity stake in the business and is effectively running their own business under the umbrella of a company, normally a Limited Liability Partnership (LLP).  In fact, may of these partners are self-employed for tax purposes so they are legally running their own business.  The best analogy that I can find to describe the way that these firms operate is like a co-operative where a number of businesses come together to form an entity that has greater buying and selling power than they would have individually.

This means that the governance of a professional firm is different to a traditional business where owners and shareholders tend to be a different group of people from those entrusted with running the business (the directors and managers), who are different from those who create the product or deliver the service.   In partnerships the roles of these different groups of people tend to overlap combining the roles of owner, manager and producer.  This structure is problematic not only because of  the potential conflict of interest but also because while most are skilled practitioners in their particular field, they lack the skills and experience required to run a business.

This situation is further complicated when there are a large number of partners – it is, for example, not uncommon for even medium sized firms to have over 30 partners, each of whom have a say in the strategic direction of the business, as well as the routing management decision making.  This can make day-to-day running of the business very difficult to say the least!

It will come as no surprise that this structure makes creating and implementing a strategic plan for the business as a whole very challenging, if not impossible.  This is because the individual partners can be so focused on their own objectives for their clients and building their own part of the business that they have little or no interest in the development of the firm as a whole.  This has clear implications for the development of a shared vision for the firm which then makes it difficult to create any coherent firm-wide strategic plan.  For some ideas on how this structure might be improved, ready our article “Creating A More Effective Business Structure for Professional Partnerships“.

The main area where there is a common purpose among partners is in remuneration since the profit generated by the firm as a whole is normally divided among the partners on a regular basis.  In this regard, the firm is effectively running as a not-for-profit organisation as no profit is retained within the business.

One would think that the fact that the better they partners perform as a group, the more money they will make would give them sufficient motivation to work together for the greater good as this will ultimately comeback to reward them individually.  The fact is that this is rarely the case as some partners will be naturally better at client development and will bring in more money than others who are content to sit back and reap the rewards.  This creates friction and resentment within the firm and leads to people being more and more protective of their own business, leading to less focus on the firm as a whole.  In addition, while financial reward is a motivator for some it is not a motivator for everyone and there will always come a point where money is no longer important so basing a strategy around remuneration is destined to fail.

Consequently, we need to find ways to identify and/or create a vision for the firm that the majority of partners will support in order to develop an effective strategic plan for the firm.  Having worked in and with professional service firms over many years I understand that developing and implementing a strategic plan is not an easy task.  It requires commitment and open minded thinking on the part of the partners in the firm, as well as strong and often charismatic leadership from the senior partners – those tasked by the other partners with running the firm.

We have found that involving the partners in the strategic planning process can be very effective as it ensures that each partner has their say in the future direction of the firm.  This means that they feel that their views have been listened to and their own goals and aspirations have been taken into account in the planning process.  This not only creates a robust strategic plan that is grounded in reality but also acts as a catalyst for positive change and improvement in the business, thereby increasing the likelihood that the strategic plans will succeed.

What is a Professional Services Firm?

Professional services firms are knowledge intensive organisations that provide expert service to clients.

Examples of professional services firms include Accountants, Architects, Management Consultants, Lawyers, etc.

There are some peculiar characteristics of professional service firms that distinguish them from other types of organisations.

1. All, professional firms’ primary assets (like knowledge, experience and reputation) are intangible;
2. The service they deliver is intangible and are customised or adapted to individual customers’ needs;
3. Highly skilled and trained people provide services in direct contact with the customer, developing customer-centric relationships.

Professional firms are organised to create value by selling and delivering promises to their clients. The value creation is achieved through intellectual capital, and not through machines and other tangible assets, as happens in traditional manufacturing businesses.  Consequently, the main assets are human.  For this reason, a strong recruiting and retention system in professional firms is necessary, as well as the development of an effective knowledge-management program.

Another key asset of professional firms are relationships. Given the importance of human assets, the relationships that professionals have within the firm and with the clients are critical for professional firms in achieving competitive advantage. In fact, in many cases the firm discovers that clients are loyal to a specific professional and not the firm as a whole.

In addition, professional services firms tend to be structured as partnerships which makes their governance more challenging than in a traditional business as the roles of owners, managers, and employees which are separate in a traditional business, tend to overlap in a partnership.  This can create issues with developing strategic plans in these organisations – see our articles “The Unique Challenges of Developing Strategic Plans for Professional Partnerships“.  It can also cause problems managing these firm effectively – see our article “Creating A Better Business Structure for Professional Partnerships“.