The strategies and management of Professional Service Firms

ServiceForum 07, Tampere, Finland, October 29-30

Professor Bente R. Lwendahl, Ph.D. Department of Strategy and Logistics BI Norwegian School of Management

Two topics and an intro

Brief Intro: What are PSFs and why are they special? Strategic Management of PSFs A resource based view Generic strategies and inherent challenges and tensions The small partnership firm, the streamlined professional organization, and the expert innovative firm
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Brief intro about consulting and other professional services

Managing people like chessmen

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What is unique about professional services?

Customization requires a flexible, responsive organization Client interaction increases the challenges Innovation means routines and standard procedures are relatively few and far between Professional judgment requires individual autonomy and authority to deliver what is best for each client Professional norms (to the extent that they exist) are internalized and both provide a foundation for and set limits for what is a viable culture for the firm. Consulting firms often import professional norms from other professions, such as law (e.g. McKinsey) and auditing.

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When is a knowledge intensive service not a professional service?

If it is mass-produced (not customized) If the professional norm of best interest of the client is violated If professional norms of ethics are violated If the firm/professionals sacrifice quality in the interest of maximizing profits instead

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Five Is make PSFs extreme

Intangible outputs Invisible Assets Interaction with clients Innovation (tailor made solutions) Information Asymmetry

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Together these characteristics make PSFs very different from traditional manufacturing firms. Applying theories of strategy and organization developed for industrial corporations is not only wrong, it may lead to detrimental conclusions!

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TOPIC 1
Resource Based Strategic Management - inspired by Itami (1987): Mobilizing invisible assets, Harvard University Press.

Itami: A basic framework for dynamic synergy

(1987, p.129; reprinted with permission in BL, 2005, p. 82)

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Figure 8: Strategic Resources (p. 94)

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Key finding:
Intangible resources (Invisible assets) are primarily improved as a byproduct of daily operations This is particularly true for competence, but also applies for reputation and relationships This is much more extreme in PSFs than in traditional industrial or service companies

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Ownership or control of resources

Tangibles and collective intangibles can be owned by the firm Individually controlled intangibles are contracted by the firm (contracts may be explicit or implicit; relational) Relational resources are partly owned or controlled by external stakeholders

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Figure 9: Controllability of firm resources (p.95)

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Mobilizing resources Resources which are not owned by the firm cannot be allocated - they need to be mobilized!
(Haans, Knut B, 1997)

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TOPIC 2
Three generic strategies for PSFs tensions and challenges

The #1 strategic challenge of all business firms: Balancing efficiency (minimum cost) and effectiveness (service quality/customer satisfaction). For PSFs, there is a 3rd dimension: Employee (partner) satisfaction.

Two key strategic dimensions

Prioritizing projects and clients what do we deliver, to whom, where, when, and how (Domain decisions) Recruiting, retaining, developing, and mobilizing the best and right kind of professionals (Resource base decisions)

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Strategic focus three sources of superior competitive ability

Superior client/customer relations pure effectiveness based
Our professionals deliver whatever the client/customer may need, as long as it is within our area of expertise

Superior solutions (modular, modified, adapted) pure efficiency based

We have the solution for you; we will customize it to fit your particular needs. Examples: BCG and SAP

Superior problem solving (innovative, creative, expertbased) both efficiency and effectiveness
We have the best experts within our area(s) of expertise, and will deliver state-of-the art solutions to your toughest problems

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Generic Strategies for PSFs

Two extreme strategies: A) The individually based firm, primarily focussing on individual expertise, individual reputation, individual client networks. Very often a small partnership firm. B) The professional bureaucracy (Mintzberg, 1983), primarily focussing on firm level expertise, firm reputation, routines and methodologies. Well established practices for client project deliveries as well as for professional career development. The intermediary position: C) The expert firm delivering unique solutions to complex problems
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A) The individually based PSF:

High degree of autonomy for each expert Consensus based decisions Minimum managerial authority (none, or rotating role of CEO) Minimum overheads No room for external owners Difficult to expand or internationalize External focus: client relationships

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Different individuals, different contributions

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B) The professional bureaucracy:

Invests heavily in development of routines and methodologies Often offers modularized solutions Invests heavily in socialization and education of professionals Has a formal hierarchy of authority May have external owners Can grow very large and may be global External focus: Selling solutions

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C) The expert firm:

Described as ideal by many professionals, but very difficult to maintain in the long run, as tensions pull both towards A and towards B Individual and highly autonomous experts backed by more routine-dependent junior staff Requires extremely good senior managers respected professionals with strong leadership skills External focus: Solving unique problems
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Figure 13: Internal and external foci (p.132)

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Tensions off the diagonal

Type A firms are unable to deliver repeat solutions in an efficient way too costly. If they invent a clever solution, they need a sales organization, not autonomous professional partners Extreme client responsiveness with a professional bureaucracy (Type B firms) is impossible, since too much flexibility and local autonomy is required

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Tensions in Type C firms

Some of the best experts are like Prima Donnas they do not want to sing in a choir, and they do not like sharing the applause. Some excellent experts are good educators and mentors and share with juniors. Many (the marjority?) are not. The best experts like technical challenges, not administrative. Hence type C firms need to manage multidimensional authority

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ABC People and Projects

In a recent seminar, senior managers in the Denmark based engineering consulting company COWI, BU1 Economics and Management, pointed out that not only firms, but also people and projects may be classified as predominantly A, B or C. Lets explore that idea further...

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Typical type A people

Typical type A-people are highly individualistic, require substantial autonomy, and barely tolerate being in a firm. In the most extreme, they prefer being independent freelancers and establish a me inc. They have an extremely high level of self confidence, and thrive on new challenges. And they are often Prima Donnas.

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Typical type B people

Typical type B-people prefer to be in a structured and relatively predictable environment. They are often perfectionists, and like to demonstrate excellent mastery of their specialties. They prefer modest and incremental changes, and dislike high risk. Type B firms are often excellent learning places for young professionals. Typical type B people love the well-structured career and competence development systems of type B firms. Typical type B people thrive on seeing the modified solutions work well.

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Typical type C people

Typical type C-people are experts as well as team players. They are like members of a big band or a symphony orchestra the best are soloists at some points in time, but they also blend into the harmonies of the entire orchestra. Typical type C people accept to do routine work some of the time, but if the firm accepts too much of that kind of work, they will look elsewhere for employment. Typical type C people are team players, and enjoy seeing their colleagues excel. They are excellent mentors, and like to contribute to the professional development of juniors. Typical type C people thrive on solving the most challenging professional problems for/with demanding customers.

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Typical type A projects

Typical type A projects are small, highly adaptive, and require close interaction with the client. Type A projects are typically delivered by one experienced expert, but projects requiring the collaboration of several experts with complementary expertise are also acceptable. Projects requiring substantial coordination and managerial supervision are unlikely.

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Typical type B projects

Typical type B projects are large, require several experts with different levels of expertise, and are highly structured. Type B project teams are hierarchical and led by a senior expert. Type B projects are relatively easy to plan, and parts of the projects may be pre-specified and allocated to individuals or small teams, sequentially as well as simultaneously.

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Typical type C projects

Typical type C projects may be large or small, but require the development of new solutions to advanced problems. Excellent experts may be assisted by juniors, and teams may involve one or many professional specialties. Projects may be large or small, but ideal projects typically involve several specializations and a high degree of collaboration and coordination. In type C projects, clients/customers are often more partners than just buyers of services

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Can firms be both A, B, and C?

Type A firms cannot deliver type B projects. They do not have sufficient staff, they do not have the managerial capacity to deliver highly coordinated solutions, and type A professionals do not like to work on modifying standardized solutions. Type A firms cannot deliver type C projects, unless they can be carried out by one expert. Type B professionals do not work for type A firms.
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Can firms be both A, B and C? (2)

Type B firms can have a small number of type A (or C) people, and these can deliver a few type A projects. These are typically partners/senior managers or involved in R&D. Some junior type A people may also be attracted to type B firms as part of their education. These often start up their own companies later. In some firms, type A people are allowed to consult to clients on an individual basis and bill these assignments from their own me inc.s. A common example is professors in Universities delivering small consulting assignments. In other firms, type A seniors give individual advice to clients as part of the service portfolio. These are often seen as free services as part of a larger contract, or as marketing investments in a continued relationship. Type B firms are unlikely to be able to win type C projects.
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Can firms be both A, B and C? (3)

Type C firms typically have both A, B and C type professionals and (can) deliver all three types of services. Type A professionals in type C firms are typically either
nerds technical experts with no interest in commercial issues, who provide excellent solutions and add substantial value for the company, or stars brilliant professionals who might just as well start a type A firm, but who feel that they shine more brightly together with colleagues in a type C star firm. Such experts are primarily attracted to the #1 within their area of expertise

Type B projects often generate substantial profits, and bottom-line oriented people often want more of these
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Challenges resulting from type B projects in type C firms

External owners are investors and, by definition, bottom line oriented. For this reason, it is very difficult for type C firms to have external owners. External owners will put severe pressures on type C companies, pulling them in the direction of type B. Industrially educated and oriented people, including the large majority of the top international management consultants, will typically advice a type C firm to move more towards the type B corner. Type C firms offering a growing proportion of type B projects will have to hire more type B people (or junior type A or C people who see type B work as educational). If type B projects become predominant within an area of specialization, excellent type A and C professionals are likely to leave. As a result, the firm loses its credibility as a type C problem solver.

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Pressures for change

Clever individuals in a type A firm invent solutions that can be sold to multiple clients for extra profit. If only they can hire some juniors to do the legwork, they might get rich... But juniors mean hierarchy and managerial responsibility... Clever individuals in type B firms develop individual reputations and realize that they can make more profit on their own. They object to all the overheads resulting from the managerial hierarchy and the R&D-people, and dislike having to subordinate their expertise to the common way of doing things here. They create spin-offs or negotiate individual arrangements Clients want small unique projects outside Firm B expertise

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Pressures for change in type C firms

Type C firms have to live with the basic tensions of both the type A firm (some partners create hierarchies and/or routines) and the type B firm (some partners negotiate special arrangements and are allowed to behave like type A partners). The result is tensions that have to be managed all the time. They do not go away! Type A and type B firms may reach a stable equilibrium and can stay that way for decades. Especially if management is aware of the strengths of their type, and avoid giving in to the pressures. If type C firms reach good balance, they still have to actively manage the tensions in order not to be pulled to one of the sides.

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Figure 15: Pressures for change (p.145)

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Conclusions
All three strategies seem to be viable for consulting firms, but tensions are strong both towards more individual autonomy and more standardization (modularization, repeat sales). Transitions are difficult to make, and mergers of firms of different types are even more difficult. Type C firms buying type A or B firms need to invest substantial amounts of management time and efforts in order to integrate operations with the other firm. Generic strategies should be clear, stable, and consistent. Probably also conscious.

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The #1 managerial challenge:

Everyone

says that all our resources go down the elevator at the end of the work day and disappear. Most people see that as a problem, as the firm is then empty. To me that is not a big problem, as long as they come back the next day. Hence, my most important task is to make sure they want to come back tomorrow!
(Henry Michel, CEO (1990), Parsons Brinckerhoff, NY)

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Loyalty, 1

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Loyalty, 2

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