My Vistage chair’s favorite saying is that the “cobbler’s children have no shoes”. This may be the case with many professional services firms who are in the business of advising others, but whose bloated organizations are incapable of change. The failure of several multi-national law firms has brought the professional services partnership model to light.
A bi-product of the information age has been the dramatic expansion of professional services. Mergers and acquisitions and complex regulations such as Sarbanes-Oxley drove activity for Big 4 accounting and prestigious law firms. In a market boom, top lawyers (such as intellectual capital attorneys) have fetched more than $500 per hour.
Yet such firms are under strenuous scrutiny and price pressure. Core clients including the Fortune 1000 and insurance companies demand that their advisors utilize junior level associates for mundane work. Clients arbitrarily set prices for their attorneys by clipping their invoices much like insurance companies have set the price for physician fees.
As senior partners in such firms age, the massive payouts they have come to expect create a drain on the cash flow of their firms, thus inflating their overhead. The professional services partnership model is strained, and firms will have to adapt their business model to fit into a market unaccepting of fat.
Historically, partnerships were tightly run as to preserve work quality and promote specialized skills. Professional service firms are beginning to hire professional non-partner managers, operations experts and CFO’s, in an effort to run their firms more like businesses. In particular, the partner driven approach to business development is flawed. For partners to win all the business but not stick around to execute the work can be unseemly to clients who have many choices.
Demand for professional services ebbs and flows with the economy and regulatory cycles. Some industries such as the practice of law, suffer overcapacity (the number of lawyers grew from 212,600 in 1950 to 1,225,000 in 2011)[i]. In accountancy, turnover of auditors is very high, and there is a dearth of experienced accounting professionals.
Physicians face other obstacles from health care reform, the advent of electronic medical records, and the resulting contracting of fees. No business is consolidating more quickly than health care as physicians and hospitals vertically integrate in order to mitigate the pressure created within a market with spiraling costs. Yet the implications are the same, that medical offices will need to run with the efficiency and service attributes similar to those employed by retail stores.
It seems like the more money that is involved in an industry, the greater the resistance to change. If you take the process for jury selection (for example), it is completely antiquated and does not create positive outcomes for the judicial system or for the jurors. The practices are embedded so deeply they are difficult to alter.
It is not hard to see that these industries will have to evolve like others have in recent years. Once any industry reaches a point of saturation, the innovation that occurs is in service delivery, and one would have to believe that professional service industries will be disrupted by new technologies and processes. In the case of physicians, accountants and attorneys, the client experience is not all that it could be. Such interactions usually occur because of some negative series of events.
So it is time for us service professionals to rethink our business models, best practices and methods for delivering value. Professional service firms have to start to run like businesses. It is time for new shoes.
[i] White-Shoes Blues Bloomberg Business Week April 23rd, 2012