Thoughts on ways to improve the management of professional services firms

Monday, July 31, 2006

Snippets

It takes a lot of time to write detailed posts even where I have lots of available material. I am therefore standing back for a short breather. In the meantime, I wanted to share a few snippets with you.

Talking to a colleague, I asked why so few lawyers were really interested in management. The response was succinct - managing partners!

This response actually meant two things. Managing partners were responsible for this, so others need not worry. Except, of course, when things went wrong. But the response also referred to another set of problems, the way in which managing partners actually exclude others from management, the desire of other partners to preserve their autonomy.

These two issues are linked in that many managing partners, and here my sympathies are with them, are forced into authoritarian get it done roles because of the need to actually make something happen. In turn, this leads others to leave it to the managing partner.

A recent edition of The American Lawyer carried an interesting article by David Maister, The Trouble with Lawyers that bears upon the role of the managing partner. The article begins:

"After Spending 25 Years saying that all professions are similar and can learn from each other, I'm now ready to make a concession: Law firms are different. The ways of thinking and behaving that help lawyers excel in their profession may be the very things that limit what they can achieve as firms. For firm managers, challenges occur not in spite of lawyers' intelligence and training, but because of it.

Among the ways that legal training and practice keep lawyers from effectively functioning in groups are problems with trust; difficulties with ideology, values, and principles; professional detachment; and an unusual approach to decision making. If firms cannot overcome these inherent tendencies, they may not be able to deliver on the goals and strategies they say they have. "

The full article is well worth a read.

While I think that Maister's points are generally well taken, I am not yet ready to give up on the point that professions can learn from each other. However, this has to be done in a particular way.

I have been involved with managing or consulting to professional services firms for coming up on twenty years. This includes a two year period as CEO of a specialist medical college. I know that there are quite profound cultural differences between different professional groups. I also know that there are a remarkable similarities, some of which of themselves make cross-professional collaboration difficult but which can provide a base for cross-professional fertilisation.

The challenge is to put this in ways both sides can understand.

Friday, July 28, 2006

People management in professional services - a training primer 2

Nice email from Bruce MacEwen to say that he liked the last post, People management in professional services - a training primer 1. Just to summarise the core arguments put in that post.

I made three key points:

  1. At organisational level, training should be thought of as the process by which staff acquired the knowledge and skills they needed as they needed them. Attendance at a few continuing professional development seminars or individual short courses was not training in the way I was defining the term, but instead should be thought of simply as training activities.
  2. It seemed clear that the great majority of knowledge and skills acquisition- probably well over 90 per cent in most organisations, 100 per cent in some - was informal and took place on the job.
  3. Training could offer significant economic pay-backs if, but only if,the training process focused on and integrated total learning within the firm, including informal learning.

I now want to extend my argument by focusing on other elements in the training process of practical relevance to professional services firms.

Different Training Types

One core difficulty with training as a process and a key reason why training fails is that it can involve a mix of outcomes each requiring a different approach. Mix them together and you can get a mess!

I need to clarify just what I mean by the word outcomes. In the current context, I am not talking about the results from specific training activities, but am instead applying the term to broad generic training categories.

I will describe these in a moment. From a practical management perspective, the key point is that both managers and individual professionals can use them to help make judgements about training. Further, you do not need to be a training expert to do so!

The key training outcome categories I am talking about are:

  • knowledge -how & what to do
  • skills - the capacity to do
  • judgement - when to do
  • and attitude - willingness to do.

Individual elements in this mix are better suited to different training modes.

Knowledge, for example, can be acquired via self-study with the acquisition measured through oral or written test. This allows for a variety of delivery modes including eLearning.

This is also an area where the new computing and communications technologies and especially the internet are steadily undercutting training's traditional role as a supplier of knowledge by giving people the ability to access information when they need it. This makes the firm's information systems an adjunct to the training process.

By contrast, skills acquisition requires practice, practice that may need to continue after the formal training has been completed if the skill is to be really internalised. Certain types of skills may be capable of being taught, practiced and measured via simulators. Others, the softer management or communications skills are an example, require direct oversight and group interaction.

Judgement takes skills acquisition one stage further and can only be acquired through experience, including observation of others.

We can now see why on the job training is so important, why 90 per cent plus of knowledge, skills and judgement formation takes place as a natural by-product of work. Only while working can you acquire the firm and environment specific information you need and the actual practice required to build knowledge and skills. "Formal" training can supplement, not substitute.

The final training outcome category, attitude, is actually a slippery one because so many things combine to create attitude. I have no doubt that training can be valuable in giving people information on the attitude to be adopted in regard to specific clearly defined things. However, the use of training to achieve broader attitudinal change is, I think, very uncertain.

Competency Based Approaches

The terms competency and competency based approaches have become very fashionable in Commonwealth and European countries, much less so in the United States.

While we have problems with their rigid and formalised application in the vocational education and training arena, they do provide a critical building block in the training process because they provide a bridge between the definition of the need to be met one one side, the training approach to be adopted on the other.

Let's start with a very simple definition.

Competence means no more than a person has the knowledge, skills, judgement and attitude required to carry out a task or set of tasks to a required standard. So when we talk about competency based approaches we are talking about the required standard on one side, what is needed to achieve the standard on the other. Once this has been defined, then it becomes easier to identify performance gaps and to take corrective action.

In practice, the whole process can be quite hard because it may require different ways of looking at work. For example, it means putting aside activity lists - and a remarkable number of people think of a position in terms of a long list of activities that have to be carried out to do the job - to focus instead on the core features of the job. What are they, how do we measure them, what are the key inputs required for success?

Some firms have already adopted this approach. For those that haven't, getting started need not be too complex. You can look at the problem in terms of specific positions. Alternatively, you can focus on classes of activities. You won't get it right the first time. Rather, we are talking about a process that can be refined over time.

Individual vs Organisational Needs

An interesting thread in the current global debate on the future of training relevant to our current discussion is the potential conflict between individual and organisational needs. Many training and development professionals in particular argue that much training failed because it failed to meet the needs of individual participants in the training.

The real position is far more complex since, from our experience, there are three sets of needs that have to be taken into account if corporate training is to be effective:

  • the organisational needs (objectives) of the organisation
  • the needs of the trainees' work area or areas
  • individual trainee needs.

The problem is that these needs can conflict. For example, an organisation wide program to upgrade general management or marketing skills may fail because of resistances at workplace and individual level. These conflicts need to be identified and managed as part of the overall training activity.

Of importance here is what we see as fundamental shift in developed countries in people's attitudes to work itself, a shift that has had a direct impact on individual approaches to training.

The end of life long employment together with constant corporate restructuring has forced individuals to change their attitudes to work. Whereas they were previously prepared to consider things that would aid their career within the individual organisation, people's focus has now shifted to things that will assist their career beyond the organisation.

This has had a significant impact on individual attitudes to training. People are simply less willing to do training unless there is a definable individual payback. Will it give me a marketable skill? How will it look on my CV? Will it build my network, give me new contacts? These changing attitudes need to be taken into account in the design of training activities.

I will finish this post here, completing this discussion on the training process in my next post. I will then turn to discuss the people chain, starting with induction.

Thursday, July 27, 2006

People management in professional services - a training primer 1

Interesting article in Bruce MacEwen's blog, Adam Smith Esq - http://www.bmacewen.com/blog/ - on the war for talent, the challenge faced by law firms in attracting and retaining top talent.

I have mentioned this blog before as one I scan regularly. While it focuses on law, the issues raised by Bruce are of relevance to greater or lesser extent across all professional services areas.

The war for talent Bruce refers to can only get worse given an aging population in developed countries. Better training is - more precisely should be given the way training is often managed in practice - a key weapon in the war for talent. For that reason, this post focuses on training and the training process.

I have deliberately kept the post as simple as possible given that my main audience is not training professionals as such. My aim is to provide a simple primer on training from a management perspective.

The post is written against a background of major change in both education and training. Those interested in the debate on the training side can find out more from the January 2006 Ndarala staff paper Is Training Snake Oil?.

Starting with three general points.

First, at organisational level, training should be thought of as the process by which staff acquire the knowledge and skills they need as they need them. This simple definition draws out certain key points:

  • the focus is on organisational needs
  • training is defined as a process. Attendance at a few continuing professional development seminars or individual short courses is not training in the way I am defining the term, but instead should be thought of simply as training activities.
  • the training process focuses on the acquisition of specific knowledge and skills as needed when needed.

Second, it seems clear that the great majority of knowledge and skills acquisition- probably well over 90 per cent in most organisations, 100 per cent in some - is informal and takes place on the job. This simple statement has significant implications:

  • From experience, most organisations define training in terms of specific defined training activities. This limits the training function to 10 per cent or less of the total knowledge and skills acquisition within the firm
  • The value of the on the job training depends upon the training and supervisory abilities of existing staff. If these are poor, then total learning across the firm will be significantly reduced
  • Firms who want to maximise returns from training need to manage both formal and informal learning.

This brings me to my third general point.

Part of the current debate in training deals with doubts among trainers and others as to the extent of real returns from training. These doubts are partially due to measurement difficulties, what should we be measuring, how should we measure it? But they also flow from the narrow way in which training is defined.

In my view, and this extends my second point, training can offer significant economic pay-backs if, but only if,the training process focuses on and integrates total learning within the firm, including informal learning.

An example from my own experience to amplify this last point.

The engineering profession in combination with the aerospace industry developed the concept of the learning curve, expressed as a" graph that depicts rate of learning, especially a graph of progress in the mastery of a skill against the time required for such mastery." (http://www.answers.com/topic/experience-curve-effects).

Linking this across to our current discussion, in simplest terms, the shorter the learning curve with new staff or existing staff doing new things, the greater the return to the firm.

To illustrate.

Some years ago I had to establish a new section in the Australian Treasury to process applications by foreign investors wishing to invest in Australia. This was my first experience as section head. We were under delivery pressure and were carrying out a new activity in a politically sensitive environment.

Recruitment of staff was difficult and took time. There were general staff shortages compounded by the fact that my new section was in a relatively unfashionable area of the Department. However, we still had to deliver regardless.

I did have access to one staff pool, new graduate recruits. The conventional view at the time was that it took at least twelve months before such staff really became useful. I did not have this luxury, I needed them to be able to do things quickly. So I defined structured on the job training with a graduated mix of process and research tasks, combined with staff seminars, thus mixing formal and informal training.

I was not surprised to find that people improved more quickly than expected nor that I had a generally happy team. I was surprised at the extent of the improvement. I found that it took my people about three months to get to the competence point usually expected at the end of the first year, a huge performance gain. Later when I did an analysis of the 33 or so people I had working for me during this period, I also found that their later promotion patterns had been better than the Departmental average even though their qualification level on entry had been lower than the Departmental average.

This has become quite a long post. I will therefore stop here and extend the analysis in my next post looking at some of the other components in the training process.

Wednesday, July 26, 2006

People management in professional services - developing management skills

My last post People management in professional services - professionals vs managers focused on the differences between professionals and managers created by role, training and even personality. I concluded: The bottom line in all this is that it is not surprising that most professionals are not good managers and that professionals and managers can experience difficulty in talking to each other.

Now if the core of the problem does lie in the role, training and even personality of the professional, what then can we or should we do about it? That is, does it matter?

I think that it does matter. Increasingly professionals are expected to work in teams, to have the capacity to integrate their work with others, to manage others. This makes management skills important. So we need to look for ways to help professionals acquire those skills.

In doing so, we need to recognize that some professionals simply cannot or will not. A person may be a brilliant technician but lack the personality, motivation and skills to manage others. In these cases we need to be flexible enough to manage round them, to benefit from the person's skills without expecting them to do things they cannot.

We also need to recognize that the professional's core role lies in their professional responsibilities. As I see it, a core challenge in the management of professional services firms is to free the professionals up so that they can do their job without bogging down in administrative and management elements irrelevant to their core role.

Subject to these qualifications, I think that three things need to be done.

First and at the most macro level, training in management and associated communications skills needs to be built into the training of all professionals.

Now I must admit to a frustration here. Anybody who has been involved in training knows that there is a difference between knowledge and skills. Knowledge, the information about what has to be done, can be acquired through private study. Skills, the capacity to do, can only be acquired through doing.

Every professional knows this. When we train specialist doctors, we ensure that they gain lots of practical experience under the supervision of experienced specialists. Yet when you look at the communications and management training in many professions it tends to be knowledge focused. We need to do something about this.

Second, we need to ensure that professionals likely to be exposed to management issues receive proper training while on the job. Again, this must be skills focused. The only way to learn effective delegation is through the combination of knowledge acquired through training with practical, assessed, application.

Finally, performance measurement systems must be structured so as to measure, where appropriate, management contribution. When I see a system totally focused on individual production I know that there will be a delegation and management problem.

I now want to extend my analysis by focusing on the people chain in professional services from recruitment through to exit. But before doing so I want to provide a short overview on the training process itself to set a context. I will do this in my next post.

Tuesday, July 25, 2006

People management in professional services - professionals vs managers

I thought that the best way of starting this series on people management was by focusing on the difference between managers and professionals because this links to one of the issues that I mull over from time to time - why do so many professionals make lousy people managers? And, more to the point, just what can be done about it.

I know that this is not a new issue. In engineering, for example, the problems involved in promoting good engineers into management positions removed from direct hands-on engineering has been a topic of discussion for years. In medicine, the sometimes inability of doctors to communicate with patients is well know. The inability of some senior partners in law firms to manage is infamous.

While the issue is not new, I was reminded of it again in a recent discussion with a senior professional on a management issue. The professional is highly intelligent, even brilliant in his field, and also has an interest in management issues. Yet he simply could not see the issue in question. He gave instructions, his staff should get on with it!

When I looked at the discussion later, I realized that the core of the problem lay in the role, training and even language of the professional as compared to the manager.

A good point in looking at managers vs professionals is to start with their varying roles.

A manager's core role is to manage the resources available to him/her to achieve the objectives set for the area. Performance is always measured, or should be, by the results of the area.

In contrast, the professional's role is to carry out specific professional tasks. The core focus is on the performance of the individual professional in undertaking those tasks.

This difference in roles is reflected in training.

The professional's training dates back to the craft system of the middle ages. It focuses on the individual acquisition and application of the knowledge, skills and values associated with the profession. The core focus is individual, not collective. The subsequent rewards offered by the profession, and especially the critical recognition of peers, are all based on individual performance. It is no coincidence that the Nobel prize is awarded to individuals, not teams.

The manager's training is different.

To begin with, we have to distinguish here between the acquisition of technical skills such as financial analysis and broader management skills. Many of those coming out of business schools become technical experts and should more properly be classified as professionals rather than managers.

Beyond this, management training focuses on managing people and other resources. Further, most managers become managers by doing, by actually managing with increasing degrees of responsibility. In contrast, many professionals are suddenly thrust into management roles when they get to a certain point in their career and are then, suddenly, expected to manage.

Differences in role and training are also reflected in differences in personality. Perhaps more accurately, different personalities are attracted into the professions as compared to management. The professions tend to attract people who prefer individual endeavour, whereas managers are more collectivist.

I recognize that these are broad generalizations. Some professionals are very good managers, some managers are hopeless managers. Nevertheless, the differences are real and mark very different cultures.

The bottom line in all this is that it is not surprising that most professionals are not good managers and that professionals and managers can experience difficulty in talking to each other.

I will focus on possible responses to the problem in my next post.

Monday, July 24, 2006

People management in professional services

My last two posts focused on pricing, positioning and service areas within professional services.

I now want to shift focus to ways of improving people management within professional services.

Thinking about this, I think that the best way of approaching the problem - and it is a problem in professional services - is from a practical management perspective.

In this context, as we go along, I and my other Ndarala colleagues would be happy to answer specific questions on real problems. The only thing that I ask is that you disguise them well enough so that nobody can identify specific individuals.

Saturday, July 22, 2006

Professional services - pricing, positioning and service areas continued

In my last post I suggested that each firm needs to analyse and understand its own business, taking current and prospective clients into account as well as any variations between fields of law. From experience, particular problems can arise where the firm operates in several different fields with different patterns. The most common problem is simply failure to recognise the differences, leading to the application of firm wide policies and procedures that do not properly take variations into account. This can be a particular problem where firms are moving into new fields of practice.

I thought that it might be worthwhile teasing the last point by taking an actual example.

Take a firm whose largest area of business is commercial law.

In market terms, the firm positions its pricing policy so that it is charging a little below the big CBD/national firms. The competitive strategy is better value for money as compared to those firms. Rates are moved up in lock-step fashion with the national firms. Billing is generally monthly, with a major performance focus on individual charge performance combined with fast WIP turnover. The complex nature of some of the work means that leverage (ratio of more junior time to senior time) is low.

The firm moves into a new area of law with a private client/family business focus to create a new growth focus while reducing reliance on commercial law. The new initiative struggles despite an apparently strong potential market. Analysis shows:

  1. The new market with its mix of small and large clients has different and generally lower pricing structures. Application of pricing policies based on commercial clients therefore creates a very real problem. Moves to manage this through application of fixed price to certain activities helps reduce impact, but then creates another problem through higher WIP write-offs.
  2. Service delivery structures are different. There is a larger back-office function, return depends upon achieving greater leverage, more combination of individual resources. This creates management problems (more active management is required), measurement problems (while team performance measures are used, there continues to be a strong measurement focus on individual performance) and recruitment problems (deciding what staff are needed, getting them, at a time when the firm is trying to control overall head count).
  3. WIP and billings patterns are different. Instead of monthly billings, many clients are now billed against specific milestones. Monthly billings, the previous core perfomance measure, is no longer an accurate performance measure but needs to be combined with WIP.
  4. Finally and perhaps most importantly, these various differences create a major difference between the culture holding in the commercial law area and that required in the new area.

Friday, July 21, 2006

Professional services - pricing, positioning and service areas

I finished my last post by commenting: Even in a single professional field like law, there are considerable variations between customer types and fields of law in areas like pricing, the pattern of WIP creation, write ups, write offs and billings. These need to be understood and accommodated.

Because I am still mulling these issues over in my mind, I thought that I would make a short supplementary comment, taking law as an example.

To begin with, there is considerable variation within law as to the extent of fixed price quotes. This varies between customers, law firm practice and fields of law.

Some customers demand fixed prices, others require firm estimates, still others are prepared to accept conventional time based billings. The willingness of law firms themselves to accept fixed prices varies. It is common in some fields of law - estate or conveyancing for example - for service offerings to contain a mix of fixed price and time based elements.

There is also considerable variation in customer payment patterns. Again, this varies between customers, law firm practices and fields of law. Some firms bill monthly, some against milestones, some at the end of the job. There are some fields of law - estates and conveyancing are again examples - where there can be quite long lead times in translation of WIP to billings.

Each firm needs to analyse and understand its own business, taking current and prospective clients into account as well as any variations between fields of law. From experience, particular problems can arise where the firm operates in several different fields with different patterns.

The most common problem is simply failure to recognise the differences, leading to the application of firm wide policies and procedures that do not properly take variations into account. This can be a particular problem where firms are moving into new fields of practice.

Wednesday, July 19, 2006

On financial metrics - professional services

In discussions with some of my colleagues on time, time keeping and performance measurement, I found a degree of confusion about some of the terms I used in discussion. For that reason, I thought that it might be helpful to a broader audience if I provided some simple definitions.

Gross Fees

Gross fees simply describes the total value of work we have or will bill the client.

Disbursements

Disbursements are simply the cash-out costs directly involved in doing the job.These may be very small, bus or taxi fares, phone costs. However, in some consulting work they can be very substantial, especially where subcontractors are used.

Net Fees

Net fees, the amount we actually get for the job, equals gross fees minus disbursements. This is our real income.

Work in Progress

Work in progress or WIP represents work done but not yet billed. It includes disbursements where these are to be charged to the client.

Billings

The term billings simply describes the value of work actually billed to the client. These billings will include disbursements if these are to be recovered from the client.

Write Ups, Write Downs

Actual billings need not equal WIP. When we come to bill, we may find that we cannot bill the client for all the time involved. In this case, we have to write WIP down. In other cases, we may be able to bill more than the time directly involved. In these cases WIP is written up.

As an aside, write downs are not necessarily bad, write ups not necessarily good. A firm without WIP write downs may be undercharging, a firm with write ups over charging. It depends upon the circumstances.

Prepayments

Clients may pay us in advance for part of the work.

In some cases, law is an example, these may be placed in a trust account and excluded from firm accounts until the funds are drawn down upon billing. In consulting, advance payments may be made upon contract start or on meeting certain milestones to help fund the job. In these cases, the prepayment is formally a liability in an accounting sense, diminishing as work is done and WIP created.

Financial Flows

These simply definitions provide the basic financial structure for the standard professional services firm.

As we do the work we create WIP. As our future billings, WIP is a key asset of the firm.

WIP minus any write downs plus any write ups then translates into billings as we bill the client. So in balance sheet terms the WIP asset has been replaced by accounts receivable. Then as the client pays, accounts receivable become cash.

Management Issues

All this is pretty simple stuff. However, it does raise some important management issues.

To begin with, the fastest possible translation from WIP creation through to cash receipt is obviously very important and provides a first point of focus. Many firms focus on parts of the process only, usually billings to collection, whereas the whole process needs to be understood.

Secondly, disbursements need to be properly understood and managed especially where these constitute a significant part of gross fees. This is very important for independent consultants leading collective bids.

Thirdly, WIP itself needs to be properly understood and managed. In my view, this is one of the most common areas of failure within professional services.

As a first example, take the standard Government fixed price contract with payments against milestones. Failure to identify and manage WIP in this type of contract quickly leads to over-working at points along the job path, resulting in reduced hourly yields.

As a second example, firms who focus on billings sometimes ignore changes in WIP. They do so at their peril. A billings focus may help get WIP to billings, but this may conceal the fact that the firm's real position is deteriorating because increased billings come from reduced WIP. For that reason, performance statistics need to incorporate both billings and WIP measures.

WIP information is also important for multi-service firms working in different marketplaces.

Even in a single professional field like law, there are considerable variations between customer types and fields of law in areas like pricing, the pattern of WIP creation, write ups, write offs and billings. These need to be understood and accommodated.

Friday, July 14, 2006

Consolidation among accounting firms

In my last post (Professional services : mergers, acquisitions and goodwill), I talked in part about mergers and acquistions.

The first round of action by the aggregators in Australia - those acquiring accounting firms to fold them into listed entities - had some spectacular failures. But the trend continues.

I say this because I recently looked at the web site ofthe WKK Group, one of Australia's leading aggregators. See - http://www.whkgroup.com.au/ . Before going on, chaps, when are you going to turn your web site into a real marketing tool?

Being insatiable curious, I dug down into the detail on the site, looking especially at the investor section. Now the beauty of this section is that it includes all the public announcements about acquisitions. So one can look at patterns.

I was especially interested in what WHK calls tuck-in acquistions. These are small firm acquisitions that can be tucked into existing operations. There are a lot of them, with WHK using a mix of shares and cash to acquire the firms. This greater acquisition capacity is one of the reasons why the aggregators are likely to become very major players in accountancy.

Tuesday, July 11, 2006

Professional services : mergers, acquisitions and goodwill

My Saturday July 8 report focused on role clarification within partnerships. My key point was the need to separate equity returns from payment for work. Once this was done, the definition of roles and the remuneration to be attached to those roles could then be dealt with using conventional job analysis and remuneration principles.

In response, one of my colleagues commented that this sounded simple and effective. He asked what I saw as the potential pitfalls or points of resistance.

Key Resistances

I suggested to Mike that there were a couple of key difficulties/resistances.

To begin with, the very transparency/accountability offered by the approach is of itself a key difficulty. Partners don't want to loose control, while the approach also forces them to address differing performance levels between partners that may have simply been swept under the carpet.

This problem can hit early in that you have to start with some allowance for existing levels of partner remuneration before you can strike a notional real profit.

In simplest terms this can be done in two ways. Take existing partner drawings (most partnerships have some form of drawing system) as a given and simply deduct them. Alternatively, agree among the partners a national existing base salary level for partners or partner equivalents and then deduct this. The balance between the notional salary and existing drawings represents the equivalent of dividends.

A second linked technical issue is to get an agreed definition as to what constitutes profit. This may sound simple and it should be, but difficulties can arise simply because partners are not used to thinking in these terms.

Structural issues can arise. Most partnerships have service companies. Some have other companies as well. Then there may be trusts. The issues associated with income stripping, transfers of costs and income to maximise tax benefits, have recently become a real issue with the Australian Tax Office. So the existing partnership structure needs to be analysed and understood to identify issues that might arise from a partner perspective. It may simply be too hard to do something.

Finally, practical issues can arise in terms of the way existing accounting and information systems are structured. The firm really needs to be able to fit the approach within its existing systems.

Introduction to Mergers and Acquisitions within Professional Services

The idea of separating returns from equity and work links to another key issue within professional services, the increasing trend towards mergers and acquisitions.

Why is this important?

All professional services firms are facing the challenges created by structural change within the professional services sector broadly defined.

Increased compliance costs are one element of this. We have seen this among my own Ndarala Group members because of the impact, for example, of increased professional indemnity requirements and costs. A second element is increased investment requirements for new systems and services.

These changes are placing great pressures on both smaller and mid size practices to get bigger or get out.

Demographic changes are adding to these pressures.

The average age of partners/senior managers is rising especially among smaller practices, while recruitment of new staff with partner/senior manager potential is becoming more difficult. Not only are numbers in entry level age cohorts in decline, but attitudes have also changed. Staff are less willing to stay with the one firm, have greater immediate expectations, are less interested in partnerships or ownership, demand greater flexibility.

The scale of the challenge posed by these changes is far greater than commonly realized. Without having crunched numbers in detail, my best guess is that over the next five years as many as a quarter of current practices across a wide range of professions will have to close or merge.

This makes issues associated with succession, mergers and acquisitions of great interest to all those within professional services and especially to those of us advising professional services firms. The very scale of the challenge makes for significant market opportunities in assisting firms to manage the change process.

Goodwill and the Change Process

One technical element forcing change is the changing treatment of, and valuation placed upon, goodwill.

Traditionally realization of goodwill, the value placed upon the business over and beyond its immediate tangible assets, has been the major way of realizing value upon exit. However, this has become more difficult for two reasons.

First, the value of goodwill depends upon the stability and sustainability of the income stream attached to that goodwill. Heightened competition threatens sustainability, making sale of goodwill more difficult.

Secondly, the number of people willing and able to take on the responsibilities of ownership has declined. This has hit hardest at the small end of town, but has also been a problem for the bigger practices where traditionally entry level junior partners have essentially mortgaged their assets and alienated immediate income in order to get future rewards. With professionals less willing to do this, many of the bigger firms have responded by abolishing goodwill, admitting new partners in return for payments linked simply to net tangible assets.

This may have assisted firms to meet immediate needs, but it has also created a new set of problems.

Problem one is a behavioural one, the way in which the new approach has shifted partner focus from creation of value for later realization to maximization of cash now. Investment still takes place to meet immediate development needs and to ensure maintenance of cash flow, but the time horizons and service focus have shifted.

Problem two is a structural one, the way in which abolition of goodwill has in fact opened up professional services to further structural change. The reason for this is simple.

Regardless of all the arguments, the reality is that the firm's intangible assets do have potential value. Obviously the real value depends upon the firm's business. In some cases, the real value may be very low or even zero. But in other cases, the real value may be very significant. So long as these intangible assets are valued at zero, then opportunities are opened up for acquisition of the firm by someone who can offer the owner/partners some capital return.

Two cases to illustrate the point.

So long as market P/E rates are higher than the value offered by existing realization paths (and this almost definitionally follows when intangible assets are valued at zero), then listing or the acquisition of the practice by a listed vehicle holds out the possibility of unlocking capital value.
At the smaller end of town, people's inability to sell their practices creates opportunities for profitable bolt-on mergers or acquisitions to build volume or enter a new service or geographic area.

Consequential Issues

While the changing treatment of goodwill opens up opportunities, these have to be handled with care. We only have to look at the failure of some of the listed aggregators within accounting to see the risks that can be involved.

Four issues are of critical importance from the viewpoint of the acquiring firm.

The first is the need to be absolutely clear on the reasons for and potential value of the potential acquisition. The second is the need to set a price that locks in the potential gains. The third is the need to do proper due diligence. Finally, there needs to be a clear and effective strategy for ensuring effective integration of the acquired entity

Sunday, July 09, 2006

Professional opportunities within regional Australia

Ten days ago I was rung by a journalist doing a story on personal downsizing among the professions, the growing tendency among some professionals to look at opportunities in regional Australia as a way of staying in practice while reducing the complexity and pace of life.

Then, and as I have reported in my personal blog (Personal Reflections - http://belshaw.blogspot.com/), I received an email from Peter Bailey announcing that the new Country Week web site - www.countryweek.com.au - had gone on line. To be held in Sydney on 11-13 August, Country Week combines areas across regional NSW into a single high intensity promotion designed to sell the virtues of regional NSW for work, life or play to Sydney dwellers.

There is no doubt that regional Australia does offer significant opportunities as well sometimes as challenges for professional practice. We are in the process of putting a story up on this on the Regional Australia web site - www.regionalliving.com.au.

The advantage of Country Week is that it allows those professionals that might be interested in professional practice within Regional NSW to investigate opportunities in a large number of areas at one time and in one place.

Saturday, July 08, 2006

On role clarification within partnerships

As a professional adviser, one of my core arguments has been need for change within many professional practices to better delineate otherwise conflicting roles and to facilitate more effective governance and management. I believe that this is critical to improved performance and indeed survival in some cases.

Partnerships Under Challenge.

The partnership is the traditional organizational form within professional services and remains important today. In this form the world is dominated by the equity partners who essentially own the game. The practice grows by admitting new partners generally recruited from within the ranks who pay a price for partnership. In turn, this facilitates exit by existing partners. Partners receive their return from the profit pool, the pre-tax net remaining after deduction of expenses.

This traditional model is under strain. Risks associated with equity partnership have increased. There is growing reluctance among younger professionals to accept partnerships. At the same time, the availability of partnerships has also declined for those that are interested. Increasingly, partners themselves want more flexible life styles.

There is not scope in this type of post to canvass all these changes and their implications. Instead I want to focus on one thing drawn from organizational theory, the way in which role clarification can assist a partnership to manage change.

Confusion in Roles

All of us who have been involved as managers or advisers on people issues know that clarity in job role is critical to performance. People need to know what they have to do, how their performance will be measured. This is also critical when it comes to remuneration. Lack of clarity about the links between role and pay can and does create significant management problems.

Unfortunately, the traditional partnership approach breaches the clarity principle. Partners traditionally receive an agreed share of the profit pool. In return, they are expected to do a range of things that may have little direct connection with either the size of the profit pool or their share of it. This can create significant tensions within the practice and may make it hard to easily address performance problems at partner level.

Clarifying Roles

In my view, the first key step in addressing this problem is to make a clear distinction between the partner's equity and work roles.

Equity partners in the firm should receive a return on the capital invested in the practice, while their work roles should be remunerated with payments directly related to those roles and associated contribution to the practice. These payments should then be counted as a cost from a management accounting perspective, creating a notional profit directly related to equity.

Once this separation principle has been established, the definition of roles and the remuneration to be attached to those roles can then be dealt with using conventional job analysis and remuneration principles.

Impact of Clarification

This simple approach to role clarification offers a number of very real performance gains.

To begin with, it makes partners more directly accountable for their own work performance. In turn, this makes it easier to assess partner contribution and vary remuneration accordingly.

It also makes it easier to admit staff or non-equity partners in that they can be paid using the same principles as applied to equity partners for their work.

Finally, it can increase flexibility for equity partners in managing their own affairs.

Take leave as an example. An equity partner on leave would still be entitled to a return on his/her investment. Any other payments can then be handled on the same basis as applying to other staff.

Wednesday, July 05, 2006

Two Web Sites that I like

A brief post to record two web sites that I like.

David Maister's writings on the management of professional services firms are well known. His web site - http://davidmaister.com - includes a range of free resource material.

Bruce MacEwen's blog - Adam Smith Esq: http://www.bmacewen.com/blog - focuses on law firms. It includes commentary plus access to sources.

Tuesday, July 04, 2006

Selling your practice: the self employed professional case

In my last post I spoke of the difference between the self-employed professional and those trying to build a professional services business. I suggested that one key difference lay in the attitude to final sale.The self employed professional does not think of sale, the business builder does.

One of the things I try to do is to get my self-employed professional to consider the sales option.

I recognise that sale of practices has become more difficult in many areas. The doctor who used to think of sale of practice as an integral retirement option may now struggle to find a buyer because of changes in the profession. The aging principal in many smaller engineering or legal practices may conclude that he (it is still usually a he in these cases) has no choice but to close the pratice.

Yet despite all these difficulties, sale is still a far realler possibility than many people realise. The key need is to identify and test the possibility well in advance. You can then put it aside or, alternatively, start planning for it.

Self-employed professionals vs business builders

Discussions last week with one of my colleagues raised again the difference between the self-employed professional and those trying to build professional services businesses. Why is this important?

Well, in the case of my colleague, one core issue was the nature of the different exit strategies.

The self-employed professional is not trying to build an asset for later sale. Rather, his/her focus has to be on maximising the value of cash flow since investment from this provides the base for later exit.

The business builder is in a different position. He/she wants to get a return not just from immediate cash flow but also from business sale. So the focus has to be in part on investment from cash flow to build longer term business sale value.

Sounds simple, but the difference leads to quite profound behavioural differences.

Monday, July 03, 2006

Introductory Post

This blog has been created to encourage debate about and to provide information relevant too the management of all professional services firms.

With time, I hope that it will develop into a valuable resource.