Employee benefits programs usually have two parts: short-term benefits characterized as health, wellness, and lifestyle benefits; and long-term benefits characterized as sustenance benefits. The short-term benefits include health insurance; vacation, sick, and personal days; short-term disability;
Partnership and Governance Structures
69
child care; educational reimbursement; skills training; and so on. Many of these can be bundled into so-called cafeteria programs where, up to a certain dollar amount, employees can choose their own benefit “cocktail.” Unemployment insurance and workers’ compensation are also considered benefits and need to be considered. Long-term benefits include long-term disability insurance, 401(k) plans, Simplified Employment Pensions (SEPs), profit-sharing plans, and so on and often pick up when short-term benefits expire. Most benefit plans are offered to all employees, typically after a short waiting period.
Principals and professionals in most professional services firms are also accorded perks, which may include reimbursement for certain entertainment and business development expenses and participation in community activities and networking costs. For some, there are company cars or car allowances. For others, there are club dues. The list goes on. Who participates and to what extent is a decision for firm leaders. Perks represent out-of-pocket money. Each expenditure should be periodically reviewed and its value reassessed.
Leadership team members typically have additional perks associated with their roles in guiding the firm. Often these perks are associated with privilege, but if the funds are well spent, it is in the interest of the business to accord them.
All costs associated with compensation need to be viewed both comparatively to ensure marketplace competitiveness and discretely because they are a major component of the firm’s pricing structure. How much to bill and how to support pricing decisions are covered in detail in Chapters 7, 9, and 10. The higher the labor content (total costs measured against individual performance) in any firm’s capital structure, the more difficult it may be to compete. Costs should be justified by a value proposition that provides an attractive profit margin. In all, a professional services firm is trading hours for dollars. With a finite number of hours in the year and a variety of overhead and necessary investment commitments that eat into those hours, the firm (and individual professionals) must be cautious how billable hours are spent (Exhibit 3.3).
How the professional services firm makes its collective business and policy decisions is extremely varied from firm to firm. Because of the nature of professional services, rigid hierarchical models seldom work for long—professionals tend to want a collaborative environment. Some firms gravitate to a model featuring a moderate leader working collegially with a larger group of inf luential peers who, in turn, represent critical practice areas or profit centers. Others are attracted to a strong leader moderating the discourse among a larger leadership group. In some instances, professional services firms have reached out and hired professional managers for all, or most, operational functions while reserving practice issue decisions to internal peer groups.
The term decision management is appropriate because many professional services firms engage in a less formalized process of decision making. This
70
Managing and Governing the Professional Services Firm
365 days
Weekend
Holidays
Vacation days
days
104
10
20
Weather/sick/other
days @ 11
220 days
Service
Sales
Administration
delivery
15%–25%
55%–75%
10%–20%
of time
of time
of time
Nets 121–165
days to sell
Short gigs and lots of
travel eat days
Overhead, budget,
and your cut
Your daily/performance rate
Exhibit 3.3
The Time Professionals Have to Sell
Partnership and Governance Structures
71
informality allows for a broad discussion of ideas and issues before decisions are made. Often a general consensus is reached through the attrition of options rather than in response to a targeted call to action. In this peer environment, such an approach helps promote a sense of participation, although it can tend to slow problem resolution. Those firms that have documented their processes and follow consistent procedures further enhance their decision f low while at the same time allowing concerned professionals to focus only on problems as they arise.
Many professional services firms that have attempted to adopt corporate, top-down models for decision making in a quest for efficiency have found that this approach is met by great uneasiness within the ranks and may, in fact, be vigorously resisted.
Home Office/Branch Office Model
In the first application of this two-part model, the firm’s main office sets broad policy guidelines, including profitability and burden targets, then typically stands back and allows broad autonomy to the various branch office leaders. This approach can work well when branch offices and the home office are relatively independent and the branches depend on the home office only for items such as systems support, financial services, and research. Under this system, branches have maximum latitude and minimum regulation.
In the second application, the main office provides orthodoxy throughout the practice with all branches replicating main office policies, procedures, and processes. In this application, branches operate more like franchise units in a chain. The economies of scale generated by consistency are intended to make up in profit what they take away in creativity. This works well for narrowly focused and /or easily systematized professional services and less well for those with much discretion and a broad array of services.
Managing Partners and/or Chief
Executive Officers
Some firms choose to keep as close to the traditional corporate profile as possible, by choosing a managing partner, president, or CEO to lead the firm. Typically, the leader takes on the additional role of chairman of the board. In this structure, a single leader manages policy and operational performance. The benefit of this approach is that the firm is led by one of its own. The disadvantage is that the leader often goes from being a key rainmaker and performer to a cost center, and an expensive one at that.
Some firms lessen the impact on the firm by selecting an able, but not stellar, performer for this role and support this leader with a strong executive
72
Managing and Governing the Professional Services Firm
committee (see later discussion). Still others rotate the position among the executive committee group.
Other firms choose to hire a professional manager, an administrator (not one of the firm’s professionals), to oversee all administrative and marketing functions. Practice management is still usually controlled by the firm’s professionals, either in the form of a broad-based committee or through the managing partner for the specific practice area.
Candidates for these positions, who often carry a chief operating officer (COO) title, come from all disciplines. Those with marketing and administrative experience, often having earned an MBA or similar degree, are typically the firm’s best choice. Policy decisions typically remain with the firm’s inner circle of professionals.
Rebellion in the Ranks
While professional services firms have traditionally sought ways to maximize profitability and demonstrate strong leadership, it can be a struggle. One early client, a professional services firm with several offices and more than 800 professionals, was being run by a chairman and an executive committee. Committee members were unhappy with the amount
of time managing the firm took away from their billable time. The
chairman was so busy with his management duties that his practice was declining. Consulting intervention pointed to some process improvements and recommended the hiring of a professional manager as CEO.
The leadership group agreed with this strategy and a search was con-
ducted. A candidate was found at a large financial institution and was hired. The chairman was delighted and very supportive. Committee
members were initially pleased but were in open rebellion within eight months, forcing the ouster of the CEO and leading to the chairman’s res-ignation from the firm. The partner who led the rebellion was soon serving as the new chairman, and the firm retained this model until several years later when they were acquired by a large financial institution. The reason cited for the rebellion was that the professional manager never absorbed the culture of the firm.
Executive Committees
Many professional services firms use an executive committee approach to firm governance. Firms large enough to have a professional administrator often use the executive committee as a mini-board of directors to interface with the administrator and moderate his or her decisions. In the smaller firm, this committee frequently serves as a virtual office of the president,
Partnership and Governance Structures
73
making day-to-day decisions for the firm and submitting these decisions for ratification by the board of directors when they meet or by poll. Most often, executive committee members are also members of the board of directors of the firm, and operational and shareholder issues are handled simultaneously (though specific resolutions may be required to meet legal requirements).
Firms that do not follow the bylaws they have established or fail to maintain complete and accurate records open the firm and themselves to potential risk. When in doubt, it is always better to draft a simple resolution and get it approved by the larger board than to take the risk of a future challenge to an oral decision.