About the Authors
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Bryan graduated from the University of Pennsylvania with a BA in international relations and a minor in economics and then received a Juris Doctorate from Washington University School of Law in St. Louis, Missouri.
Bryan has worked for two U.S. Magistrate Judges and one U.S. District Court Judge and is currently licensed to practice law in Texas, New York, and the U.S. Virgin Islands. Bryan was also selected as one of the “Best Lawyers Under 40” by DMagazine.
SECTION I
Managing and Governing the
Professional Services Firm
1
Managing the Professional
Services Firm
JOHN BASCHAB, JON PIOT, AND ROBERT H. SCHWARTZ
Some problems are so complex that you have to be highly intelligent and well informed just to be undecided about them.
—Laurence J. Peter
It was a cool and rainy day in Texas, drizzly weather odd for mid-June, when the cell phone began to ring. It was a friend of ours from Chicago who was running a consulting company. After a bit of small talk, she said,
“Speaking of drizzle, we have been facing a constant drizzle of problems in our practice group.”
She related a few of the problems that had been keeping her awake for weeks:
The market hasn’t changed, the demand for services seems to be strong, but our company sales are down and our pipeline is weak. I cannot figure out how to keep our pipeline building as we deliver more and more work. It always seems like we have a few large deals that we close, we execute those deals, and then our pipeline dries up. As our projects come to a close, we scramble to re-fill our pipeline. We just finished two of the largest projects in our company history, which was great while they lasted, but now I have 20 consultants sitting on the bench with no work to give them. I cannot keep them there indefinitely. Last year we had a similar situation, and I had to lay off 12 staff; believe me, that was not pleasant and really hurt our morale. Two months later, we closed a major bid, and our HR department hustled for weeks to hire back some of the people. We had to push the start date on those projects back by three weeks. On top of that, my controller is telling me we are behind on cash f low, 3
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Managing and Governing the Professional Services Firm
so I need to call the VP at my largest client and ask them to pay their outstanding invoices, so we don’t run into any trouble covering payroll. I just hope all of this doesn’t affect my buyout negotiations with Stan, my original partner. You know he and I have not been working well together, so I have decided to buy him out. His management skills are horrible, and he was really hurting the culture around here. Besides, he hasn’t sold any new business in probably two years. I can’t wait to get some closure; however, the bank may balk on the loan if business performance isn’t stable. Any way, I know you guys run a larger firm, and I’m sure you’ve had to face some of these issues. Can you help me?
We responded quickly and to the affirmative. It would be a long couple of weeks as we helped her sort through the many issues we have witnessed both through direct experience and through helping other professional services firms. Those experiences prompted our conversations with other professional services firm executives, who had all experienced similar management issues in their firms.
Professional Services History
People have been offering their expertise in exchange for compensation for centuries, probably dating back to trade route guides, mercenaries, and early forms of bookkeepers. In fact, traces of accounting as a professional service date back 5,000 to 7,000 years with the invention of clay tablets that were used to track property records.
Interestingly, there is little evidence of large professional services firms predating the nineteenth century. There seem to be a few turning points in history that led to larger firms. First, in the 1600s, England saw the emergence of the professional accounting firms. In England, feudal law was replaced by the law of royal courts. The royal courts developed common law in the early seventeenth century. This drove a surge in litigation and a growth in law firms. Then, 200 years later, in the 1800s and early 1900s, most of the large U.S. accounting, legal, and consulting firms were started.
Why this period and why not before then? There were major technolog-
ical inventions during this period. The early 1800s saw the invention of the steam engine, which allowed easier transportation between major cities.
The telephone allowed communication within and between major cities.
Then, in the early 1900s, the invention of the automobile again provided another mechanism of transportation. These inventions allowed the emergence of multioffice firms that could now communicate and meet more
frequently. Additionally, the inventions enabled big businesses in other industries. This period saw the emergence of the large industrial manufacturing companies, which would require more professional services. As
Managing the Firm
5
companies built multicity offices, professional services firms had to follow suit. Higher demand, higher need for specialization, larger customers, and ability to communicate and travel across greater distances are all factors in the transformation of the one- to two-person proprietorship to the growth of the large professional services company. These factors are also relevant as we determine how to build a business from a handful of professionals to several hundred. In short, no reasonable person today contemplates life without professional services (hiring a lawyer, selecting an accountant, hiring an architect, retaining an advertising agency). Additionally, professional services firms can now scale to multithousand-employee firms while just a few hundred years ago, these firms were limited to fewer than a handful of professionals.
Another Book on Professional Services?
With the increase in professional services over the recent past, it might be expected that guidance for executives in those firms would be readily available. We scanned the virtual bookshelves of our favorite online bookseller and located about 50 books on professional services. The topics covered in these books range from how to get started, how to sell, how to incorporate, how to minimize risk, to how to market your services. Surely, another book on running professional services companies was not needed.
However, closer examination yielded a surprising result about most of these books. The vast majority are focused on the yet-to-be-created professional services company. The books are focused on professional staff who are part of a larger firm but wishing to branch out and start their own company as an independent provider. These books are geared to giving them the know-how and the courage to branch out. Topics range from where to purchase office supplies to creating letterhead. This set of books is also targeted at the one-person shop—how to network, how to send out marketing material, how to create a contract—hardly topics of interest to anyone who has been in business for any amount of time. Book after book targets this sole proprietor market. Lacking, however, is a book focused on the mid-size professional services group, employing 5 to 250 professional staff, with strong growth aspirations.
Another subset are the popular and widely known books about profes-
sional services, yet these tend to address the problems of multinational firms with enormous numbers of professional staff. The concepts included are both appropriate and valuable but geared toward steering a massive ocean liner and modifying its direction by a few degrees—again, hardly the tactical and pragmatic text reference for the small to mid-size firm trying to grow.
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Managing and Governing the Professional Services Firm
How Do We Define Professional Services?
While there are a large number of books on the subject, there doesn’t appear to be a standard definition of professional services. A formal definition of professional services found in most dictionaries is similar to the following: Professional service is a service requiring specialized knowledge and skill usually of a mental or intellectual nature and usually requiring a license, certification, or registration. The definition posted on the web site of one state legislative agency is:
PROFESSIONAL SERVICE means work rendered by an independent contractor who has a professed knowledge of some department of learning or science used by its practical application to the affairs of others or in the practice of an art founded on it, which independent contractor shall include but not be limited to lawyers, doctors, dentists, psychologists, certified registered nurse anesthetists, veterinarians, architects, engineers, land surveyors, landscape architects, accountants, and claims adjusters. A profession is a vocation founded upon prolonged and specialized intellectual training which enables a particular service to be rendered. The word “professional” implies professed attainments in special knowledge as distinguished from mere skill.
Governments, industries, businesses, and people use different definitions for professional services depending on the situation. They include or exclude different vocations in the definition. For the purposes of this book, professional services are businesses in which professionals are providing a service not based on a tangible product. In our definition, we include accountants, appraisers, attorneys, business consultants, technical consultants, political consultants, architects, engineers, physicians, advertising agents, real estate brokers, and insurance agents. These types of occupations must deal with similar issues in delivering specific and specialized services through people.