Responsibility for Risk Management and
Quality Assurance in the Organization
Ultimately, responsibility for quality assurance and risk management falls on the shoulders of the senior managers of the firm. These are the individuals with the experience, background, and judgment to determine the best course of action in most cases. However, the information most needed to make the right decisions, as well as new ideas, can come from the professional and internal staff. Firms with effective risk management and quality assurance programs establish a culture that holds the entire team responsible for ensuring quality delivery and mitigating risks. Success depends on the involvement of all—the risks and trouble that assail the firm daily are too numerous and varied to be mitigated by anything less than total involvement.
Some firms may choose to elect or appoint an officer in charge of these areas. The research on decision making shows that certain personality types may be more effective than others in this role. In a 2001 paper titled “ Worry and Mental Accounting with Protective Measures,” Schade and Kunreuther10
hypothesize that “a greater tendency to worry would intuitively be expected to lead to a higher level of [willingness to pay] for any protection.” In fact, their research demonstrated that the reverse may be true—that worriers may make more cost-effective decisions than nonworriers. The researchers
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contrast anxiety (“an emotion”) with worry (“a cognitive phenomenon”).
Worry leads to thinking, analysis, data gathering, and effective decision framing. Prior research by Tallis, Davey, and Capuzzo11 found that worrying:
• Acts as a stimulant
• Clarifies thoughts and concentration
• Gives the opportunity to analyze situations and work out the pros and cons
• Adds to the problems and, as such, leads to exploration of different possibilities
The research concludes that “low-worriers are likely not to care much about the risk, and hence may not calculate values of objects, losses and prices for protection.”12 The implications of this for firms attempting to improve decision making, quality assurance, and risk management are clear: Contrary to intuition, an effective worrier, not prone to anxiety—the emotional component of worry—may be their best asset.
RESOURCES
Norman Augustine et. al., Harvard Business Review on Crisis Management [HBR-Crisis Management] (Boston: Harvard Business School Press, 2000).
Thomas L. Barton, William G. Shenkir, and Paul L. Walker, Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management Max H. Bazerman, Judgement in Managerial Decision Making (New York: John Wiley & Sons, 1994).
Steven Fink, Crisis Management: Planning for the Inevitable (Backinprint.com, 2001).
Matthew J., Hassett and Donald Stewart, Probability for Risk Management (ACTEX
Publications, 1999).
Paul R. Kleindorfer and Howard Kunreuther, co-chairs. The Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania, Available from http://opim.wharton.upenn.edu/risk.
James Lam, Enterprise Risk Management: From Incentives to Controls (Hoboken NJ: John Wiley & Sons, 2003).
Peter G. Neumann, moderator and chair, Risks Forum newsgroup, sponsored by the ACM Committee on Computers and Public Policy. Available from http://www
.csl.sri.com/∼risko/risks.txt.
Harry V. Roberts and Bernard F. Sergesketter, Quality Is Personal (New York: Free Press, 1993).
J. Edward Russo and Paul J. H. Schoemaker, Decision Traps (New York: Fireside Books, 1989).
J. Edward Russo, Paul J. H. Schoemaker, and Margo Hittleman, Winning Decisions: Getting It Right the First Time (New York: Currency, 2001).
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Richard H. Thaler, The Winner’s Curse: Paradoxes and Anomalies of Economic Life (Princeton, NJ: Princeton University Press, 1992).
R. Max Wideman, ed., Project and Program Risk Management: A Guide to Managing Project Risks and Opportunities (Project Management Institute, 1998).
Christopher Marrison, The Fundamentals of Risk Measurement (New York: McGraw-Hill, 2002).
NOTES
1. Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996, ISBN 0471121045).
2. Obituary of Arthur Rudolph, New York Times (January 3, 1996).
3. J. Edward Russo and Paul J. H. Schoemaker, Winning Decisions: Getting It Right the First Time (New York: Doubleday, 2002), p. 6.
4. See note 3, p. 3.
5. See note 3, p. 5.
6. Howard Kunreuther and Mark Pauly, “Ignoring Disaster: Don’t Sweat the Big Stuff,” working paper collection from the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania (October 11, 2001).
7. Howard Kunreuther, Nathan Novemsky, and Daniel Kahneman, “Making Low Probabilities Useful,” working paper collection from the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania (December 2000).
8. Howard Kunreuther, “ Wharton on Making Decisions,” Chapter 15, “Protective Decisions: Fear or Prudence?” (New York: John Wiley & Sons, 2001).
9. Richard Thaler, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, Chapter 5, pp. 50– 62.
10. Christian Schade and Howard Kunreuther, “ Worry and Mental Accounting with Protective Measures,” working paper collection from the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania (February 20, 2001).
11. Tallis, F., G. C. L. Davey, and N. Capuzzo, “The Phenomenology of Non-Pathlogical Worry: A Preliminary Investigation,” in Worrying: Perspectives on Theory, Assessment and Treatment, ed. G. C. L. Davey and F. Tallis (New York: John Wiley & Sons, 1994), p. 77.
12. See note 9, p. 6.
SECTION V
The Back Office:
Efficient Firm Operations
15
Finance, Accounting, and
Human Resources
JEFFERY B. NEMY
If you can’t measure it, you can’t manage it!
—Peter Drucker
Financial management of a professional services firm requires a delicate balance between shareholders’ needs to control costs and grow the business profitably and management’s responsibility to recruit, train, motivate, and retain talented employees. This delicate balance is an art, not a science, and requires a close interrelationship between finance and human resource (HR) functions.
This chapter focuses on both departments because a clear delineation between them is difficult to draw, especially in small- to mid-size firms.
It is often said that a professional services firm’s most valuable assets walk out the door every night. Management’s challenge is to properly motivate those assets to return in the morning and deliver high-quality professional results. Importantly, such motivation encompasses far more than a healthy salary, as training, evaluation, mentoring, and bonus programs contribute significantly toward an employee’s attitude of the firm and his or her individual performance. Successful firms balance these needs well, although seldom to everyone’s satisfaction. In this chapter, we address key issues in managing both human and financial resources.
Why This Topic Is Important
Millions of dollars pass through even the smallest professional services firms. In many cases, the firm may act as an intermediary agent of the client, 337
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procuring goods and services on its behalf, and accordingly has a significant fiduciary responsibility to safeguard its assets. Executive management of the professional services firm must be reasonably well versed in essential financial concepts and related HR issues to provide effective leadership.
Without such knowledge, it is relatively easy to make decisions that, even though they appear to be the “right thing to do,” may conf lict significantly with fundamental financial planning and accounting principles and in the most serious situations could be deemed illegal. Further, by understanding where potential liabilities may be hidden, executives can take appropriate action a priori to ensure that proper procedures are employed. Clearly, a firm must also be well managed financially to exist as a going-concern. Finally, solid HR management is vital to a firm’s ultimate success because it has only the knowledge, skills, and abilities of its employees to sell.
Human Resources
Management of the professional services firm requires a unique focus on the firm’s most critical asset, its people. The interrelationship among HR, accounting, and finance is so close that a clear delineation of responsibilities often is difficult to find, particularly in smaller organizations. Smaller firms will oftentimes aggregate the responsibilities of overhead departments such as HR and finance together. Compensation management, payroll processing, vacation tracking, management of legal issues, and timesheet management are among the traditional HR areas that often may be managed to greater or lesser extent by the finance department. Because of the critical integration between these two functions in the professional services firm, financial managers and HR managers often must be well versed in each other ’s craft.
Typically, smaller professional services firms do not have the wherewithal to recruit and retain seasoned HR professionals. Instead, mid-level financial professionals with industry experience are routinely tapped for the senior financial and HR leadership roles in small firms. These employees are often well qualified to meet the needs of a small firm. But as the firm grows, the need for specialized leadership becomes more critical. Systems, processes, and procedures that work well on an informal basis in a small firm are quickly rendered ineffective once the organization has more than a few dozen employees. Senior leadership of the firm must augment those resources themselves when the firm is small and then be prepared to recognize when it is time to recruit professional HR talent to the team as the firm grows.