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Stephan Kaiser, Max Josef Ringlstetter: Strategic Management of Professional Service Firms

Professional service firms, like corporate law firms or management consultancies, provide knowledge-intensive services for businesses.

Service quality is a critical feature in the success of professional service firms. Knowledge is considered to be another core resource of professional service firms.

In order to market innovative services, firms must be able to convince clients and customers to use them. This presupposes adequate marketing of the professional service provider and its services.

A large part of the success of professional service firms is the acquisition of new business.

Over the last few years there have been signs of change in the structure of the industry. Spin-offs and increasing market diversification have meant that the market is characterized by an increasing number of small and medium professional service firms; however, they are still competing with the large professional service firms.

Professional Service Firms – The World of Professional Services

Professional service firms play a major role in today’s economy. They are generally associated with keywords like modern concept of work and service, high turnover and profit rates, but also with unpleasant decisions such as corporate restructuring measures.

Professional service firms like law firms, investment banks, consulting firms, auditing firms etc. are companies of the so-called tertiary sector. It includes all services, i.e. products, ‘which require direct contact of provider and consumer and which appear mainly intangible prior to, during and after the contact’.

Professional service firms providing knowledge-intensive services. Professional service firms providing services for companies.

There are three resources which significantly influence the success of professional service firms: knowledge, relational competence and reputation.

  • Knowledge: Professional service firms have made it their business to work on unstructured problems for their clients.
  • Relational competence: Comparable to other services the client is integrated into the service provision process as so-called ‘external factor’.
  • Reputation: Due to their high complexity and their economic significance for clients, professional services – as opposed to e.g. cleaning services – are deemed high quality credence goods.

The service quality and the quality of the choice are often, if at all, revealed only after conclusion of contract.

So far, professional service firms have not been focusing too much on the management of their own businesses. However, also the service provision of professional service firm needs to be profit-oriented in the long-term. The changed trend from purely partner-managed professional service firms towards so-called ‘Managed Professional Businesses’ clearly reflects that.

Professional service firms – more intensively than other businesses – have to be active in and coordinated for two important markets at the same time: the market for professional employees and the market for professional services.

In other words, employees and clients are core success factors.

  • Employees: Highly qualified professionals are both carrier of (implicit) knowledge, and interaction partner of the clients.
  • Client: The professional service market is shaped by individual client requirements.

The main management challenge in professional service firms is to establish a balance between those markets and their specific requirements and constraints.

The possibility of using leverage in the areas of knowledge and client relations also allows professional service firms to charge higher rates when using their junior professionals and therefore increase the firm’s profitability.

Three project types can be identified in one continuum:

  • The term brain project is used in the case of highly innovative contracts with little room for standardization. Brain projects usually include problems with issues, which are strategically of particular importance to the client. The number of experienced and creative senior professionals has to be relatively high. Clients have comparably little remuneration sensitivity, which leads to high consultant fees.
  • The service provision in procedure projects is more standardized, remuneration sensitivity is much higher and hourly rates are lower.
  • In contrast to the aforementioned, gray hair projects have a low degree of innovation although they require a large amount of practical knowledge. The problems in procedure projects have often already been identified and the problem-solving process can be standardized to a considerable extent. Gray hair projects assume a middle position concerning remuneration sensitivity and leverage potential.

There are three main levers to influence and align the behavior of employees to the business objective: the management of professionals, the design of the organizational structure and the development of corporate culture.

The topic ‘professionals’ indirectly links to the second management challenge of professional service firms: the design of the organizational structure.

In general, individual professionals with specific individual skills form one professional service team to solve client problems.

Ideal – typically the pyramid-like organizational structure has three – in law firms mostly two – levels: Partners, project managers and junior employees.

The partners are particularly responsible for the development and care of client relations.

Project managers are mainly in charge of coordination tasks.

While junior employees provide more operative tasks to solve client problems.

The point to be made is that the vertical hierarchical structuring is determined by the project type and vice versa.

Since market and client requirements permanently change, it is beneficial for the professional service firm to have a flexible horizontal structure. This structure is characterized by knowledge pools.

Strongly developed cultures can thus considerably facilitate the firm’s management on the levels coordination, integration and motivation of employees:

Since the beginning of the nineties at the latest, the professional service market had been characterized by high growth rates and intensification of competition.

The Business of Professional Service Firms

Professional service firms can select three development strategies:

  • Diversification: Diversification strategies imply expansion of the existing range of services.
  • Internationalization: In almost all PSF sectors the leading companies have begun to internationalized – at the latest since the beginning of the 1980s.
  • Strengthening of the core business: Irrespective of the pursuit of either strategy professional service firms continuously have to strive to strengthen the core businesses. The main objective is an increase of quality, i.e. to improve ‘service excellence’ in the market. Either through the market differentiator competence (knowledge leadership) or via the client relation (client leadership).

The businesses, which professional service firms are able to conclude against this background, are often of highly diverse nature. There are three basic types of business:

The first type of business is the consulting business. It tackles problems which can often not be clearly defined by clients. A typical claim of consultants is the development of constantly new specific solutions for each client. This is also referred to as expert economics.

When additional quantitative problem-solving competence is required professional service firms which only provide personnel capacities are mainly used. With the help of these additional capacity client problems can be solved which are complex, but at the same time relatively similar. The term for this is ‘re-use economics’. A classical example of such a case is the implementation of a new IT system.

Brokering, or the so-called brokerage, has a main focus. Simply put, objects are transferred from one owner to the other on behalf of the client.

In practice the combinations of types of businesses are manifold.

The three different types of businesses can furthermore also vary in terms of the relation, in which the service is provided. In particular the so called jobbing and sparring relations are differentiated in that context. Sparring relations are often characterized by intensive reciprocal interaction. Jobbing relations on the other hand are rather implementation oriented.

The main remuneration forms are:

  • The payment of a commission is a remuneration form with decisive parameters or percentages.
  • Profit sharing is a special firm of commission payment.
  • The probably most common remuneration form is the hourly fee.
  • The remuneration in form of fixed prices, so-called retainers, is invoiced on a regular basis.

The Subsectors of Professional Service Firms

In this book the following subsectors are examined in more detail:

  • Auditing companies
  • Corporate law firms
  • Consulting firms
  • Recruitment agencies
  • Investment banks
  • Communication agencies
  • Engineering service providers

The existence of a problem is an essential trigger to use consulting services. Clients hope that mandating a consulting company will solve problems irrespective of the problem type.

The core service ‘auditing’ includes the audit of year end accounts and consolidated financial statements statutory for stock corporations and other large companies.

As sub-segment of ‘assurance services’ the auditing process intends to increase information quality and meet statutory requirements.

Many auditing firms have also entered new business segments like tax consulting, management consulting or legal advice as part of the diversification process. However, when professionals audit and consult at the same time, there is a risk that the double function endangers both their judgment and their independence.

The auditing process can be standardized considerably. Standardization is limited though, since the interpretation of laws and accounting standards requires a well-founded judgment on part of the auditor.

Many areas of the auditing profession such as training, membership in interest groups and the practice of the profession are subject to statutory regulations.

Law firms are considered professional service firms, if their clientele mainly consist of companies, industrial groups or institutions. Their services include attorney’s legal advice, in particular in the area economic and tax law and client representation in court, arbitration or before authorities.

The main interaction partners of corporate law firms are executives of client companies. Many areas of the legal profession such as training, membership in interest groups and the practice of the profession are subject to statutory regulations.

Generally speaking, consulting can be seen as interactive process with the objective to influence the behavior of clients in the context of a problem solution and – if necessary – also to support clients with the implementation.

In general, a distinction is made between strategy and organizational consulting as well as IT consulting. While strategy consulting and organizational consulting can be associated with the superordinate management consultancy concept, IT consulting can be further divided in IT consulting in the strict sense and IT services.

Apart from management consulting – in the wider sense – there are also recruitment agencies, IT consultancies and consulting engineers and their various subsectors among the consulting firms.

In most countries the term ‘consultant’ is not a legally protected occupational title. There is no standardized training and no discipline-specific academic degree is required.

Due to these ambitious, but also rather general requirements for professionals the sector tries to accelerate the compliance with certain principles via professional organizations and associations.

At first sight the recruitment agency sector is difficult to define. When talking about a recruitment agency in the wider sense, one refers to all consulting activities and services, which can be allocated to the human resource sector. The recruitment agency in the stricter sense, offers its services predominantly in the recruitment area.

In total the sector is characterized by a high degree of intransparency concerning the recruitment agency’s reliability and professionalism. This is in particular due to low market entry barriers. Neither high capital expenditure, nor a documentation of qualifications is necessary.

Historically, investment banks have acted as intermediates between supply and demand of capital.

Irrespective of the business segments employees are, however, the core success factor for investment banks. Recruitment by competitors and the loss of entire teams (including clients) have impressively demonstrated that in the past.

Communication, as ‘transmission process of messages between a sender and one or several recipients’, is the core service that communication agencies provide to their clients – companies or other institutions.

Since each measure needs to be developed both client as well as product specifically, communication services are to be regarded as highly complex consulting products.

The engineering service provider sector plays an increasingly important role in industrial development. However, engineering service providers often work invisibly for the general public. Even for sector insiders it is difficult to gain an overview of the highly heterogeneous industry.

Engineering service providers offer their services in the areas engineering, chemical industry, oil and gas production, energy and water supply, microelectronics, paper and automotive industry etc.

The services are mostly provided in classical project business form. Based on client requirements, teams are created and the project is organized.

Management of Strategic Resources Quality Management

Service quality is a strategically important resource in professional service firms. It leads to business deals and – in a second step – generates economic profits.

Client trust is thus the results, but also the precondition for successful business relations of professional service firms.

Service quality is best described as the result of an assessment process, in that course the client compares the expected service with the one delivered.

There are two core factors relevant for the evaluation and/or perception of quality:

  • The actual result of the service provision decisively influences the perception of quality.
  • The actual service quality is superimposed by the subjective perception of the professional service firm and its employees.

Following the critical resources of a professional service firm the perceived overall quality can be influenced via three approaches:

Continues development of the knowledge base with targeted knowledge management can help to improve the quality of the service provision.

Strengthening of the relational competence positively influences the quality perceived by clients.

The development of reputation.

Knowledge is a blend of skills generated by information and experience that, however, only gain relevance for a company, if it is action-oriented, i.e. bears fundamental significance for the business of the respective company.

Essential for professional service firms is a particular technical, but at the same time also client-specific knowledge. Client knowledge is the second core component of the knowledge base of professional service firms.

Three categories have to be differentiated in that context:

  • General comprehension of the respective sector,
  • Detailed knowledge about the client company and
  • Personal knowledge on key staff members such as decision makers and information providers in the client company.

A major precondition for the optimum use of knowledge is the exchange of knowledge between the people involved and the connected transition from individual to organizational knowledge.

The exchange of implicit knowledge is of special significance and at the same time represents a big challenge. Explicit knowledge on the other hand, like facts or concepts, can be articulated and thus transferred more easily.

Two different strategies can be used for the knowledge management in professional service firms:

  • The codification strategy focuses on the use of IT systems. Explicit – and as far as possible also implicit – knowledge is being systematically codified here and saved in databases so that any legitimized employee of the company can access it.
  • When using a personalization strategy on the other hand implicit knowledge is mainly transferred via direct interaction of employees.

Ernst & Young or Accenture implement this strategy by using a ‘people-to-documents’ approach.

After removing client-sensitive information, we develop “knowledge objects” by pulling key pieces of knowledge such as interview guides, work schedules, benchmark data and market segmentation analyses out of documents and storing them in the electronic repository for people to use.

With the personalization strategy companies like Bain, The Boston Consulting Group or McKinsey concentrate on another point. The focus here lies in the interaction between individuals and not in the knowledge saved in databases.

Apart from a solid knowledge basis the development of client relations considerably affects the perceived quality.

In a sparring relation the professional tries to put himself in the client’s shoes to grasp his problems. Jobbing relations can be observed in particular if the required knowledge is highly specialized and the client also has a decent amount of expertise in the respective area.

The work of strategy, organization and financial consultancies is rather characterized by sparring relations. The services in auditing firms, marketing agencies, market research institutes, engineering offices and IT service providers are provided in a jobbing mode. The businesses legal consulting, recruitment, communication and PR consulting are hybrid forms.

Especially in the professional service sector that is characterized by a high level of insecurity, positive word-of-mouth advertising can help to generate new contracts.

The stage following the actual service provision is described as ’bridge phase’ to long-term client retention.

Another approach to convey and/or communicate quality, towards existing and potential, new clients, is reputation. It has key significance for the selection process of the client as well as for professional service firms. Reputation can shape market differentiation for professional services for two reasons:

  • Effects of reputation.
  • Suitability as quality surrogate when selecting a professional service firm.

Specialists built reputation by focusing. Generalists on the other hand use a broad service spectrum to improve their reputation. Reputation can thus be either shaped by the institution as a whole or by individual characters that create a sense of identity.

A selection of approaches outlines the variety of possibilities:

  • Appearance of Employees
  • Alumni Contacts
  • PR Management
  • Performance Guarantees
  • Crisis Management
  • Advertisements

A poorly selected professional service firm might possibly not be able to provide the service with the desired quality or within an acceptable period of time. In this context this is called performance risk.

Secondly the recipient of the service is confronted with the insecurity whether the service provider has sufficient commitment. There is the immanent risk of opportunistic behavior in the sense of a relational risk.

Trust is more than just the confidence in the performance of the professional service firm. Exceeding the mere attribution of performance, the trust construct includes primarily relational aspects. This also applies for the expectations that the service providers and / or their employees refrain from displaying opportunistic behavior.

The service encounter determines the interaction of the service provider with the client. It is often also called moment of truth.

Four interaction levels can be differentiated:

The lowest level is formed by individual actions, i.e. phone calls or personal meetings between employees of the professional service firm and clients. These individual actions are only individual elements of an episode

Above the episode level there is another interaction level that is here named sequence. Examples for a sequence are a joint project, the establishment of a facility or a joint product.

Only a row of sequences forms and stabilizes a relationship between service and client company.

In addition to the differentiation of various interaction levels, a differentiation is also made regarding process aspects one the one hand and result aspects on the other.

The development of mutual, organizational trust is thus an emergence process, i.e. a process of collectivization of personal trust in several organization members and over a longer period of time.

The fact that individual, negatively perceived interactions can suddenly destroy workiously achieved trust can be considered a problem.

The second, rather critical comment regarding the success factor refers to the fact that trust only develops in the visible part of the service; at the same time however, a number of activities of the professional service firm remain invisible and thus unclear for the client. If the transparency level for the client is too high in an attempt to improve trust this can have adverse effects on the company’s profitability.

Knowledge Management and Innovation

Knowledge is the key input and output factor of a professional service firm and is thus a decisive success factor.

While data per se is deemed to be understood as mostly context-independent abstract and objective fact concerning things or events, information is seen as individual and thus context-dependent interpretation of such data. Knowledge, on the other hand, is ultimately the product of individually developing substantiated views and opinions about things or events on the basis of information.

Following Nonaka and Takeuchi (1995) different types of knowledge can be categorized in two dimensions, i.e. the degree of aggregation and articulation. Within the aggregation dimension a distinction is drawn between individual and collective knowledge.

Within the articulation dimension, knowledge is either attributed implicit or explicit character. Implicit knowledge in this context is deemed to be subjective, i.e. connected to the respective knowledge carrier.

Knowledge is thus either understood as asset or alternatively as process.

Innovations in the service sector on the other hand have only recently been identified and focalized. Innovation, as a rule in such case is regarded as the successful market implementation of something new.

While creativity in the sense of a human characteristic is viewed as a generator of new associations and/or ideas, inventions are already deemed functioning new ideas. However, both only become innovation when implemented in the market, i.e. when the new idea or item is being commercial exploited.

Codification strategy pursues a ‘people-to-documents’ approach by trying to codify knowledge, i.e. to detach it from human resources and to make it independent of them, to guarantee the knowledge can later be used for various purposes.

In case of a codification strategy, the knowledge dominating within the organization should particularly have explicit character, since implicit knowledge can hardly be documented and/or codified.

The leverage of the knowledge of the partners of a professional service firm (i.e. the increased use of this knowledge by junior professionals) is potentially very high.

Organizational learning is accordingly focused on the exploitation of existing knowledge.

Personalization strategy has a different perspective. The objective is to enable the use of knowledge throughout the organization and to promote dialogues in a ‘person-to-person’ approach between the human bearers of knowledge.

Since the dominating organizational knowledge in case of this strategy is mainly implicit, codification can literally not be used.

As a result of the necessity of personal and (time) intensive communication, the potential leverage of partner knowledge is much lower.

The focus of the organizational learning can also be described as explorative.

The decision for one of the two knowledge management strategies should not be made arbitrarily.

There is a big difference whether a professional service firm primarily provides services standardized to a great extent or highly individualized services.

Contrary to the other four key tasks, controlling knowledge management is of superior meaning since it is focused on the organization, control, coordination and supervision.

In another step, based on determined knowledge objectives, it is of vital importance to create transparency regarding the knowledge available in the professional service firm as well as in the external environment.

Ernst & Young’s centers of business knowledge, which are interconnected and integrated in the company structure on a worldwide scale. The professionals of PricewaterhouseCoopers also use so-called Working communities. McKinsey pursues a similar target by operating Practice Centers.

If, in the context of the knowledge transparency mentioned above, it turns out that certain knowledge objectives are not covered by the organizational knowledge basis the question arises how to fill these gaps by acquiring the respective knowledge.

Knowledge is acquired internally if it is more cost intensive, strategically unacceptable or not possible at all to resort to external bearers of knowledge.

KPMG, e.g. has an internal Assurance Business School, where junior employees receive training measures on KPMG auditing methods.

The efficient use of knowledge is the final goal of any knowledge management and not least serves the purpose to justify the amount of time and costs involved in the individual knowledge management activities.

Of course, the exploitation success of edited knowledge strongly depends on the quality of the editorial work and/or on the trust in its quality. For this reason, the knowledge processing should be taken seriously and be subject to strict quality management.

Another key task of knowledge management in professional service firms is maintaining organizational knowledge.

A measure often used in consulting companies in that context is the already mentioned systematic production of lessons learned.

Numerous studies have shown that, in particular factors like corporate culture, management style as well as recruitment can persistently affect the development of the organizational knowledge basis.

The idea is that radically new professional services allow the professional service firm to disassociate themselves from competitors and to receive ‘innovation awards’ at the same time.

Following Rammert (1988) something new and/or an innovation exists if at least one element is renewed or if the combination of elements is changed.

New knowledge can thus either develop by completely new creation or by the new combination of existing knowledge.

Marketing and Relationship Management

A unique feature of a professional service firm from the client’s point of view is at first the quality commitment. If the self-conception of a brand meets client expectations, the client regards the quality commitment to be fulfilled. In the long term the resulting client trust and the reputation of a professional service firm are decisive success aspects.

To successfully market professional services, it is vital to recognize key criteria which clients apply during the procurement decision process. In principle organizational procurement is characterized by the following aspects:

  • Multi-personality: The involvement of several people in the selection process.
  • Rationality: The attempt to actively generate an objective general view by systematically gathering information.
  • Multi-organization: Involvement of third organizations – like banks or professionals – in the procurement decision
  • Interaction: Regular and intensive contact for the exchange of information and agreement on common and performance objectives.

Moreover, the procurement of professional services is subject to special rules.

  • At first the high degree of insecurity in connection with the procurement decision has to be reduced.
  • The way professionals understand an issue is also of major importance.
  • Another point is the close connection of the service with the implementing professional.

Image, recommendations and experiences thus are key factors to reduce insecurity and in the selection of the service provider.

Three main factors which influence the procurement decision can be identified:

  • Market Reputation
  • Personal Reputation
  • General Quality Indicators for Professional Services

In many professional service sectors, the idea of marketing was not only strange; it was even perceived as indecent.

As a matter of fact, marketing is one of the most important functions for a professional service firm to rise to the ever-changing market challenges.

Modern and effective professional service marketing covers all hierarchical levels and functions of a company.

It is of particular importance that professionals are actively involved in the acquisition process.

Professional services are a particularly pronounced and pure form of service. It is thus logical to look for the fundamentals of professional service marketing in service marketing.

The ultimate goal of the service marketing is the control and outperformance of client expectations.

Inter-personal skills can be identified as the most important tools to retain existing clients and to gain new clients

Apart from knowledge and relational competence reputation beyond doubt is the most important tool to market consulting services.

it is also vital to encourage satisfied clients to actively recommend the services within their network.

Key sales argument for professional services is efficiency.

The traditional transaction-oriented marketing approach turns out to be inadequate for complex and knowledge-intensive services. Relationship marketing is an adequate marketing strategy in that context.

Starting point for the relationship marketing approach is the business relation between the professional and the client system.

A business relation accordingly consists of three phases.

  • It is essential to stimulate the interest of the client in the context of a first encounter.
  • If this was successful the resulting acquisition phase, is supposed to persuade the client to award the contract.
  • The subsequent implementation phase is crucial for the long-term business relation and according follow-up contracts.

The client receives added value from the business relation, which results in an added value for the professional service firm in form of client loyalty.

The aforementioned expansion of the client focus to all stakeholders of a company is implemented via the so – called six markets model.

  • The client market is still at the centre of the model.
  • On the recommendation market network contacts are actively used to acquire new clients.
  • Long-term partnerships are important on supplier market.
  • On the employee market relations are maintained with the respective educational institutions and new employees are selected.
  • In the opinion market relationships with opinion leaders are nurtured.
  • Ultimately a marketing culture prevails on the internal market within the company. Open communication guarantees the unimpaired flow of information and thus relationship marketing becomes a company-wide function.

In principle a consulting company can market their services either directly, via classical advertising or public relations.

  • Contact marketing hereby equal all marketing activities with direct client contact.
  • Credibility marketing should properly market a consulting company.
  • Corporate level marketing is primarily dedicated to the long-term establishment of reputation.

PACE Pipeline of Walker, Ferguson and Denvir is an efficient tool to acquire new clients.

Four possible sources for the future business success of a consulting company can be differentiated: The overall market:

  • Identified potential clients (P1)
  • Potential clients, who were already approached via marketing activities which, however do not participate in a dialogue with the consulting company (P2)
  • Potential clients, with whom the consulting company has entered into negotiations. (P3)
  • Existing clients (P4)

Marketing activities for existing and new clients cannot be clearly separated.

Consistent long – term acquisition of new clients leads to an expansion of the existing clientele recommending the consulting firm to new clients, if business relations are retained accordingly.

Management of Professionals – Human Resource Management in Professional Service Firms

The business of professional service firms is often described as people-driven. This underlines the key role of human resources in the sector.

The core service of a professional service firm – providing services in interaction with clients – is quite clearly characterized by the commitment and the skills of individual employees and/or employee teams.

The objective of any human resources management in professional service firms is to ensure optimal levels of performance on part of the professionals.

Professional performance is a function with three variables:

  • It depends on the skills of the professional,
  • his/her commitment,
  • but also, on organizational framework conditions.

The performance level of professionals always has to be seen in the context of organizational requirements and thus in relation to client and market requirements.

In order to successfully acquire suitable professionals on the external work market, relevant market segments have to be identified and to be tackled strategically.

However, mere success in acquiring professionals does not suffice. Both performance level components, performance and commitment of professionals, have to be permanently improved.

There is more involved than developing the skills of individual employees, but includes generating collective performance by putting together teams where individual professionals work together synergetically. In the area of motivation, the focus lies on motivating employees to efficiently tackle organizational requirements. In this context, suitable reward systems have to be developed.

The loyalty of professionals, the main high performers of the company, must be retained by offering suitable career perspectives.

All the performance level should be defined in terms of qualitative and quantitative aspects. In a second step, market requirements, i.e., needs of potential clients have to be predicted and to be translated in qualitative and quantitative requirements for professionals.

Big strategic consultancies evaluate their consultants, e.g., depending on their problem-solving abilities, their management and communication skills, as well as depending on their behavior in a team and towards clients.

Most consulting firms, e.g., form targeted knowledge pools resulting both from sector requirements (e.g., consumer goods) as well as from functional requirements (e.g., marketing).

Commitment can be evaluated on an aggregated level using measures to determine the work and employee satisfaction.

The analysis of existing performance levels of professionals needs to be compared with organizational requirements.

The significance of the acquisition of high performing young professionals cannot be overestimated. It is a critical success factor for the profitability of professional service firms. In principle, the ratio between fees charged and remuneration paid is best in this scenario.

The challenges in the relevant work market segment result on the one hand from relative market volume, i.e., from the ratio of potential professionals and the number of jobs for professionals on the market. On the other hand, challenges result to a large extent from the existing acquisition potential, i.e., the employer brand.

Due to the HR intensity of professional service firms, motivation of professionals has particular significance: ‘In a professional service firm, a less than fully motivated workforce (…) is a death knell’.[1]

Only highly motivated professionals render high quality performance. This leads to client satisfaction and to market success. The resulting economic success of the professional service firm in turn guarantees the motivation of professionals through high remuneration, career opportunities etc.

Monetary incentives in most professional service firms are primarily a high salary and benefits, such as privately usable company cars, laptops and mobile phones.

A precondition for granting individual monetary incentives is, of course, functioning evaluation systems. These evaluation systems must be able to differentiate individual contributions to the company’s performance.

For non-monetary incentives to be motivationally effective, they have to meet requirements of the professionals. The requirements of the individual professionals in turn, however, depend on his or her characteristics, values etc. Immaterial incentives should thus be individualized as far as possible.

‘Treat them as winners’ and ‘Always keep the next goal out front’.

The so-called performance tournaments, also known as ‘up-or-out’ and/or ‘grow-or-go’, vary only marginally between partnerships and non-partnerships.

The development of professionals is subject to the problem that the objective criterion of the development, namely professional skills, cannot easily be determined.

Core factor in the development of skills of individual professionals is therefore:

  • Learning through experience.
  • In a second step, making use of external experiences in the sense of observational learning is relevant.
  • Thirdly, concrete skills can be further developed with synthetic experiences, for example through specific seminars.

The challenge in turn results from the degree of novelty and the level of task completion. It can thus be stated that skills are advanced via experiences which, in turn, depend on the task to be completed. The speed at which tasks are changed directly influences the speed of development.

The more professionals are trained to be ‘generalists’, the more flexibly the professional service firm can react to changes in client and market requirements.

Analyses of the professional service firm sector show that reward systems for senior managers do not always motivate them to invest time in the development of their employees.

A major part of the professional performance is provided in teams.

Which factors constitute this collective performance though? It is primarily a result of the complex interaction of skills of individual professionals based on organizational rules and structures.

The core and main mechanism to create collective performance is the allocation of professionals to projects and tasks. The so-called ‘project staffing’ leads to the creation of collective problem-solving skills. Within project structures, individual skills are combined, communicated and different views are exchanged.

Professional Service Firms as High-Performance Work Systems

The so-called high performance work system approach takes this insight into account by emphasizing the systematic concentration of personnel measures with the purpose to enhance entrepreneurial performance.

Companies following a management approach and thus enabling high employee performance are called high performance work systems. Synonyms are terms such as high involvement organizations or high commitment organizations. This integrative approach provides a comprehensive view of individual corporate staff measures, which are systematically coordinated.

Therefore, high performance work systems can be seen in the context of ‘knowledge work’ or ‘intellectual capital’ which stand for a changed interest in employees as a source of competitive advantages.

High individual performance therefore results from high motivation in connection with the availability of necessary skills and adequate positioning of employees, including a certain understanding of role on his or her part.

In his model, Guest points out the broad understanding and/or the ambiguity of the term performance. The definition of the term depends to a considerable extent on the targets and/or results to be achieved. Performance is, e.g., reflected ex-post in the profits generated or the revenue of past business years.

Performance in professional service firms is also based on a value-creating perspective related to the input-process-output chain. Simply put, problems of the client and the knowledge provided by the employees of a professional service firm are called input factors, while solutions are the process factors and the final concept and/or its implementation represent the output factors in this service-oriented value creation chain.

A distinction can be made between strategic performance aspects, focused on results related to work productivity, innovation, quality, efficiency and flexibility, and more social performance aspects stressing legitimacy and fairness. Both performance aspects are equally important in professional service firms.

Under the construct of the high-performance work system, measures suited to ensure staff commitment can be subsumes.

The factor knowledge has a dual role in professional service firms as it provides considerable input for service processes and, at the same time, is also the elementary product of these companies. Professional service firms thus offer their clients intangible problem solutions and use the knowledge of their employees in the process.

Work-Life Balance in Professional Service Firms

Professional service firms demand enormous working hours, highest flexibility and constant employee motivation from their employees.

The activities of professionals are furthermore characterized by extremely high work intensity. More than 60 hours per week are rather the rule than the exception.

Many professional service firms have to deal with high fluctuation and difficult conditions in the context of personnel retention and acquisition. The loss of employees means loss of critical resources for professional service firms, since knowledge, relational competence and reputation are often closely connected to the employees themselves.

Different approaches and perspectives have thus led to a diversity of terms, which makes it difficult to form an overview: work-life conflict, work-life facilitation, life domain balance, work-life integration, work-life interference.

From a conflict perspective the term work-life balance thus stands for a minimum interference between work and other life areas.

The enrichment perspective is based on the assumption of a positive interaction of different life roles.

The term work-life balance unites the conflict perspective and the enrichment perspective insofar that a person experiences a successful work-life balance in the form of the lowest possible work-life conflict and a maximum of mutually enriching interaction of roles.

Various factors affect the work-life balance of a professional adversely or positively.

Often role conflicts are caused by so-called ‘critical’ events, i.e., special important stages of life, or decisive points which radically change one or several life areas. Such critical events are traditionally the start of a family (marriage, birth of children) or the illness/care of a relative.

According to science, a personality trait is a (in the medium or long-term) stable, internal (non-situational) factor, which makes the behavior of a person consistent and distinguishable from other people’s behavior. Personality traits explain why individuals react differently to different situations and requirements.

The so-called ‘big five’ personality traits (extraversion, neuroticism, openness for new experiences, agreeableness and conscientiousness).

The Alumni Network

Alumni networks are a key success factor for professional service firms. They are particularly relevant in the consulting field, but also play a vital role in other sectors. Alumni act as key suppliers of resources crucial for the success of professional service firms: client relations and knowledge.

Two groups of participants can be differentiated in alumni networks of professional service firms: On the one hand is the professional service firm in its role as alma mater, including its active professionals. On the other hand, are the former employees with their social relationships as informal sources and networks.

The relevance of alumni networks as success factor is initially based both on the potential of the alumni to acquire talented employees and on the promotion of the corporate culture.

There are often significant differences in the cultures of individual professional service firms.

Dependence of professional service firms on a few key resources makes their handling a critical strategic task.

Alumni networks also help strengthening critical resources of professional service firms such as knowledge, social competence as well as reputation.

In future, strategic recruitment aspects will become more and more important. Personnel marketing, recruitment and assessment should be centralized. Talent Relationship Management (TRM) is one concept to deal with the topic alumni. TRM as a strategic concept is a personnel policy measure based on the ideas of customer relationship management. The focus is on active development of long-term relationships with talents who are considered sustainable and valuable assets by companies throughout their whole vocational life cycle.

Management of Strategic Development – Strategic Development of Professional Service Firms

For professional service firms, above average company growth and the highly competitive business environment represent central challenges for strategic development.

For the development of professional service firms, three strategic options are presented:

  • Diversification
  • Internationalization
  • Strengthening of the core businesses

The organization structures of professional service firms can ideal-typically be represented – independent of the concrete hierarchy levels – as a so-called professional pyramid based on three levels: the seniors and/or partners, the managers and the junior staff members.

The career path system in numerous professional service firms, which are mostly in the consulting sector, is characterized by the concept of ‘up-or-out’. ‘Up-or-out’ defines a career path model where employees are either promoted (up) or laid off (out) after predefined time periods.

This is to ensure the excellence of the employees at all career levels. This personnel strategy was implemented for the first time around 1950 in the consulting firm McKinsey.

By involving experienced managers and seniors in the project teams, synergies are generated from which results the added value of the projects for customers and clients. An optimized structure of the project teams is thus the precondition for an effective and economic activity of the consulting firm.

The work load in professional service firms is very high, even for junior professionals. To be able to recruit new employees in spite of that, career promises play a big role. The possibility of long-term development and of ultimate inclusion in the circle of partners plays a central role in motivational criteria.

As partners acquire an interest in the profits of the company – often as shareholders – enlarging the circle of partners must be accompanied by an increase of company profits. The original partners will most likely not agree to sharing their part of the profits, but will rather aim at generating an increase. Under these conditions, professional service firms must generate huge growth in order to satisfy the requirements of their professionals and maintain the relationship between senior and junior professionals.

  • Diversification: Extension of business activities to include new professional services,
  • Internationalization: Extension of business activities to new countries,
  • Strengthening of the Core Business: concentration on already existing activities with the aim of intensifying them.

The diversification strategy meets the client’s desire for service from a ‘one-stop shop’ without any interfaces to lower their transaction costs. One can distinguish between horizontal diversification, whereby new markets are gained through new services, and vertical diversification, whereby the depth of services is extended.

By internationalization, professional service firms can offer their clients a so-called ‘seamless global service’, i.e., the possibility to work with the same provider on a worldwide basis.

Independent of pursuing these two strategies, professional service firms should continually strive for strengthening their core businesses. Strengthening the core businesses can here be affected by focusing on a functional competence area or on a specific sector.

Companies like the Boston Consulting Group or McKinsey have brought about the enormous growth of the last few years mainly through internal resources. The existing client base and the service spectrum of the professional service firm then form the starting point for further development.

A relatively low leverage of 1:6:6 can, e.g., be found in strategy consulting and means ideal-typically that for each partner there are six project managers, and for each project manager there are six junior employees.

The recruitment of university graduates provides the professional service firm neither new clients nor new knowledge in the short term, but is, on the other hand, linked to an enormous expenditure. Thus, investment in new employees poses a risk and is often neglected, particularly by companies with weak capitalization.

Instead of recruiting graduates, lateral hires focus on experienced professionals who have already climbed a few career steps.

For professional service firms, lateral hires offer two substantial advantages: The acquisition of so-called Rainmakers, i.e., professionals mostly at the partner level, who have already gathered experience in a specific business area and have a good network of client relations available.

Certain barriers to mobility applying to existing employees can be bypassed through lateral hires.

When implementing the strategies internally, structural challenges arise through the growth of the company.

The described development can result in higher complexity at various levels.

Such an increase in complexity requires a stronger structural differentiation.

Clients working in different countries or in different business fields with the same companies, expect the same quality and spectrum of services and a specific corporate culture prevailing everywhere.

When acquiring professional service firms, attention must be paid to corporate as well as professional regulations of the companies in question.

Financing the purchasing price for professional service firms that are not publicly owned can pose problems in three different aspects. First, it is often not possible to use own shares as acquisition currency; second, their own equity base is limited since in many cases taking on investing shareholders without the required professional accreditation is prohibited; and third, the possibilities of outside financing are limited due to a lack of collateral assets.

Two main reasons have been identified – fear of ‘exploitation’ and fear of ‘contamination’ – why professionals reject the cooperation in the context of an acquisition:

  • Fear of exploitation exists in those cases where professionals rate their own know-how higher than that of their new colleagues.
  • Fear of contamination by integrating ‘foreign’ services appears when professionals rate their ‘image’ higher than that of their new colleagues.

Inter-organizational networks enable the implementation of a concentration, internationalization or diversification strategy without having to extend the resource base of one’s own firm.

One way to cooperate is through expert networks. Next to professional service firms which may be specialized in other service areas, this can include other companies or institutions such as universities.

Even though networks between professional service firms are a common occurrence they are often viewed critically. The stability and advantageousness of diversification and internationalization networks between companies is questioned in particular. Turnover increase via cross-selling may be the declared intent of inter-organizational partnerships, but often it is not or only to a less than satisfactory extent fulfilled. Scott views inter-organizational cooperation exclusively as intermediary to a subsequent acquisition.

Networking as a Strategy for Small and Medium Professional Service Firms

The possibilities of external growth are limited for small and medium professional service firms. Thus, opportunities for growth through acquisition are generally only an option for well-capitalized professional service firms.

Due to their structural specifics, the often locally or regionally operating small and medium professional service firms are thus subjected to the well-defined limitations of organic and external growth.

Providing complex services in value-adding networks makes it possible, also for small and medium professional service firms, to pursue different development strategies in parallel.

The starting points of all value-adding networks are the social relations of the agents involved.

In analyses of social capital, the structural characteristics of the social network represent the key elements. They can be analyzed, e.g., with regard to the strength of social connections or the density and integrity of a social network.

Weak ties are considered to be an advantage wherever increased distribution of information is the aim, or where more information is to be received. Close or strong ties, on the other hand, reduce the breadth of received information but may, under certain circumstances, increase its potential for use.

Whether the capital of social networks can be used successfully by professional service firms depends, last but not least, on the qualities and properties of the professionals, groups and organizations linked in social networks.

The structural aspects of value-adding networks addresses the strength of the ties, the density of the network, the existence of structural holes and/or bridges as well as the use of appropriate coordination media.

For the development of structural bridges in the people-driven business of professional service firms, personal relationships formed outside of the working environment (e.g., when playing golf) should generally be of particular relevance.

In which way the structures should be supported by appropriate coordination media, such as trust or contracts. One should assume that in new and weak relations this is predominantly affected with complex contracts and sanctions, due to the uncertainty with regard to the services of the value-adding partner, while in long established and strong value-adding relations the coordination is supported by reciprocal trust and identity.

An important question is with whom, from the perspective of the professional service firm, value-adding activities should be entered into. Here, the quality of the potential value-adding partners is the focus of consideration.

If the partners of the value-adding network aim at offering a complex service such as, e.g., M & A consultancy, then it is necessary that each partner brings its unique competence into the value-adding network.

The quality level of the network partners should at least be equally good or better for the cooperation to generate added value from the perspective of the focal professional service firm.

In many PSF subsectors there exist precautionary arrangements meant to guarantee a minimum of quality.

In recent years, growth has mostly come from developing new themes within existing client relations.

Adapting achievement tournaments, e.g., is just a way to weather a growth crisis for a short period of time. Vertical structuring, on the other hand, means far-reaching modification of the business model.

In practice it is frequency, severity and admission of new participants in such achievement tournaments which can be tweaked to reduce growth pressure: Lower frequency prolongs the time span a professional remains at a specific career level. Apart from such time delay, the severity of the achievement tournament can be increased by restricting the promotion quota. The chances of coming out as the winner of a tournament are thus reduced. At the same time, a limitation of the admission to company-internal tournaments will also lead to avoiding this negative divergence.

Surviving Crises – Crisis Management

For restructuring horizontally, some requirements must be met. In the first place, employees must be willing and capable of dealing with projects of a new content type.

Where horizontal structuring is not an option, companies can only resort to vertical restructuring. In vertical restructuring, a modification in the leverage ratio is permitted to happen in professional service firms, thus that new project types can be handled.

For one thing, professional service firms can try completely restructuring the former project area, build up a new leverage structure long-term, and thus distance themselves from the former way of working. For another, it is possible to build up a second area of activity in parallel to the existing business, and to thus diversify with regard to project types.

Vertical restructuring is admittedly time-consuming and should therefore be considered only as long-term strategic option.

Strategies for the management of professional service firms in times of economic crisis can be identified for diverse areas.

  • The human resources of a professional service firm are one area often affected by crises.
  • Another area are specific sales measures.
  • A third topic which should play an important role, especially in times of crisis, is the question of compliance.

During a crisis, professional service firms must therefore move away from dealing equally with diverse client segments, but use aggressive or at least active sales strategies and push-methods instead.

Next to the traditional form of acquisition through existing contacts, companies must resort in times of crisis to the option of cold calls for winning new clients in the context of direct sales.

The key concept of the archetype approach can be summarized in a few simple words: Organizations acting within similar settings and which compete against each other form, for efficiency reasons, similar structures and management systems.

In PSF research, quite a number of dimensions are taken into consideration for describing archetypes of a professional service firm. These are structures, systems and interpreting schemes.

The interpreting scheme comprehends the values, ideas and principles of the agents. It finds its expression in categories such as governance, profession and efficiency.

The Professional Partnership (P²) differs by the type and extent of control exercised (control dimensions) based on the specifics of the primary task (the profession) and the resulting governance and owner structure of other already existing approaches.

Another archetype is the Managed Professional Business (MPB), which appears most often in big international auditing firms and which must be seen, as far as the formation of structures and systems is concerned, as being diametrically opposed to P². This archetype underlines the aspects of economic focus in professional service firms.


[1] In the book on page 97

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