Effectively managing a professional services firm is about the balance: The right investments between business development now and capabilities in the future; the right leverage models between sellers and doers; and the right profit distribution between partners at the peak of their productivity and those who have accumulated significant equity ownership over time. This issue has become even more important in the age of AI, which is expected to augment workflow and staffing models in professional services.
In this article, we propose a resource allocation framework that examines resources in the complex and dynamic systems that are professional services firms. The framework is underpinned by systems theory in industrial psychology. These concepts emphasize the interdependence and interactions within an organization rather than isolated components and that argues that an imbalance in any part of the system can reverberate throughout the organization. In turn, isolated components lead to inefficiencies and reduced productivity.
In the context of professional services firms, effectively managing these complex and dynamic systems can be even more complex because of their unique organizational structure (most often partnerships) and with talent being their most important asset when knowledge work is undergoing fundamental transformation. In fact, in his bestseller Managing the Professional Services Firm, industry expert David Maister started the book with the first chapter titled “A Question of Balance.”
For most professional services firms, the leverage model is the most critical balance to get right. Leverage model defines the ratio across resources at multiple levels of the organization. The optimal ratio can vary depending on the nature of work as well as the firm’s strategy in adopting AI to enhance knowledge-based work (e.g., data collection, analytics).
The economics of a firm’s client service combined with labor market dynamics drive competitive compensation rates among managers and associates, while partners distribute the firm’s remaining profit. However, partners face a challenging decision about the optimal allocation of funding between rewarding managers and associates (e.g., promotion, salary adjustment, bonus) and maximizing the partner profit pool.
The former ensures that the firm can attract and retain the best talent and keep morale high for an often burnt-out workforce, thereby maintaining a strong pipeline for future partners of the firm. Attrition of billable staff also directly impacts revenue, in addition to the cost of turnover (e.g., search cost, training, non-productive time during ramp-up). Meanwhile, excessively depleting the partner pool to reward managers and associates may result in dissatisfaction among the partner population and result in governance risks (e.g., low support for the firm’s management team).
Successful professional services firms should be mindful about underinvesting in its non-partner workforce in the current economic environment. Today, labor markets are highly stagnant — with low volumes of job movement, employee dissatisfaction may be masked by low attrition rates. The productivity impact (some refer to this phenomenon as Quiet Quitting 2.0) and future attrition risks (dare we say, Great Resignation 2.0?) may shake the firm’s core and cause harm that will take many years to recover from.
The resource allocation across various partner cohorts is another important layer of balance a professional services firm must get right. In Managing a Professional Services Firm, Maister defined eight archetypes of partners and examined the correlation between earnings and productivity (as measured by a variety of metrics such as sales, billable hours, managerial duties, and talent development). For our purposes, we take a simple approach to partner cohorts in the context of tenure. These are broadly defined as follows:
The central question in partner profit distribution is the balance between rewarding for productivity and recognizing partners’ economic interests in the firm as an owner. At many professional services firms, ownership (typically denominated in units) is accumulated over a partner’s career and directly to their capital contribution (i.e., buy-in) in the firm.
Tension may arise when mid-career partners at the peak of their productivity feel that they do not receive a fair portion of the firm’s earnings when they bring in more revenue or profit than longer-tenured partners who have accumulated more units over time. Four strategies may help mitigate that tension:
Most professional firms have a ramp-up mechanism for early-career partners to reach a certain earnings threshold within the first few years of becoming a partner. The ramp-up is funded by both a growing partner pool and retiring partners who typically exit the firm at higher earnings levels than those newly admitted to the partnership. The most effective ramp-up mechanism gives early-career partners the room to grow into their responsibilities as a partner while ensuring that high-performing early-career partners are rewarded for their impact and contribution.
Finding balance in the professional services firm system is critical to the sustainable development of the organization. Dynamic business and operating environments set partnerships on a never-ending search for equilibrium.
