In the face of political and economic uncertainties, professional services firms may feel compelled to focus on cost control to protect near-term earnings and maintain competitiveness in the long run. In doing so, firms must remain mindful of the unique characteristics of the professional services industry and ensure that any actions taken do not adversely affect the strategic operating model.
In his seminal work, “Managing the Professional Services Firm,” David Maister identifies two key characteristics that make professional services firms unique:
The foundation of effective management is a human capital leverage model that requires careful calibration across the firm's various layers. The slightest miscalculation in such calibration would tip the balance of the firm’s profit formula.
Although Maister's insights were shared nearly three decades ago, they remain relevant for all professional services firms today, regardless of ownership (public vs. private) or revenue models (pure-play consulting vs. consulting as an adjunct to a software platform).
All firms must be attuned to their solution set, client relationships and leverage model. Differences arise in how firms recognize revenue and profit. On one hand, pure-play firms recognize these through billable time and efficient delivery. Most pure-play firms have explored rightshoring of delivery teams and are heavily invested in exploring how artificial intelligence can significantly enhance delivery efficiency.
On the other hand, firms selling software or technology platforms may intentionally operate the consulting business on lower revenue and margin to boost technology, product and licensing revenues.
Financial pressure may prompt professional services partnerships to review their earnings distribution model. Most partnership agreements explicitly limit earnings allocation so it would never put unnecessary pressure on the firm’s liquidity and risk a capital call (i.e., the need for partners to make additional capital contribution).
However, a sudden dip in earnings allocation may create retention risk among high-performing partners, especially if the firm does not have effective “handcuffs” in place. Publicly traded professional services firms may employ tools such as moderating bonus funding and stock grants. In many ways the financial balance could be even harder to strike at publicly traded firms vs. partnerships because of the need to deliver quarterly earnings to non-operating shareholders.
Rightsizing headcount and reducing bench size are common strategies to manage costs. At the right scope and scale, these actions can help better manage performance, reinforce critical skills valued by clients and stimulate productivity growth. However, if not implemented effectively, they may damage the firm’s leverage model and competitive advantage for years to come.
The explosive growth of AI is adding to the strategic and operational complexity, opening new opportunities in client work while creating significant disruption to firms’ talent models. AI capabilities drastically reduce firms’ reliance on entry-level resources, putting pressure on hiring activities for junior talent. However, such a shift in talent acquisition strategy could damage the talent pipeline and threaten the long-term viability of the partnership.
These were painful lessons learned from the financial crisis of 2007-2008 and the COVID-19 pandemic of 2020-2022. Imprudent cost management decisions, while financially reasonable at the time, negatively affected firms long after the crisis subsided. Aggressive cutbacks on headcount, hiring, promotion or salaries disrupted client relationships and damaged the firm’s reputation as an employer and service provider of choice in the long-term.
Alternatively, firms that distributed the pain thoughtfully and equitably managed to retain critical talent and flourished as the economy rebounded. Beyond reputation and morale, the real business risk is a path to mediocrity as high-performing talent turns away.
Before making any cost control decisions, consider the following questions:
Professional firms could benefit from heeding the insightful words of Rahm Emanuel, former Chicago mayor, during the financial crisis of 2007-2008: “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.”
If a recovery emerges, whether toward the end of this year or beyond, explore which opportunities your firm can seize. Could market uncertainty provide an opportunity for restructuring, reassignments or reskilling to guide the organization toward a workforce for the future? Successful leaders show adaptability and build resilience in trying times.
Political and economic pressures may be rising, but those who resist the temptation to undermine their talent in the short term will be positioned to win the long game. Professional services firms are fundamentally human capital-based businesses. Your talent and clients will remember how they are treated and how you navigate the uncertainty.
