There are few issues that provoke greater debate, interest and often tension within the Partner group of a professional services firm than Partner compensation and how Partner contribution should be managed and assessed.
So it was with interest that we read the recent survey by Performance Leader, Managing Partners’ Forum (MPF Global) and Internal Consulting Group (ICG) into the current trends in ‘Partner Contribution and Compensation Management’ within professional services and advisory firms.
The ‘Partner Contribution and Reward Survey‘ makes interesting reading for anyone leading a professional services firm. In particular, we would point you in the direction of the eight recommendations on Page 9 of the survey.
Continued obsession with short-term, narrow, ‘activity-driven’ financial metrics
One particular issue highlighted by the study, which continues to have significant impact on the majority of professional services firms is the continued obsession with short-term, narrow, ‘activity-driven’ financial metrics such as billable hours and utilisation.
In this Point of View article we examine the impact these ‘activity-driven’ metrics have on client relationships and the firm’s staff.
We then investigate whether the traditional culture of professional services firms – underpinned by billable hours and utilisation metrics – is compatible with the ambitions, expectations and attitudes of junior staff members. Finally, we outline our recommendations for professional services firms.
What the continued focus on short term, financial metrics says about your firm
We have written before that it is time for professional services firms to slaughter the ‘uncontested untouchable’ of billable hours because it specifically rewards and underpins behaviours that can be both to the detriment of the firm and, more importantly, its clients.
The survey shows however that narrow, financial ‘activity-driven’ metrics are still the key determinant of Partner reward in most professional services firms.
The critical thing for Partner groups to consider is this; what signal does your focus on activity-driven metrics – such as utilisation and billable hours – send to clients and your firm’s staff?
The impact of ‘activity-driven’ metrics on clients
Consider the impact on your clients first. The first problem, as we previously mentioned, is the behaviours these metrics reward. If reward is purely based on activity levels, surely this promotes inefficiency? There are few other industries where the quantity of input (hours) is rewarded over the quality of output.
In our experience, clients hate billable hours. The fear of being charged a significant amount for simply contacting the firm means there is little incentive for regular communication and clients can become equally cynical every time their professional advisor contacts them. Can any metric that causes the client to be suspicious of your firm or deters communication be a good thing?
The impact of ‘activity-driven’ metrics on the firm’s Partners and staff
Within the firm, narrow metrics do a disservice to any Partners who might want to use their time to focus on additional strengths that are of benefit to the firm such as business development, client relationship management or coaching and mentoring. The focus on ‘one-size-fits-all’ financial, activity-driven metrics allows little flexibility or incentive for Partners to carry out vital roles on behalf of the firm.
As Professor Laura Empson has previously discussed, in some professional services firms you find a perverse situation whereby a Managing Partner actually loses authority and influence among the Partner group because she has passed clients to another Partner in order to fulfil her role as leader of the firm.
Staying within the firm, narrow financial metrics (such as utilisation) provide little incentive for staff members to undertake additional activities such as learning and development which could greatly benefit the firm in the long run.
We are often told by our programme participants that one of the main reasons they struggle to attend programmes and subsequently put the learning into practice is because they simply do not want to fall back on their utilisation targets caused by days out of the office.
Is the traditional ‘activity-driven’ culture of professional services firms compatible with younger generations?
The final point to consider is whether the traditional culture of professional services firms, illustrated in the report by the ongoing weight placed on activity-driven metrics, will be compatible with the ambitions, expectations and attitudes of future generations – particularly when it comes to work-life balance.
It’s easy to understand why the traditional ‘activity driven’ culture is unlikely to change in many firms.
The most senior individuals in the firm have likely worked extremely long hours and made significant sacrifices all their working life to meet the firm’s activity-driven expectations to be rewarded and ‘make it to Partner’, so a focus on rewarding activity-driven metrics is something they accept and to which they have become accustomed.
The question is whether those employees who might become future Partners are willing to subscribe to the uncompromising expectations created by activity-driven metrics?
The problem for professional services firms is that for a large proportion of junior staff, the traditional expectation to work very long hours in the hope of ‘making Partner’ is simply not worth the sacrifice.
In our conversations with junior staff, it has become clear that younger generations are less likely to subscribe to the same work regime as their parents or make the sacrifices they witnessed them make while growing up.
This is backed up by research from Bentley University:
“Forced early in their careers to recognize that hard work and a good education do not necessarily lead to job security, members of this well-educated group say that their family responsibilities and personal aspirations will take precedence over their professional goals.”
A similar suggestion is made in an article by Micah Solomon in Forbes:
“Millennials have often shared with me their unwillingness to sacrifice their off-work time or to make other lifestyle compromises in return for financial compensation. It’s been argued that millennials’ inclination in this regard relates to them having watched their boomer parents delay happiness in return for career advancement, a worldview they’re not willing to buy into for themselves.”
As David Maister once pointed out, the ‘risk of not making it’ used to serve professional services firms as it put a large degree of pressure on junior staff to work long hours to succeed. Perhaps the ‘risk of not making it’ no longer carries the weight or threat it once did?
Or perhaps ‘making it’ now carries a different definition such as achieving a satisfactory work-life balance or making a positive difference to society?
By way of illustration, in a recent conversation, a senior well-respected Managing Partner was lamenting the fact that they were losing many good junior staff members and he couldn’t understand why because they were paid very well, in a high-status firm, with good partnership prospects:
“The problem is, the younger generation are just not willing to subscribe to our culture which has suited us very well for many years.”
The question raised is:
“Do the younger staff members need to fit the culture or does the culture need to adapt to fit them?”
Our recommendations for professional services leaders:
Interestingly, the ‘Partner Contribution and Reward Survey suggests there is a desire among some Partners to broaden the range of performance metrics. This is something we wholeheartedly support.
Firstly, we suggest firms start to measure and reward behaviours that put the client first as diligently as they reward activity metrics.
Firms could consider alternative pricing structures that are not based on ‘activity’ metrics. Alternatives might include ‘fixed fees’ or value-based pricing whereby prices are set as a function of value created for the client and the ability to design and deliver a service that directly meets clients’ needs, rather than on the cost of production (hours billed).
The signal value-based pricing models send to clients around your firm’s motivation and commitment could not be more different than the perception created in your clients’ minds by traditional ‘hours billed’ models. Of course, the challenge ‘value’ presents is that firms will need to be much more transparent and clear about ‘client value’.
Here’s another important point for Partners to consider: some firms are already doing this. Examples include Reed Smith and Jackson Lewis.
What’s more, the continued focus on billable hours by traditional firms means the conditions are ripe for new disruptive market entrants, such as Riverview Law – “We charge fixed prices so there are no targets around billable hours, it’s all about quality, customer service and contract renewal.”
Within the firm, we suggest firms explore additional metrics to assess contribution and determine reward beyond ‘activity-driven’ metrics.
Other examples of behaviours firms could measure and reward include: client loyalty, business development, people development, time spent coaching and mentoring, collaboration, relationship building, trust, client service, innovation, pro-bono commitment, thought leadership generation and public speaking.
Determining ways of measuring these behaviours will not be easy, but the traditional focus on narrowly constructed personal financial results creates greater problems in the long run. As Seth Godin wrote in his article ‘The Money Maximisation Distraction’:
Money is a simple metric, and one that captures a certain sort of information about value and scarcity. But it’s wildly inaccurate when it comes to measuring many of the things that actually matter to us. It can mask the emotions and moments and contributions that we work so hard on, the people that we seek to become, the contributions that we seek to make.
And yet, because it’s easy to rank and compare and change, we can get seduced into believing that money is the metric that matters the most, that matters all the time. If we only use money to make our decisions about worth, we’re going to get it wrong almost every time.
Until we get significantly better at matching money to contribution, we need to embrace the difficult to measure.
Leaders of professional services firms: you need to define your metrics or they will define you and perhaps not in the way you would want. Take heed from the words of William Bruce Cameron in ‘Informal sociology: A casual introduction to sociological thinking’:
“Not everything that can be counted counts, not everything that counts can be counted”