CLIENT: Harvard Business School
PUBLICATION: HBS Leading Research
FORMAT: 8.25 X 11.75 inches, 16 pages
AUDIENCE: Fortune 500 CEOs, business press, and alumni

Star Guide

Organizing Professional Firms for Success

Research by Jay W. Lorsch

"It would be hard to discover a significant company in today's tumultuous business environment that does not rely heavily on some mix of professional services. From the boardroom to the shop floor, the footprints of professionals are everywhere." So begins a new book co-authored by HBS professor Jay W. Lorsch and Thomas J. Tierney, director and former CEO of Bain & Company. In Aligning the Stars: Organizing Professionals to Win (HBS Press), the authors present an unprecedented inside look at the firms that corporate managers increasingly turn to for expert counsel and services. With more than a trillion dollars in annual sales, professional services represent a significant and rapidly growing sector of our economy. Yet, despite the expanding presence of these firms, little had been done to identify the forces that drive their successes or failures.

All this changed five years ago when Lorsch and Tierney came to a remarkable realization. While discussing "Leading Professional Service Firms," a popular HBS executive education program in which they both teach, it occurred to them that much of the program's content was derived from their personal experience. [Lorsch is the founder and faculty chair of the program that attracts professional service firm (PSF) executives from a wide range of professions and geographies.] Through classroom dialogs, the authors also grew increasingly aware that most PSFs share many surprising similarities. They reasoned, therefore, that there likely was much that these firms could learn from their counterparts in other professions, especially from the standpoint of best practices.

Exploring an Uncharted Realm

To learn more, Lorsch and Tierney launched an extensive research effort in 1997 that began with a preliminary study of some 60 to 70 PSFs in diverse professions. From these, they selected 18 firms representing seven specialty areas: accounting, advertising, executive search, investment banking, IT consulting, law, and management consulting. "We wanted firms," says Lorsch, "that clearly were successful, had enduring track records, and had survived more than one generation of leadership." The heart of their investigation was an extensive series of interviews with each firms' senior managers. To help frame their findings, the researchers also identified and studied trends that had occurred within the sector during the two preceding decades.

"One reason why the sector was relatively unexplored," says Tierney, "is that many of its companies were privately held, making information difficult to obtain. The PSF sector is also highly fragmented with a myriad of firms that range from solo practitioners to global practices employing thousands of professionals." The authors also point out that the sector was far smaller 20 years ago, and considerably more obscure. Hence, it drew less attention.

The Primacy of Stars

The business model under which PSFs operate differs significantly from that of a corporation. With rare exceptions, a PSF's sole means of generating revenue is the talent and expertise of its professional staff. Consequently, how it manages that staff directly affects its ability to survive and prosper. It is these highly-rained and talented individuals who have the highest future-value to the firm that Lorsch and Tierney have dubbed stars.

To understand the unique status of stars, the authors employ a triangular diagram in which the points represent the firm, its stars, and its clients. The lines connecting them reflect how each element relates to the others. The firm's relationship with its clients, for example, is based on its particular strategy which typically defines the type of clients it is willing serve and the services it offers. A PSF's relationship with its stars is largely behavioral, and requires motivating them to act in ways that are highly consistent with the firm's strategic goals. Stars, by contrast, tend to develop strong personal relationships as they work closely with clients. Significant problems arise, the authors discovered, when the goals of a firm, its stars, and its clients come into conflict. The challenge for the firm's CEO, therefore, is to achieve and maintain alignment among these three elements.

"It is extraordinarily difficult to do," says Lorsch. "Two factors complicate the task. First, the environment is in a state of continual and rapid flux as companies evolve, regulations change, and market boundaries and barriers shift. Second, stars by nature are highly independent. They are keenly aware of the market demand for their talent — and, are generally free to take it elsewhere at any time. That they sometimes do means staff retention is usually a vital concern for the PSF leader."

Four Main Engines

Based on their extensive research, classroom discussions with executives, and years of experience, Lorsch and Tierney offer numerous lessons in PSF leadership. For ease of understanding, their book groups many of these lessons into four management categories: strategy, organization, culture, and leadership.

Referring to strategy, Lorsch explains that we traditionally have learned that a firm's strategy defines how it should be organized. Retail strategies, for example, must have strong buying, distribution, and marketing capabilities. In a PSF, however, organization necessarily drives strategy because the staff's expertise defines the strategy the firm can pursue. To alter its strategy, a PSF must fundamentally change its organization, says Tierney. This is far more difficult than changing the design of a product or distribution system. Here, you're talking about changing people — people who often hold an interest in the firm as its partners. In 1997, NationsBank, wanting to enter the investment banking field, acquired the well-known Montgomery Securities. When many of Montgomery's senior staff resigned soon after and several clients followed, Montgomery's strategy was suddenly bereft of the very organization for which NationsBank had paid $1.2 billion.

Culture is another critical ingredient of PSF success. Essentially, these firms are groups of highly-talented, independently-minded professionals who often are partners in their firms. How, then, can a CEO motivate them to act in ways that are aligned with the firm's strategic goals? "Culture is central to shaping behavior," says Tierney, "because it defines what is acceptable and what is not." Adds Lorsch, "It's also a myth that culture cannot be changed. We found ample evidence that successful firms do find ways to alter their cultures without weakening them in the process." In one such case, when Charlotte Beers assumed leadership of the ailing advertising firm Ogilvy & Mather Worldwide in 1992, many in the firm feared a dramatic cultural change. To their surprise, Beers not only respected the firm's strong culture, but also found fresh ways reinvigorate it.

With respect to leadership, a single message emerged from the research — that, unlike corporate CEOs, PSF leaders must be able to lead without control. PSFs typically are organized as partnerships in which many staff members are also owners. Even PSFs not legally established as partnerships tend to operate as such. Hence, most professionals in a PSF are commonly perceived as peers. Tierney, drawing from his Bain & Company experience, says that, "Rather than the span-of-control leadership concept we learn about in management classes, leading a PSF requires the ability to lead through a span-of-influence."

The lessons mentioned here are but a few of many that Lorsch and Tierney have unearthed and set down in Aligning the Stars. While their findings provide important new insight for those who lead, work in, or retain professional service firms, the researchers believe that many of the lessons also have considerable relevance for other types of talent-intensive organizations. Achieving and maintaining positive alignment between strategy, stars, and clients, is a formidable task, the authors discovered. Yet, they say, when a task is difficult and you do it well, you'll have a real competitive edge.

— Peter Jacobs