For nearly 40 years those working in market research firms, business schools and executives who base their decisions on evidence have understood and quoted Steven Kerr’s famous 1975 article ‘On the folly of rewarding A, while hoping for B’. In this post I argue too many professional services firms behave exactly as Kerr described, rewarding revenue growth while hoping for profit increases.
Earlier this month I was reminded of the many truths in Kerr’s paper when reading yet another crop of firm statistics, this time from the UK where Allen & Overy’s 2011 revenue is reported to overtaken that of another magic circle London law firm for the first time.
In the USA AmLaw does it. In Australia the Financial Review and BRW do it. And to be fair in other professions Accountancy Age and Engineering News Record also do it. ‘It’ is a focus–in some cases approaching it seems an obsession–on size, where size measured by revenue and head count. I recognise these tables publish other valuable information. It’s not my intention to criticise league tables per se, rather to alert readers to the dangers of over-reliance on the size aspects of the tables.
Size is fuel for league tables. And league tables fire imagination, capture eyeballs and sell publications. The reason is simple, reporting size is relatively easy and the egos of partners eventually drive the firms to co-operate and provide the data requested rather than be subjected to a publication’s ‘estimates’.
As we have pointed out before–as did David Maister before us–the real determinant of success in a professional services firm is how well the firm serves its clients, not how big it is. ‘Bigger, better or both. Dilemmas and strategies for mid-sized professional service firms’, a recent Beaton Capital white paper by Warren Riddell, should be read as an antidote every time a league table is mentioned in a firm.
Then there’s the question of the KPIs used in partner performance management. Surprise, surprise if the firm measures and rewards revenue, then partners pursue revenue. As Kerr put it “Whether dealing with monkeys, rats, or human beings, it is hardly controversial to state that most organisms seek information concerning what activities are rewarded, and then seek to do (or at least pretend to do) those things, often to the virtual exclusion of activities not rewarded”. It is true that many firms have adopted balanced scorecards as the basis for measuring partners’ performance, but more often than not the items that count first, second and third are fees introduced, fees generated and fees supervised. No wonder, like Kerr’s– and Pavlov’s–animals, partners define themselves and others by the size of their practice, either enviously “She runs a $10million practice” or critically “He’s only doing $1m”.
The staff of most professional services firms, especially those with partnership structures, are told about and encouraged to contribute to growth targets, where the chief and often only measure of growth is, you guessed, revenue. It’s anathema for a managing partner to stand up and say to staff ‘we want you to work your guts out to increase partner profits by 12% this year’. Even better would be an exhortation and support to increase client satisfaction by a measurable amount, but without measurement that’s not possible.
Finally there are bragging rights that drive managing partners and their BD and PR people: ‘Fastest growing firm’, ‘Now in the top 20’, ‘Pipped ABC for top spot for the first time’ where the measures are all related to size.
Yet, while all firms rely on revenue to measure, to reward partners and for bragging (‘A’ in Kerr’s language) they are fundamentally striving to maximise their profits (‘B’ in Kerr’s language). Now, I do acknowledge that many league tables also publish profitability measures, as the Legal Week article cited above does. It’s the public and private emphasis on revenue at the expense of other components in the balanced score card that concerns me. Kerr’s folly is the use to which firms are putting “reward systems that ‘pay off’ for one behaviour even though the <the firm> hopes dearly for another". And the media are reinforcing this.
What really matters is the comparative performance of firms in serving clients. The better the value delivered, the more clients will patronise to the firm, the more willing they will be to pay the firm’s asking price, and the more inclined they will be to recommend the firm to others. The trouble is most firms don’t have any hard evidence on their comparative performance. They rely on anecdotes and on oft-flawed, but better than nothing, client feedback they gather themselves.
Proven systems for measuring and benchmarking client perceptions and staff engagement exist. The pay-back period on the cost of the systems can be as short as a few months. Yet very few firms invest in measuring these crucial drivers of overall performance. Those firms that do–and we know quite a few–attest to the enduring value of measuring and therefore being able to manage what makes them better, not bigger.
Let’s not blame the league tables. The trouble is coming from the fascination firms and their leaders and partners have with size. Size matters in some ways, but not they are never jugular.
It's time for all firms to measure what's most important: What their clients and staff really think and to know how these measures compare with those of their competitors.
Comments are closed.