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Published 19 October 2012 06:11, Updated 21 November 2012 08:02
The size of a firm matters in one of three situations.
Size only matters to a professional services firm in three situations
Far too many firms focus on getting bigger. Their language says it all: “We’ve added 19 people this year” or “We’re growing at 12 per cent”. Size is important in some situations but the prominence of its status is not warranted among firms striving for best practice. There are much more important measures of business health and all too commonly they are not paid sufficient attention.
This week I was the keynote speaker at a conference in the US on growth of mid-sized accounting, law and management consulting firms. The presentations illustrated the dangers of using the wrong metrics on management’s dashboard. Firms blindly pursuing growth are heading lemming-like in the wrong direction. Nearly 40 years ago, Steven Kerr wrote On the folly of rewarding A, while hoping for B, a famous article that explained the psychology of the growth fallacy. If a firm uses revenue as a key performance indicator to reward partners, then they pursue revenue.
It is true that many firms have adopted balanced scorecards to measure partners’ performance but more often than not the indicators that count in remuneration and promotion are fees introduced, fees supervised and personal billings – all size related. No wonder partners define themselves and others by the size of their practice, either enviously, “She runs a $10 million practice” or critically, “He’s only doing $1 million”.
The size mindset neglects the measurement of what’s truly important to the stakeholders in a firm: value received for clients, degree of engagement for staff, and level of profit for owners. Value, engagement and profit are “B” in Kerr’s work, whereas revenue is “A”. It’s folly indeed.
The size of a firm matters in one of three situations. First, in smaller firms it’s crucial to escape from the dead man’s drop-zone, a reference to helicopter flying where reaching the safe zone several hundred metres above the ground is a rule of survival. How big is big enough for these small firms to be out of the danger zone? The short answer is: When there is sufficient depth in each key practice to survive the loss of the lead partner or a major client. In this situation it is as much about succession as about size.
The second situation pertains when meeting the needs of core clients requires increased footprint, depth and/or range of skills. Here, size is a relevant measure, and being able to say if the firm is sufficiently large to retain its clients and grow with them is a good test for being the right size.
Third, when scale makes a difference to the economics of the firm, that is when the cost of a unit of service falls with the volume of service delivered, size is a key determinant of success. This is one of the few situations in professional services where maximising market share is important. Service delivery relies on scale for profitability, giving professional advice does not.
Yet almost all firms strive for size without regard to whether they fit one or more of these situations. They do so at their peril, forgetting David Maister’s admonishment “to get better, not bigger”. He refers, of course, to being better at serving clients – every firm’s raison d’etre.
George Beaton is executive chairman of Beaton Research & Consulting and a partner in Beaton Capital, firms dedicated to professional services.