29 Apr 2002  Research & Ideas

Star Power! How to Win in Professional Services

Leaders of professional service firms face challenges unknown to most other CEOs. Jay W. Lorsch, an HBS professor, and Thomas J. Tierney, of The Bridgespan Group, explain why, in this excerpt from their new book Aligning the Stars: How to Succeed When Professionals Drive Results. Plus: Q&A with Jay Lorsch

 

Limits to leadership

Being the chief executive of any company is a demanding job. Carrying out the responsibilities of a CEO in a professional service firm is exceptionally challenging because the position lacks the inherent power and control that CEOs of traditional companies enjoy. We've made this point before. But we want to review the key differences briefly from the perspective of the CEO because the implications are crucial: for how the job of the senior leader is defined, and for what successful performance in the job requires.

The differences begin at the beginning. In conventional corporations, the CEO is selected by a higher authority (the board of directors) acting on behalf of the shareholders, which gives him strong positional power to shape the company's direction, strategically and organizationally. The PSF leader starts with a different hand of cards. Regardless of the specific mechanics, he is chosen directly or indirectly by the very people he is expected to lead. In addition, his peers also have an ownership interest in the firm. So unlike the senior executives in a corporation, who defer to their bosses' judgment, these senior stars believe they have the right to question, debate, and even oppose initiatives with which they disagree—and often do so.

Corporate CEOs also tend to deal with their shareholders periodically and at a distance. True, they have to talk with analysts at least quarterly, and they may receive inquiries from concerned shareholders. But this is a far cry from the PSF CEO, who lives and works among her "shareholders." She passes them in the hall, eats lunch with them, and has to guide them productively to accomplish her objectives. Even if they work in distant locations, partners are never more than an e-mail or a telephone call away. When they have any concerns or suggestions, the CEO will hear them in real time. Professional service firm leaders are always in the midst of their partners and fellow owners, which is one reason we use the phrase "leading from within."

In a PSF, the CEO can't undertake a new strategic initiative without the buy-in of the senior stars who will have to lead and fund the effort.
— Jay W. Lorsch and Thomas J. Tierney

Finally, there's the important matter of who decides the CEO's tenure. In traditional companies, if the board of directors believes the CEO is doing a fine job, he stays until he reaches retirement age. If the directors think otherwise, sooner or later he leaves. In PSFs, the situation is strikingly different. The CEO serves at the pleasure of the partner-owners. Many firms require that he be reelected and/or restrict the number of terms he can serve. Even in firms that have public shareholders or corporate parents, removing the firm leader can only be done effectively with the consent of the senior stars. If the stars don't like the idea, the consequences for the CEO's successor and the shareholders can be an unproductive and distracted organization, in which professionals who go down in the elevator one evening may not return the next morning.

Together, these dynamics ensure that the CEO's role in the professional service firm's decision making is both constrained and complex. Suppose a corporate CEO believes his company should make an acquisition or embark on a major European expansion, for example. While any competent CEO would discuss the initiative with his direct reports and, one hopes, gain their support, most subordinates will read the tea leaves and endorse their boss's thinking unless they believe he is way off base. They are, after all, employees not partners; the decision and accountability ultimately accrue to the chief executive. As for the board of directors, only a stream of wrong decisions is likely to stir its concern. In contrast, in a PSF, the CEO can't undertake a new strategic initiative without the buy-in of the senior stars who will have to lead and fund the effort. Trying to force support through arm-twisting is a sure recipe for failure. The only effective course of action is to facilitate a consensus among the partners that the new direction is sound.

Similar constraints apply to organizational choices. Suppose the issue is a decision to promote a successful young person to lead a significant business unit. A corporate CEO will typically solicit input from others, including the vice president of human resources. Essentially, though, it's the CEO's call, and the executive who's being asked to take the new assignment will likely feel immense pressure to accept. (Although candidates can turn down formal leadership opportunities, most realize that doing so is apt to be what's often called a career-limiting move.)

In a PSF, the process is more opaque. True, the managing partner usually can select whomever she wants to assume leadership responsibilities as an office head, say, or a practice area leader. It's part of the CEO's job. Getting her colleague to accept the position is a different matter, however. An outstanding attorney doesn't want to sacrifice her clients to manage an office. An executive search professional refuses the headaches associated with leading a practice area. Information technology consultants resist management assignments, for fear they'll become "administrators." Aggressive investment bankers prefer doing deals to managing people. Accomplished advertising stars prefer the creative process to management hassles. Expert accountants prefer accounting. Often the response to an opportunity to assume a leadership position is "Thanks, but no thanks!"

What leverage does the managing partner have? Not a lot. While a conventional CEO can offer a compensation increase, or talk about subsequent career opportunities, or even threaten dire consequences if the offer isn't accepted, the PSF managing partner has no such ammunition. His partner's compensation is largely determined by the firm's partner-compensation agreement and by the firm's and his personal performance. Besides, the compensation committee would have to approve any unusual change for the person in question. A promise of increased management responsibility is unlikely to be a major carrot. Finally, of course, there's no way the managing partner can threaten to drum his colleague out of the partnership if he doesn't accept.

Comparable limits circumscribe other organizational choices. If the CEO wants to add a new management position, he has to convince his colleagues. If he thinks a change in the firm's measurement system—or even worse the compensation scheme—would improve alignment, it means more discussions with the senior stars and maybe the creation of a committee to study the issue and come up with a recommendation to all the partners. If the question is one of bringing a lateral hire into the partnership, or even which young stars to promote, the CEO cannot make the decision alone. At a minimum, he has to develop an informal agreement among his senior colleagues. Often the firm's governance process dictates that the decision be made by all the partners (or a subset of the partnership) whom the CEO can influence but not control.

Three Questions for Jay Lorsch

Working Knowledge: How would you define a "star?"

Lorsch: "Stars are the men and women in critical jobs, whose performance is crucial to the firm's success . . ." They have a record of past accomplishments, but also, and more importantly, the potential to continue to contribute to their firm's success. This means that they have the highest future value to their organizations. In these firms stars are not prima donnas, but true team players.

Q: There is an intriguing line in the book, "The people you pay are more important over time than the people who pay you." What do you mean by that?

A: What is meant by the line is that while clients are, of course, important, the professionals who you pay are really critical to finding, serving, and retaining clients. In the end, great firms need clients and stars to be successful.

Q: How do you transform talent into stars?

A: This is tough to answer briefly. It is the topic of more than one chapter in the book. But, if you start with professionals with high potential to succeed, the challenge is help them learn to apply their knowledge and skill. These outstanding firms do this through teaching on the job, constant performance feedback, and through assigning younger people to jobs from which they can expand their knowledge. Finally, there is a constant process of increasing the professional challenges for those who succeed, and phasing out those who do not, so the latter find more suitable careers.

—Sean Silverthorne

Excerpted with permission from Aligning the Stars: How to Succeed When Professionals Drive Results, Harvard Business School Press 2002. Copyright © 2002 Jay W. Lorsch and Bain & Company, 2002.

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Jay W. Lorsch is the Louis Kirstein Professor of Human Relations at Harvard Business School. He is the author of over a dozen books and has taught in all of Harvard Business School's educational programs.

Thomas J. Tierney is the former chief executive of Bain & Company, and currently serves as chairman of The Bridgespan Group, Bain's nonprofit affiliate.