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Published 28 September 2012 06:03, Updated 28 September 2012 09:36
The traditional partnership model for professional services firms is under threat and may be gone as we know it in another decade.
Owners of professional services firms traditionally think of themselves as partners, irrespective of whether their corporate structure is a partnership, unit trust, company or hybrid. Even in some listed professional services, firms the senior practitioners have the status and title of “partner” and among staff there are those who aspire to be partners.
Partnership brings many benefits: unity of purpose, strength of collegiality, mutual support, shared identity and, for those structured as partnerships, accountability associated with joint and several liability. Such is the appeal of partnership, I have heard CEOs of major listed corporations express an ambition to build a culture where senior managers “behave like partners”.
The traditional partnership business model is under threat; some would say it’s broken. The challenges emanate from two main external sources and a weakness. Externally the pejoratively labelled “non-firm firms” and technology-driven commoditisation of services are growing rapidly.
The weakness is the way profits are fully distributed every year, resulting in a disincentive to invest in and build the capital value of the firm. The extent of the threats varies by profession and by size of firm – but few are immune.
In last week’s post I referred the increasing role of computers, decision-making algorithms, outsourcing and crowd-sourcing taking over the delivery of services by professional firms. These innovations are funded by public and private equity, and the people working in them – the entrepreneurs – are not trapped like flies in the webs of partnership legacy and culture. They are hugely motivated by the freedom to experiment, the thrill of innovation and by the motivation of wealth creation in their work, rather than through investments outside their work.
Some professional services firms are starting to emulate the private equity-backed entrepreneurs. Just look the United Kingdom and the torrent of innovation in legal services under alternative business structures legislation where one example suffices to make the point. Riverview Law and Riverview Chambers are fixed price solicitors’ and barristers’ services aimed at SMEs and they are 40 per cent owned by DLA Piper, now one of the largest law firms in the world. Riverview is in effect a “skunk works”, a way of innovating outside the inhibiting culture of the main firm.
Too few traditional partnerships have the will and capability to venture like DLA Piper. So the majority will have to fight to defend their market shares from their relatively disadvantaged positions.
Those that are immune to these threats are David Maister’s famous “brain surgeons”. These are practices that advise – with advice based on largely proprietary IP – much more than they render services. McKinsey & Co is the quintessential brain surgeon. McKinsey, like too few others, continuously invests much of its surpluses in generating new IP. Brain surgeons’ R&D spends are proportionately very much higher compared with the firms that are primarily in service delivery; “factories” is one way of describing them.
R&D explains why brain surgeon firms are privately owned and structured as companies. The shareholders are investing in themselves, first intellectually and then financially. No pure investor would accept this. The business model based on proprietary IP is self-sustaining, provided these firms continue to attract and retain the world’s finest strategy minds – “brain surgeons”.
It also explains why they don’t engage in M&A. They are self-generators of IP and have alliances with leading academic institutions to source what they can’t make themselves. Size is relatively unimportant; they don’t need scale per se.
A plausible futuristic professional services sector scenario sees brain surgeons continuing to flourish, massive growth of non-firm firms and fewer, shrinking, less profitable traditional partnerships. Quite possibly, the next decade will be the one when partnership as we know it ended.
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