Paul Holmes 26 Sep 2005 // 11:00PM GMT
In 1999, at the height of the dot-com boom, a lot of people were puzzled when I suggested at a Counselors Academy meeting that the agency business was in crisis. After all, most firms were growing at a very healthy double digit pace, and there were newspaper reports of public relations firms turning away clients. Surely, things had never been better?
But while clients were easy to come by, even the best firms were finding it increasingly difficult to find good talent. And since sustained performance in the public relations business is entirely dependent on the quality of the people doing the work, I worried that an implosion was imminent. If we were finding it as hard to win good clients as we were to hire good people, nobody would have questioned the diagnosis—and good people are more important than good clients.
I was basing that assertion on the concept of the “value chain,” a concept that says good people attract good clients, and good clients help firms make good profits. In other words, the foundation of a profitable business is its people. In no industry, I argued at the time, is that more apparent than in public relations.
I wish I had a copy of Jay Lorsch and Thomas Tierney’s book Aligning the Stars back then. Because Lorsch (the Louis Kirstein professor of human relations at Harvard Business School) and Tierney (former chief executive of management consulting powerhouse Bain & Company) make the case much more convincingly than I did, backing up their assertions about the importance of cultivating talent in a professional service firm with two lifetimes of experience.
They have produced a book on professional service firm management that deserves a place alongside the various works of David Maister on the desk of every public relations agency principal or partner.
The thesis is simple: “Outstanding firms are consistently able to identify, attract, and retain star performers,” say Lorsch and Tierney. “To get stars committed to their firm’s strategy; to manage stars across geographic distance, business lines and generations; to govern and lead so that both the organization and its stars prosper and feel rewarded.”
But executing against that philosophy is not so easy, and Lorsch and Tierney also provide an effective guide to the kind of culture, strategy and organization needed to build a world-class professional service firm based on an alignment of the stars.
“Proprietary strategy and sustainable competitive advantage are the two holy grails of business,” they say. But achieving either is rare indeed. Barring patent protection or monopolistic power—both of which are almost unheard of in the professional services world—most strategies can eventually be copied. Similarly, most competitive advantages are temporary. But professional service firms, the authors say, have a unique ability to build “powerful competitive advantages that can approach some level of sustainability.
“Because people are different, firms are different. Because groups of people behave differently, no two organizations are exactly alike. In these businesses, both financial success and sustainability rely on outstanding individuals, their client relationships and their behavior toward the firm.”
At this point, it’s probably worth taking a moment to explain how Lorsch and Tierney define “stars,” because their definition is slightly broader than some others. Indeed, some of the larger PR firms have attracted criticism for a culture that rewards “star” performers over all others, with “star” usually defined in terms of new business performance.
But according to Lorsch and Tierney, stars are “the individuals who have the highest future value to the organization, the men and women in critical jobs whose performance is central to the company’s success. If a star leaves, the firm and its clients notice the difference. If enough stars leave, the firm’s financial performance suffers…. What makes stars “stars” is the fact that they propel the business model along all three of its dimensions: building enduring client relationships, consistently performing up to their full potential and putting the firm first, and implementing strategic imperatives.”
Not all stars are rainmakers, and not all rainmakers are stars. “What distinguishes the rainmakers who are stars from those who aren’t,” Lorsch and Tierney say, “is that the former not only strengthen their firm’s top line but also are sufficiently aligned with its goals and values to manage the way they behave with colleagues. To state it simply, they put the firm first.”
In fact, in Lorsch and Tierney’s view, there’s a role that is more important than rainmaking to a firm’s long-term success: starmaking, which they define as “an organization’s competency at attracting, retaining, developing, and motivating star talent…. Just as there are individual rainmakers, there are partners who become starmakers—people especially adept at building star capacity within a firm. They, and the firms they work for, understand the basic fact of life in professional services: the people you pay are more important over time than the people who pay you.”
So in great firms, the senior people worry as much about missing out on or losing new talent as much as they do about missing out on or losing good clients. So they devote as much time to recruiting and performance reviews as they do to account reviews.
When they talk alignment, Lorsch and Tierney mean creating “organization practices and structures that simultaneously fit the strategic requirements of a business and the need of key employees…. Although their managers may not discuss alignment, they do think alignment; the consequence of their cumulative decisions and behaviors is an aligned organization.”
The relationship between some decisions and their cultural impact is obvious. For example, most PR firms understand that compensation packages influence behavior quite dramatically: awarding bonuses based entirely on new business success, for example, can lead employees to neglect existing clients while pursuing new ones.
But in other cases, the law of unintended consequences is neither so direct nor so obvious. The authors cite one firm, worried about employee retention, that introduced financial penalties for partners based on turnover in their departments. Turnover dropped to near zero, but so did the quality of the firm’s work because even mediocre performers were retained and promoted.
According to Lorsch and Tierney: “In professional service firms, alignment is a consequence of two separate but interdependent phenomena: the choices the firm’s leadership make over time on a handful of critical dimensions and the behaviors of the professionals who implement those choices day by day. Practically speaking, this means that four aspects of the firm are central to the work of creating alignment: strategy, organization (which includes people systems as well as structure and governance), culture, and leadership.”
Alignment is particularly difficult to achieve in a professional service firm, they argue, because traditional command and control models don’t work.
“In most manufacturing and service companies (and most management texts), strategy leads and organization follows…. In PSFs, this neat cause-and-effect relationship falls apart. Decisions about organization and strategy go hand in hand.” Because while power in a traditional company is “essentially position and top-down,” power and influence in a professional service firm is more widely distributed among the partners. Thus the success of a professional service firm, its organization and its strategy, is dependent upon the consent of its senior people.
So in a professional service firm “where people have so much personal discretion and autonomy, culture has more influence on a professional’s behavior than any job description or corporate policy ever written. Policies and procedures, manuals, and job descriptions cannot dictate behavior effectively where professionals work without close supervision, people are running their own offices and practices, partners are serving their own clients, and leadership is highly decentralized.
“Culture is a dominant force—if not the dominant force—in determining how the members of the firm actually behave toward one another and toward their clients.”
Lorsch and Tierney believe that at any successful professional service firm, five core beliefs characterized the way the senior professionals thought about the firm and their relationship to it:
• Belief in partnership: “The conviction that senior stars are the owners of the firm, and that regardless of the legal form of ownership, it must be governed as a partnership.”
• Belief in extraordinary teams: “There’s always a temptation for team members to want to look good and advance their own careers to the detriment of their teammates,” but belief in teams “discourages that kind of behavior and send out a strong signal about how you should related to the people with whom you work every day on project teams.”
• Belief in community: “The proposition that at the end of the day we’re all part of one firm and we are expected to work together and help each other.”
• Belief in stars first/client first: “If you’re over-investing in your clients, you’ll lose your stars; but if you don’t meet your clients’ needs because of your stars’ desires, you won’t be competitive. The belief that both are equally important enables firm managers to work for a balance in meeting conflicting demands.”
• Belief in perpetuity: “A shared understanding, at senior level, that you and your peers are building a firm that will transcend degenerations, that you’re not only ‘in this together’ with your current partners, but also that part of your job is to help create a firm that will endure so future partners can succeed.”
In an aligned firm, starmaking is ingrained in the culture. “A senior partner, for example, might spend several days each month to aid his firm’s recruitment effort. Or he might take young colleagues to lunch between client meetings…. Everyone in the firm believes that these activities represent critical long-term investments, and as a result, the firm’s habitual practices for developing its new talent are as systematic and as strategically aligned as its practices for developing new business opportunities.”
Firms that want to attract and retain the best young people, Lorsch and Tierney say, understand the needs of their young stars:
• First, they want to learn. “They have been learning all their lives, they’re good at it, and they like it. In addition, they know that learning increases their market value.”
• Second, they want career options. “People joining PSFs today want to use them as a stepping-stone to something else… This means that young stars are thinking about whether your organization will open future doors or close them. The doors can be inside the firm or outside it.”
• Third, they value affiliation and teamwork. “Young stars want to be affiliated with like-minded professionals, and this affiliation contributes to the energy that drives them…. They need to feel emotionally connected to their firm, to know that senior people really care about them and their success.
• Fourth, they value autonomy. “Young professionals are independent-minded and want to have a voice in matters that effect them, like which projects they work on and which ones they don’t.”
• And finally, they value flexibility that enables them to better balance their professional and personal lives.
Another thing that distinguishes a firm that is aligned behind a starmaking culture is that is has a low tolerance for mediocrity, which Lorsch and Tierney define (broadly enough that it should worry almost every PR agency principal out there) as “people who are less talented than those who built the firm and/or are currently leading it.”
A firm that starts attracting B-level talent may not notice the impact immediately, because most of the B players will be reporting to A-level partners. But over time those B players will be leading account themselves, and worse, will be responsible for developing the next generation of talent. “And young stars don’t like working for less talented bosses any more than key clients like being served by less-talented professionals….
“A small marginal difference in the quality of people coming into the firm at any given moment will have order-of-magnitude effects five, ten or 20 years down the line.” Under the circumstances, investing in young talent looks like the single smartest decision professional service firm leaders can make. So why do so few firms do it well?
“Absent some kind of systemic reinforcement, most senior professionals are likely to follow the temptation to consistently put clients’ needs ahead of starmaking. Why? There are the day-to-day pressures clients exert. And there are the tangible rewards and praise that come from meeting client needs. Professional service firms’ incentives tip toward clients because PSFs are top-line driven; their short-term financials hinge on revenue generation and utilization. Therefore, the natural orientation is to recognize and reward rainmaking above all else.
“The great and enduring firms, however, understand that rainmaking alone is inadequate. They know that over time, starmaking is more important than rainmaking and that, in fact, the latter is entirely dependent upon the former. They’ve witnessed one-generation firms, founded by a handful or rainmakers, that fell apart when those rainmakers failed to replicate themselves—when they failed at starmaking.”
Great firms, the authors argue, also do a better job of deploying their people appropriately. In many firms, people are chosen as office heads or practice leaders solely on the basis of their client work. Management positions are a reward for quality client work.
“But the odds that the assignment will be a mismatch are high for a couple of reasons. One is a compensation system that gets in the way because it’s geared toward serving clients and producing current-year revenues or because it rewards titles rather than management results and thus gives partners the wrong incentives for accepting the positions in the first place.
“The other is the psychology common to many stars, who derive enormous satisfaction and recognition from solving clients’ problems and little—if any—from dealing with administrative issues and people problems.”
Someone looking to pick holes in the approach Lorsch and Tierney suggest might level a couple of reasons why they can ignore the authors’ advice. The first is that firms can and often do “buy” talent rather than cultivating their own. By doing so, perhaps they can avoid the expense of investing in young talent and the energy of building a starmaking culture?
But Lorsch and Tierney warn that lateral hires can create problems that make them a less than ideal long-term solution.
“Bringing in a partner-level professional is complicated on two dimensions. One is the signal it can send to younger people in the firm, who often perceive (rightly or not) that it diminishes their own opportunities because there are only so many senior slots. The other is the obvious difficulty or assessing how the lateral hire will affect the firm’s gene pool…. If your new lateral hire is a gifted creature who brings with him several key accounts but quickly alienates the team of younger professionals he is meant to lead, your firm is worse off for the hire in the long run.”
The second reason for questioning whether all this work is necessary is perhaps more serious. Lorsch and Tierney are writing for professional service firms seeking to build long-term sustainable competitive advantage, but short-termism has come to the professional services business just as it has to the rest of the business world. Many public relations firms appear to be “built to flip,” to use the phrase employed by business guru James Collins to describe the dot-com mentality.
Most PR entrepreneurs see selling their firm to a larger competitor or a giant holding company as their only viable exit strategy. If that’s the case, why worry about long-term investments in people?
One answer is that smart buyers will one day look at a firm’s culture and its talent pool with as much care and attention as they currently look at its financials and its client list. The fact that they don’t do so today is perhaps one reason so many public relations acquisitions fail to live up to expectations.