Strategy in law, accountancy and other professional service firms

There is something wrong with strategy in professional service firms today. Take a look at some of the results below of a survey conducted by the Managing Partners Forum in 2007 which asked senior partners and executives in professional service firms (PSF), mainly law and accountancy firms, their views of the outcomes of the strategy process:

 

• Almost 25% of UK firms and 30% of North American firms said they were dissatisfied: with how much of their strategy they achieved; with success in increasing profitability; or with success in increasing top line revenue
• Some 25% of UK firms and over 50% of North American firms said they were dissatisfied with whether it created any meaningful differentiation from competitors
• In the UK nearly 30% of owners said they were dissatisfied with the amount of buy-in into the plan.

 

Whilst I am not privy to the nature of the strategy development within the firms included in this survey, I have seen (and been involved) in enough 'strategy' processes within PSFs to have a solid understanding of how they view strategy, the processes they go through, and the models they apply to the process. The problem within most PSFs is their understanding of what a strategy is and how it should be developed. I am not talking about strategy retreats and the like, rather I am talking about their preconceptions (mental models if you like) of strategy theory and the appropriate way to develop strategy. From my experience, most PSF focus on the positioning school of strategy which is most frequently associated with the work of Harvard Professor Michael Porter. An industrial economist, Porter developed some of the most well known frameworks/concepts in strategy, a couple of which are identified below. The basic premise of Porters work is that firms must find a unique strategic position which can be developed through the analysis of industry forces and the application of generic strategies:

I will not go into a review of the above figures (on the left Porters five forces framework and on the right his three generic strategies) as readers can find an abundant wealth of information discussing the pros and cons of these models. I will discuss the application of such concepts to the PSF and by inference discuss the results cited above as I believe too many PSF are using concepts such as Porters believing these are the be all and end all of the strategy process (which is far from the truth). Whether they actually use these models is not the issue, the issue is the implicit approach they take which is often based on such positioning school concepts. When they take such a view that strategy in this context is about finding a unique strategic position and defending it through market power etc, it is little wonder that PSF are disappointed by the results of strategy in terms of firm performance and differentiation.

Whilst it is hard to speculate why so many PSF use the concepts of the positioning school of strategy (such as Porters work), I am convinced these are least well suited to the job. The problem with Porters analytical tools for developing strategy is that they are static in nature and fail to account for dynamism of external market factors as well as the innovative capabilities of firms within industries. This is a view poorly suited to PSF which often compete in the same markets, offering the same services, to the same target clients. Strategic choice within these firms is not only limited by the ability to find a unique strategic position (if such positions exist), they are limited by the culture, politics, and existing business models of the firm that cannot be readily changed based on some external market analysis intended to differentiate the firm. It ignores the fact that firm factors, as much as if not more than industry factors, determine the success of the firm and in the professional services sector where most clients see firms as undifferentiated, how will success be determined when unique strategic positions are not readily visible. A business model is the value creating logic of the firm and all the associated activities which go towards delivering client value (such as recruitment and retention systems, KM, technology applications etc) and strategy choice has an undeniable impact on business model since any model must change to meet the strategic needs of the firm and the value that clients demand. Let's take an example, if a law firm conducts an external analysis and realizes that clients are demanding more efficient services and fixed fees, it will have to make substantial changes in its business model (i.e. through project management techniques, the elimination of hourly billing which will involve remuneration systems and performance measurement) in order to realize its strategy of becoming a more efficient service provider. The firm will never become a low cost leader (as in Porters generic strategies) as the ingrained business model of most law firms prevents this yet it is neither truly differentiated (again according to Porters model) as there are not clear differences in the practices and services it offers when compared to other firms. According to Porter, such a firm would be 'stuck in the middle', an untenable position that eventually leads to sub par performance. This may be so but according to this definition of strategy numerous PSFs would be stuck in the middle yet they are extremely successful.

The ideas of the positioning school and people like Porter do not fully appreciate the idiosyncratic resources within the firm that combine to create distinctive competencies that lead to firm success. Porters view is too narrow and describes strategy as finite process that creates a unique position which can be measured as to its successful implementation. This is the view that PSFs have ascribed too and hence the disappointment with the outcomes as mentioned in the results of the MPF study cited at the beginning of this post. In fact, in his Harvard Business Review article (1996) 'What is Strategy', Porter makes the astonishing claim that Japanese firms do not have strategy and that they need to learn it (based on his view of unique positions)! Such a narrow view of strategy ignores the resources and learning perspectives of strategy which are so vital to the success of PSFs. Additionally, since differentiation cannot be claimed by position (i.e. we do better audits is hardly credible), PSFs must be extremely concerned with the internal processes and dynamic capabilities of the firm (which according to David Teece, author Dynamic Capabilities, are sensing, seizing and transforming) which are the keys to strategy and differentiation. This includes issues related to how the firm generates and shares knowledge internally and how it can leverage intellectual capital to enhance client value. If PSFs complain that strategy has not created meaningful differentiation they need to change their view of strategy and realize that it is an on going and re iterative process which is not limited to a one time search for unique positions based on hard external analysis and realize that it is as much about soft factors and resources, learning, emergence, and firm wide integration (some may even call this operational effectiveness, but why can't operational effectiveness be part of strategy and generate competitive advantage?).

A powerful example of this concept can be found in one of the most fungible of professional services, the audit. Accounting firms (including the Big 4) have long complained about the commoditized nature of audit services and that the only thing which matters to clients is price. This is not quite accurate. Bruce K Behn, Joseph V Carcello, Dana R Hermanson, Roger H Hermanson. Contemporary Accounting Research. Toronto: Winter 1999. Vol. 16, Iss. 4; pg. 587, 22 pgs) used the following questions to identify if there was a link between client satisfaction and the ability to charge higher audit fees:

 

• Both the CPA firm and the audit team as a group (at the manager level and above) had an appropriate amount of prior experience in auditing your company.
• Both the CPA firm and the audit team as a group (at the senior level and above) had the necessary industry expertise to effectively audit your company
• The CPA firm was responsive to your company's needs
• The audit team members as a group were technically competent in their application of GAAP and GAAS.
• In all of your dealings with the CPA firm, and with individual audit team members, the CPA firm and its representatives never engaged in any actions that would compromise its/their independence, either in fact or in appearance.
• The audit team members as a group always exercised due care throughout the engagement
• The CPA firm has a strong commitment to quality.
• The executives (partner/manager) from the CPA firm were actively involved in the engagement
• The audit team members conducted the audit field work in an appropriate manner.
• The audit team members interacted effectively with the audit committee before, during, and after the audit engagement
• The audit team members had high ethical standards and were very knowledgeable about accounting and auditing.
• The audit team members maintained a skeptical attitude throughout the audit engagement.

The authors found that 'the significant relationship between client satisfaction with the audit team and audit fees provides evidence suggesting that Big 6 (when the study was done) audits provided to Fortune 1000 clients are viewed by corporate controllers as services that can be differentiated. The results highlight the importance of individual team members in allowing a Big 6 firm to differentiate its audit services.' I have bolded the items which relate to this discussion on strategy which goes beyond the narrow perspective that it is about funding a unique strategic position. If one takes a look at these items they would not be on the strategy radar for the majority of PSFs since they seem to be issues related to firm culture, resources, and internal processes, and that is exactly the point! Differentiation is not achieved through a superficial static position, it is achieved through a strategic intervention which is concerned about the capabilities and competencies of the firm as much as it is concerned about the external environment and industry forces. Many of the bolded items are linked to knowledge and the ability of the firm to leverage intellectual capital. Since knowledge is the key product of any PSF, the ability to generate and share knowledge across the firm is a vital component of any PSF strategy. The ability to learn and adapt as time goes on is crucial to enhancing client value and hence the idea that a PSF can find a defendable strategic position may be counterproductive to the strategy process overall if firms become blinkered by analytic processes which restrict their ability to see changes and be willing to value emergent strategic processes. I believe that the work of Porter and others in the positioning school make useful contributions for the strategy process within PSF but the fact that so many firms base their entire strategic thinking around these concepts is problematic, and one of the key reasons why so many report high levels of dissatisfaction with strategy initiatives. It is time for these firms to embrace strategy on a more holistic level and think of differentiation as something that involves operational effectiveness as much as positional perspectives.