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Article | Executive Pay Memo North America

Professional services: Talent in the age of COVID-19

Executive Compensation
COVID 19 Coronavirus

By Paul Platten , Kenneth Kuk and Chris Hamilton | April 21, 2020

Avoid rash talent decisions driven by the intensity of the COVID-19 pandemic, and stay the course on long-term operating strategy.

In the heat of the COVID-19 (coronavirus) pandemic, professional services firms may be tempted to focus on cost control to ensure long-term survival. While it’s perfectly natural to turn to a response that offers tangible control over a bigger-than-life event filled with uncertainty, it’s important to be mindful of the key characteristics of professional services firms. It’s also essential that any actions don’t adversely impact the strategic operating model.

What makes professional services firms unique

In his seminal work, Managing the Professional Services Firm, David Maister posits two key characteristics of professional services firms that make them unique. One is the customizable work they do that is unique for each client regardless of tools, management information or data. Second is the importance of nurturing client relationships. Supporting both of these key characteristics is the human capital leverage model that determines revenue and profit, and needs to be finely tuned between the various layers of the firm.

While the book was written almost 30 years ago, clearly these characteristics ring true for all professional services firms regardless of ownership (public vs. private) or revenue models (pure-play consulting vs. consulting as an add-on to a software platform). All firms need to be attuned to their solution set, client relationships and leverage model. What is different is how firms recognize revenue and profit: Pure-plays recognize revenue and profit through billable time and efficient delivery, while their counterparts that sell a software or technology platform may purposely run the consulting business on lower revenue and margin to support increased technology, product and licensing revenues.

Sustain your operating model

Many professional services partnerships are reviewing their distribution formulas to ensure that they don’t distribute more than they will earn for that year, making it necessary to ask partners to write a check back to the firm. Publicly traded firms may be looking at lower bonus funding and stock grant values as well as underwater stock options. Making an uninformed decision on who would be impacted, critical talent or otherwise, could undercut an organization’s rewards value proposition and risk talent retention that supports recovery, and could inflict permanent damage to the go-to-market strategy and model of the firm. Moreover, digital natives in a stronger financial position may take advantage of this opportunity to go after critical talent, intensifying the battle to retain critical talent in other sectors.

It is important that cost control decisions be viewed through the lens of an organization’s business and HR strategy. This was a painful lesson learned from the financial crisis. Imprudent decisions affected firms long after the crisis abated. There are many studies that show that decisions to cut staff or reduce salary and hours gave some firms a reputation for rash expediency that affected their client relationships and employment brand for years. Alternatively, some firms that shared the pain and managed to keep strategically important human capital prospered as the economy recovered. Reputation and morale aside, the real impact on the business is the risk of retaining the wrong people and losing the most creative and impactful high performers — a professional services firm’s most critical assets.

Ask yourself these questions

Before making any decisions on cost control demands, ask yourself:

  • What is our competitive advantage and brand to our clients and employees? Will my actions undercut our brand in the marketplace for long-term thinking, creativity or client loyalty?
  • Will our cost control actions adversely affect the talent we rely on for creative solutions and client relationships? Can we find a way to keep them engaged during the crisis?
  • How do we balance our firm’s culture with a pragmatic knowledge that we may need to take employment actions?
  • Does our performance management system have the necessary credibility to support employment actions?
  • Do we have a fair human capital infrastructure so that cost control decisions don’t inadvertently create fair pay issues?
  • Are our managers well-trained to differentiate performance fairly and have the right conversations with the different segments of talent?

Positioning your organization for the long term

If, in fact, there is a recovery towards the end of the year, is there some opportunity your firm can take advantage of here? Restructuring? Reassignments? Workforce downsizing of low performers? A lot of successful leaders have said that they got their best opportunity to step up and show what they could do during a the most challenging times.

COVID-19 is creating a lot of financial pressure, but those who withstand the temptation to undercut talent in the short-term will win the long game because professional services firms are human capital-based business and your talent (and clients) will remember how you handled this crisis.

Authors

Managing Director, Talent & Rewards (Boston)

Director, Talent and Rewards (Washington, D.C.)

Senior Director, Executive Compensation and Rewards Practice Market Leader (Washington, D.C.)

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