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Article | Executive Pay Matters

Professional services: Prospering in the new normal 

Executive Compensation
COVID 19 Coronavirus

By Paul Platten , Kenneth Kuk and Chris Hamilton | May 14, 2020

Leading professional services firms will stay ahead of the competition by creating a vision of future business now.

In an earlier article (Professional services: Talent in the age of COVID-19, Executive Pay Matters, April 21, 2020), we discussed how a sustainable leverage model is the essence of a professional services firm. We further posited the need for professional services firms to resist the temptation of undercutting talent and to leverage the crisis as an opportunity to optimize their operating models.

Most challenges are temporary, but some can cause structural and permanent setback

Most challenges in COVID-19 times are temporary. It is true that some clients are pushing back projects or asking for longer payment terms to conserve cash, but business will likely normalize as more economies reopen. There will be plenty of opportunities for professional services firms to help their clients adapt their business to the new normal. COVID-19 likely will turn out to be the biggest stimulus for digital transformation because it has accelerated our reimagination of a completely different way of working and living.

There are, however, some less obvious damages that can cause structural and permanent setback to a professional services business, including falling victim to the “under-delegation trap.” As clients look for expert advice to help them navigate through the crisis and as regular projects requiring considerate onsite or analytical work get delayed, most work falls upon senior advisors and requires little help from junior associates. Adding to this is the individual pressure on chargeability (or “utilization”) placed on the senior sellers, who may be tempted to manage chargeable time (or “billable hours”) for themselves — a natural reaction but less than ideal. All these pressure points fundamentally challenge the leverage model of professional services firms, particularly those with a pyramid-shaped organizational structure where each senior seller is expected to bring in projects that keep many junior associates busy.

The damages under-delegation can bring are far beyond a near-term hit on profitability, which is the result of far lower margins on senior practitioners in a traditional professional services leverage model. The sustainability of a professional services business is built on a constant supply of highly motivated talent who replenish the salesforce and bring fresh ideas to leadership. Prolonged under-delegation essentially compromises skills building and undermines talent development. The negative impact on morale, motivation and engagement can permeate through the entire organization, driving self-motivated, highly competitive talent out of the professional services sector and into other industries.

Vision of business in the new normal and planning for the long term

We are all hopeful that the COVID-19 days will soon be behind us, but most of us have acknowledged that expecting everything to go back to normal is unrealistic. To win over competition, leaders of professional services firms must start envisioning business in the new normal when competitors are still addressing near-term challenges with business volume and profitability. The new normal may require a different business model because work can be done by fewer team members thanks to automation or because extensive traveling for business pursuit is no longer considered cost-efficient — or is potentially considered unsafe. Clients may grow accustomed to working with a remote project team, meaning that extended periods of onsite work (and weekly traveling) are no longer part of a viable service delivery model. Adoption of new technologies may significantly improve productivity and take over some consultant work activities (e.g., project management). Data sharing between advisor and client teams may occur more often in real time, thereby eliminating further inefficiencies. New work forms may emerge as professional services firms explore new ways to differentiate their solutions. In addition to the leverage model, all these possible realities in the new normal may fundamentally influence the location strategy, knowledge management strategy, service delivery model, definition of work and career pathing in a professional services business.

These possible realities in the new normal also bear implications on pay systems. For example, it may push partnerships away from the traditional tenure-based view on pay toward a more role-based view for a greater visibility on “return on talent” and allow firms to divert resources disproportionately to leadership roles that are critical in the new normal. There may also be a need to reexamine the business’s short- and long-term performance metrics under a new leverage model and cost structure, redefining the parameters of its pay-for-performance framework. The emphasis on skills and the accelerated “deconstruction” of work may accelerate the need for a work- and skill-based pay model to sustain talent development and combat the under-delegation trap, challenging conventional ways of compensating employees and leaders.

It’s not just about learning from the crisis, it’s about when you take action

This crisis may be an opportunity to do things you once thought were impossible. It will be hard to put this into action when the crisis is almost over; it is even harder to do so when we are still living in the crisis. But as history has taught us time and again, those who see the future when others are still buried in the present will always prosper.

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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