THE BIRTH OF THE INCLUSIONARY FIRM
The Sayings Of Peter Drucker And Professional Services Management
The recent death of Peter Drucker, one of America’s greatest business philosophers – a man who substantially changed the practice of American management – brought forth an abundant burst of adoration and glorification from all corners of the business and journalistic world. (Including, as you may have seen, in these pages..) Articles and memorials quoted extensively from his works. The sayings of Peter Drucker, in some cases in litany reminiscent of the sayings of Chairman Mao, have been printed and reprinted ubiquitously, and have appeared in almost every obituary. Every word of praise uttered or written about Drucker is deserved and true.
Drucker wrote primarily for corporations, whose line management structure is very different from the professional firm’s vertical structure. The question, though, is whether the sayings of Peter Drucker, valuable as they may be, truly inform us of his value to today’s managers, and particularly those who manage professional firms. In other words, can you learn to manage from a litany of quotations? Or do you have to go more deeply into not only his message, but the traditional management of your firm as well?
What is his underlying message, and how do we make his thinking valuable and productive for law and accounting firms? What can we distill from his extensive writing and teach to help us better understand how to make law and accounting firms function better?
If quotes alone don’t make the philosophy, or cause action in the fulfillment of their message, they at least open the window to a larger inquiry, and to a great many important questions. How, we must ask, can Drucker’s underlying philosophy and observations help better manage accounting and law firms in today’s environment? How can we apply Drucker’s principles to help law and accounting firms function more effectively and more productively, and to compete better in today’s highly competitive environment?
If Drucker’s principles applied only to a firm’s management, they would be good enough. However, they apply as well to the practice of law and accounting itself – how the services are shaped and delivered. But most importantly, the serve to keep a firm relevant to the needs of the legal and accounting marketplace in the coming decades.
The quotes are shorthand for a larger message, but alone, say a great deal. For example…
“Because the purpose of a business,” he said, “is to create a customer, any business enterprise has two and only two basic functions: marketing and innovation.”
How many law and accounting firms see themselves that way? Most firms see themselves as purveyors of skills and wisdom in using those skills. But in the professional world, that perception is fostered by the concept that professional skills are crucial to the business and social worlds, that they are scarce, and that it’s always a seller’s market, because the complexity of the economic and regulatory environment demand professional skills to navigate through the shoals of that environment.
But is this true in the dynamic world of the 21st century? Is this true in a world in which it frequently takes more than one law or accounting firm to serve all the needs of a company, or even an individual?
Not any more it isn’t. The right to frankly compete – a right only a few decades old – breaks the old paradigm. Competition made it so.
The purpose of the professional firm is to get and keep a client. No getting away from it, particularly in a competitive environment.
“What is the value to the customer?”
The world of the billable hour emerged at a time when the traditional firm, virtually unchanged since the 19th century, was still the accepted norm. Changing from the undocumented fee to the hourly billing fee was practically painless, and hardly diminished the latitude given to the firm, which was usually entrenched with the client. If there was any form of competition among firms in that era, it was quiet and subtle, and too often driven not by the skills of the successful firm so much as the poor performance of the losing firm.
But in this new competitive environment, and with the help of competitors, clients have become more sophisticated. They ask more searching questions. They are better educated in the legal and accounting practices. They no longer blithely accept as received wisdom the words and instructions of the professional. They want to know why, for example, Attorney A costs as much as Attorney B, when A is obviously half as competent as B.
In other words, the clients now think in terms of value. And so too, then, must professionals begin to think in terms of value offered and received. Not the traditional “Here’s my advice – ignore it at your peril,” but rather, “How does my professional service contribute to helping you and your business?” A very difficult question to answer, it seems, but worth the effort.
And when you can answer that, and quantify it, then you can bill for the value to the client, and not for the hours spent (or wasted) on client matters. You can use time that’s not billable to a client for firm advancement, such as practice development.
It’s been often noted that the billable hour is too profitable to the professional firm for the firms to ever give it up. But count on it – the clients, not the professionals, will make that decision for you. It’s now called negotiation.
“The responsible worker is a worker who not only is accountable for specific results, but also has the authority to do whatever is necessary to produce results and, finally, is committed to these results as a personal achievement.”
The traditional top-down structure of the professional firm, in which each rank informs those in the next lower rank – but only on an arbitrarily perceived need-to-know basis, is obsolete in this knowledge-based society. It may give the illusion of orderly governance, but it deprives the firm of ideas from the very people responsible for fulfilling the firm’s promise to its clients.
True, the lesser experienced of the firm’s professionals may not have as much to contribute and do the older and wiser heads. But given the ability, and the increased responsibility, the younger ones then have the impetus and enthusiasm to contribute more than mere labor. And they may have, as well, the ability to see traditional approaches from a fresh perspective.
In the accounting profession, much of the old drudgery has been removed by technology. An increasing number of accounting firms don’t accept clients that aren’t properly computerized.
In the legal profession, the drudgery of such tasks as Shepardizing and document search have been removed by Nexis and other computerized services.
What Drucker is saying to us is that sharing the promise to the client with those on every level who must fulfill the promise means more ideas, greater contributions to the task from every level with the firm, and more enthusiastic performance in the service of the client.
I note, parenthetically, that treating staff like participants does more for morale than all the inspirational speakers combined. Cheaper, and more profitable too.
“Leadership is the lifting of a man’s vision to higher sights, the raising of a man’s personality beyond its normal limitations.”
To those professionals who rose in the firm’s hierarchy the old fashioned way, reaching the top is achieved by “paying one’s dues.”
But law and accounting firms are not college fraternities. They are serious and complex businesses.
There are two major factors that dictate rising in the hierarchy of a professional firm -- rainmaking and outstanding performance. Too often, rainmaking – bringing in business – trumps all else, and so we have firms (with notable exceptions) run by the best salespeople. Or the best lawyers or accountants. But not necessarily the best managers or leaders. We have leaders who are trained in neither leadership nor management skills. We have firms led by good lawyers and accountants, but poor managers and even poorer communicators.
And we have firms run so completely from the top that potential leaders within the firm are denied the opportunity to grow and thrive.
Where, Drucker might ask, are the firms that realize that the firms run so assiduously from the top, without giving reasonable responsibility to professionals in all levels of the firm, will not outlive the current generation of leaders?” Where are the firms with one foot planted firmly in the future, predicated on building the leaders of the future? And where are the firms that understand that in the process of building leadership for the future, they are strengthening leadership in the present?
Where, we might ask, is the inclusionary firm? That, Drucker is telling us, is the firm that will best thrive in the future.
I should note here that there are inklings of that trend to building the inclusionary firm, as described by the estimable Bruce MacEwen (Adam Smith, Esq.) (https://www.bmacewen/com/blog), who reports that an increasing number of firms are now using a two-tier system, in which those lawyers on a partnership path are distinguished from those not likely to become partners, but who are cherished for their particular skills. There are, as well, a few accounting firms using the system. He reports, also, that the relationship between partners and associates, at least in law firms, is changing. Revolutionary, I think, in the eyes of the last generation of lawyers.
This is not abstract theory, as studies run by such organizations as McKinsey have shown. But more of that another time.
Beyond the quotes, which really represent some serious concepts and ideas – ideas that were revolutionary when Drucker first propounded them, is a large body of management wisdom. Traditional management, prior to Drucker (and, unfortunately, post-Drucker), was top down. It was the age of the imperial manager (I’m the boss, and you ain’t – my way or the highway), in which employees had little say in production, marketing, finance, or management. Unions arose and gained strength to fight this very concept. Drucker realized that changing times required different rules, in which every employee, on every level, had much to contribute.
In that first quarter of the 20th century, employees were so isolated from the larger function of a business and its markets that a company’s growth was impeded by management limitations on vision and effective competitiveness. By the second half of the 20th century, with the beginning of globalization, our labor-intensive economy became a knowledge-based economy. In a knowledge-based economy, knowldge is no longer a commodity, but the life blood of a company. With no history of dealing with knowledge workers or intellectual capital in this context, new rules had to emerge. The midwife was Drucker.
At the same time, the knowledge-based economy changed the traditional rules of business. Business became more dynamic. The needs of the marketplace, for virtually all industry, not only changed, but become dynamic – changing constantly. New techniques for dealing with this kind of dynamism made the old rules obsolete.
Those industries and managers who understood this new dynamic thrived. Industries – (not only fixed asset industries but professional services, as well,) who failed to recognize and understand change – faltered.
How does Drucker fit into this picture?
First, Drucker took a new look at corporations in the attempt to fathom their nature. “What business are you in?” he asked everybody from the top of the company down. Few gave the right answer. “We’re in the steel business.”, or “We’re in the hotel business.” Lawyers were in the law business, and accountants in the accounting business.
No, said Drucker. The purpose of the corporation – and by extension, the professional firm -- is to make a customer. This simple sounding concept is at the core of Drucker’s philosophy.
It runs counter to the traditional concept of the professional. The first lesson for the professional, then, is to recognize that you are in the client business. Without a client, you can be the smartest lawyer or accountant – but for whom is your wisdom?
The reality is that in today’s competitive world, it’s becoming clear that the most productive - and profitable – view of a law or accounting firm is subject to the same basic rule as is any company -- that professional firms are really in the marketing business. Supplying legal or accounting services are what they do to fill the channels opened by marketing.
Heresy? Not really. Not when two or more firms are competing for the same client, using frank marketing techniques.
Professional firm marketing can’t produce clients where no need for service exists. A great marketing campaign by a matrimonial practitioner can’t persuade a happily married couple to divorce. But if they choose to divorce they will go to the lawyer or firm that best persuades them that they can do a better job. That’s what professional services marketing is about.
This simply stated point of view, if adapted by an accounting or law firm, can radically change – and improve -- the practice of law and accounting.
It places the emphasis not on the abstraction of the practice, but on the means to best serve client needs. It changes the focus from inward to outward – to better understanding the prospective clientele, and how best to meet their needs. It means examining the structure of the firm – its governance, its structure, its compensation methods, and the very meaning of partnership. It raises new questions about the two tier system and billing structures.
Drucker asks, “What is the value to the customer [client] of what we do?” Traditionally, the professional determined that value – the lawyer by looking at the legal aspects and effects of the law; the accountant by meticulous accounting. But this view can be astigmatic, serving the firm better than it serves the client. Drucker teaches us that the final judgment of value rests with the client. Understanding value from the client’s point of view requires paying attention to the client – becoming immersed in the client’s business and industry, and staying intensely involved in that business. We sometimes call this client retention, but it goes beyond that. It establishes a relationship that allows the firm’s professionals to constantly improve the firm’s performance, and relevance to the client’s needs.
The role of the knowledge worker – in this case, the professional – changes. In the old world, knowledge in a professional firm came from the top down. The structure manifested itself in the partnership. Three factors dictated the nature of the traditional partnership. Governance came from the top, and those not showing aptitude for a partnership were let go. Second, knowledge rarely went from the bottom up, resulting in shaping the practice on the limits of experience by the senior partners. And third, each partner functioned with his or her fiefdom, and shared very little knowledge with the other partners. Cross-selling was a myth. Client relations were jealously guarded by each partner. And of course, internal communications became a cliché, and not a reality.
The problem with this kind of structure was that not only was the firm deprived of the consummate knowledge of every professional in the firm, but so too was the client. But at the same time, the structure of the market changed. The Bates decision introduced frank competition into the professions, and the tradition of one firm for life for a client no longer applied. New structures were needed to meet the changing nature of the clientele.
Can we make these changes without causing too much damage to the traditions of the professional firm, without losing the objectivity and integrity of the professions? Yes, we can, and we are. It’s the foundation for the professions’ traditions of integrity, probity, skills, and knowledge that are necessary for the value of the profession to the society they serve. With this foundation, there would be no law or accounting profession Chaos, maybe, but no professions.
If you'd like to discuss any aspect of the inclusionary firm with me, send me an email.