One on One with Ed Hess, Part Two

Ed Hess In the last edition of Consulting’s One-on-One , we discussed why "Grow or Die" is bad advice for clients. This week, we continue the conversation with Ed Hess, a former Arthur Andersen strategy consultant and current professor at the University of Virginia’s Darden Graduate School of Business, by turning the lens on consulting firms.

Consulting: Turning the table to our own companies, “grow or die” is just as prevalent across consulting firms. Without growth, there’s no need to make new hires. Without new hires, there’s no pressure to force promotions up the pyramid. How do we overcome this?

Hess: Professional service firms are in a very difficult situation. The bottom line is that if you don’t have growth, you’re not making more partners. And this cuts to most firms’ underlying business model—the very basis on which the business was built [i.e., to continually add partners that will eventually buy out your shares]. The business model of adding new partners every year was easy to rationalize when you were growing revenue and were growing profit consistently. In today’s economy, where most firms aren’t growing—or, at least, not by very much—the model has to change. You either stop or significantly slow promotions, or ask the existing partners to give up a part of their stake in the firm in hopes that by adding new partners it will grow the size of the pie. To answer that question, partners have to really go back and revisit questions like, “to what purpose does this business exist?” and “are we doing this for more than just money?” Too often I see companies feeling forced to grow at any cost. They deal with the problem by buying business through significant discounted rates. And I have to wonder once a firm sends that signal to clients, if the business will ever return to historic margins.

Consulting: What should partners do instead?

Hess: Every firm has a different culture. But they’ve got to ask themselves, “what’s the impact of these choices on our culture?” and “what do we want our culture to be?” Growing at the cost of the firm’s long-term success isn’t wise. But it’s rare to find the firm that has a strong enough culture in which partners are willing to take significant cuts in compensation for years for the betterment of the business. As smart as it may be long term, few firm leaders are asking themselves “what type of firm are we going to be over the next five to 10 years? Are we building a strong firm? Do we truly want to be the best place to get professional training in an environment that encourages work-life balance? Are we willing to make the sacrifices to make that happen?”

Consulting: What kinds of conversations should successful firms have at their partner meetings?

Hess: Partners need to be honest with each other and decide whether they’re willing to take, say, a 20 percent cut in pay and commit to building the firm together. If not, then the next step may be to let some of the partners go. Those types of honest discussions come down to an organization’s values more so than finances. Going through that process and coming to a decision that can be explained to the entire organization will put you in better stead than an autocratic decision. If you get to the point where everyone is willing to take a 20 percent cut to keep all of the partners, then you have to address issues, like: “How do we add additional value to our clients?” and “how can we aggressively go out and bring in new clients?” Before, clients walked in the door. Now, we have to look at how we are pursuing client acquisition and expanding our services to produce reasonable margins. Everything has to be reassessed.

Consulting: What’s the most challenging part of that process?

Hess: It’s difficult emotionally and intellectually. It’s very hard to have very open discussions about what the partnership can afford and what they’re willing to do. But whatever the decision, the partnership has to be honest with the staff. Nothing kills culture faster or more completely than the destruction of trust. It’s human nature for leaders to think, and then say, “If we can just hold it together, we can do better.” No one wants to have difficult decisions. The fact is that you have to be honest and truthful. You have to be transparent. You can’t say that this round of layoffs is it, because then when another round comes you’re dead. Everyone wants to put salve over it. But that’s what leadership is all about. Tough times test leadership.

Consulting: But the truth may be that you just don’t know what the future holds. How do you share that with your staff without discouraging them?

Hess: My advice is to drop any sense of arrogance and be willing to admit you don’t know how to get out of this. A good sailor knows where they want to go, but often has to make adjustments. It doesn’t mean you’re sunk. It does mean coming clean with your staff by saying, “We’ve never been in this situation, but we’re all in this together.” It takes an emotional maturing and emotional awareness that a lot of professionals lack. Is it doable? Yes. Is it hard? Yes. Welcome to the real world.