The strategies and
management of
Professional Service Firms
ServiceForum 07, Tampere, Finland, October 29-30
Professor Bente R. Løwendahl, Ph.D.
Department of Strategy and Logistics
BI Norwegian School of Management

Two topics – and an intro
• Brief Intro: What are PSFs and why are
they special?
• Strategic Management of PSFs – A
resource based view
• Generic strategies and inherent
challenges and tensions – The small
partnership firm, the “streamlined”
professional organization, and the expert
innovative firm
31/10/2007 2 Bente R. Løwendahl, Professor

Brief intro about consulting and other
professional services

Managing people like “chessmen”
31/10/2007 4 Bente R. Løwendahl, Professor

31/10/2007 5 Bente R. Løwendahl, Professor

What is unique about
professional services?
Customization requires a flexible, responsive organization
•
Client interaction increases the challenges
•
Innovation means routines and standard procedures are
•
relatively few and far between
Professional judgment requires individual autonomy and
•
authority to deliver what is best for each client
Professional norms (to the extent that they exist) are
•
internalized and both provide a foundation for and set limits for
what is a viable culture for the firm. Consulting firms often
“import” professional norms from other professions, such as law
(e.g. McKinsey) and auditing.
31/10/2007 6 Bente R. Løwendahl, Professor

When is a knowledge intensive
service not a professional
service?
• If it is mass-produced (not customized)
• If the professional norm of “best interest of the
client” is violated
• If professional norms of ethics are violated
• If the firm/professionals sacrifice quality in the
interest of maximizing profits instead
31/10/2007 7 Bente R. Løwendahl, Professor

Five I’s make PSFs extreme
• Intangible outputs
• Invisible Assets
• Interaction with clients
• Innovation (tailor made solutions)
• Information Asymmetry
31/10/2007 8 Bente R. Løwendahl, Professor

Together these characteristics make PSFs
very different from traditional manufacturing
firms.
Applying theories of strategy and
organization developed for industrial
corporations is not only wrong, it may lead
to detrimental conclusions!
31/10/2007 9 Bente R. Løwendahl, Professor

31/10/2007 10 Bente R. Løwendahl, Professor

TOPIC 1
Resource Based Strategic Management
- inspired by Itami (1987): Mobilizing
invisible assets, Harvard University Press.

Itami: A basic framework for dynamic synergy
(1987, p.129; reprinted with permission in BL, 2005, p. 82)
31/10/2007 12 Bente R. Løwendahl, Professor

Figure 8: Strategic Resources (p. 94)
31/10/2007 13 Bente R. Løwendahl, Professor

Key finding:
• Intangible resources (Invisible assets) are
primarily improved as a “byproduct” of
daily operations
• This is particularly true for competence,
but also applies for reputation and
relationships
• This is much more extreme in PSFs than in
traditional industrial or service companies
31/10/2007 14 Bente R. Løwendahl, Professor

Ownership or control of resources
• Tangibles and collective intangibles can be
owned by the firm
• Individually controlled intangibles are
contracted by the firm (contracts may be
explicit or implicit; relational)
• Relational resources are partly “owned” or
controlled by external stakeholders
31/10/2007 15 Bente R. Løwendahl, Professor

Figure 9: Controllability of firm resources (p.95)
31/10/2007 16 Bente R. Løwendahl, Professor

Mobilizing resources
Resources which are not owned by the
firm cannot be allocated - they need
to be mobilized!
(Haanæs, Knut B, 1997)
31/10/2007 17 Bente R. Løwendahl, Professor

TOPIC 2
Three generic strategies for PSFs
– tensions and challenges

The #1 strategic challenge of all
business firms: Balancing efficiency
(minimum cost) and effectiveness
(service quality/customer satisfaction).
For PSFs, there is a 3rd dimension:
“Employee” (partner) satisfaction.

Two key strategic dimensions
• Prioritizing projects and clients – what do we
deliver, to whom, where, when, and how
(“Domain decisions”)
• Recruiting, retaining, developing, and
mobilizing the best and “right kind” of
professionals (“Resource base decisions”)
31/10/2007 20 Bente R. Løwendahl, Professor

Strategic focus – three sources of
superior competitive ability
• Superior client/customer relations – pure effectiveness
based
• Our professionals deliver whatever the client/customer may need,
as long as it is within our area of expertise
• Superior solutions (modular, modified, adapted) –
pure efficiency based
• We have the solution for you; we will customize it to fit your
particular needs. Examples: BCG and SAP
• Superior problem solving (innovative, creative, expert-
based) – both efficiency and effectiveness
• We have the best experts within our area(s) of expertise, and will
deliver state-of-the art solutions to your toughest problems
31/10/2007 21 Bente R. Løwendahl, Professor

Generic Strategies for PSFs
• Two extreme strategies:
• A) The individually based firm, primarily focussing
on individual expertise, individual reputation,
individual client networks. Very often a small
partnership firm.
• B) The “professional bureaucracy” (Mintzberg,
1983), primarily focussing on firm level expertise,
firm reputation, routines and methodologies. Well
established practices for client project deliveries as
well as for professional career development.
• The intermediary position:
• C) The expert firm delivering unique solutions to
complex problems
31/10/2007 22 Bente R. Løwendahl, Professor

A) The individually based PSF:
• High degree of autonomy for each expert
• Consensus based decisions
• Minimum managerial authority (none, or
rotating role of “CEO”)
• Minimum overheads
• No room for external owners
• Difficult to expand or internationalize
• External focus: client relationships
31/10/2007 23 Bente R. Løwendahl, Professor

Different individuals, different contributions
31/10/2007 24 Bente R. Løwendahl, Professor

B) The professional bureaucracy:
• Invests heavily in development of routines
and methodologies
• Often offers modularized solutions
• Invests heavily in socialization and
education of professionals
• Has a formal hierarchy of authority
• May have external owners
• Can grow very large and may be global
• External focus: Selling solutions
31/10/2007 25 Bente R. Løwendahl, Professor

C) The expert firm:
• Described as ideal by many professionals,
but very difficult to maintain in the long run, as
tensions pull both towards A and towards B
• Individual and highly autonomous experts
backed by more routine-dependent junior
staff
• Requires extremely good senior managers -
respected professionals with strong
leadership skills
• External focus: Solving unique problems
31/10/2007 26 Bente R. Løwendahl, Professor

Figure 13: Internal and external foci (p.132)
31/10/2007 27 Bente R. Løwendahl, Professor

Tensions off the diagonal
• Type A firms are unable to deliver repeat
solutions in an efficient way – too costly. If
they invent a clever solution, they need a
sales organization, not autonomous
professional partners
• Extreme client responsiveness with a
professional bureaucracy (Type B firms) is
impossible, since too much flexibility and local
autonomy is required
31/10/2007 28 Bente R. Løwendahl, Professor

Tensions in Type C firms
• Some of the best experts are like Prima
Donnas – they do not want to sing in a choir,
and they do not like sharing the applause.
• Some excellent experts are good educators
and mentors and share with juniors. Many (the
marjority?) are not.
• The best experts like technical challenges, not
administrative. Hence type C firms need to
manage multidimensional authority
31/10/2007 29 Bente R. Løwendahl, Professor

ABC People and Projects
• In a recent seminar, senior managers in the
Denmark based engineering consulting company
COWI, BU1 Economics and Management, pointed
out that not only firms, but also people and
projects may be classified as predominantly A, B
or C.
• Let’s explore that idea further...
31/10/2007 30 Bente R. Løwendahl, Professor

Typical type A people
• Typical type A-people are highly
individualistic, require substantial autonomy,
and barely tolerate being in a firm.
• In the most extreme, they prefer being
independent freelancers and establish a “me
inc.”
• They have an extremely high level of self
confidence, and thrive on new challenges.
And they are often “Prima Donnas”.
31/10/2007 31 Bente R. Løwendahl, Professor

Typical type B people
• Typical type B-people prefer to be in a structured and
relatively predictable environment. They are often
perfectionists, and like to demonstrate excellent
mastery of their specialties. They prefer modest and
incremental changes, and dislike high risk.
• Type B firms are often excellent learning places for
young professionals. Typical type B people love the
well-structured career and competence development
systems of type B firms.
• Typical type B people thrive on seeing the modified
solutions work well.
31/10/2007 32 Bente R. Løwendahl, Professor

Typical type C people
• Typical type C-people are experts as well as team players. They
are like members of a big band or a symphony orchestra – the
best are soloists at some points in time, but they also blend into
the harmonies of the entire orchestra.
• Typical type C people accept to do routine work some of the
time, but if the firm accepts too much of that kind of work, they
will look elsewhere for employment.
• Typical type C people are team players, and enjoy seeing their
colleagues excel. They are excellent mentors, and like to
contribute to the professional development of juniors.
• Typical type C people thrive on solving the most challenging
professional problems for/with demanding customers.
31/10/2007 33 Bente R. Løwendahl, Professor

Typical type A projects
• Typical type A projects are small, highly
adaptive, and require close interaction with the
client.
• Type A projects are typically delivered by one
experienced expert, but projects requiring the
collaboration of several experts with
complementary expertise are also acceptable.
• Projects requiring substantial coordination and
managerial supervision are unlikely.
31/10/2007 34 Bente R. Løwendahl, Professor

Typical type B projects
• Typical type B projects are large, require
several experts with different levels of
expertise, and are highly structured.
• Type B project teams are hierarchical and led
by a senior expert.
• Type B projects are relatively easy to plan,
and parts of the projects may be pre-specified
and allocated to individuals or small teams,
sequentially as well as simultaneously.
31/10/2007 35 Bente R. Løwendahl, Professor

Typical type C projects
• Typical type C projects may be large or small, but
require the development of new solutions to advanced
problems.
• Excellent experts may be assisted by juniors, and
teams may involve one or many professional
specialties.
• Projects may be large or small, but “ideal” projects
typically involve several specializations and a high
degree of collaboration and coordination.
• In type C projects, clients/customers are often more
partners than just buyers of services
31/10/2007 36 Bente R. Løwendahl, Professor

Can firms be both A, B, and C?
• Type A firms cannot deliver type B projects.
They do not have sufficient staff, they do not
have the managerial capacity to deliver highly
coordinated solutions, and type A
professionals do not like to work on modifying
standardized solutions.
• Type A firms cannot deliver type C projects,
unless they can be carried out by one expert.
• Type B professionals do not work for type A
firms.
31/10/2007 37 Bente R. Løwendahl, Professor

Can firms be both A, B and C? (2)
• Type B firms can have a small number of type A (or C) people,
and these can deliver a few type A projects. These are typically
partners/senior managers or involved in R&D. Some junior type A
people may also be attracted to type B firms as part of their
education. These often start up their own companies later.
• In some firms, type A people are allowed to consult to clients on
an individual basis and bill these assignments from their own “me
inc.s”. A common example is professors in Universities delivering
small consulting assignments.
• In other firms, type A seniors give individual advice to clients as
part of the service portfolio. These are often seen as free
services as part of a larger contract, or as marketing investments
in a continued relationship.
• Type B firms are unlikely to be able to win type C projects.
31/10/2007 38 Bente R. Løwendahl, Professor

Can firms be both A, B and C? (3)
• Type C firms typically have both A, B and C type
professionals and (can) deliver all three types of
services.
• Type A professionals in type C firms are typically
either
• “nerds” – technical experts with no interest in commercial issues,
who provide excellent solutions and add substantial value for the
company, or
• “stars” – brilliant professionals who might just as well start a type A
firm, but who feel that they shine more brightly together with
colleagues in a type C “star” firm. Such experts are primarily
attracted to the #1 within their area of expertise
• Type B projects often generate substantial profits, and
bottom-line oriented people often want more of these
31/10/2007 39 Bente R. Løwendahl, Professor

Challenges resulting from type B
projects in type C firms
• External owners are investors and, by definition, bottom line
oriented. For this reason, it is very difficult for type C firms to
have external owners. External owners will put severe pressures
on type C companies, pulling them in the direction of type B.
• Industrially educated and oriented people, including the large
majority of the top international management consultants, will
typically advice a type C firm to move more towards the type B
corner.
• Type C firms offering a growing proportion of type B projects will
have to hire more type B people (or junior type A or C people
who see type B work as educational). If type B projects become
predominant within an area of specialization, excellent type A
and C professionals are likely to leave. As a result, the firm loses
its credibility as a type C problem solver.
31/10/2007 40 Bente R. Løwendahl, Professor

Pressures for change
• Clever individuals in a type A firm invent solutions that can be
sold to multiple clients for extra profit. If only they can hire some
juniors to do the “legwork,” they might get rich...
• But juniors mean hierarchy and managerial responsibility...
• Clever individuals in type B firms develop individual reputations
and realize that they can make more profit on their own. They
object to all the “overheads” resulting from the managerial
hierarchy and the R&D-people, and dislike having to subordinate
their expertise to the “common way of doing things here.”
• They create spin-offs or negotiate individual arrangements
• Clients want small unique projects outside Firm B expertise
31/10/2007 41 Bente R. Løwendahl, Professor

Pressures for change in type C firms
• Type C firms have to live with the basic tensions of both the type
A firm (some partners create hierarchies and/or routines) and the
type B firm (some partners negotiate special arrangements and
are allowed to behave like type A partners). The result is tensions
that have to be managed all the time. They do not go away!
• Type A and type B firms may reach a stable “equilibrium” and
can stay that way for decades. Especially if management is
aware of the strengths of their type, and avoid giving in to the
pressures. If type C firms reach good balance, they still have to
actively manage the tensions in order not to be pulled to one of
the sides.
31/10/2007 42 Bente R. Løwendahl, Professor

Figure 15: Pressures for change (p.145)
31/10/2007 43 Bente R. Løwendahl, Professor

Conclusions
• All three strategies seem to be viable for consulting
firms, but tensions are strong both towards more
individual autonomy and more standardization
(modularization, repeat sales).
• Transitions are difficult to make, and mergers of firms
of different types are even more difficult. Type C
firms buying type A or B firms need to invest
substantial amounts of management time and efforts
in order to integrate operations with the other firm.
• Generic strategies should be clear, stable, and
consistent. Probably also conscious.
31/10/2007 44 Bente R. Løwendahl, Professor

The #1 managerial challenge:
says that all our resources go down
“Everyone
the elevator at the end of the work day and
disappear. Most people see that as a problem,
as the firm is then “empty”. To me that is not a
big problem, as long as they come back the
next day. Hence, my most important task is to
make sure they want to come back tomorrow!”
(Henry Michel, CEO (1990), Parsons Brinckerhoff, NY)
31/10/2007 45 Bente R. Løwendahl, Professor

Loyalty, 1
31/10/2007 46 Bente R. Løwendahl, Professor

Loyalty, 2
31/10/2007 47 Bente R. Løwendahl, Professor