Managing a professional services firm

Chuck Hufnagel is a professional engineer and in 1988 started his own firm. He specialized in land development and his clients included developers and a number of municipalities in the Philadelphia suburbs for whom he acted as a consulting engineer. Chuck had an excellent reputation and developers, architects and municipal officials loved to work with him. In 2014, Chuck was 64 years old and engaged me to assist him with exit planning. Chuck’s firm had survived a crippling recession and was doing about $3 million in revenue with 20 employees including 2 key employees who were 51 and 54 years old.

Chuck initially stated that he would prefer to sell to his key employees if possible. He wanted to work for another 5 years but he was adamant on one point—he wanted to work on engineering projects of interest to him but he didn’t want to have any management responsibilities. As I learned more about Chuck’s firm, I began to understand his disinterest in management. The accounting system was poor and the bookkeeper level employee who managed the finances was incapable of producing monthly statements. Twice a year, the firm’s outside CPA would come in and produce a six-month operating statement. Job budgeting and cost tracking were primitive and the key employees were particularly bad at billing the projects they were running. The firm was home to some excellent professional engineers who weren’t particularly interested in running a business.

Now taking an engineering firm—or any professional services firm—from zero to $3 million per year in revenue is no small feat and the firm’s overall success was a testament to its excellent professional reputation and high level of customer service. However, the firm’s poor management was becoming a significant obstacle to its future growth. Chuck hired a business consultant at my suggestion who, after familiarizing himself with the situation, estimated that the bottom line could be improved by $75,000–$100,000 by making some basic management reforms. This was in fact achieved.

Entrepreneurs typically have business management experience when they start their companies. As they grow, management discipline is either imposed by outside financing/investing sources or developed by bringing in experienced managers or by acquiring education through executive MBA programs and the like. There is no similar route for professional service firms to acquire management expertise. Typically even large firms with 100+ professionals are run by a senior professional or small group with no particular expertise in management. To cite just one area, large professional service firms are frequently hampered by poor human resources policies. Although one frequently hears the refrain “our most valuable asset walks out the door every night,” firms rarely have policies in place to develop those professionals.

Part of the problem is cultural. Professionals frequently choose their career in part because they don’t want to “go into business” and think of the professions as a refuge from business. Professional schools encourage this attitude by refraining from introducing their students to the economics of a professional practice. I recently had a conversation with a medical doctor (a successful internist) about the business models followed by various medical specialties (orthopedics, oncology, ophthalmology, etc.). He remarked that when he was choosing a specialty, he had no idea of the financial implications of his decision.

One sometimes hears the complaint that young professionals—so-called millennials—are not interested in making the
career commitment—long hours, extracurricular business development activities—that was once routinely expected of their elders. There is some truth to this, but it is not the crux of the problem. Management was a problem for professional service firms long before the advent of this age cohort.

Another part of the problem is senior firm leadership. I hear complaints from younger professionals that there is a “top down” command culture rather than an inclusive culture at their firm so that the younger professionals are not exposed to management.

Poor management practices at a professional services firm tend to foreclose exit options for the owners. Our engineer, Chuck Hufnagel, would have liked to sell his firm to his 2 key employees, but their lack of management skills precluded this. Chuck really had no choice but to sell to a large engineering firm.

For small firms, one of the key challenges is identifying and developing employees with management/ownership potential. Several years ago I worked with a sole-owned 50-person engineering firm where the owner identified the best qualified internal buyer/successor to be a 35-year-old professional. The problem was that there were a number of much more senior engineers who would be passed over for ownership. Since the owner was committed to an internal successor, we spent much time and effort with the senior professionals to minimize the chance that they would leave the firm once it was announced that the new owner would be a younger person. The owner here successfully identified the best possible successor and implemented a plan that allowed for a successful transition.

Professionals frequently don’t see themselves as managers, but in truth, every successful professional must understand how to manage their business.

Published in Business2Business magazine, October 2015