Mar 22, 2007

The partnership model

David Maister who is one of the thought leaders in the area of professional services firms (we studied his model when I was an employee of the large 4 psfs) asks a question whether the "stewardship model" of the professional services firms is outdated.

In the old days, when professional firms acted like they cared, many of them ran on the principle of stewardship or “legacy.” The firm was run not only for the current generation, but with an eye to building an institution that would flourish and survive in future years. Partners, so the argument went, held the firm in trust for the next generation.

This was not just a cultural issue. Under the stewardship model, equity in the firm was transferred at book value – in at book, out at book. Partners made their money from the income they earned while working at the firm, not by equity appreciation.

But what do you think is going to happen in the UK when the Clementi reforms are (finally) implemented and outsiders can buy the equity of a law firm? How long do you think it will take for the existing partners to rethink (even more than they have been doing) whether they want to admit new partners without forcing them to buy in at fair-market value? Why give away a part share of ownership in your law firm when you can sell it to Goldman Sachs?

In accounting firms, it depends on the size of the firm. Big global firms still pretend they are “passing on the heritage”, while many small CPA firms owners are unapologetic in saying: if you want ownership in my firm, you have to buy it from me!

I first started thinking about the ownership model of such firms when AT Kearney partners carried out a management buy-out (or whatever it is called) from EDS. I read a quote by Prof. Ashish Nanda of Harvard (also a specialist when it comes to professional services firms) where he stated:

"When your principal strategic assets are your people, private ownership is the better model," said Ashish Nanda, associate professor at Harvard Business School. "It has the advantage of binding together capable professionals into a shared organization, in which they each have a financial stake, which in turn delivers genuine commitment to produce results."

Yes I know, private ownership of consulting firms that Prof. Nanda is talking about does not directly relate to the stewardship model, but it surely rules out that some firms can be traded on the stock exchanges. Which gets me thinking, IT services and BPO firms are also dependent on the strategic assets called "people". Why are they public and not private? Is it the nature of work that really says whether the people are strategic assets or not, or is it a function of size of the organization and the industry also?