Charting the Luminary Leadership in Professional Service Firms

In their new book Aligning the Stars: How to Succeed When Professionals Drive Results (Harvard Business School Press), HBS professor Jay W. Lorsch and former Bain & Company CEO Thomas J. Tierney (MBA ’80) draw on five years of intensive research plus their own wealth of practical and academic experience to examine the unique challenges of leadership in professional service firms. The result of what may be the first-ever collaboration between an HBS faculty author and a CEO alumnus, Aligning the Stars provides an in depth analysis of the factors that drive success in an industry that attracts 65 percent of MBA graduates from leading business schools — many of whom eventually leave to run organizations of their own.

With revenues approaching a trillion dollars, professional service firms wield significant influence among the world’s top corporations. Why do some of these organizations enjoy generations of success while so many others flounder? “The answer,” say Lorsch and Tierney, “lies in the ability to develop and motivate star talent, while explicitly aligning individual needs with the strategic and organizational priorities of the business.” Because this alignment is difficult to accomplish, they argue, “it creates a powerful competitive advantage.”

How does a professional service firm differ from a traditional corporation?
Lorsch: Professional service organizations — such as accounting, advertising, IT, investment banking, law, and management consulting firms — are unique in that they have no products, manufacturing plants, or distribution systems. Their financial success depends entirely upon the capability and performance of their human resources. Unlike most corporations, they are organized around the principles of partnership.

Tierney: In these businesses, the people you pay are more important than the people who pay you. Your people are your product. This creates a complex and unforgiving business: If a professional service firm’s top talent were to resign suddenly, there would be an almost immediate impact on its P&L. This is why people systems, governance, culture, and leadership are so critical in professional service firms.

How do “stars” differ from other managers?
Tierney: We define stars as the professionals who have the highest future value to the business — typically, “partner-level” executives. They wear three hats: as producers they generate revenue, as managers they guide teams, and as leaders they help shape the destiny of the organization. Absent stars, a professional service firm tends to drift toward mediocrity.

Lorsch: A professional service firm’s stars differ from the majority of corporate executives in two important ways. First, they necessarily have highly developed knowledge in their profession, be it investment banking, consulting, or another area. And second, they tend to think and act independently. Leading an organization largely made up of such individuals clearly poses an extraordinary challenge. We refer to it as “leadership without control.”

Explain the concept of alignment.
Lorsch: Alignment refers to the ongoing process of designing organizational practices and structures that fit both the strategic goals of the firm and the needs of its stars. Successful professional service firms are able to do this more or less consistently on a long-term basis. We found there are four critical aspects to managing these firms effectively: strategy, organization, culture, and leadership. Success demands that all four aspects be closely aligned, both with each other and with the needs of the firm’s stars. Because these firms compete in a dynamic environment, maintaining alignment is a perpetual and difficult task.

Tierney: Think about this from the star’s viewpoint. What happens when the firm decides to pursue a strategy that is inconsistent with its star’s interests and goals? What if an organizational change prevents stars from undertaking the type of assignments they most enjoy? What if the nature of the firm’s culture and leadership is frequently at odds with the way its stars prefer to work, act, and relate to one another? When any of these elements drift out of alignment, stars may take their talent and skills elsewhere. And should they leave, experience shows that clients and other stars will often follow. The preeminent challenge, then, for a firm’s senior management is to assure that they nurture an organizational system that both satisfies stars and fulfills the strategic imperatives of the business.

Did your research unearth surprises?
Tierney: One of the biggest surprises, I think, was how similar most professional service firms really are when you look beneath the surface, especially when you consider the diverse professions in which they operate. Whether you examine law firms, advertising agencies, investment banks, or management consulting firms, the business model and the challenges they must successfully meet to prosper over the long term are amazingly similar. All of these firms are almost entirely dependent on their star talent and its motivation and productivity. As our economy shifts more toward “knowledge workers,” we believe that professional service firms will be a model for many other types of businesses — from technology to health care to communications to financial services.

Lorsch: The rampant turmoil within the sector also surprised us. During the course of our research, there were dozens of significant mergers and acquisitions. Many leading firms went public. After decades of relative stability, most professional service firms today find themselves confronting unstable markets and competitive threats, amplifying questions about globalization, scale, and diversification. These challenges are unlikely to go away anytime soon.

— Peter K. Jacobs

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