Are high quality functional leaders the magic ingredient?
Scaled professional services firms are some of the world’s most successful commercial enterprises with the leading brands seen as equivalent in status to major corporates and financial institutions. Over the last decade they have enjoyed a remarkable period of growth and relative stability while also transforming in their level of organizational sophistication.
This latest Hedley May Thinking. report looks at the critical role played by senior functional leaders in delivering this enduring level of success.
Over the last decade most leading professional services firms have enjoyed stable leadership and significantly enhanced financial performance despite a decade that has proved exceptionally challenging for many corporates and financial institutions.
A notable feature of this period has been the increasing demand for high quality functional leaders (CFOs, COOs, HRDs, CMOs, CTOs, GCs etc) to reinforce a management infrastructure that for decades relied heavily on a cadre of “gifted amateur” partners.
As the scale and complexity of leading professional services firms has increased, these senior functional roles have become more technically demanding and are now some of the most attractive appointments in the market.
This current edition of Hedley May Thinking. focuses on the issues raised by the professionalisation of the key functions in professional services, as well as the peaks and pitfalls of taking on or recruiting for such roles.
Hedley May carried out over 30 face-to-face interviews with both professional services leaders (CEOs, Senior Partners, Managing Partners) and the Heads of key functions (CFOs, COOs, HRDs, CMOs, CTOs, GCs) at the largest law firms, 3 of the Big 4 and other scaled business consultancies including the leading strategy houses.
In all cases we focused on organisations that are, or closely replicate, partnerships in terms of structure, governance and independence from external capital. We took each participant through a questionnaire, but also gave them scope to add their personal insights. The analysis also reflects Hedley May’s experience of making some of the most senior functional hires across the same range of professional services clients.
We will be holding a series of Breakfast Forums to develop these themes, so if you would like to contribute to the debate please contact email@example.com.
What unique challenges face functional leaders in the professional services sector?
What traits do functional leaders need to influence such complex organizations?
What will the next generation of functional leaders look like?
What behaviours should functional leaders avoid?
Can skills learnt outside the sector thrive in professional services firms?
How can we improve the outcome of key functional appointments?
Is high quality functional leadership essential to the success of professional services firms?
Both our recent conversations and our experience of recruiting senior functional leaders for the world’s leading corporates, financial institutions and professional services firms, reinforce our belief that there are challenges specific to the professional services sector.
These may vary in degree between types of firm, but in one way or another they apply across the sector and significantly impact the working environment for those who lead the key functions and ultimately their success in role.
At the heart of the challenge is the nature of professional services firms themselves, which, for the most part, have retained their distinctive ownership and leadership models despite the broader transformation of the sector.
The partnership ethos, pride in professional training and self-sustaining financial structure are all key elements of the best professional services firms, but equally they have a significant impact on the role of their functional leaders.
Even the largest and most sophisticated professional services firms are still led almost exclusively by partners, and it is nigh on impossible for functional heads to reach the most senior leadership positions.
Both the formal and informal governance structures of most partnerships exclude or sideline the professional managers in stressful times, so relatively few functional leaders play a genuinely business critical role on the firm’s executive committee or board.
In many cases they report through a frontline partner who may, or may not, have relevant operational management experience.
Although even the largest professional services firms are relatively small compared with global corporates and banks, they are complex communities with a disproportionate number of influential individuals.
While this can sometimes work to ensure stability and resilience, it can also encourage rivalries, political intrigue and sometimes unpredictable leadership elections, especially in periods of stress.
A partnership is effectively a distinct entity within the organisation which relies on its “unique culture” to self-regulate. Without the discipline of external shareholders or a rigorous regulatory authority, partnerships tend to defend themselves “perpetuating versions of our former self”.
Although less homogenous than in the past, the “Partnership” still represents the cultural heart of any firm and in most cases the senior functional leaders are excluded from this inner circle.
Revenue generation is still the centre of gravity for professional services firms. While most executive leadership teams recognise the necessary role that high quality functional expertise plays in their success, they are often constrained by a “fee earning community” that sees the non-professionals as a “flexible cost rather than an essential service”.
This tension is inherent in many of the most contentious clashes between partners and the functions.
Professional services leadership teams are rarely diverse. Senior partners have often been “born and bred” at the firm and so have few true external benchmarks to evaluate best in class functional management.
Such a narrow DNA can make executive teams wary of new processes and blind to some of the less attractive traits of their own culture.
It can also leave them unaware of the challenges functional leaders face, especially when individuals are recruited to deliver change against a broadly accepted status quo.
The most senior and influential partners will typically have worked together for much of their career, often in a fluid reporting matrix where accountability and performance management are rarely formalised.
Mistakes are seen as personally damaging in this environment, so it is sometimes “easier” to blame professional managers and their teams when things don’t go to plan.
This accentuates a two-tier management structure and can detrimentally impact the relationship between partners and the functions.
Despite the increasingly corporatised feel of many large professional services firms, they have maintained their distinctive ownership structure and often idiosyncratic cultural traits. While functional leaders need to adapt to the inherent nature of the professional services sector, the firms themselves should also go out of their way to support key functional appointments in role. This involves a high degree of transparency and openness to change if firms are to reap the full benefits of the more sophisticated functional infrastructure they are building.
The functional heads at a major corporate are typically among the most senior people within their organisation with automatic membership of the executive leadership team and significant vested authority. While this is less consistent in financial services, where powerful product and divisional heads often drive leadership culture, the key functional leaders are still respected senior executives and important figures in the day to day running of the business.
Although scaled professional services firms have already evolved from treating the functions as just an operational infrastructure to support the partnership, the executive authority of the functional leader is less firmly established and often sits within an opaque control hierarchy.
Functional leaders can be treated as junior members of management and often have only limited formal representation on the main leadership forums. Most decisions have to be negotiated through the inherent tension between the firm’s executive team and the wider partner body which considers itself to have delegated authority to their leaders – “the executives are only temporarily elevated to first among equals themselves”.
Functional leaders must identify who has influence within the firm and win respect for their level of expertise. This is not always obvious from outside (or even from a short period inside) as professional services firms are notorious for having individuals with grand titles who have little power and others who are very influential with no title at all.
Professional services firms are often concentrations of subject matter experts with strong intellects but not always a great deal of awareness of their impact on the wider community around them. A high degree of emotional intelligence and social judgement is a great advantage.
Any change process requires key internal influencers to be taken “on a journey” whether they have knowledge of a particular area or not.
This process can involve repetition and compromise that can feel demoralising for a talented functional expert who is un-prepared for the professional services environment.
Functional heads can be tasked with managing sizeable teams many of whom are embedded in the complex matrix of businesses they support. Maintaining the balance between sufficient centralisation to ensure global consistency while allowing for services (sometimes geography or practice specific) to be delivered locally is critical to success.
The functional head must also maintain the confidence of their team both in terms of internal cohesion and the outward face to the firm.
Despite the inherent unity of successful partnerships, they are not always bound together by an “over-arching business strategy”, so priorities and agendas can change unpredictably.
Although often stated flippantly as part of the professional services caricature, ambiguity is almost intrinsic to these organisations. This can be frustrating for any professional tasked with delivering change as the levers of control are “rarely in plain sight”.
“Positive political skills” are critical to identifying which battles are worth fighting and when “you need to change tack or try a different approach”.
The ability to create goodwill and build sponsorship is often tactical (“sometimes even cynical”), but needs to sidestep political factions as the key functions have to avoid being seen as partisan if at all possible.
Partnerships set high expectations for functional leaders’ ability to communicate not just what they are doing, but why. Although the preferred format can vary across the sector – law firms expect strong verbal presentation and well written documents while the Big 4 are inevitably more comfortable with accurate spreadsheets and the consultants like charts and slides – there is a consistent expectation for concise and efficient communication.
Many successful professional services firms have transformed from essentially domestic players into diverse international businesses. A legacy of local autonomy can leave operational structures, performance management and individual behaviours lagging this process, with the key functions tasked with creating the linkages and consistency across geographies and service lines.
This is an area where functional leaders can gain (or lose) significant credibility.
Professional services firms are by their nature intellectually demanding. New ideas are challenged and tested thoroughly as a matter of course, so functional leaders must be sufficiently assured to drive initiatives (and give their teams confidence as well) but avoid the hubris of having to own the outcomes and win the credit.
While there is a huge amount to learn from large professional service firms, few are “cutting edge thought leaders” on the core functions or naturally inclined towards innovation. Therefore, it is all too easy to become “dumbed down” from the constant internal demands and lose touch with current best practice.
You can’t be a ‘Diva’, you are never going to tell them what to think
Most professional services firms are typically in deficit of emotional intelligence so don’t expect much sympathy from the start
Professional Services firms are politically complex organisations and so success is often more of an art than a science. Professional services leaders need to take a constructive and flexible approach to decision making, employing a raft of influencing techniques to achieve successful outcomes. At the same time, firms need to value and respect these skills as well as become better at listening to and acting on the advice of the increasingly professional non-professionals they are investing in.
The vast majority of our contributors felt that scaled professional services firms are going through a period of transformation that will have a significant impact on their operational management and potentially the partnership model itself.
While competitive pressures vary across the sector (Big 4 operate in a highly consolidated market vs the legal market which is highly un-consolidated), all agree there will be increasing demands on each of the key functions combined with a drive towards greater integration and coordination between them.
Some of the biggest challenges are anticipated around technology given it permeates so many aspects of the professional services business model. Regulation is also driving change whether by reducing the technical barriers between the professions more flexible funding models, or by restricting organisations through the imposition of new regulatory frameworks – the current pressure on the Big 4, if taken to the extreme, could result in their break up.
Our analysis focuses across the full range of functions, but from the outset it was clear there is an implicit hierarchy of roles that has a direct impact on the status vested in the individual functional leaders.
Law firms see Finance, and increasingly Technology, as the critical functions while Human Resources and Marketing are sometimes still considered delegated services. Within the Big 4 and strategy consultancies their financially literate partner group can sometimes see the Finance function as a “hygiene factor”, but Marketing, Legal and Human Resources have become more influential.
Finance has typically been the first function to be elevated to the executive team as the size of professional services firms increased.
The role has morphed from a glorified financial controller protecting and distributing partner profits, to a far more complex position covering MIS, performance management, financial modelling, investment planning, funding, FX etc. The continued breakdown of the “time and materials” model, ever more complex joint venturing and greater interest in M&A activity, make these more challenging roles which will demand a significantly more proactive skill set.
Historically an administrative role focused on the non-professional staff and dealing with the “people issues that partners were afraid of” such as under-performance and disputes.
HR has dramatically increased in sophistication (especially since the financial crisis) to cover talent management, restructuring, performance management (increasingly including partners) and most recently diversity and behaviours – #MeToo has greatly increased the spotlight on the latter. There is now a demand for more strategic skills as HR takes on the broader talent agenda role for all levels of the organisation.
Traditionally professional services firms believed partners sell the work and see the firm’s brand as simply an output of the quality of the work they do. This resulted in a tactical, marketing support (brochures, presentations and events) based approach with marketing professionals at the beck and call of partner’s favoured initiatives.
There is now demand for more sophisticated brand management and coordinated business development plans especially around the larger multi-partner/practice/geography client relationships and thought leadership. Strategic brand development (including employer branding) is becoming “the new frontier” although most agree the sector still has a way to go.
Often a soft retirement option for a trusted partner at a law firm, the GC role has taken on much greater significance for other types of professional services firms.
Ever more costly litigation and greater regulatory scrutiny has magnified the perceived operational risks, while the need to collaborate with third party technology suppliers has driven demand for more sophisticated contracting capabilities. Most recently behavioural issues have come to the fore (#MeToo again) which have significant legal and reputational ramifications.
Demand for technology expertise is increasing exponentially as there are now few areas of global professional services which are not underpinned by technology and related digital infrastructure – typically a knowledge base that most partner groups are unfamiliar with.
GDPR and Cyber Security are just the latest challenges and the biggest professional services providers increasingly have to joint venture or partner with technology firms to deliver Fin-Tech, Reg-Tech and Law-Tech products and services.
As professional services firms have grown in scale, the demand for experienced operational management has increased.
While historically this was often treated as an extension of the finance function, with the CFO the “first among equals”, there is a trend towards importing high quality operational leadership with broader management experience.
In many cases the COO can join a firm’s executive committee with a number of the other functions reporting through them. This supplements the skills mix of the executive team and can provide it with a more integrated view of the organisational infrastructure.
The most recent trend in functional leadership within professional services firms is the elevation of risk to the executive and even board level. This was traditionally treated as a compliance function, but increasing public scrutiny and regulation (particularly of the Big 4) has underlined the exposure faced by the largest professional firms. This has provided the impetus to build a genuine risk capability but poses particular challenges as the skillset is still rare in the sector so needs to be imported from outside with the associated risk of rejection.
There are other functional areas going through a similar process of evolution including PR and Communications, Corporate Development/Strategy, Knowledge and Training as well as a whole suite of services around Facilities, Property and Workplace. The latter in particular has gained greater significance as firms across the sector review their business models (the impact of artificial intelligence, workplace practices, open plan, admin support, outsourced services etc.) in competitive markets. As yet these are seen as lower profile roles and typically report through another function to the executive.
The process of professionalising the functions is a dynamic process which has come a long way over the last decade but remains set to continue apace. For the functional leaders the transition to a more demanding future will be both an opportunity (more diverse, professionally fulfilling and rewarding roles) and a challenge (requiring new skills and potentially creating internal tension). As the organisational demands increase, partnerships need to reflect on how they leverage these more advanced skills and attract the highest quality functional leaders.
Although there are many instances where senior functional leaders have been highly successful, all of our interviewees (executives and functional heads alike) were aware of occasions where appointments have gone seriously wrong.
While to some extent this is the mirror image of the traits that make individuals successful, there are specific traps which leave individuals vulnerable in these potentially unforgiving environments.
Behaviours that were raised multiple times include:
Professional Services firms like to hire market leading talent. They see themselves as Blue Chip brands and being a subject matter expert is at the core of their own professional self-image.
However, partnerships themselves prefer to be “taken along a path” rather than given a solution.
Softer influencing and political skills are often more valuable than being the technically strongest in any particular area.
Individuals can become vulnerable if they fail to build relationships with key influencers around the firm.
Given “the approval” of the wider partnership is still so important, shadowing the Managing Partner does not in itself create the same “halo effect” as having the support of a CEO at a corporate.
Having demonstrable early successes is seen as critical to gaining recognition from partners and failure to have notable achievements in the first year can be difficult to recover from. Equally picking “too controversial initiatives” or, even worse, making overly ambitious claims, leaves functional heads open to attack from outside.
Sometimes early success leads to rapidly increasing responsibility or proliferation of responsibilities.
Many still see the functions as a “service for partners” and so are happy to delegate difficult issues to “overly keen and willing” functional leaders with little thought for the impact on their set agenda and workload.
While professional services firms respect high quality expertise, functional leaders must to be careful not to become so buried in the technical minutia that they lose focus on the initiatives that partners expect to be delivered. Firms prefer functional heads to operate as pseudo partners (leading and supervising their teams) and sell the big picture rather than look like technicians.
The credibility of a functional leader is closely associated with the performance and feedback of their team.
If the local managers of any function, many of whom are embedded in the business, express reservations, the partnership quickly loses confidence and there is rarely much time given to turn things around.
Professional services firms are political by nature, not least because so many of the key individuals have already been competing with each other for most of their careers, coupled with the quasi-democratic nature of partnership governance. While it is critical to understand the pervading political environment, functional leaders who get caught up in a sensitive debate can become victims of “palace revolutions” which rarely take account of non-partners positions.
Ultimately most professional services firms operate as two tier organisations in terms of status and recognition of their functional infrastructure.
These are not the most supportive environments for leaders who seek a lot of affection or public approval.
Partners expect their functional leaders to engage with the partnership even if they are not always that open to engagement themselves. This can demand a high degree of persistence and willingness to prioritise the “pet hobby-horses” of individual partners.
Success in professional services is not just about what you do but also, how you do it. There are a host of pitfalls that can impact an individual’s reputation and historically some firms have abdicated their responsibility to ensure these are avoided. There is a great deal more firms can do to support newly appointed leaders (whether internally or externally sourced) to minimise the risks of failure.
As the demands on professional services functional roles has increased, so has the appetite for importing talent from other sectors. This is particularly the case for the largest professional services firms who feel there is a limited pool of candidates with sufficiently scaled experience in their own sector, and, who often shy away from recruiting from their direct peer group.
In many cases recruitment is triggered by demand for a step change in a function due to competitive pressures, new business models or technological innovation. This makes an external appointment more likely as there is a perceived scarcity of top talent especially in newer functional areas.
There is also a tendency to seek external solutions over appointing internally, as firms are often accused of being poor at succession planning. Whether this is because successful functional leaders tend to “stay in situ too long” or the failure of a previous appointment damages trust in the function itself, there is a market wide perception that “it is quite difficult to get promoted to the No 1 spot as partners don’t spend their time re-imagining the people in the No 2 position… It is sometimes easier to leave and bounce back in at a higher level!”
While the rationale for importing new skills and experience is valid, there are risks inherent in hiring from outside the sector. Many of the professional services leaders we spoke to felt that while out of sector hires had proved successful at junior and mid-levels, with increased seniority (especially at head of function level), there were more complex integration issues and a higher rejection rate.
A number of core themes were repeatedly highlighted as specific to hiring candidates with non-professional services experience.
Although the distinctive nature of functional roles in professional services is well recognised, many executives felt that candidates did not fully appreciate the challenge of a lack of positional authority creates in practice. They all suggested that the more explicitly (and honestly) this is dealt with upfront, the better.
Executive teams often look outside the sector for aspirational functional hires who can help them drive complex strategic change programmes.
The wider partner constituency can be more focused on a less challenging set of day to day operational hygiene factors – smooth service delivery and tactical problem solving. This creates an inherent tension between the competing demands of the executive and the wider partnership, setting up the new appointment to disappoint one side or even both.
While most businesses have explicit rules-based disciplines set by executive edict or regulatory demands, partnerships prize autonomy and have an organic and culture specific approach based on self-discipline.
The degree to which partners assume they are governed by a matrix of loose principles (allowing interpretation and flexibility) can be a shock to those coming from more regulated environments outside professional services.
There is recurring message that professional services leaders see value in importing innovation from other sectors which they perceive to be “more sophisticated”.
However, this is often derived from a general sense of dissatisfaction with what they have and a hope that “things can be done better”rather than the result of detailed analysis. This can cause tension when ‘change agents’ are brought in to what are often homogeneous organisations with a strong sense of accepted wisdom.
The profitability of the leading professional services firms gives them significant buying power to hire “world class talent”. There are clear benefits to new thinking and processes which have been tried and tested in other sectors, but there is also a need for caution around being too radical or trying to deliver necessary change through a functional hire alone. Using a surrogate to achieve too much too fast can often energise counter-productive resistance. This is especially true when there is a deviation between the intent of the executive team and the mood of the wider partnership.
High performing organisations with strong and distinctive internal cultures always represent a recruitment challenge as the risk of candidate rejection is higher.
There are a number of pit-falls specific to professional services highlighted by our respondents regardless of the previous background of the candidates themselves. Some of these “mistakes” were seen as so entrenched that they were regularly repeated despite being openly recognised as sub-optimal.
The most commonly highlighted “learnings” from a large cross section of appointments include:
Although typically instigated by a single economic buyer (the Managing or Senior Partner), the final decision to hire is often dependent on an extended group of influential individuals with a less consistent view on what they are looking for.
Partners are less attune to the dynamics of functional hiring which can lead to frustration for candidates especially when seemingly unconnected “hidden stakeholders” are introduced into an extended and apparently iterative consensus building process.
There was a common refrain around the danger of hiring a “good looking CV” rather than the person best suited to fit with the organisation.
Leading professional services firms benchmark themselves against the most respected brands in other sectors which can lead to partners being influenced by perceived quality rather than a more considered analysis of a candidate’s competencies in the context of a very different professional services environment.
Although there can be many genuine reasons why a firm recruits a functional leader, the qualitative benchmark is often defined around the strengths and weaknesses of previous incumbents.
Given the stakeholders often lack external market experience (even less beyond the sector), this can skew the criteria towards personal preferences rather than evaluation of how an individual meets the organisation’s needs.
Partnerships like consensus decision making. When multiple candidates progress through a process there can be a tendency towards the hire that is easiest to get through the process rather than a potentially more talented individual who may polarise opinion.
Given many of these hires are designed to introduce change, it is unlikely all stakeholders will be equally happy.
Professional services firms have traditionally been slow to adopt sophisticated assessment techniques especially as partners have been reticent to apply them to their own professional cohort. If the focus shifts towards more in-depth analysis of each candidate’s skill and personality fit, then more formal techniques of assessment against defined competencies will become more important.
Although leading professional partners are extremely well paid themselves, they often have a distorted view about the cost of hiring top talent in key functional areas.
Partners can shy away on principle when the price tag is high or looks too much like a true partner equivalent. The risk of “sticker shock” is especially high when recruiting from outside the sector where the structure of compensation (bonuses and long-term incentive plans) is less straightforward to replicate.
Many leading headhunters have experience of recruiting senior functional professionals for corporates and financial institutions, but relatively few have a deep understanding of the complexity of hiring for scaled professional services firms.
They can get frustrated with the complex organisational dynamics and tortuous decision-making process so there are benefits to working with recruiters who have genuine sector experience and will invest the time to think through assessing cultural fit and how best to explain the firm to the preferred candidates.
Despite a tacit recognition that professional services firms are difficult organisations to “learn quickly”, in many cases completion of the hiring process is seen as “job done!”.
There is often limited structured thinking around the integration process and sometimes a “sink or swim” mentality prevails. Very few of the functional leaders we spoke to felt a significant effort had been made to assimilate them into their firms despite “lack of support” in the first few months being openly recognised as contributing to when hires prove unsuccessful.
Although much of the focus is inevitably on the experience and pedigree of individual candidates, sustained success in these roles is greatly influenced by their fit with the distinctive culture of the firm and the specific internal dynamics of the management group they join. There is usually more that can be done during the selection process to assess culture/personality fit, while investing sufficient time and energy into the integration process is universally underestimated as a critical factor in long term success.
The scaled professional services market includes a wide variety of businesses covering several distinctive markets. These range from the highly consolidated audit and assurance market, where the Big 4 dominate, to the far more diffuse legal sector where even the largest firm represents less than 3% of the total.
Despite this diversity, partnership remains at the core of these remarkably self-referencing organisations, and the concept of the individual partner central to their culture. Even if to some it feels like this is changing too fast, in practice the gap between professional services and the wider corporate and financial services sectors remains significant.
The separation of partnership governance and operational management can make it difficult to disentangle the contribution made by partner dominated success of the executive teams and the functional leaders they work with. However, it is ever clearer that the success of the larger, more complex professional services firms is heavily reliant on this growing cadre of professional managers.
While this is not always apparent to all rank and file partners, we found leadership teams consistently recognise that well led functions were instrumental in ensuring their firms thrive and survive in ever more competitive markets. What’s more, they feel the professionalisation process needs to accelerate as the quality of current and future functional leaders becomes an essential ingredient to delivering enduring success.
The challenge is to appoint individuals who are not only capable, but also able to operate effectively in organisations that are complex to navigate at the best of times. For some time to come functional leaders will still need to adapt to an idiosyncratic leadership model and work out how to be effective in a two-tier management structure.
Whilst having the appropriate professional experience and technical expertise is clearly important, it is just as much about the right thinking and influencing style, and not just for professional services firms generically, but for the specific firm and executive team as well.
For the best appointments (whether internal or external) professional services will provide the excitement of a successful industry going through a period of rapid evolution. This will undeniably involve dealing with threats, but also deliver exceptional opportunities for those that embrace the challenges most effectively.