My Vistage chair’s favorite saying is that the “cobbler’s children have no shoes”.  This may be the case with many professional services firms who are in the business of advising others, but whose bloated organizations are incapable of change.  The failure of several multi-national law firms has brought the professional services partnership model to light.

A bi-product of the information age has been the dramatic expansion of professional services.  Mergers and acquisitions and complex regulations such as Sarbanes-Oxley drove activity for Big 4 accounting and prestigious law firms. In a market boom, top lawyers (such as intellectual capital attorneys) have fetched more than $500 per hour.

Yet such firms are under strenuous scrutiny and price pressure. Core clients including the Fortune 1000 and insurance companies demand that their advisors utilize junior level associates for mundane work.  Clients arbitrarily set prices for their attorneys by clipping their invoices much like insurance companies have set the price for physician fees.

As senior partners in such firms age, the massive payouts they have come to expect create a drain on the cash flow of their firms, thus inflating their overhead. The professional services partnership model is strained, and firms will have to adapt their business model to fit into a market unaccepting of fat.

Historically, partnerships were tightly run as to preserve work quality and promote specialized skills. Professional service firms are beginning to hire professional non-partner managers, operations experts and CFO’s, in an effort to run their firms more like businesses.  In particular, the partner driven approach to business development is flawed. For partners to win all the business but not stick around to execute the work can be unseemly to clients who have many choices.

Demand for professional services ebbs and flows with the economy and regulatory cycles. Some industries such as the practice of law, suffer overcapacity (the number of lawyers grew from 212,600 in 1950 to 1,225,000 in 2011)[i]. In accountancy, turnover of auditors is very high, and there is a dearth of experienced accounting professionals.

Physicians face other obstacles from health care reform, the advent of electronic medical records, and the resulting contracting of fees.  No business is consolidating more quickly than health care as physicians and hospitals vertically integrate in order to mitigate the pressure created within a market with spiraling costs. Yet the implications are the same, that medical offices will need to run with the efficiency and service attributes similar to those employed by retail stores.

It seems like the more money that is involved in an industry, the greater the resistance to change.  If you take the process for jury selection (for example), it is completely antiquated and does not create positive outcomes for the judicial system or for the jurors.  The practices are embedded so deeply they are difficult to alter.

It is not hard to see that these industries will have to evolve like others have in recent years.  Once any industry reaches a point of saturation, the innovation that occurs is in service delivery, and one would have to believe that professional service industries will be disrupted by new technologies and processes.  In the case of physicians, accountants and attorneys, the client experience is not all that it could be.  Such interactions usually occur because of some negative series of events.

So it is time for us service professionals to rethink our business models, best practices and methods for delivering value.  Professional service firms have to start to run like businesses. It is time for new shoes.

There has been the occasional business leader whose reign has been magical (Welch and Jobs come to mind).  Yet their business often fall to sustaining enterprise value after they leave. GE’s revenue and stock appreciation has been stuck in neutral since Welch’s departure, as the 20^th century’s most profitable company tries to find its way.  Apple has been trading all over the map in the last few weeks as the market tries to reconcile a world without the imagination of Jobs and his fancy gadgets.

A systemic problem for private companies is that a lack of management and bench strength.  This dearth of talent goes deeper then inhibiting productivity in the short term; it is a significant barrier to value creation for the entrepreneur.  If an exit is an objective (as is often the case), buyers generally want to see a strong management team and bench that can support future growth. If it is the business owner and his brother-in-law that possess all of the tribal knowledge (intellectual capital) about how a business operates successfully, the enterprise can lose luster with investors.

There are similar problems when one or two employees within a company are technically superior to those around them. Often, feeling their power and value, they are unwilling to teach, document, and delegate. When management and boards allow such conditions to persist, they are doing a disservice to the shareholders and are putting the company at risk.

Organizations should:

1. Require that every manager have a delegate – Identify and develop strong number twos that can eventually step in and take on the job duties of every manager. If people can’t attend conferences or go on vacation, because no one else can cover their desk, it is a sign that they have not developed the talent around them. To develop others takes time and investment including focus on performance reviews, career pathing and training.
2. Institutionalize activities, duties and best practices – Develop thorough documentation. Companies must maintain policies and procedures if they are going to be operationally excellent. When a supplier errs, it is usually because an inexperienced junior staffer doesn’t do something the way his senior counter-part would have. Often the junior staffer is criticized, even though it is their management who put them in position to fail.
3. Teach - Great leaders are usually great teachers; they aspire to develop others through daily interaction, and the sharing of information. The inability to teach is often a sign that a manager views themselves as the only person competent enough to complete certain tasks, and makes excuses as to why they can’t find other people to step up.  Great companies have development plans for every key employee, and make resources available for their continuous improvement.

Organizations that formalize these practices in their companies will maintain a long term strategic advantage over those who do. The talent war has only just begun.

A federal judge’s recent ruling that elements of the health care bill are unconstitutional has heightened the health care debate.  Republicans, feeling their oats and perceiving a mandate are threatening to repeal the Patient Protection and Affordable Care Act.

It was only after my friend and colleague Dr. Bala Chandrasekhar explained most of the information in this post to me that I first came to understand the fundamental problem.  Our medical community suffers from perverse incentives. The system does not reward results; it rewards the extension of care.

In the world’s best hospitals, such as the Mayo Clinic, physicians collaborate, in a finite space, where information is shared and decisions are made. In the overwhelming majority of cases, patients are shuttled around, from general practitioners, to specialist, and from one laboratory to the next.  Information about the patient’s medical history is rarely shared, an approach that does not support the best medical outcome for patients.

The advent of electronic medical records and new rules governing payments is the impetus to consolidation in a business so unsophisticated, that many medical files and prescriptions are managed with a piece of paper, pen and fax machine.  The institution of medicine needs to undergo radical change, and the prospects of larger organizations managing our care means that the stakes are getting higher.

Unlike professionally managed businesses, there are massive variations in best practices in medical groups.  Physicians hate oversight, and we pay the price in an estimated 100,000 people a year dying in U.S. hospitals from pure negligence (errors).

It is intuitive to all of us that raising medical care costs are unsustainable, yet the numbers are daunting.  The convergence of an aging populace and exponential health care inflation will double Medicare costs within a decade.  By 2020, Medicare and Medicaid are projected to increase from 21% to over 30% of federal spending (non-interest payments), and that doesn’t include massive spending by state and local governments. Proponents argue that we have the best medical care in the world; but at what cost? A knee replacement that costs upward of $40,000 in the U.S., costs $5,000 in Germany. We all want the best health care, but at some point common sense must prevail.

According to the bipartisan congressional report -Restoring America’s Future, “slowing the growth of health spending is realistic. Other advanced countries have substantially lower health spending as a share of GDP, while still achieving measures of access and quality that often exceed those in the United States. Although a uniquely American approach is required, these comparisons show what is achievable.” Health care reform focuses on capping costs for doctors and reforming various forms of insurance coverage (including universal coverage). It does little to reform the underlying behavioral issues that are driving up health care costs.  The fee for service model is dated and irrelevant.

If these costs are not constrained, our fiscal mess will get much worse, and our businesses and personal wealth will be drained by massive tax increases.  Small business owners, who bear the brunt of a bloated health care bureaucracy in the form of inflated health insurance premiums must advocate for more meaningful reforms.  Our economic future depends on it.