Professional Services - Role Clarification within Partnerships

October 2005

Dear Colleagues

This report looks at one current topic within professional services, the need for change within many professional practices to better delineate otherwise conflicting roles and to facilitate more effective governance and managemen t. I believe that this is critical to improved performance and indeed survival in some cases.

In discussing this topic I am focusing especially on accountancy and law. However, many of the issues are relevant to other sectors within professional services.

Partnerships Under Challenge.

The partnership is the traditional organizational form within professional services and remains important today. In this form the world is dominated by the equity partners who essentially own the game. The practice grows by admitting new partners generally recruited from within the ranks who pay a price for partnership. In turn, this facilitates exit by existing partners. Partners receive their return from the profit pool, the pre-tax net remaining after deduction of expenses.

This traditional model is under strain. Risks associated with equity partnership have increased. There is growing reluctance among younger professionals to accept partnerships. At the same time, the availability of partnerships has also declined for those that are interested. Increasingly, partners themselves want more flexible life styles.

There is not scope here to canvass all these changes and their implications. Instead I want to focus on one thing drawn from organizational theory, the way in which role clarification can assist a partnership to manage change.

Confusion in Roles

All of us who have been involved as managers or advisers on people issues know that clarity in job role is critical to performance. People need to know what they have to do, how their performance will be measured. This is also critical when it comes to remuneration. Lack of clarity about the links between role and pay can and does create significant management problems.

Unfortunately, the traditional partnership approach breaches the clarity principle. Partners traditionally receive an agreed share of the profit pool. In return, they are expected to do a range of things that may have little direct connection with either the size of the profit pool or their share of it. This can create significant tensions within the practice and may make it hard to easily address performance problems at partner level.

Clarifying Roles

In my view, the first key step in addressing this problem is to make a clear distinction between the partner's equity and work roles.

Equity partners in the firm should receive a return on the capital invested in the practice, while their work roles should be remunerated with payments directly related to those roles and associated contribution to the practice. These payments should then be counted as a cost from a management accounting perspective, creating a notional profit directly related to equity.

Once this separation principle has been established, the definition of roles and the remuneration to be attached to those roles can then be dealt with using conventional job analysis and remuneration principles.

Impact of Clarification

This simple approach to role clarification offers a number of very real performance gains.

To begin with, it makes partners more directly accountable for their own work performance. In turn, this makes it easier to assess partner contribution and vary remuneration accordingly.

It also makes it easier to admit staff or non-equity partners in that they can be paid using the same principles as applied to equity partners for their work.

Finally, it can increase flexibility for equity partners in managing their own affairs. Take leave as an example. An equity partner on leave would still be entitled to a return on his/her investment. Any other payments can then be handled on the same basis as applying to other staff.

Regards