https://youtu.be/E-CTfefAIqM
Steve Preda discusses three types of professional service firms in terms of their organizational structures, pricing structures, and overhead. He then describes how these factors interact to produce varying degrees of profitability and scalability.
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Brains, Gray Hairs and Efficiency One
Today I'd like to talk about a concept that I picked up from David Meister who wrote the seminal Managing the Professional Services Firm, actually Managing the Professional Service Firm, many years ago and he introduced this concept to me that keeps my brain spinning and since which in which he speaks about different types of professional services firms. He says that generally they fall into one of three types. There are firms that he refers to as the brains firms, there are gray hair firms, and there are the efficiency firms. So what does it look like and what differentiates these different firms?
So the brain firms are the ones that have a handful of highly paid experts. These are really cutting edge people with cutting edge knowledge of their business, and they essentially selling themselves. They're selling their knowledge, they're selling their consulting, and they charge by the hour. Typically, these people will have premium prices. So think about maybe a criminal attorney who is top-notch at saving mafiosi, or think about a doctor who is at the top of their profession, or think about maybe an accountant who is specialized in vintage cars or something that is really unique, maybe venture capital, something that is unique and they have a special knowledge of, or maybe taxation, maybe it's about offshore taxation, whatever it is. So these are the brain firms.
Now a brain firm, what it looks like, typical brain firms maybe have two or three partners, maybe a little bit more, and then just a couple of secretaries, or maybe a paralegal, just to serve and do some research for them, but essentially they come to the office, they sell their hours, and they go home, and they make a very high margin on their services because the overhead is very light. So that's the brains firm. The second type of firm is what Maister calls the gray hairs firm. So think here about maybe a family law firm or maybe a corporate run of the mill corporate law firm that serves small to medium sized businesses and these people would come to the law firm and what they expect?
They don't expect cutting edge advice. What they want is someone who knows their stuff, who's not going to screw up the case, who will give them a pat on the back, basically make them comfortable and reassure them that they are in good hands, everything's going to be okay and they're not going to lose their livelihood, they're not going to have a bad divorce that's going to be hunted down by the IRS. So that's the service that they're looking for. They want the gray-haired professional with lots of experience, who will personally hold their hand and make sure that they are okay.
In professional services, there are brain firms with cutting-edge expertise, gray hair firms for seasoned assurance, and efficiency firms for streamlined success.Share on X
Now, what does a firm like this look like? It could be basically, it's top-heavy in terms of senior people, whether they are partners or just paid employees. So in a typical firm, you would have maybe a few partners, maybe three or four partners, and then you have some senior employees who are not partners because they're not good at finding their own clients, but they are great at delivering the service. And then maybe you have some junior staff who will, you know, again, paralegals who will do some digging for them.
But essentially, it's either the partners are making their own money and a little bit of a cut on the junior people or they are making their own money and they make a cut on the senior people who are not partners because they cannot kill their own beast. And that's it basically.