Do Professional Services Firms Have Legacy Costs?

When we talk about legacy costs, we usually think about aging capital-intensive industries. Car manufacturers have legacy platforms, facilities, processes, or healthcare costs. Airlines have legacy contracts, aging aircraft, or route networks. We assume that professional services firms can’t have legacy costs: there’s no fixed capital, and the people involved are smart, dynamic thinkers. But as I look around, nearly every firm I’ve worked with, from scrappy start-ups to large multi-nationals, has some sort of legacy cost that’s holding them back from growing and scaling to their full potential. Based on my experience, you can break these costs down into three areas:

Legacy People

One of the most common legacy costs is a mismatch between your senior people and the work the firm needs to do going forward. Usually, that means highly paid senior partners or experts who are expensive to employ but don’t generate or manage a commensurate amount of business. They can creep into a firm in a number of ways:

  • The jack-of-all-trades you needed when the firm was smaller doesn’t scale to the needs of a larger firm
  • You acquired another firm and it wasn’t the marriage-made-in-heaven everyone thought it would be at the start
  • Successful doers are promoted into management roles they aren’t equipped to succeed at, but they can’t step back without losing face

Rather than handle these issues when they crop up, many firms turn to solutions that feel easier in the short term, but are detrimental in the long term. They create well compensated senior level “advisory” positions without real responsibility, like a Vice President of Special Projects. Some just let people linger in a business-less purgatory hoping they’ll get frustrated and leave. Or firms create shadow-management positions, like heads of non-existent departments or non-executive chairmen, that have high visibility but no real authority in the firm.

Each non-solution skirts the real issue with non-performing partners: what the firm needs and what they deliver are no longer in line. Either the expectations have changed, their performance changed, or the two were never aligned in the first place. Like any other performance issue, you need to do what you can through development, calibration, or a transition, to get things realigned. But unlike similar performance management conversations, you have the added complication that you’re dealing with senior practitioners who may have significant firm equity, deep and portable client relationships, and potential adverse employment claims.

These are all reasons to handle the situation delicately and respectfully rather than delaying it until things become worse. If the business has changed, have an honest conversation about it. If performance has changed, have an honest conversation about it. Like any other people management issue, the longer you let it fester, the harder it is to handle.  An airplane doesn’t have a shared history with you in the firm, or a family to provide for, and it definitely can’t sue you. A senior partner is a different case entirely.

The most important thing to keep in mind is that just because someone is no longer a fit for your firm, doesn’t mean they no longer have value to add somewhere else.  I’ve seen a number of senior professionals stagnate after long careers only to find new success and energy when they finally transition someplace new.  Leaving them to linger in continuous uncertainty is unfair, and for many it’s a relief just to find out where they stand and have the opportunity to find a job they can be excited about again.

Legacy Systems

Even though your people are the core of the business, they work together through a variety of systems that either enable or limit how effective they are at doing the work. If you’re not continuously improving your systems – and despite their best efforts, most firms aren’t – they have a tendency to calcify, and over time work against your ability to scale.   A recurring frustration among KPMG associates in the early 2000s was the firm’s slow transition to eAudits, and Richard and Daniel Susskind recount that many magic circle law firms struggled in the late-90’s to transition client conversations from phone calls to e-mail.

Like other legacy costs, legacy systems in professional services are often the result of short term expediency turning into a long-term liability. A tool built in a spreadsheet just works, so there’s no need to automate it, even though you never get the scale out of isolated data. Back office functions that could easily be automated are left in place because the current manual solution is good-enough and the people have been there a long time. For non-technology systems, offerings grow stale if they fail to incorporate the latest thinking, best practices, tools, or techniques. Most often, the real issue is management inattention: the people using the system and the people who make decisions about it are different people.

As the firm grows, these systems can be hard to fix. There aren’t regular processes in place for incorporating feedback and communicating changes, so any shift becomes an expensive undertaking involving process redesign, technical development, and retraining, and large-scale communication programs. But the longer legacy systems remain in place, the longer you accrue costs associated with them: technical debt, lost client opportunities, and employee dissatisfaction.

Legacy Clients

Large anchor clients can be the lifeblood of your firm, helping you scale up practices you otherwise couldn’t afford, manage cash-flow, and try new things. But there are also risks associated with having a single client provide so much of your work for so long. Your largest clients can demand customizations and extra work that make you uniquely suited to servicing their needs in a way that doesn’t scale to your other projects. Over time, you can get so comfortable with your day-to-day contacts that you lose your senior level relationships. They can hold you hostage, demanding actions or changes that make sense in the short term but undermine your business, and your business together, in the long term.

You don’t want to lose your legacy clients, but you do need to think of ways to jump-start the relationship by bringing in new talent, elevating the conversation, or adding in new ideas gratis to keep the relationship fresh. You also need to make sure that you design enough flexibility into the work you do for them that you can scale it to other parts of the firm. Most importantly, you need to be ready for the possibility that the client will go away by continuing to grow your average client size, especially if you’re at risk of losing the relationships due to exogenous factors like client executive turnover or a matter resolving itself.

What can you do about it?

If you look at all of these scenarios, they have three things in common:

  1. Complicated people-issues with emotions, relationships, and feelings of obligation
  2. Short term decisions made for the sake of expediency that turn into long term liabilities
  3. Large recurring expenses that will require even larger one-time investments to fix them

So what can firms do?

Ultimately, each of these scenarios require you to pull off the band-aid: have the hard conversation, make the big investment, or shake up the stagnant relationship. That doesn’t mean acting impulsively. It means to start the methodical process of resolving your legacy problems by communicating with key stakeholders, planning your interventions, and mitigating your risks.

Legacy costs will always be a part of traditional industries: the nature of the business dictates that they have to make large capital expenditures or enter into long-term contracts. But for professional services firms, that’s not the case. Firms can inoculate themselves against legacy costs by putting in place processes for continuous feedback, continuous improvement, and continuous reinvention.