04: Brains, Gray-Hair or Efficiency

In this episode, 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.

 

Time Stamps

 

[0:27] Introducing the inspiration for this episode, David Maister’s book, Managing the Professional Service Firm.

[0:49] Stating the three types of firms — brains firms, gray-hair firms and efficiency firms.

[1:09] Type 1: Brains Firms.

[1:11] Defining brains firms — typically composed of a handful of highly paid and deeply knowledgeable experts.

[1:29] The pricing structure of brains firms — hourly — and specific examples of brains 

firms — top-notch criminal attorneys, top-notch doctors, taxation experts and accountants who specialize in vintage cars.

[2:02] The organizational structure of brains firms — two to three partners and a few administrative staff such as paralegals or secretaries. 

[2:30] Type 2: Gray-Hair Firms.

[2:34] Examples of gray-hair firms — corporate law or family law firms. 

[2:45] The services that people expect from gray-hair firms — people who might not be cutting-edge but who know their stuff, provide comfort and will not screw up their client’s case.

[3:28] The structure of gray-hair firms — typically composed of three to four partners, senior employees and junior administrative staff.

[4:00] The pricing structure of gray-hair firms — the partners make money and take a cut on their junior or senior employees.

[4:20] Type 3: Efficiency Firms.

[4:22] Defining efficiency firms — a classic professional services firm with a pyramid structure.

[4:30] Describing the junior people at efficiency firms — auditors or analysts who are talented but not deeply knowledgeable and work long hours.

[5:04] Types of senior people at efficiency firms — audit seniors, managers, senior managers and partners.

[5:12] The path to partnership in an efficiency firm — nine to fifteen years and encouragement to leave if an employee does not make partnership.

[5:26] The pricing structure of an efficiency firm — the partners make the most money and leverage the cheaper labor of lower-level employees.

[6:20] Comparing the different types of firms in terms of profitability and how buyable they each are.

[6:33] Brains firms have the highest short-term profitability due to low overhead and strong expertise at the very beginning.

[7:00] Gray-hair firms have the second highest short-term profitability. They have more overhead than brains firms and require some grooming of senior employees.

[7:49] Efficiency firms have the lowest short-term profitability. They have high overhead and require lots of training of junior employees.

[9:26] Efficiency firms have the highest long-term profitability. The numerous junior employees sustain the firm and make money.

[10:00] Brains firms have the second highest long-term profitability. They are robust against recession because the demand for strong expertise remains. They also have low overhead costs.

[10:32] Gray-hair firms have the lowest long-term profitability. Their higher overhead costs, compared to brains firms, are not sufficiently balanced out by the benefits of having more employees.

[10:53] Efficiency firms are very buyable. The exit of partners does not impede profitability due to the pyramid structure consisting of many employees.

[11:32] Gray-hair firms are the second most buyable in that they do have assets to sell, provided their partners are all not too close to retirement.

[12:19] Brains firms are the least buyable because if the partners exit or retire, the firm does not have much to offer.

[13:05] Overview of the three types of firms in terms of profitability and how buyable they each are.

[14:13] Call-to-action for comments & questions.

 

Conclusion

Have you made similar observations to Steve about profitability and scalability when working at brains firms, gray-hair firms or efficiency firms? Which of these structures would you choose if starting your own professional service firm? We’d love to hear your comments and questions! Here are some resources that you might find helpful:

Traction Equity Website

Book a Free Consultation with Steve

Join a Webinar with Steve

Managing the Professional Service Firm by David Maister

https://StevePreda.com