One on One with Ed Hess, Part Two

In the last edition of Consulting's One-on-One , we discussed why "Grow or Die" is bad advice for clients. This week, we continue the conversation with Ed Hess, a former Arthur Andersen strategy consultant and current professor at the University of Virginia's Darden Graduate School of Business, by turning the lens on consulting firms.

Consulting: Turning the table to our own companies, "grow or die" is just as prevalent across consulting firms. Without growth, there's no need to make new hires. Without new hires, there's no pressure to force promotions up the pyramid. How do we overcome this?

Hess: Professional service firms are in a very difficult situation. The bottom line is that if you don't have growth, you're not making more partners. And this cuts to most firms' underlying business model—the very basis on which the business was built [i.e., to continually add partners that will eventually buy out your shares]. The business model of adding new partners every year was easy to rationalize when you were growing revenue and were growing profit consistently. In today's economy, where most firms aren't growing—or, at least, not by very much—the model has to change. You either stop or significantly slow promotions, or ask the existing partners to give up a part of their stake in the firm in hopes that by adding new partners it will grow the size of the pie. To answer that question, partners have to really go back and revisit questions like, "to what purpose does this business exist?" and "are we doing this for more than just money?" Too often I see companies feeling forced to grow at any cost. They deal with the problem by buying business through significant discounted rates. And I have to wonder once a firm sends that signal to clients, if the business will ever return to historic margins.