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Professional Services Firms and Information Technology: Ongoing Search for Sustained Competitive Advantage THOMAS H. DOORLEY, ALISON GREGG AND CHRISTOPHER GAGNON The "professional services" comprise a diverse group of industries including law, management consulting, investment banking, accounting, architecture, and engineering. The professional services merit special attention because they rep- resent the confluence of two of the most important trends in our economy: (1) growth of the services sector; and (2) emergence of the "knowledge worker." These fimns, as a rule, are high value-added enterprises that create economic value through the development of the skills of their employees leveraged through technical and organizational systems (Maister, 1982~. Yet, despite their importance, professional services firms (PSFs) have been among the least analyzed and understood in American industry. In fact, there are significant strategic and operational differences between PSFs and traditional product firms. For example, much of the traditional wisdom regarding strategy and competitive advantage was developed for goods firms and does not seem to hold for PSFs. This paper will explore the nature of PSFs, especially in relation to the ap- plication of information technology for competitive advantage. We will 1. present some background about PSFs; 2. discuss relevant phenomena we have measured and observed; 3. explain these phenomena in relation to the way PSFs and technology interact; 4. estimate the more important ways in which technology will affect the professional services; and 5. suggest mechanisms managers and technologists should use in view of these changes. 175
176 THOMAS H. DOORLEY, ALISOJ!: GREGG, AND CHRISTOPHER GAGNON TABLE 1 Professional Services Components of GNP for year 1986 (in billions) GNP Business services Legal services Misc. professional services Total Total as a % of GNP $4,201.3 $ 162.8 $ 52.3 $ 70.1 $ 285.2 6.8% SOURCE: U.S. Bureau of Economic Analysis. PROFESSIONAL SERVICES EXPANDING IMPORTANCE The problems of measurement and the lack of reliable statistics in the services sector are well documented (Aanestad, 19871. However, we estimate that the professional services constitute 6.8 percent of U.S. GNP (Table 14. These industries have been exhibiting solid growth for the last 25 years. As shown in Table 2, rather than moderating, this growth has accelerated of late. But, the statistics are not all so positive. The importing of business services into the United States has grown faster than our exports of services to the point that our trade surplus in business services is almost nonexistent (McMeans, 19861. INDUSTRY STRUCTURE ECONOMIES OF SCOPE Increasingly, a fundamental strategic theme is being sounded within PSFs, that is, the attempt to capture competitive advantage by broadening the scope of the enterprises's activities, using the leverage of economies of scope. Examples of this include the expansion of the Big Eight accounting firms into management consulting, the emergence of "one-stop" shopping for TABLE 2 Growth in Professional Services (percent) 1960- 1984 1980- 1984 Business services 6.8 7.2 Legal services 4.6 6.4 Securities and brokerage 4.6 16.9 SOURCE: Department of Commerce cited in New York Times 10/2 as "Services: Where the Growth Is."
PROFESSIONAL SERVICES FIRMS AND INFORMATION TECHNOLOGY 177 financial or marketing services, and the breadth of services offered by ar- chitectural and engineering design firms. Table 3 shows the percentage of 1986 revenues Big Eight accounting firms had in different businesses. Although the accounting and auditing function represents the initial and traditional business of these firms, the growth of the other services will cause most of them to have more than half of their revenues outside the original services within 5 years. The top engineering design firms also had their billings distributed across a variety of businesses (Figure 11. Many of these engineering firms believe that expansion into other areas will be facilitated by current experience. For example, CH2M Hill, a consulting engineering firm specializing in environ- mental design believes its experience in water and wastewater design gives the firm an advantage while competing for hazardous waste jobs. The dilemma facing the firms will be the trade-off between concentration on a single line of business that may be subject to greater volatility versus the complexity of multiple activities whose diversity may dampen individual business fluctuations. Information technology's role in providing timely, accurate operating data increases as businesses move away from a single core activity. INDUSTRY STRUCTURE ECONOMIES OF SCALE? In product-based businesses there is a demonstrable link between profit- ability and relative scale as was postulated by Bruce Henderson (1979) and others. Braxton Associates has observed this relationship in many of our clients' businesses as the following example from the passive component industry illustrates (Figure 21. Based on this and similar analyses, managers TABLE 3 Diversification of the Big Eight Company Mgmt. Consulting Audit (Jo) (%) Tax (%)U.S. Revenues Arthur Andersen 47 32 21$1350 Touche Ross 55 22 23565 Peat Marwick Main 56 18 261080 Ernst & Whinney 58 20 22900 Arthur Young 59 15 26615 Coopers & Lybrand 61 18 21855 Price Waterhouse 61 17 22740 Deloitte Haskins & Sells 66 12 22595 SOURCE: Public Accounting Report, 3115/87. American Institute of Certified Public Ac- countants Annual Report, 1987.
178 30 25 cn my) 20 . _ ._ m o 15 a) Cry a) CL 10 5 O THOMAS H. DOORLEY, ALISON GREGG, AND CHRISTOPHER GAGNON WATER HAZARDOUS SEWERAGE MANU- OTHER TRANS- POWER GENERAL SUPPLY WASTE FACTURER PORTATION BUILDING Project Categories FIGURE 1 TOP 500 design firms: billings distribution. cn 50 a) - a' ~ 30 co ~ ~ O 10 ._ _ 0 0 {L ~ x a, 10 ~ c' a) a.) cry -30 Competitor D ~ TIC '~Competitor B ~ Competitor A ~ (~nmn~titor F 0 10 20 30 40 50 Market Share (%) FIGURE 2 Profitability-scale relationship: passive electronic components. SOURCE: Braxton Associates.
PROFESSIONAL SERVICES FIRMS AND INFORMATION TECHNOLOGY TABLE 4 Concentration in Professional Services (Percentage of Total U.S. Industry Revenues) Top 4 firms Top 8 firms Management consulting 3.4 5.2 Advertising 2.0 3.7 Legal services 1.0 1.8 Executive placement 6.5 SOURCE: Braxton Associates. 179 in product-based fimns formulate and implement strategies with the economies of scale relationship as a core, underlying concept. Managers in many PSFs develop large-scale oriented strategies as if similar laws of economic behavior apply to them as well However, to date, absolute size or market share seem to have less inherent value in professional services industries than in others. For example, if large scale were of value, industry concentration rates would be high. But, concentration in these industries tends to be very low (Table 41; further, there seems to be little or no discernible trend toward increased concentration. Also, if economies of scale applied for PSFs a profitability-scale rela- tionship similar to Figure 1 should apply. Figures 3 and 4 indicate the opposite; there is no systematic relationship between the size of advertising and law firms and their profitability. Our research in other professional services sectors reinforces this conclusion. Scale may not translate into other sources of competitive advantage either. In ct .~ o x a) 1 2 ~n ~ 10 . _ ._ m - 8 O ~6 O 4 $ a) 2 t , ] .'' O- . _ ~ ~ <25 25-50 50-100 100-200 200-500 500+ Annual Billings in Millions of Dollars FIGURE 3 Profitability-scale relationship: U. S . advertising agencies. SOURCE: Braxton Associates.
180 THOMAS H. DOORLEY, ALISOIV GREGG, AND CHRISTOPHER GAGNON cool - cn O 700- to To - <* 600- - - ~500- CO CL ~400- a) ~300 o CL 200 - - O . . Hi. ·. ~ ·f :. . . . · - · ~ . . . . . ~ ~ ~ ~ I ~ ~ ~ ~ ~ ~ ~ 1 ~ ~ ~ ~ ~ 0 75 100 170 200 230 260 290 320 350 380 410 600 700 Size of Firm (Number of lawyers) FIGURE 4 Profitability-scale relationship: U.S. law fimns. The most profitable law firms in 1986 were ranked 11th and 29th in revenues. For example, there do not appear to be marketing advantages of scale in the accounting and auditing business. A two-part study in Accounting Review concluded that there was no significant shift of revenue from smaller firms to the Big Eight during the period 1964-1980 (Danos and Eichenseher, 19861. That is, there was no increase in industry concentration and, therefore, no change in competitive status related to scale. Increasingly though, managers of PSFs appear to be adopting strategies based on a belief in a direct profitability-scale relationship. For example, Saatchi & Saatchi is pursuing an acquisition-based strategy to build the world's largest advertising and marketing services firm. Whether this will yield profitability benefits remains to be seen. History is clearly against the success of the strategy on two counts: limited (if any) positive scale effects and the difficulty all organizations face attempting to capture synergy across multiple activities. THE GROWTH-PROFITABILITY FUNDAMENTAL Scale then has not generated profitability to the same degree in PSFs as in goods firms. However, if the value of scale is diminished, the role of growth is heightened. As Figures 5 and 6 demonstrate, scale and profitability for insurance brokers do not correlate, but growth and profitability do. Figure 7 portrays similar data for a peer group of large Touche Ross offices. Again, the direct relationship between growth and profitability is depicted. Other sectors follow a similar trend.
PROFESSIONAL SERVICES FIRMS AND INFORMATION TECHNOLOGY 181 30] cn a) a) cr i_ O 20 - o a) a' a) In > ~ ct 10 .- ~ ~ Go ° a) CL x ' c<:' a) ~ _' O~ o . Poe Hilb, Rogal & Hamilton _,A ~ Gallagher Corroon & Black Frank B. Hall Marsh & McLennan Alexander 8` Alexander 500 1000 1500 2000 Revenues 1986 FIGURE 5 Size versus profitability: insurance brokers. SOURCE: Company annual reports. In a) a) 301 Ed 20 o c: o) CL ~ ~ of: 10 .- (D O ~ CL ~ '. x hi. a) CLAD O . Marsh & McLennan Hilb, Rogal & Hamilton Alexander & Alexander / Frank B. Hall ~ ~ Gallagher Poe ~ Corroon & Black 10 20 30 Percent Revenue Growth (1 984 -1 986) FIGURE 6 Growth versus profitability: insurance brokers. SOURCE: Company an- nual reports.
182 THOMAS H. DOO~EY, ALISON GREGG, kD CHRISTOPHER GAGNON From these observations flows the following broad strategic direction for PSF managers: · Growth and profitability are not independent, they are linked. To complete the thought, our experience demonstrates two additional points: · Growth must be market driven; and · Organic (internally generated) growth has a greater expected value than growth through acquisition. Thus, the debate about growth within a PSF should focus on "how to" achieve it (e.g., which markets? who will lead the charge?) not on "whether" to grow. Whether to grow is a given. THE DIFFICULTY OF SUSTAINED GROWTH THE "HOT-HAND" EFFECT Another fundamental phenomenon operates that sheds light on the nature of professional services, namely, the "hot-hand" effect. The hot-hand effect concerns the relative difficulty PSFs have in sustaining higher than average growth rates in their industry. 0 , ~ Q ~ ·_ Co she O ~ ~ Go -a) O . a) a) ~ a) . > a) Q 0 10 20 Percent Net Services Growth (1982-1987) FIGURE 7 Touche Ross Offices: large office peer group. Actual dollar amounts are not given because that is proprietary information.
PROFESSIONAL SERVICES FIRS kD INFORMATION TECHNOLOGY 183 The hot-hand effect can be seen using the "sector graph," a display Braxton developed to capture competitive dynamics within a market segment. Firms that are sustaining higher than average growth move upward and to the left on the graph. For example, Figure 8 shows the U.S. advertising industry for the period 1979-1981. Growth for the industry as a whole was approximately 5 percent for the period but some firms, such as Doyle Dane and HBM Creamer had much higher growth. Note that in the next 3 years (Figure 9), these two firms had much lower than average growth rates while other players, such as Ted Bates and REDO, grew much faster than the industry. Finally, in the period 1983-1985 two different companies (Ogilvy Group and Grey) had outstanding perfo~ance, while the previous period's highest performers drifted toward the pack (Figure 10~. Note that during this 7-year period no company was able to gain significantly in relative scale. In many professional services industries not only is it difficult to gain abnormal share, but it is equally difficult to differentiate services in the clients' mind. Figure 11 shows that clients perceive no significant difference in quality of services among the Big Eight accounting firms. Why is it that gaining advantage through scale or quality is so difficult for PSFs to achieve? One answer is that they are limited by their scarcest resource quality people. As a firm tries to translate any near-term advantage into high long-term growth, it must compete to hire and retain qualified professionals. Professionals enjoy more mobility today than ever before and feel less loyalty to their employers if offered more money, freedom, or responsibility elsewhere. This issue is becoming even more acute as the "baby bust" generation enters the work force. THE INDUSTRY IN TRANSITION One of the ways PSFs may overcome the hot-hand effect is through the strategic application of information technology to leverage their scarcest resource, the talent of the individuals who make up the firm. Well-applied information technology tends to increase the knowledge, skills, and value of individuals. This enhances the firm's ability to pay them more. Information technology holds the promise of making centralized information, both data and expertise, more widely available, aiding communication within a PSF, and most importantly, contributing to the development of human capital. But, technology as a route to securing a sustainable competitive advantage for a PSF is currently hypothetical. The facts of the recent past and the current setting do not yet support the hope. If an industry transition is under way, the competitor that makes a bold move and executes effectively can make an unprecedented gain. If no transition ensues, investment may be counterproductive.
184 THOMAS H. DOOREEY, ALISON GREGG, ID CHMSTOPHER GAGNON 20 - 15 - - o o- - ° 10 cry 5 - lo O 1985 Dollars 1 Billion US Billings, O Doyle Dane Bernbach Ogilvy Group Q O Needham Harper ~ BBDO O HBM Creamer __ ~ Young & ( Rubicam \ Wed Bates Grey J.W. Thompson 1 1 1 1 .1 X .07X .04X .02X .01 X I I I l r I r T 1 OX 7X 5X 3X 2X 1.5X 1 X .7X .4X .2X Relative Market Share (1981) Sector Growth FIGURE 8 U.S. advertising agencies: U.S. billings sector graph 1979-1981. SOURCE: Braxton Associates. The largest firm is compared with the second largest firm. All other firms are normalized on the largest firm. This display method emphasizes the difference between the largest and second largest firms. 20 15- - 10 5 - Ted Bates 31 % ~ 7) BBDO Grey Ogilvy Grouped Needham Harper Young & Rubicam \ a) O HBM Creamer J.W. Thompson A,) Doyle Dane Bernbach O- ~ 1 1 1 11 1 ' 10x 7x 5x 3x 2x 1.5x 1x .7x .4x 1 1 1 1 1 .2x .1 x .07x .04x .02x .01 x Sector Growth ORelative Market Share (1983) = 1 Billion US Billings, 1985 Dollars FIGURE 9 U.S. advertising agencies: U.S. billings sector graph 1981-1983. SOURCE: Braxton Associates. The largest firm is compared with the second largest firm. All other firms are normalized on the largest firm. The display method emphasizes the difference between the largest and second largest firms.
PROFESSIONAL SERVICES FINS kD INFORMATION TECHNOLOGY 185 20 - - - o 0- 15 ° 1 0- 5 - O - Young & Rubicam \~ 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0x 7x 5x 3x 2x 1.5x 1 x .7x .4x .2x .1 x .07x .04x .02x .01 x ~ Ogilvy Group t_: Grey BBD( )~ ( ) Needham Harper J.W. Thompson ( ) Doyle Dane Bernbach I) Ted Bates O HEM Creamer 0 = 1 Billion US Billings, 1985 Dollars Relative Market Share (1985) Sector Growth FIGURE 10 U.S. advertising agencies: U.S. billings sector graph 1983-1985. SOURCE: Braxton Associates. The largest firm is compared with the second largest firm. All other firms are normalized on the largest firm. The display method emphasizes the difference between the largest and second largest firms. no 9_ 8- 6 - 4 - 3 - 2 - _ ~ lo 1 2 .............................. .............................. .................... ,, ... .. ~-A ~ ...................... .. ................... . .......................... . ., ,, , ~ ........................... ' .......... , . . ..................... .. ........................... . .................... .. .. ~ ~. ! 7 8 1 Arthur Andersen 2 Price Waterhouse 3 Peat Marwick Main 4 Ernst & Whinney Firm 5 Coopers & Lybrand 6 DeloiKe Haskins & Sells 7 Arthur Young 8 Touche Ross FIGURE 11 Service to clients: Big Eight fimns. SOURCE: Survey of College Professors.
186 THOMAS H. DOORLEY, ALISON GREGG, AND CHRISTOPHER GAGNON INFORMATION TECHNOLOGY Increasingly, PSFs are aware of the potential to utilize computers in their business. For example, Peat Marwick Main & Co. believes that the future of its auditing and consulting practices is "inexorably tied to technology" (Spindler, 19861. Arthur Andersen has worked to develop an approach to "Information for Competitive Advantage" (Noling and Blumenthal, 19861. PSFs have bought and are buying computers, communications equipment, and software. So much so, that in 1983 the capital endowment per worker in the "information sector" surpassed that in the traditional industrial sector (Roach, 1988~. We estimate that accounting and legal firms spend an average of approximately 2 percent of billings (revenues) on information technology and software, not counting service fees or internal development expense. Computer utilization in many professional services industries ranks among the highest. A study of 100,000 households, aimed at determining the in- cidence of personal computers in the U.S. workplace, determined that nine of the top ten industries in terms of percentage of workers using a personal computer are services industries. At least five of these industries have com- ponents that are incorporated in our definition of professional services (Figure 121. 70 60 cn 50 ._ c,) 40 a) By 30 o a) 20 a) CL -. 10 o DATA INSURANCE ACCOUNTING COMMUNITY MILITARY BANKING ENG./AR. SECURITIES EDUCATION LAW Type of Business FIGURE 12 PC use by industry. SOURCE: Future Views, 10/28/1986.
PROFESSIONAL SERVICES FIRMS A!ID INFORMATION TECHNOLOGY 187 100 In a) 80 o Be 60 ._ In In .~40 o. O)On C.)~V a) 2-3 4-7 8-12 13-25 26-101 >102 AVER. Number of Employees per Firm FIGURE 13 Consulting engineers: use of computers by size of firm. SOURCE: Computers and the Design Professions, American Consulting Engineers Council, 1985. Traditionally an industry with high utilization of technology, consulting engineering firms, reflect this high incidence of computer use. In the most recent survey on computer use in consulting engineering firms the American Consulting Engineers Council found that more than 80 percent of all con- sulting engineering firms are computer users. All firms with more than 150 employees were computer users, whereas the average size of noncomputer users was just 7 employees. Figure 13 shows the distribution of computer users by firm size. These data suggest that technology may be scale related, that is, the larger firms can afford to invest in software and hardware. If this is the case, scale economies in PSFs may be possible. If the greater ability and propensity to invest in technology can be converted into strong, sustained competitive performance few., higher growth, better profitability), scale effects would ~ ~ . _ _ be evident, a transition from b 'no-scare to n~gn-sca~e would oe under way. The top three computer applications are not engineering task specific, but rather are applied to common, shared activities, that is, basic business ap- plications of accounting, management of information, and project manage- ment (Table 51. Pure engineering applications followed, ranked consistently with the most frequently offered services in the industry.
188 THOMAS H. DOORLEY, ALISON GREGG, kD CHRISTOPHER GAGNON TABLE 5 Computer Applications: Consulting Engineering Industry Application Accounting Management information Project management S tructural/building Geometry/surveying Hydrology/hydraulics HVAC/energy Bridge & highway Mechanical/plumbing Electrical/electronics Environmental CADD graphics Other graphics Traffic/transit Geotechnical Use (multiple responses) 72% 69% 46% 40% 39% 37% 32% 26% 23% 21% 18% 18% 15% 11% 8% SOURCE: American Consulting Engineering Council, 1985. Several reasons explain the at first surprising result of nonengineering computer applications preceding engineering applications. The most obvious is that accounting, management of information, and project management are common activities shared by all engineering firms regardless of the type of services offered. Additionally, availability of software programs may also influence computer usage: 91 percent of the nonengineering software pro- grams listed in the survey were purchased, whereas 60 percent of the en- gineering programs were purchased, 26 percent custom written, and 13 percent time-shared. When asked about the ways they acquire engineering-oriented software, a majority of the consulting engineering firms responded that they used customer software, either written in-house (57 percent) or written by software consultants (36 percent). This implies that at the time of the survey, the commercially available software was inadequate to meet the industry's needs. One would expect this intensification of information technology to show some significant productivity results. Many of the early signs, however, are not encouraging. Stephen Roach, a senior economist at Morgan Stanley has concluded that there have been no significant gains in white collar produc- tivity since the 1960s. Measurements of output in the services sector are notoriously difficult to gather and usually fail to measure the quality, com- plexity, timing, and flexibility gains in services output. Still, it is not sur- prising that many professional services executives have "a growing dissatisfaction with high tech's productivity payoff" (Bower, 19861. Fur- thermore, it is difficult to find examples of PSFs who have used information
PROFESSIONAL SERVICES FIRMS AND INFORMATION TEClINOLOGY 189 technology to establish a long-term sustainable advantage over their com- petitors. Thus, the payoff from investment in information technology is not obvious. THE NATURE OF INFORMATION IN A PSF PSFs compete in three basic ways according to David Maister (Maister 1986) · Experience (or the "gray hairs". Firms that compete on the basis of experience sell the ability to perform certain kinds of work that has been performed before. · Expertise (or the "smartest kid on the blocky. Firms that compete on the basis of expertise hire a relatively small number of very bright profes- sionals with specific expertise that can be sold as customized work at high margins. These firms tend to do ad hoc or creative work, attacking unique problems with a process rather than a canned solution. · Execution (or the "cheapest- most efficient of a number of competent firms". These firms offer a number of standardized services that they can perform at the lowest unit cost. These companies function within strict guide- lines and well-defined bureaucracy. They tend to have many relatively junior staff performing "back-office" type work. Each of these three strategies holds different implications for the appli- cation of information technology. Figure 14 shows a simplified model of information flows within a PSF. A fimn has a body of knowledge (which INTERNAL SPECIAL STUDIES by, PERSONAL EXPERTISE ~ i/ EXTERNAL SOURCES | if, ~_:I'ROFESSIONALS ) KNOWLEDGE ~ \\\\\\\\ BASE J \\ Specific , ~Solutions FIGURE 14 Information flows in professional services firms. ~] CLIENTS |
190 THOMAS H. DOORLEY, ALISON GREGG, AND CHRISTOPHER GAG1YON can be either subject knowledge or process methodology) that it resells to clients through its professional staff. There are three key stages in this model. First, is the storage of the firm's knowledge base in some form, be it human, paper, or electronic so it is accessible by the members of the firm. Second, is the means of communicating that knowledge or expertise throughout the firm. Finally (this is where most information systems perform most poorly), there must be some feedback loop in which information from the clientVs), delivery nodes, or other sources can be incorporated into the knowledge base of the PSF for the future. Information flowing into a firm-wide knowledge base, then out to the staff (arrows in Figure 14) works inconsistently within most PSFs. The point where information technology can be used most effectively to leverage a firm's capabilities will be determined by which of the strategies described above it follows. All the technologies discussed below will be of at least some interest to most firms in the future. The productive application of information technology in each of the three types of strategies will vary by type of firm as follows: Experience. In an experience-based firm, two of the most critical success factors are (1) leveraging the knowledge of senior personnel, and (2) de- veloping the human capital at the junior and middle levels. Information technology allows firms not only to make information avail- able to client services staff but also to educate the firm's professionals about both hard data and the firm's methodology, assets, and culture. Shoshana Zuboff (1985) of the Harvard Business School calls this process "informat- ing" and describes the inculcation of the data base into organization structure. According to Zuboff, informated firms can and have "replicated" them- selves, allowing firms to expand their markets geographically. As this process takes place, firms can not only offer their services at lower costs but also free personnel to push their "state-of-the-art" by building on previous experiences. This development is a major contributor to the emer- gence of the multioffice law firm. Aided by internal and external data bases such as LEXIS, several firms with more than 500 lawyers have emerged (Glaberson, 1986) in the legal services sector. Many firms (e.g., Touche Ross among the Big Eight accountants) have successfully used a "Voice Box" concept where firm members can access the experience of members around the firm by entering their questions or problems over an electronic mail network. Expertise. In a creative, expertise-based firm, computers are best used to aid professionals with more routine work and free their time for work that cannot be automated. David Maister relates that his clients typically feel that 50 percent of what professionals do in a given work day could be performed by more junior associates. For example, a Texas architectural firm found that its architects were spending too much time estimating and quoting proj
PROFESSIONAL SERVICES FIRAlS AND INFORMATION TECHNOLOGY 191 ects. By automating this process, they estimated they were able to gain 10 times their investment and provide more accurate quotes (Wiseman, 19851. A Chicago law firm billed an extra $30,000/year per attorney by automatically tracking lawyers' phone time, much of which was going unbilled (Wiseman, 19851. Designers using CAD technology can now spend less time on drawing and modeling tasks, although the computer cannot substitute for the con- ceptual and creative ability of the designer. Similar benefits can be seen in investment banking where technology has made it possible for new financial instruments to be created, tested, and delivered to the market much more quickly than ever before. Execution. Execution-based firms must try to lower costs and reduce per- sonnel limitations by reselling rule-based skills. Many professional services are, in essence, rule based; new services developed at the expertise and experience levels can quickly be translated into standardized services. For example, a small accounting firm raised revenues 50 percent by offering on- line accounting services to small businesses. This increase required only three new staff members. Arthur Young has developed an expert system called ASQ that guides auditors through key decisions in the audit process based on partners' experiences. Arthur Young feels that in addition to low- ering costs the system improves quality and speeds turnaround. PSFs AND TECHNOLOGY THE DILEMMA Although these examples hint at substantial "potential" for information technology, at least three significant barriers exist that serve to retard infor- mation technology investment: (1) bias toward "personal tangible" invest- ment; (2) traditional focus on (near term) partner earnings; (3) inability of information technologists to solve problems quickly, effectively. Our experience at Braxton indicates that overhead investment in PSFs most often takes the form of personal tangibles, that is, individual purchases that have benefits that are direct, controllable, visible, and easily understood. For example, a PSF partner recognizes the need for telephones, typewriters, and individuals to operate them. The partner knows they perform a valued function. He or she can see it daily and, therefore, can support the reduction of direct compensation that results from increased overhead. PSFs are large purchasers of information technologies, but their purchases are usually personal tangibles, frequently taking the form of personal com- puters. For example, in 1987, accounting and law firms were projected to spend more than $500 million on computer hardware (Professional Publi- cations, Inc., 1986~. Although more than 90 percent of the firms surveyed are planning on buying personal computers, only 13 percent are going to buy minicomputers, and only 25 percent are planning on investing in network
192 THOMAS H. DOORLEY, ALISON GREGG, AND CHRISTOPHER GAGNON technologies, which require more planning and a longer time horizon to justify. The computer survey by the American Consulting Engineers Council, referred to earlier, likewise supports the concept of investment in personal tangibles. Seventy-seven percent of all computers used by consulting engi- neering firms are microcomputers, and frequently a firm owns computers from multiple manufacturers. The evidence from these three professional services industries indicates that the purchases of information technology are driven by individual needs and are not reflective of a coherent, unified technology strategy for the firms. Further, according to Maister, the partnership structure of many PSFs orients their financial goals toward net income per partner (Maister, 1984), increasing the short-term, personal tangible bias. A dollar invested in systems with possible long-range impact is a dollar out of the partners' pockets today. Long-range planning implies equity ownership. The partnership structure of many PSFs seems ill suited to properly encourage that kind of behavior. Some fight this malaise through carefully developed "corporate cultures" that motivate partners to take pride in and a long-term view of their firm. This partnership-induced bias helps us to understand the nature of the hot- hand effect. Because PSFs are poorly suited to making long-range technology plans, they have difficulty using technology to leverage competitive advan- tage and turn it into ongoing growth. Without technology, the limiting factor is the near-term personnel capacity of the firm. This hiring problem is ex- ~acerbated by the fact that many PSFs have difficulty forecasting their work loads and, therefore, future personnel requirements. To stimulate more innovative managerial thinking, it may be that some PSFs need to think more about adopting some of the characteristics of cor- porations as long-range decisions become more crucial to survival. The Cal- ifornia Society of Certified Public Accountants, recognizing this problem, recently installed a long-range planning system that will extend beyond changes in leadership. Those firms that have been able to follow a technology strategy have had senior partners with a vision. George Gordon, founder of Gordon & Glickson, has led his law firm to a profitable practice largely through his personal commitment to technology and innovation. Gordon & Glickson leverages its understanding of high technology to sell to clients whose businesses involve computers. There is a third barrier the information industry must overcome before information technology can truly become a weapon for competitive advantage in the professional services. The professional services are constantly changing as client needs become more sophisticated; the systems development process is currently too long to respond effectively to clients' needs. The system development process is typically a separate function that does not include
PROFESSIONAL SERVICES FIRMS AND INFORMATION TECHNOLOGY 193 the professionals who are delivering the service. The Arthur Young ASQ system, described above, required 2 years and 50,000 person-hours to de- velop (McKee, 19861. As one executive said: "We have a short window of opportunity. If it takes two-and-a-half years to develop a system, it's gone!" PSFs AND TECHNOLOGY THE PROMISE Clearly, the cultural barriers described above constrain PSFs from making significant information technology commitments. For the promise of infor- mation technology to be realized, it must overcome these barriers by deliv- ering on two fronts: (1) enhancing results, and (2) tailored technology that can allow a specific competitor to gain, then maintain an advantage. Although it may be a platitude to state that all services must enhance results (e.g., most consulting firms go to great lengths to promote how much value is added by their service to clients), information technology must have as its focus allowing the PSF to perform more effectively. Arthur Young's ASQ system is aimed appropriately at enabling the firm to deliver a better product more quickly and less expensively. If this and other programs can deliver observable results, the tendency to invest will increase. Hopefully, PSFs will perform postinvestment analyses to measure whether or not desired results were achieved in order to justify similar future activities. Finally, use of generic software (or other non-firm-specific technology) benefits multiple firms and multiple clients. As such, no individual firm obtains an advantage. Investments in such technology are defensive, that is, each firm must invest to keep pace, but no firm can differentiate itself. Information technology will assist PSFs through an industry transition phase primarily to the extent that firm's specific competitive barriers can be created. This is the enticing competitive promise that keeps PSFs at least dabbling, if not making enormous commitments. CONCLUDING NOTES Historically, PSFs have made investments in information technology hes- itantly and usually oriented toward an immediate return. Such an investment strategy was appropriate given the limited leverage such investments gen- erated. In the future, if the rules of the game change, for example, if scale has greater value than in the past, there will be substantially higher investment leverage. If so, and if information technologists can deliver firm-specific, responsive, timely solutions, information technology investments may both multiply and be able to deliver competitive advantage to those with a clear vision of how to use technology and a concomitant capacity to sacrifice current earnings for that vision.
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