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business: sales, delivery, training, intellectual property, hiring, and support.
While this practice has entailed extra effort, the business improvement ben-
efits have paid a more than adequate return to the investment.
A crucial part of good decision making for professional services firms is
the pursuit decision for new business. Many successful service providers
have an aggressive, sales-oriented culture. While this is effective for driving
revenue, oftentimes the firm will overreach when selling the next deal and
wind up too far to the right-hand side of the risk continuum. A successful
senior executive from a professional services firm put it succinctly: “Good
business in. Good business out.”
This phenomenon has been dubbed “The Winner ™s Curse” and is a topic
of study by Richard Thaler, a prominent behavioral economics researcher at
the University of Chicago. In his book The Winner™s Curse: Paradoxes and
Anomalies of Economic Life, Thaler outlines the dilemma:

Suppose that each participant in the auction is willing to bid just a little bit less
than the amount he or she thinks the land is worth (leaving some room for prof-
its). Of course, no one knows exactly how much [the project] is worth: some bid-
ders will guess too high, others too low. Suppose, for the sake of argument, that
the bidders have accurate estimates on average. Then, who will be the person
who wins the auction? The winner will be the person who was the most opti-
mistic about the [value of the project], and that person may well have bid more
than the [project] was worth. This is the dreaded winner ™s curse. In an auction
with many bidders, the winning bidder is often a loser. A key factor in avoiding
the winner ™s curse is bidding more conservatively when there are more bidders.
While this may seem counter-intuitive, it is the rational thing to do.9

Finally, one of the most effective risk-mitigation approaches employed by
firms is simple, but rigorously enforced, policy and procedure. The larger the
firm, the more important it is to put risk mitigation on “auto-pilot” through
these methods. The importance (and positive effect) of this was recently
highlighted for us. A senior manager of a service company we are acquainted
with had his company acquired by a Fortune 50 entity. Immediately, all man-
ner of new policies was implemented, which was both startling and amazing
to a small company. Armed guards, sign-in protocols for guests, document
disposal guidelines, new systems security requirements, and other changes
both large and small were the order of the day.
While the majority of the changes made sense, others seemed to be over-
kill (e.g., the window blinds had to be closed in a certain way to avoid any
incidence of espionage by occupants of errant helicopters f lying near the
12th story of the building). The larger story, however, is that an enormous
company manages to avoid any new risks through the blanket application of
security protocols that had been designed over time and found to work. While
not all of them made perfect sense in their specific application, it was easier
328 Services Delivery: Taking Care of Business

to mandate them en masse and get back to work than sort through them indi-
vidually. Thus, a large company with billions of dollars can still manage to
control the day-to-day minutiae required for effective risk management.

Specific Actions to Reduce or Avoid Risks
There are a variety of specific actions that the professional services firm can
take to avoid some of the risks outlined previously in the chapter. While by
no means a comprehensive treatment, we have addressed a few.

INTERNAL RISK. The best prevention for internal risks is good hiring.
Motivated and honest professionals provide mitigation against both expected
and unexpected risks. Going beyond hiring practices, professional services
firms should ensure that proper firm governance codes are established and
followed, as well as codes of conduct and policies as outlined elsewhere in
this chapter. Finally, appropriate finance and accounting checks and bal-
ances should be implemented. These common accounting practices are well-
explored territory, with dozens of available books and guides available.

DELIVERY RISK. The best prevention for delivery risk is clear communi-
cation with the client. Eventually a project will suffer from scope creep, a
key staff member will leave, or some other issue will be encountered. Clear,
rapid, and open communication with the client that drives to solutions for
both parties is the best cure for unanticipated delivery problems.
Other delivery risk mitigation tools include contracts (also covered in
Chapter 19, “Legal Considerations,” in this book) as well as errors and omis-
sions (E&O) insurance (covered in Chapter 16, “Purchasing, procurement,
vendor and asset management”). In short, the contract terms should limit the
firm™s liability to a reasonable amount (fees received or no more than the limit
of the firm™s insurance coverage). The contracts should also specify methods
for managing disputes that fall short of litigation, such as arbitration.

CLIENT RISK. The best way to avoid the risks associated with clients is to
avoid clients of questionable financial standing. Because services are gener-
ally impossible to repossess in the event of bad debt, a few bad receivables
can erase firm profits. Firms can determine client viability through credit
checks and other research inquiries (Dun & Bradstreet Small Business Solu-
tions, smallbusiness.dnb.com, as well as other information on business re-
search web sites such as Hoovers, www.hoovers.com).
While work is underway with a client, senior firm managers should en-
sure that they keep up with the clients financial health, as well as internal
client politics, all of which can affect the firm contracts. Good managers
will develop multiple sources of information inside a client and have more
than one or two “sponsors” within a given client at different levels, providing
329
Risk Management and Quality Assurance

additional insulation from personnel changes or client political battles.
Going on-site with clients is one of the best ways to accomplish this, and
senior managers should visit with their major clients on-site not less than
once every two weeks.
Firms providing services to specific industry segments should also keep
up with overall industry trends to avoid any surprises and stay ahead of
surges or cutbacks in spending, changes in legislation, merger activity, or
other industry news.
The level of acceptable risk may also vary according to the current level of
the business climate. Firms with large demands on their time may be able to
take on fewer, less risky clients, whereas firms hungrier for business will take
on larger risks.

EXTERNAL RISK. External risks are the most difficult to estimate and
control. Most mitigation against these types of risk come from either avoid-
ance or the purchase of insurance. Firms must work diligently to ensure the
safety of their internal and professional staff. For companies engaged in work
in at-risk areas, firms such as Kroll Worldwide (www.krollworldwide.com)
provide related risk consulting services.
Finally, for hard-to-estimate external risks, professional services firms
should work with their insurance provider to determine proper policy types
and coverages.


Quality Assurance
Many of the key elements of quality control are the same as those for risk
management: leadership and expertise, quality professional staff, client-tested
methodology, process, standard operating procedures, and policies. A firm
that is good at risk management is generally good at quality assurance.
In the late 1980s and early 1990s, the “quality movement” produced end-
less literature on quality in manufacturing. Many of the same concepts from
quality manufacturing apply to the professional services firm as well. The re-
sources section of this chapter contains references to some of these. A per-
sonal favorite of ours is Quality Is Personal by Harry Roberts and Bernard
Sergesketter. This book takes the concepts from quality management and ap-
plies them to the individual in daily business activities. Training programs or
reading from this book will provide benefits to professional staff within the
firm.
Another important factor in ensuring quality delivery is culture. Firms that
celebrate whistle-blowing and institute a culture of senior management ap-
proachability will have a chance to solve problems before they become too dif-
ficult to handle. Unfortunately, the culture in many firms is one of “shoot the
messenger.” Senior management must work to instead glorify the messenger
330 Services Delivery: Taking Care of Business

who delivers the bad news of a struggling project or a dissatisfied client.
Client staff who work with a client on a daily basis are the best form of qual-
ity control. Aloof, unapproachable senior managers may not learn about prob-
lems until they have reached a true crisis point.
Finally, the senior managers in charge of the client relationship should es-
tablish the proper “early warning” mechanisms that will help identify deliv-
ery areas requiring adjustment or course corrections while underway. The
focus of these reports should be on providing an overview of status, while di-
recting the partners™ attention to critical areas. Typical reports of interest
include:

• Weekly status reports for each project or client
• Project scorecards (red /yellow/green status)
• Periodic project reviews
• Budget-consumed versus project-progress information

Senior managers should also solicit new ideas from professional and inter-
nal staff to help create new status reports that are helpful to both groups, us-
able for clients as well as not too onerous to prepare on a regular basis.


Crisis Management: The Best Laid Plans . . .
What actions should the professional services firm take if, in spite of all plan-
ning and risk management, a crisis occurs? The crisis response will take form
based on the nature of the crisis. A good text on this topic is Crisis Manage-
ment: Planning for the Inevitable; see the resources section of this chapter
for details. For major events, the firm should consider retaining a crisis man-
agement and /or public relations firm. Naturally, the right time to establish a
good relationship with firms of this type is prior to the crisis.
However, the day-to-day “crises” that professional service firms encounter
are related to the delivery of services and client satisfaction. Because client
delivery problems are inevitable for any firm, the best way that firm leader-
ship can distinguish itself is through excellence in remediation. How well
firms recognize, control and resolve their mistakes can make an enormous
difference in client satisfaction.
Each salvage operation will be different and, therefore, requires the in-
volvement and judgment of firm senior management. For example, our own
company had a client for whom we had completed a very successful engage-
ment. An unrelated, follow-on project had gone astray, with a brutal combi-
nation of scope creep, personnel problems, underbidding, and geography
conspiring to create poor performance. By moving rapidly to remediate the
situation and ultimately discounting the fees and recasting the project, we
331
Risk Management and Quality Assurance

were able to get our services back on track and find a way to please the
client. Over the long haul, we were able to continue working with the client,
thus keeping an important relationship and a good reference for our services.


Litigation
Firms should avoid lawsuits related to the delivery of their services when-
ever possible. The distraction, expense, reputation damage, and opportunity
costs emanating from even a successful lawsuit are immense. A failed lawsuit
can be devastating. Firms that achieve a reputation for suing their clients
will find their sales process an uphill battle.
“I learned long ago never to wrestle with a pig. You get dirty, and besides,
the pig likes it,” an unknown author wrote. Occasionally, a client will take an
unreasonable position on an issue and will be intractable during remediation
efforts. Even when the end client is on the wrong side of the issue, the firm
can wind up a loser from the energy, effort, and attention required to resolve
the issue. Internally, we often call this “pig wrestling” and attempt to avoid it
if possible. There are a variety of other ways to resolve disputes with clients,
from appeasement to arbitration. A good cost-benefit analysis will usually
point the way to the most appropriate approach for resolution.


Responsibility for Risk Management and
Quality Assurance in the Organization
Ultimately, responsibility for quality assurance and risk management falls on
the shoulders of the senior managers of the firm. These are the individuals
with the experience, background, and judgment to determine the best course
of action in most cases. However, the information most needed to make the
right decisions, as well as new ideas, can come from the professional and in-
ternal staff. Firms with effective risk management and quality assurance
programs establish a culture that holds the entire team responsible for ensur-
ing quality delivery and mitigating risks. Success depends on the involve-
ment of all”the risks and trouble that assail the firm daily are too numerous
and varied to be mitigated by anything less than total involvement.
Some firms may choose to elect or appoint an officer in charge of these
areas. The research on decision making shows that certain personality types
may be more effective than others in this role. In a 2001 paper titled “ Worry
and Mental Accounting with Protective Measures,” Schade and Kunreuther10
hypothesize that “a greater tendency to worry would intuitively be expected
to lead to a higher level of [willingness to pay] for any protection.” In fact,
their research demonstrated that the reverse may be true”that worriers
may make more cost-effective decisions than nonworriers. The researchers
332 Services Delivery: Taking Care of Business

contrast anxiety (“an emotion”) with worry (“a cognitive phenomenon”).
Worry leads to thinking, analysis, data gathering, and effective decision
framing. Prior research by Tallis, Davey, and Capuzzo11 found that worrying:

• Acts as a stimulant
• Clarifies thoughts and concentration
• Gives the opportunity to analyze situations and work out the pros and
cons
• Adds to the problems and, as such, leads to exploration of different pos-
sibilities

The research concludes that “low-worriers are likely not to care much
about the risk, and hence may not calculate values of objects, losses and
prices for protection.”12 The implications of this for firms attempting to im-
prove decision making, quality assurance, and risk management are clear:
Contrary to intuition, an effective worrier, not prone to anxiety”the emo-
tional component of worry”may be their best asset.

RESOURCES
Norman Augustine et. al., Harvard Business Review on Crisis Management [HBR-
Crisis Management] (Boston: Harvard Business School Press, 2000).
Thomas L. Barton, William G. Shenkir, and Paul L. Walker, Making Enterprise Risk
Management Pay Off: How Leading Companies Implement Risk Management
Max H. Bazerman, Judgement in Managerial Decision Making (New York: John
Wiley & Sons, 1994).
Steven Fink, Crisis Management: Planning for the Inevitable (Backinprint.com,
2001).
Matthew J., Hassett and Donald Stewart, Probability for Risk Management (ACTEX
Publications, 1999).
Paul R. Kleindorfer and Howard Kunreuther, co-chairs. The Risk Management and
Decision Processes Center at the Wharton School of the University of Pennsyl-
vania, Available from http://opim.wharton.upenn.edu /risk.
James Lam, Enterprise Risk Management: From Incentives to Controls (Hoboken
NJ: John Wiley & Sons, 2003).
Peter G. Neumann, moderator and chair, Risks Forum newsgroup, sponsored by the
ACM Committee on Computers and Public Policy. Available from http://www
.csl.sri.com/∼risko/risks.txt.
Harry V. Roberts and Bernard F. Sergesketter, Quality Is Personal (New York: Free
Press, 1993).
J. Edward Russo and Paul J. H. Schoemaker, Decision Traps (New York: Fireside
Books, 1989).
J. Edward Russo, Paul J. H. Schoemaker, and Margo Hittleman, Winning Decisions:
Getting It Right the First Time (New York: Currency, 2001).

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