Risk Management and Quality Assurance
Richard H. Thaler, The Winnerâ€™s Curse: Paradoxes and Anomalies of Economic Life
(Princeton, NJ: Princeton University Press, 1992).
R. Max Wideman, ed., Project and Program Risk Management: A Guide to Managing
Project Risks and Opportunities (Project Management Institute, 1998).
Christopher Marrison, The Fundamentals of Risk Measurement (New York: McGraw-
1. Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York:
John Wiley & Sons, 1996, ISBN 0471121045).
2. Obituary of Arthur Rudolph, New York Times (January 3, 1996).
3. J. Edward Russo and Paul J. H. Schoemaker, Winning Decisions: Getting It
Right the First Time (New York: Doubleday, 2002), p. 6.
4. See note 3, p. 3.
5. See note 3, p. 5.
6. Howard Kunreuther and Mark Pauly, â€śIgnoring Disaster: Donâ€™t Sweat the Big
Stuff,â€ť working paper collection from the Risk Management and Decision
Processes Center at the Wharton School of the University of Pennsylvania (Oc-
tober 11, 2001).
7. Howard Kunreuther, Nathan Novemsky, and Daniel Kahneman, â€śMaking Low
Probabilities Useful,â€ť working paper collection from the Risk Management and
Decision Processes Center at the Wharton School of the University of Pennsyl-
vania (December 2000).
8. Howard Kunreuther, â€ś Wharton on Making Decisions,â€ť Chapter 15, â€śProtective
Decisions: Fear or Prudence?â€ť (New York: John Wiley & Sons, 2001).
9. Richard Thaler, The Winnerâ€™s Curse: Paradoxes and Anomalies of Economic
Life, Chapter 5, pp. 50â€“ 62.
10. Christian Schade and Howard Kunreuther, â€ś Worry and Mental Accounting with
Protective Measures,â€ť working paper collection from the Risk Management and
Decision Processes Center at the Wharton School of the University of Pennsyl-
vania (February 20, 2001).
11. Tallis, F., G. C. L. Davey, and N. Capuzzo, â€śThe Phenomenology of Non-
Pathlogical Worry: A Preliminary Investigation,â€ť in Worrying: Perspectives on
Theory, Assessment and Treatment, ed. G. C. L. Davey and F. Tallis (New
York: John Wiley & Sons, 1994), p. 77.
12. See note 9, p. 6.
The Back Office:
Efficient Firm Operations
Finance, Accounting, and
JEFFERY B. NEMY
If you canâ€™t measure it, you canâ€™t manage it!
Financial management of a professional services firm requires a delicate bal-
ance between shareholdersâ€™ needs to control costs and grow the business prof-
itably and managementâ€™s responsibility to recruit, train, motivate, and retain
talented employees. This delicate balance is an art, not a science, and requires
a close interrelationship between finance and human resource (HR) functions.
This chapter focuses on both departments because a clear delineation be-
tween them is difficult to draw, especially in small- to mid-size firms.
It is often said that a professional services firmâ€™s most valuable assets walk
out the door every night. Managementâ€™s challenge is to properly motivate
those assets to return in the morning and deliver high-quality professional re-
sults. Importantly, such motivation encompasses far more than a healthy
salary, as training, evaluation, mentoring, and bonus programs contribute sig-
nificantly toward an employeeâ€™s attitude of the firm and his or her individual
performance. Successful firms balance these needs well, although seldom to
everyoneâ€™s satisfaction. In this chapter, we address key issues in managing
both human and financial resources.
Why This Topic Is Important
Millions of dollars pass through even the smallest professional services
firms. In many cases, the firm may act as an intermediary agent of the client,
338 The Back Office: Efficient Firm Operations
procuring goods and services on its behalf, and accordingly has a significant
fiduciary responsibility to safeguard its assets. Executive management of the
professional services firm must be reasonably well versed in essential financial
concepts and related HR issues to provide effective leadership.
Without such knowledge, it is relatively easy to make decisions that, even
though they appear to be the â€śright thing to do,â€ť may conf lict significantly
with fundamental financial planning and accounting principles and in the
most serious situations could be deemed illegal. Further, by understanding
where potential liabilities may be hidden, executives can take appropriate
action a priori to ensure that proper procedures are employed. Clearly, a
firm must also be well managed financially to exist as a going-concern. Fi-
nally, solid HR management is vital to a firmâ€™s ultimate success because it
has only the knowledge, skills, and abilities of its employees to sell.
Management of the professional services firm requires a unique focus on the
firmâ€™s most critical asset, its people. The interrelationship among HR, ac-
counting, and finance is so close that a clear delineation of responsibilities
often is difficult to find, particularly in smaller organizations. Smaller firms
will oftentimes aggregate the responsibilities of overhead departments such
as HR and finance together. Compensation management, payroll processing,
vacation tracking, management of legal issues, and timesheet management
are among the traditional HR areas that often may be managed to greater or
lesser extent by the finance department. Because of the critical integration
between these two functions in the professional services firm, financial man-
agers and HR managers often must be well versed in each other â€™s craft.
Typically, smaller professional services firms do not have the wherewithal
to recruit and retain seasoned HR professionals. Instead, mid-level financial
professionals with industry experience are routinely tapped for the senior fi-
nancial and HR leadership roles in small firms. These employees are often
well qualified to meet the needs of a small firm. But as the firm grows, the
need for specialized leadership becomes more critical. Systems, processes,
and procedures that work well on an informal basis in a small firm are quickly
rendered ineffective once the organization has more than a few dozen em-
ployees. Senior leadership of the firm must augment those resources them-
selves when the firm is small and then be prepared to recognize when it is
time to recruit professional HR talent to the team as the firm grows.
The Role of Human Resources in a Professional
The HR department plays a key role in every organization, although in a pro-
fessional services firm, effective execution of that role can be a major factor
Finance, Accounting, and Human Resources
in success. With nearly all the firmâ€™s current and future human assets as part
of their purview, HR professionals need to provide critical insights and
leverage to balance management and employee needs. As such, their role is
multifaceted and, in addition to their significant role as an advisor to senior
management, includes the following:
â€˘ Recruiter: The search for top talent is never ending. As such, an HR
manager â€™s role is to stay connected with key players in the industry and
constantly seek out the best and brightest. By maintaining relationships
with a pool of highly qualified candidates year-round, even when mar-
ket conditions are poor and layoffs are prevalent, successful firms can
improve their bench strength by hiring top talent at reasonable rates.
â€˘ Counselor and intermediary: From time to time, certain situations may
require some form of counseling to resolve. Whether it is simply the
employeeâ€™s need to discuss a minor issue with a neutral party or the
need to find an intermediary to resolve a major conf lict, the HR man-
ager must be prepared to manage and resolve such issues in a confiden-
tial and professional manner.
â€˘ Legal interface: Many of the issues facing HR managers often involve
significant legal questions relating to employment, discrimination, and
work rules among a myriad of other topics. Well-trained HR profession-
als know how to recognize these issues and subsequently seek advice
from qualified legal counsel. The ability to recognize and articulate
such issues, as well as effectively debate their resolution with counsel,
distinguishes the HR professional from the HR administrator. The HR
professional neednâ€™t be an attorney, but the need to be well aware of
legal issues is a must.
â€˘ Record keeper: Maintaining current, accurate, and complete personnel
records is a fundamental HR function. Ensuring that management
prepares timely performance reviews, documents performance and
personnel issues, as well as maintains all government-mandated forms
in an orderly manner, is the most basic, yet rarely well-executed, HR
â€˘ Enforcer: When it comes to resolution of the myriad issues facing man-
agement of a professional services firm, HR is often designated as the
â€śbad guyâ€ť to convey unwelcome news. HR professionals must convey a
sense of fairness yet remain firm in support of legal and managerial is-
sues. The ability to do so effectively is rare, but further distinguishes
valuable professionals from mere administrators.
â€˘ Cheerleader: Developing and administering programs to boost morale is
a key HR function. Ensuring that company events are well planned to
promote teamwork and consider the tastes and preferences of both the
majority and minority of the employee population is a key aspect of the
340 The Back Office: Efficient Firm Operations
As described earlier, the role of the HR team is broad and can be techni-
cal, particularly from an employment law standpoint. Small firms, in many
cases those with fewer than 100 employees, often cannot afford to invest in a
qualified HR management team. Many firms settle for less expensive HR
managers in the mistaken belief that such positions are merely the â€śperson-
nel departmentâ€ť that ensures all forms are filled out properly.
As outlined in earlier chapters, HR management is far more than form
management, and the failure to properly staff that function can result not
only in lawsuits but also in weak staff morale and employee performance.
Outsourcing of this function has grown popular in recent years and can pro-
vide smaller firms with access to highly qualified HR management at cost-
The Importance of Competent Legal Counsel
The HR function, by its very nature, involves a significant level of legal in-
terpretation. Although some rules and regulations are clear and can be exe-
cuted by trained administrators on a routine basis, many issues require legal
interpretation. The failure to identify such situations can lead to the imposi-
tion of significant fines, penalties, or judgments being levied against the
firm. HR professionals know how to identify such situations and will seek
competent legal counsel before taking action to resolve a situation. Some of
the more common issues for which legal counsel should be sought include:
â€˘ Terminating a single employee for performance or behavior issues
â€˘ Mass layoffs
â€˘ Independent contractor versus temporary employee status
â€˘ Immigration and related visas
â€˘ Sexual harassment
â€˘ Age discrimination
â€˘ Benefit eligibility
â€˘ Vacation pay compensation upon separation
â€˘ Performance evaluation form development
â€˘ Writing employee handbooks/manuals
In these instances, legal counsel normally is necessary to review specific
facts and circumstances of the matter at hand from which a legal opinion
can be formed. One of the best investments the professional services firm
executive can make is to ensure proper funding to secure highly qualified
legal counsel to augment internal resources. Encouraging HR professionals to
utilize these external resources can help the firm avoid costly litigation and,
most importantly, maintain a positive and productive work environment free
of the distractions caused by weak HR management.
Finance, Accounting, and Human Resources
To ensure compliance with all federal, state, and local laws as well as best
practices, many law firms that specialize in HR issues can conduct an audit
of the HR department for a relatively modest fee. Such audits typically in-
clude a random review of personnel and related files as well as a thorough re-
view of all policies and procedures. Completion of such an audit every five
years or so, with a follow-up review the subsequent year, will contribute sig-
nificantly toward full compliance with all relevant rules and regulations as
well as help to ensure a solid legal foundation in the event legal action is
taken against the firm. Chapter 19 covers this topic in more detail.
As the firm grows, management of the recruiting process matures as well. In
a small firm, recruiting typically occurs through word of mouth and net-
working. But as multiple positions become available, the HR team must use a
basic set of procedures to coordinate its efforts and maximize its effective-
ness. Typically, some of those procedures include:
â€˘ Open position tracking: Formalize the process by using an â€śopen posi-
tionâ€ť list to track the status of all open positions, including the date the
position was officially authorized and by whom, department, position
title, target compensation level, list of qualified candidates under con-
sideration, and the overall status of the search effort. This report should
be distributed to senior management weekly to keep them aware of the
status and ensure that all open positions have been properly authorized.
â€˘ Offers: Ensure all employment offers are made in writing. By authoriz-
ing only the HR department to make an offer to a candidate, the firm
can ensure consistency in the communications that are made to confirm
the offer of employment. Legal counsel should review and approve a
standard offer letter template for use by HR administrators. If circum-
stances require that an offer letter be tailored to the needs of a partic-
ular situation, legal counsel should be consulted to validate any
significant changes as the offer letter forms the foundation from which
future legal action may be taken.
â€˘ Negotiations: Bifurcate the employment negotiation process. Imple-
mentation of a policy that only an authorized HR department employee
may make an employment offer to a candidate will help the firm avoid
many mistakes that untrained line managers can make. By insisting that
only the HR department can negotiate an offer, management will have
a clear line to follow to determine responsibility in the event something
should go wrong. Further, by taking the line manager out of the negoti-
ations after he or she has decided to hire the individual, HR can exe-
cute its role as the intermediary and help ensure that any difficulties
experienced during the negotiations are not translated into ill will be-
tween the line manager and the new employee.
342 The Back Office: Efficient Firm Operations
â€˘ Temps and freelancers: Ensure that all employment procedures are
managed through HR, particularly including the utilization of tempo-
rary employees, freelancers, and independent contractors. When line
employees are allowed to retain the services of a freelancer, significant
liability can be at risk, including: