Analysis Group’s CEO on Managing with Soft Metrics

Ken Richardson My father is an economist at Yale, which I attended as an undergraduate. I was in the throes of adolescent rebellion, so I wanted nothing to do with economics—I didn’t take a single course in the subject. After graduation I went off to Harvard Law School, and then I practiced law for five years. The first sign that I was capitulating to my family genes came when I brought home the person I eventually married: He’s the son of Paul Samuelson, the Nobel Prize–winning economist. Then, tired of practicing law, I went to MIT to study management, a program that included courses in economics. By the time I finished, I had two babies and I wanted to work part-time. Economic consulting can be undertaken as project work, and it seemed like something I could do on a tailored schedule. But employers didn’t necessarily think so back in the 1980s. I went to a lot of interviews where I was told that I must be a wonderful mother—and I never got a callback. Eventually a small consulting firm hired me. I’d just drifted into this line of work—I had no grand plan—but I loved it. Economic consulting is complicated problem solving, and my background in law was helpful. I think of it like opera: Everybody has to come together and sing his or her part. The firm I was with was financially shaky, so in 1992 I began talking with Analysis Group. I really liked the founders. I had another offer from a larger firm, but this felt like the right place. It was one of those moments when you have to close your eyes and jump. The firm grew quickly, and I was good at the work. In 1998 I became a co-CEO, and in 2004 I became the president and CEO. As I thought about how I wanted to lead the partnership, I reflected on the way leaders had managed at my former employer. That firm closely tracked and measured the profitability of each office and each practice area. Most other firms in our industry do the same thing. It seems sensible, but at my old firm it created a lot of internal competition and divisiveness. Also, the compensation model was formula-based and data-driven. For partners, compensation was largely determined by who was selling new business, sort of like a commission system. Analysis Group uses a much different model: We determine partners’ compensation without relying on formulas. We don’t obsess over false precision about who sold what business. Pay isn’t strictly a function of billable hours. We rely on extensive, informed discussion of the many types of contributions each person makes to the firm to decide what seems fair. It’s more than a little ironic that a bunch of economists—in a profession that prizes data and equations—have chosen to rely on a nonformulaic process to determine compensation. And our model definitely doesn’t appeal to everyone. But I’m convinced that it’s one of the reasons our culture is so strong and that it has helped to create a more valuable firm over the long term. One Firm When I arrived, Analysis Group had three offices and approximately 60 employees. About half the work was litigation support—providing expert advice to lawyers in court cases. The other half was management consulting. During my early years here the economic consulting industry was going through change. A couple of companies were large, but most were very small niche firms—an economics professor might start one with a couple of grad students. As computing power increased, firms began to do more-advanced data analysis and modeling. Our firm’s focus on expert litigation work helped us grow: Litigation is an adversarial business, so if one side gets access to some new tool, the other side has to have it too. The bar gets raised, and neither side can afford to be unequal to the other. That created more demand for our expertise. We don’t obsess over false precision about who sold what business. Today three-quarters of our business is applied economics, finance, and statistics in litigation cases. The other quarter is working with global health care companies. We do analysis of health economic outcomes and epidemiology work. We have about 45 partners and 700 employees. The thing I love about this work is that the problems are really interesting. For example, we have been involved in the smartphone patent disputes, which encompass complex questions of value. Some of our work is related to issues of antitrust or securities and finance; some touches on public policy issues. Although we have 11 offices and 19 practice areas, we don’t track their profitability individually. At my prior firm, where everyone obsessed over unit profitability, we had one office that was so busy that employees were working around the clock, while in another they had very little to do. In that situation the logical solution would have been for the busy office to ask the slack office to pitch in and help. But the focus on office metrics put them in competition with each other. We avoid that by looking at Analysis Group as one firm. That creates affiliation and cohesion. It keeps the partners working together. Contribution-Based Pay At firms that use formulas to determine compensation, as most of our competitors do, people may begin to focus on the specific behaviors that drive their pay. I remember that one partner who had joined us from another economics consulting firm told me that at his old job, at any hour of the day, he could tell you precisely what he’d earned year-to-date, because it was based on how much business he’d sold and how many hours he’d billed. The comp system was literally that mechanical. I think that model has a number of problems. Pay formulas can have a garbage in–garbage out element. They can have false precision. For one thing, in a professional services firm it’s not always clear who deserves credit for a specific action. A lot of selling takes place in a team environment. When you’re working to sign a new client, the best way to create value may be to call on a partner with pertinent expertise, even if that person isn’t the one who received the initial call. How to Write a Self-Evaluation No one likes the annual review process. But particularly in a system that lacks precise metrics for measuring performance—or at a company like Analysis Group, where leaders have decided to measure employees more holistically—self-appraisals are an important input. They allow employees to remind their bosses of accomplishments, put successes (and missteps) into context, and articulate goals for the coming year. But doing them well can be tricky. How many people are truly objective about their own performance? And how can you find the right balance between self-promotion and self-criticism? Here are some tips: Know How Your Boss Will Use It Will the self-appraisal play a key role in your review, or is it just an HR-mandated formality? Will your manager use it to make decisions about promotions and bonuses? Will it be shared with anyone else? The answers to these questions will inform what and how you write. Some lazy bosses cut and paste self-evaluations into official reviews. If that sounds like your manager, write your appraisal in a way that makes it easy for him to do this. Emphasize Your Accomplishments Don’t be arrogant, but don’t downplay your successes either. “If you’ve had a great year, you should talk explicitly about your accomplishments,” says Timothy Butler, the director of career development programs at Harvard Business School. “Be very clear about your contributions.” Acknowledge Mistakes—Carefully Dick Grote, the author of How to Be Good at Performance Appraisals, urges employees to be careful when mentioning mistakes. Don’t give your boss “the noose with which to hang you,” he says. Other experts say you should mention shortcomings in passing—but be sure to put a good spin on them. “You don’t want to say, ‘Here’s where I really fall down,’” Butler says. “Instead, say, ‘Here’s an area I want to work on. This is what I’ve learned.’” Keep the Focus On You It can be tempting to criticize others, particularly if they’re hindering your progress, but remember that this is about you, not them. If you have issues with a coworker, talk about it with your manager—but don’t put it in writing. Ask for What You Need Smart employees use self-appraisals to lobby for development opportunities. Be specific. Explain the aspects of your job that most excite you and suggest ways you can become more involved in those things. But remember to ensure that your requests reflect what your business unit needs as well. Source Adapted from “How to Write the Dreaded Self-Appraisal,” by Amy Gallo, first published on HBR.org. Systems that focus on who sells what business have a tendency to over-reward people who brought in a big piece of business years ago, because those people continue to get a stream of business from that client. And a strict system of sales credit inhibits people from handing accounts off to younger partners. Focusing too much on billable hours can be a mistake too: The quality of work isn’t always a direct function of how long you spend on it. Formula-based, data-driven pay systems also fail to incentivize people to engage in softer activities, such as mentoring and recruiting, which of course generate revenue in the longer run. A key component of our approach is to ask everyone to write a self-evaluation that reflects on what he or she accomplished that year. Partners include not only what business they sold, but also whom they hired, whom they mentored, and a number of other things. We think not only about each person’s contribution for that year, but also about what he or she is doing to help build the firm for the future. It’s a time-consuming process: We have many meetings from October through March to discuss each person’s contributions and identify developmental objectives for the coming year. Are we paying every person precisely the right amount? That’s an unanswerable question, I think. But our people believe that over the long term, they will be better off here than elsewhere. And if they don’t believe in the way we do things, they don’t stay. This system isn’t for everyone. When I interview job candidates, people are often surprised by the description of our compensation system. “It seems totally opaque,” they say. But we believe that Analysis Group will continue to do better if we broaden the metrics beyond the traditional; that approach allocates money in ways that could make the pie bigger for everyone. From time to time there have been disconnects between our articulation of individuals’ performance and their corresponding pay. This tends to occur when we are not being honest and direct with people about their performance. On some occasions partners have left the firm over these disagreements, but more often additional discussion gets us all to a place of comfortable agreement. Earlier in my career, I tended to sugarcoat things and sidestep direct conversations about areas for improvement. I wasn’t alone in that—the firm’s culture operated that way. We thought we were being nice. Over time we realized that it’s more respectful to tell people directly when there’s a problem, give them a chance to address it, and reward them when they do. Staying Private We’ve made one other big decision that indirectly affects our system of compensation: the decision not to go public. Since the late 1990s several large consulting firms have done IPOs, as have nearly all the Wall Street investment banking partnerships. In such situations, going public is largely a wealth transfer to the people currently leading the firm. Plus you wind up with people who aren’t involved in the firm who have a stake in its financial performance. Retaining control has helped us run Analysis Group as we choose. For instance, we’ve never done a layoff, but I doubt we would have been able to avoid one in 2010 if we’d gone public. And I believe that if we had gone public, many senior people would have left—that’s what typically happens when professional services firms do an IPO. Formula-based pay systems fail to incentivize mentoring and recruiting. I think the fact that we decided against going public helps people view me as a different kind of leader. When I make a decision, they can trust that it’s not just about me. It’s a lot easier to run a firm in the way I do when it’s obvious to the people you’re leading that you made a big decision that went against your personal financial interests. You have to have people’s trust to operate this way, and forgoing an IPO has helped enhance that trust. There’s no question that people who are in a partnership lead differently than people who are in a typical corporation. Everybody has a vote—I can’t make things happen on my own. In truth, we tend to agree about most things, and the votes often don’t matter. But getting to agreement can take a lot of discussion. We once had a partner join us from another firm whose reaction after the first partners’ meeting was “I can’t believe this—all you do is talk.” I keep hearing and reading that younger workers are becoming less interested in money and more interested in having work that they find meaningful. I agree with that. It’s easy to get hung up on money, but you can lose sight of its limitations as a measuring stick. People rely on it too much to keep score, and that’s unfortunate. In the end, I have learned that managing people in the real world can be very different from what we were taught in business school. For example, saying “You can’t manage what you don’t measure” ignores how much you end up changing people’s behavior when you measure it too closely. When the problems are interesting and the work is meaningful, that can be so much more rewarding.

Analysis Group’s CEO on Managing with Soft Metrics

Summary.

Partner Center