The Generative Cycle: Linking Knowledge and Relationships

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“The essence of strategy is the way a company defines its business and links together the only resources that really matter in today’s economy: knowledge and relationships or an organization’s competencies and customers.”

R. Normann and R. Ramirez1

Let us assume that mastering the capabilities to learn and to collaborate — to manage knowledge and relationships — is the foundation for competitive success in the future. Where should we turn for guidance in developing these skills? Which are the benchmarks, the best-practice leaders in the “knowledge” business, the firms whose source of competitive advantage resides in their capacity to tap the collective intelligence of members and to work together to create value for customers?

Those firms, we argue here, are professional service firms (PSFs); they are lawyers, accountants, doctors, consultants, and investment bankers. The best of them have been working for decades, honing exactly the skills that large, mainstream business organizations are increasingly eager to add to their repertoire. While these high-performing PSFs may not represent today’s business, they do represent tomorrow’s. They represent the kinds of “inverted organizations” that have captured managers’ interest.2 With their flat structures, service-oriented workforce, and participative decision processes, PSFs can provide a model toward which larger, more hierarchical organizations can turn for guidance as they become leaner, quicker, and more flexible. PSFs represent a pure form of “knowledge-based” business when many leading business theorists are arguing that the management of collective knowledge and the ability to work together to translate that knowledge into customer value are the critical competencies for the future.

We recently visited three leading professional service firms, each privately held partnerships recognized as outstanding performers in investment banking, law, and medicine, respectively.3 With a cross-section of partners, we discussed each firm’s approach to sustaining competitive advantage in an increasingly turbulent marketplace. We left these conversations believing that the organizations had mastered the capabilities for collaboration and learning that created value for the firms beyond the value of each individual’s skills. Those capabilities would allow them to sustain their success despite the significant changes in each field and provide a needed prototype for all organizations struggling to enhance and utilize their knowledge to broaden and deepen their customer relationships. From our conversations, we framed a set of propositions about the similar ways in which all three firms achieved those capabilities, by creating a “generative cycle” of mutually reinforcing, self-sustaining employee and client development.

This generative cycle succeeds despite the other characteristics that have made PSFs among the most difficult firms to manage — contentiousness and self-interest, fiefdoms, insensitivity to clients, exploitation of staff professionals, and slow, inefficient decision making. How could the firms we studied bypass these obstacles to create new models of management for all organizations? Our thesis is that the capabilities that the generative cycle of reinforcing behaviors creates allowed them to minimize and overcome the dysfunctional behaviors often accompanying diffused, democratized decision making. These behaviors include the self-interest that sometimes dominates both firmwide and client-specific interests and consensus-based processes that can hinder action. The elements of the generative cycle that overcome these obstacles are specific capabilities in the development of individual professionals and clients that fuse the professionals’ interests with the firm’s interests.

The Generative Cycle

Learning and collaboration enable the continuous development of specific business-related capabilities. As a result, they are central to capability building and thus are extremely valuable in a time of change when continuous adaptation is necessary to sustain success. Hence, there is significant interest in organizational learning in writings by both practitioners and academics.4 Nowhere is the potential strategic value of learning more evident than in professional services. Yet individual learning is merely a precondition for the kind of organizational learning that the partners in the PSFs we studied saw as the source of their competitive advantage. The capability for collaboration across boundaries, whether functional, geographic, or line of business, allows the firms to find broader solutions for today’s client problems. Next, a capacity for collaborative learning unleashes the creativity involved in joint exploration of solutions that transcend technical boundaries and define tomorrow’s possibilities.5 Even the ability to collaborate to achieve single-loop learning of an incremental nature is valuable; transformed by leveraging diverse perspectives into double-loop learning that reexamines fundamental assumptions, it can add tremendous value, especially in changing environments.6

Our thesis is that the outstanding PSFs across a variety of industries mutually reinforce the processes of employee and market development. Processes for recruiting, developing, and retaining professional staff develop a capability for collaborative learning, which, in turn, produces valued outcomes for clients, which further support professional development. Taken alone, none of the elements of the cycle are remarkable; in conjunction, however, they produce extraordinary results (see Figure 1).

The advice to hire the best people, train them well, retain them, and get them to look for new opportunities and treat clients well is hardly revolutionary. But, explored together within a strategic context, the processes of individual professional development and business development reinforce each other to produce significant strategic value. The key elements of the model are (1) the process through which, and the context within which, a firm enhances and extends individual expertise through collaboration, and (2) the process through which a firm leverages individual learning to create a capacity for collaborative learning. Together these translate into new organizational opportunities.

Select the Best

The recruiting processes at the three PSFs were distinguished by the clear, specific criteria they used to identify candidates that they considered the “best.” Despite the pressure, due to their growth, to hire many people at the same time, one partner spoke of the importance of hiring candidates carefully:

“The quality of the person hired is the single most important thing in my mind. Again, I go back to the business principles — putting the client’s interest first, operating as a team, making sure that you subordinate your own interests to the firm’s.”

All three firms looked for analytic talent to do the technical work, human qualities to do the relationship work, and entrepreneurial instincts to do the organization-building work. They sought “multilingual” individuals capable of managing both content and process.7 They deemed all three criteria essential. One investment banker commented: “There are people who will be great investment bankers, but not here, because they are by nature hierarchical or political.”

Analytic talent was not hard to find and identify among the many bright prospects seeking positions at the firms. The qualities for the relationship work — a combination of interpersonal skills and personal qualities of integrity and respect — were essential to developing what one partner called “team consciousness.” They were often more difficult to detect. For example, the partners at the medical firm, in looking for this quality, asked support staff who answered prospective physicians’ phone calls to comment on the respect with which they were treated by the candidates. The firms thought entrepreneurial instincts were manifested in an inquisitive, energetic mind that saw and recognized opportunity, skills likely to translate that opportunity into new business and the motivation to do so. One investment banker commented:

“We care deeply about our people, and we try to motivate and reward them, but I think that this is one of the toughest places in the world to work. The sense of self-expectation is colossal. So the first attribute of the firm’s success is that we have a group of people who we know have mutually accepted an environment in which they ask a huge amount of both themselves and each other.”

There was also a high degree of consistency between the qualities the firms looked for when promoting people to partner and those they looked for in new hires, although the emphasis gradually moved toward the entrepreneurial and relationship work as they expected the technical skills had become a “given.” The firms expected partners, in particular, to move from merely working with others to energizing others by example and interactions. A law partner asked us, “Isn’t one of the great tests whether or not the people that you care most about in the organization will be motivated or demotivated by seeing an individual made partner?”

Another important criterion for partnership selection was a capacity to continue to grow and learn. An investment banking partner stated:

“One of my critical criteria is not just how they represent the firm and whether their make-up is similar to the culture of the firm; I try to measure how much they are going to grow as partners. The success of a partner is not in being made partner; it’s the contribution to the firm after being made partner.”

Thus the selection process began with clear criteria that focused on qualities designed to make collaboration work in the long term: capable, trustworthy colleagues, with high potential for personal growth, who were oriented toward working together and committed to thinking, at an organizationwide level, about the firm’s business.

Develop Individual Competencies over Time

A commitment to, and a willingness to invest in, developing each professional throughout his or her career was a core value of each firm. One founding partner in the law firm remarked:

“I’ve always viewed the objective of the firm as identifying what is the highest and best use of the people that you have. We need to think about how we support each other, how we build something that is greater than the sum of the pieces. One thing that we’ve had as a guiding principle is to bet on young people, have them build their practices here, and help them to build them.”

This willingness to invest was, in turn, based on beliefs about the reciprocal commitment of the individual to the firm and the benefits to the firm as a result. Two investment banking partners echoed similar views:

“People really do try to invest in each other, because there’s a significant understanding here that your success is very much a function of the entire firm. Anything that you can do to help other people help the firm is going to help you.”

“In the training, development, and selection process for partners, there’s a supposition that your partner is as talented, as able, as caring, and as committed as you are. That sets things on a very even plane, in terms of cooperating, interacting, and cross-selling, which is very crucial.”

Three particular aspects of the professional development processes at the PSFs stood out: (1) an apprenticeship approach that relied heavily on senior partners as models with a willingness to invest time to work closely with younger staff, (2) a belief that learning does not stop with promotion to partnership, and (3) continuous feedback.

Senior partners’ willingness to personally invest in the growth of new hires was always present. One investment banker remarked:

“It has to be constant talking about this, constantly going from abstractions down to day-to-day examples so people can see how the core principles apply. In terms of things like integrity or conflict avoidance, managers have to give constant seminars on day-to-day work. Not in a classroom setting, but in brainstorming with their younger associates on how a particular situation was handled. And they gradually start to absorb those values.”

Moreover, professional development at the PSFs did not end when a person became partner. The responsibility to maintain value remains throughout a career. An investment banker commented:

“You cannot create an environment in which someone can sit and use up space, if you will, and not really add significant value. Senior management’s willingness to retire partners who are not contributing at the level they once did is a very important ingredient in adding to the enthusiasm and incentive of the younger people.”

At all three firms, feedback was important to learning. Performance feedback was frequent and thorough. “Everyone here is evaluated by people senior to them, junior to them, and their peers,” one investment banking partner explained, “and partners have the same kind of evaluation process.” The medical firm asked a random sample of each physician’s patients to complete a follow-up questionnaire on the quality of care that they had received. A senior physician described its purpose: “It doesn’t go into your file or into your compensation; it’s just a tool for learning, for asking ‘How am I doing as a provider of caring service?’”

Throughout development, firm members believed they were both learners and teachers: according to one law partner, top performers and role models were “elevated to a platform, not a pedestal,” where others could join because everyone was expected to help elevate each other’s performance. The commitment that developed during apprenticeship became a strong factor in the firms’ ability to retain high performers. A senior investment banking partner described the relationship between the development experiences of professionals and the ability to retain them:

“People have to feel that they are being assessed fairly and given thoughtful feedback, and that the people who are responsible for their careers are genuinely helping them develop their potential.”

Retain Top Performers

An obvious observation that we might make is the deep sense of engagement that each individual had with the firm. This engagement was financial but also intellectual and emotional. Partners whom we spoke with had passionate commitment both to the firm and to each other. A founding partner in the law firm captured this pervasive theme:

“The way an institution becomes excellent is if the partners like being partners. If it’s just the career path they chose or they feel protected by a strong institution and have a good income, that’s not only bad for them — it’s terrible for the institution.”

Loyalty developed from the firms’ developmental focus but was also due to a sense of stewardship — a belief in and commitment to something that each partner saw as meaningful beyond his or her own interests — that encompassed clients, colleagues, and the firm itself. A retired investment banking partner likened it to preserving Buckingham Palace for future generations:

“It wasn’t only our firm. The Queen can’t sell Buckingham Palace; it’s got to be there for the next ruler. We were residents for awhile in Buckingham Palace and then we left. We’ve always had that attitude toward building, growing, and protecting the firm.”

The sense of stewardship both built on and provided shared beliefs. One physician recalled his initial interview at the medical center, almost twenty years earlier:

“I remember distinctly a three-hour conversation that I had with an oncologist who’d been president of the group for years. He said all the things that I already valued. He said we want to contribute to the community. We aren’t just here to see patients and send bills and make the most money that we can make.”

Partners’ basic beliefs of putting clients first and treating colleagues with respect were perhaps the most repeated themes that we heard during our visits. These values created a sense of unity and coherence that simplified the complexities inherent in working within the firms’ often complicated organizational structures. An investment banker noted:

“There’s somebody running every product, every region, and every industry. There’s a lot of confusion about who’s really the boss. But that’s not important. What’s important is the client’s needs and how can we deliver.”

Participation in decision making on governance issues was also critical to maintaining partners’ commitment. Although all the firms were noted for the speed with which they mobilized in response to client problems, the partners had extraordinary patience when making internal decisions of strategic importance. The director of the medical center explained:

“Most of our decision making is consensus and not voting. That doesn’t mean that everybody agrees with everything, but it means there is sufficient understanding and dialogue so people see the broader picture. So we don’t vote very often. Consensus building is effective because when the decision’s been made, the leader’s back is turned, and people can behave as they wish, that’s when it counts. And that’s when consensus and commitment are critical.”

At each firm, respect for others’ opinions was key. An investment banker remarked:

“It’s very, very important that people here respect each other’s opinion and consider it, and that they work toward consensus and things don’t get polarized. Because it’s a consensus structure, it can fail if emotions get high and people take extreme positions and won’t abide by consensus.”

And a lawyer commented:

“At this firm, the minority is strongly respected. Even when a majority of the executive committee feels strongly about a subject, if there’s a minority position that’s not irrational and has a strong base of intellectual support, that’s usually the opinion that sways, even at the risk of losing the competitive advantage of moving very quickly.”

Partners frequently referred to their concern about the inability to act quickly, but they saw it as a necessary trade-off to protect dialogue. An investment banker said:

“In a partnership, you need the goodwill of the other partners to make the right kinds of decisions. At times, that’s a disadvantage because frequently we can’t react to things quite as quickly as other firms that rely on one or two people to make an absolute decision. If you build consensus the right way, you’re potentially stronger, and it affects the way that the whole place operates.”

The quality of collaboration resulting from the consensus process paid dividends, as the complexity of products expanded. The managing partner of the investment bank explained:

“A large proportion of our products and services requires more teamwork than we could have imagined five, ten, or fifteen years ago. Our business is much more global, and different geographic units have to come together. If every time you deliver a product to people, you have turf warfare, sharp elbows, and transfer-pricing debates, you will be much slower, your reaction time will be much slower than competitors’, and you’re on the slippery slope to failure.”

Reward systems, which partners saw as equitable and supportive of collaboration, were also key to the high levels of engagement and retention of top performers:

“Everything from an accounting standpoint would be double or triple counted, so that all people would get full credit. That keeps people from arguing about whether they contributed more than someone else. It doesn’t serve any customer’s best interest to sit around haggling about how a dollar gets sliced up around the firm.”

Finally, we were struck by the obvious pleasure that the professionals found in the work itself. One lawyer explained, “Here, we like being lawyers. Most lawyers don’t, you know.” One surgeon was especially clear:

“I did eight operations today. Most of them were routine. A few were more interesting. But I enjoyed every one of them. Around here, we take that enjoyment of our work, just doing what we’re doing, and we carry it forward.”

For partners, shared values, sense of enjoyment, stewardship, equitable reward system, and inclusive decision processes together created significant barriers to exit. They produced an environment in which an individual could use the larger network to reach outcomes not possible when acting alone or within less connected, less capable firms. This, in turn, created marketplace outcomes that made the relationship financially rewarding and professionally satisfying for all.

Up to this point in the generative cycle, the groundwork is laid for the development of capabilities for collaboration and learning that most significantly distinguished the firms studied. The firms carefully developed within individual professionals the technical expertise, team consciousness, institutionwide focus, and deep sense of engagement with the firm and its clients through mentoring, a voice in governance, an equitable reward system, and shared values. The firms transformed the processes into a strategic capability in the next stage of the cycle when they brought them together to find and deliver better solutions to clients. These capabilities become strategically significant because they contribute superior value to clients, are not easily matched by rivals, and speed the firm’s ongoing adaptation to environmental change.8

Leverage Individual Expertise to Solve Complex Problems

The PSFs in our study, we hypothesize, distinguish themselves from their counterparts when they help clients deal with complex situations that cross the traditional boundaries of technical expertise. They, of course, provide the more standardized services as well, but none of the partners we spoke with felt that their firms enjoyed significantly superior advantages in these areas; it was in handling complexity that they felt they excelled. The law firm, for example, was known for integrating product liability issues with its bankruptcy practice; the physician practice, for integrating across all its medical specialties. In each case, their collaborative ability and connectedness, nurtured and espoused from the beginning, allow them to handle client (or patient) issues of immense complexity efficiently. The partners in these firms, while specialists, are also generalists who are keenly aware of fellow partners’ capabilities. We hypothesize that they are systems thinkers who have multifunctional skills. They have what Iansiti calls “T-shaped” skills: a rich depth of technical expertise in one area, coupled with an ability to link that work with other areas.9 As a result, their teams are smaller and team members are better at educating each other. A law partner offered an illustration:

“Last week we were contacted by an investor in the United Kingdom who wanted to acquire distress claims against an entity in both Europe and the United States. I worked with one partner to put together a quick outline of what issues the client would have to face. We identified issues running from pure litigation strategy, to bankruptcy considerations, to civil and criminal forfeiture law, tax law, and corporate securities. I consulted with a number of partners to reduce all that to four or five pages so that we could make a pitch to the client. We were successful in part because we brought all those resources together and focused them on one person, as opposed to sending six people to the U.K., which all our competitors did. That got us the business.”

Thus the central asset of the firms is not the individual technical expertise of their members; that is merely a precondition at these firms. Rather, the collective wisdom of their multidisciplinary teams sets them apart. Average performers rely on individual expertise to solve well-bounded technical problems. High performers excel at using the institutional knowledge of boundary-crossing teams to solve especially complex problems with the speed and efficiency that competitors find difficult to match. A competitor of the investment bank lamented:

“They are the team to beat. Why? They don’t slow themselves down with the clutter of bureaucracy. They overwhelm the problem. That could yield inefficiency, but it doesn’t. They are smart and quick and work seamlessly together.”

The capacity to work together rested on an individual willingness to learn and a belief that no one had all the answers. Many partners echoed this sentiment:

“One thing that I look at in a prospective partner is the ability to recognize when you don’t know the answer. None of us are expected to be experts across the board. Our practice is highly sophisticated, so that we have to bring to bear front-line and top-level expertise in different categories. I need to be smart enough to recognize that there’s an issue and go to my partners and my associates.”

“Work is so interdisciplinary that I just can’t imagine doing my work without substantial help from others.”

“Right at the top of the firm, everybody’s convinced that we are stronger as a collection of individuals than we are as individuals.”

Generate New Ideas

The ability to cross technical boundaries to find multidisciplinary solutions represents only the first part of collaboration’s value. When collaboration facilitates learning at organizational and individual levels, the solutions tend to be more innovative and more integrated. Many researchers have argued that shared problem solving leads to greater creativity. Because each individual’s abilities to generate alternatives and experiment with new solutions are limited by his or her particular routines and expertise, significant innovation is possible only by bringing together diverse experts who can educate each other. Otherwise, the ability to create new knowledge is limited by organizational routines, individual expertise, and biased interpretation of the potential value of new possibilities.10

The constant infusion of new talent into the firm and the resulting reexamination of existing processes enhances learning at both the individual and firm levels. One senior physician described how she learned from her medical students: “Medical students and residents ask questions that you haven’t thought about in a long time, and you have to give them good answers.”

Enjoyment in the work itself that we spoke of earlier also seemed to contribute to members’ willingness to engage in creative conversation. One lawyer remarked:

“The people working here find the work challenging and interesting. As a result, if you approach them with a novel or interesting way to handle a problem, they start off by being interested in it.”

The PSFs in our study were also careful to allocate time for innovation. Each resisted the obsession with maximizing “billable hours” that often characterized their competitors. A law partner commented:

“A key variable that has a lot to do with short-term economics is billable hours. Some firms give the message that more billable hours are the goal. This firm hasn’t done that. There’s support for people developing new practices even though it takes them away from doing the things that produce good short-term results. People have not been penalized for that.”

The president of the medical center expressed a similar view:

“We give people time to focus on their work. We know that the productivity gains of focusing on our work are far greater than if we had stayed on the bill-able-hours treadmill.”

Provide Superior Value to Clients

The capability for collaboration, extended to a capability for organizational learning, is nurtured through professional development processes and leveraged into value for clients. The breadth of expertise that the firms made seamlessly available to clients allowed them to develop broader, deeper relationships with them. A law firm partner commented:

“What we’re trying to do is sensitize our lawyers to have breadth, so that they are advisers, not narrow specialists. If you can do that, you create a different relationship with your client. Specialists are seen as specialists who can be replaced with other specialists. Advisers are trusted people. We want to become advisers to our clients.”

Such an approach requires that each partner be capable of representing the firm in all its diversity. One investment banker remarked:

“We’ve tried very hard to have a relationship approach and a transaction capability. So every client has someone, usually a group, but certainly one person who is charged with managing that relationship and knows everything about the client and its needs, objectives, and idiosyncrasies. That relationship manager or team is our first and foremost line of attack so the client never sees business units or P&Ls or departments or divisions. All the client sees is a team of experts, each of whom is trying to contribute a piece to the puzzle.”

Collaboration and learning occur in less successful PSFs but less effectively and efficiently and with less value. An investment banker said: “In this firm, it’s more difficult to try to establish or protect or defend or segregate turf than it is to forget about all those issues and just say, ‘Here’s the problem. What’s the right advice for the client?’”

Another partner expressed a similar view about the power of the firm’s client focus to cut through the complexity of its internal workings: “We run the business geographically, by industry and by product. We have a triple-layered matrix management system. Nobody really reports to anyone else in that context.”

The partners’ stories reflected their firms’ ability to keep their clients’ definition of value in mind. A physician described a collaborative effort, the goal of which was to “reduce the sleepless nights” experienced by a patient who discovers a breast lump:

“We formulated a team, including a surgeon, radiologists, and representatives of the adult primary care practice, family practice, and ob-gyn. We involved administration, nursing, and x-ray techs. By grabbing this process, we were better able to create the chain reaction that occurs when a woman has symptomatic breast problems. For patients who are experiencing undue stress, we’ve reduced a process that took weeks to a matter of hours.”

Attract and Retain the Best Clients

The generative cycle is complete when a firm’s ability to provide superior value results in an ability to attract the “best” clients. The best clients for a professional services firm, we suggest, are those with the most complex problems who are willing to invest in state-of-the-art solutions and, in so doing, push each professional to new levels of expertise. One law partner described the relationship between his clients’ issues and his professional development:

“My goal is to be recognized as someone at the top, at the cutting edge of the business reorganization and bankruptcy practice. This firm allows me to develop that. We have the freedom to take flexible and creative positions. We have clients who support us in doing that.”

Demanding customers in a competitive marketplace drive a firm toward more value-creating solutions, as Porter has demonstrated in his work on country-level competitiveness.11 Not surprisingly, each of the three firms operated in one of the most competitive areas for their respective industries — the investment bank and law firms were in New York City, the health care organization was in Minneapolis. In addition, because the number of competitors able to solve new, complex problems effectively and efficiently is more limited than the number offering standardized solutions, the risk of margin erosion is less. In much the same way as in the high-tech industry, a given firm can avoid commoditization of its products only if it can continually create enhanced solutions that deliver a better price/performance ratio to its clients.

A firm’s ability to enhance its capability to deliver these kinds of solutions depends on clients’ willingness to bring it problems for which either current solutions are inadequate or no solution exists. If a firm fails to attract and retain these types of clients, it cannot, in turn, provide the challenging problems that it needs to elevate its professionals’ development. A senior partner in the law firm explained:

“My firm’s clients tend to develop new kinds of problems that, if you’re intellectually interested, constantly reinvigorate the field. I stay active and energetic by the nature of my client’s problems.”

Replicating the Generative Cycle

The collaborative capacity for boundary crossing is more difficult for competitors to replicate than individually-based expertise and, hence, is considerably more valuable not only to customers but also to the firm itself in sustaining advantage. A firm must replicate the entire generative cycle, but it is not a cycle with easy entry. The best recruits will not join a firm that lacks outstanding professionals. Development processes based on mentoring cannot be grafted onto firms with uninterested partners. The most gifted professionals will always have many options to go elsewhere. The clients with the thorniest problems are loath to invest in professionals without a track record of tackling the toughest issues successfully.

Skepticism has traditionally surrounded the question of whether PSFs have any sustainable value.12 Talented people can always be wooed from one firm to another. However, the organizational capacities for collaboration and learning that leverage individual competence into institutional capability reside in the firm’s aspirations, values, and systems. They cannot be bought and are not easily copied, especially in light of the stereotypes of egotistical behavior in highly skilled professionals like physicians, lawyers, and investment bankers.

Managing Change in Professional Services

Another benefit of the generative cycle is the increasingly valuable, enhanced ability for successfully adapting to a changing marketplace. The pitfalls in attempting to induce change in professional firms are well known. These firms are Mintzberg’s “adhocracies,” which bring together individuals pursuing their own professional interests, whose allegiance to the firm is sublimated to their allegiance to their profession and own interests.13 The politics of their coalitions, their fragmented viewpoints, and the inability of their consensus-based decision-making processes to produce meaningful change with alacrity have been amply documented. Here, again, the capability for collaborative learning that we noted in the firms in our study benefits their management and their clients.

These firms, we hypothesize, are self-organizing to a greater extent than their counterparts. Their formal structure is not the key to their responsiveness; its major contribution is not to impede such responsiveness. The quality of the relationships across the formal structure allows for the continual reconfiguration of work groups, as demands necessitate. Quinn, Anderson, and Finkelstein call these “spider webs.”14 The information infrastructure plays an important role in identifying the appropriate web members. Because of their mind-sets and their T-shaped skills, individuals move in and out of these webs with an alacrity not found in their more narrowly focused competitors.

The same context and processes that sustain collaboration and learning about client issues also sustain it for internal management issues. The capacity for collaboration relies on mutual respect, openness, and trust; on an ability and desire to maintain an open dialogue; on shared goals and an interest in a common stewardship; and on systems that foster and reward teamwork. The capacity for learning relies on different contextual factors — a willingness to be self-critical, a belief that one doesn’t have all the answers, and a commitment to lifelong development. Taken together, these qualities create an institutional capacity for flexibility and responsiveness that greatly enhances the firms’ ability to have a sense of their future, to be patient in searching for consensus, and to reengineer themselves as necessary to adapt to changing circumstances.

Communities of Practice

A potentially useful metaphor for describing the larger supportive institutional context that facilitates and is enhanced by the generative cycle is a “community of practice.”15 Such communities are fundamentally and simultaneously concerned with producing both practical outcomes for customers and learning for members. The nature of learning, proponents of this view contend, requires participation in “doing,” shared perspectives about “doing,” and mutual development of both the individual’s and the collective’s capabilities in the process. It is in the social interaction of the community, not in the individual heads and hands of its producing members, that the community’s practice exists and evolves.

Thus a business organization as a community of practice is one held together by a shared concern for both the outcomes it achieves for customers and its members’ personal development and learning. In fact, it sees the two as inseparable in that increased capabilities at the organizational level flow from development at the individual level. The quality of the work a firm does is fundamental to what it stands for. That is, the work itself matters. Agreement on the “how” of process and the “why” of purpose are the foundation of shared meanings. Informed dialogue among members is central to the ongoing co-evolution of meaning and capabilities. Because the work itself is central to a community of practice, and because meaning, purpose, and learning are tied to doing, everything of importance that happens is personal and, hence, local.

Much of the power of the community-of-practice metaphor lies in its ability to move beyond the traditional dichotomies that we have often accepted in management — the decoupling of who we are from what we do or of the work from the person, the juxtaposition of shareholders and employees, and the tension between caring for and respecting individuals and insisting they change. Perhaps most prominently, a focus on a community of practice refuses to see individual’s interests at odds with those of the organization. Yet, in doing so, “community of practice” challenges the organization to find the shared purpose that links individual development with institutional direction in a far more reciprocal way than the old dictum of “what’s good for the firm is good for the employee.” It issues an invitation to join a community, rather then a contractual transaction to buy someone’s labor for eight hours a day.

Lessons from Leaders

In thinking about what we might learn from our visits to the PSFs, we used the community-of-practice metaphor to understand why generating a “how to” list for other organizations is so difficult. Historically, communities of practice have evolved; no one has consciously created them. They resist “management” as we generally think of it; instead they require value-driven leadership by members. They have no formal structure, like a team or a department. They exist in the minds of their members, in the sense of connection that they have with each other and with the larger institution. The creation of community relies on shared meanings that are intimately bound with the work itself, the purpose that the work serves and for whom, and the ongoing development of its individual members.

Thus the generative cycle that we have described as central to the success of these communities represents much more than a collection of best practices. It is a system of aligned processes embedded within core values. Like so many other attempts to implement fundamentally value-driven initiatives (total quality management is a good example), piecemeal attempts at imitating its techniques will fail. It is the “whole cloth” that one must purchase, and this requires embracing a set of values that have not traditionally been part of business.

In the successful firms, the magic is not in what they do; it is in what they are and what they stand for. What they do flows naturally from what they are — communities of practice committed to both the development of people and value creation for clients. What they do turns out to be fairly self-evident activities, given their values. They act as if they really care about their members’ development by selecting them carefully, investing in their ongoing learning, rewarding them appropriately, offering them a voice in firm governance, and, in general, giving them good reasons not to leave. They create value for their clients by caring more about client issues than internal politics, sharing their knowledge with each other as efficiently as possible, and constantly looking for better ways to solve their client’s tough problems.

This should be simple, except that firms have gotten it so wrong for so long by hiring people without concern for their long-term fit with the business’s principles, by treating them as commodities, by denying them a voice in decisions that affect them, and by giving them reason to leave for more lucrative offers. Firms have failed customers in similar ways — by caring more for their own comfort than client issues, by guarding turf and creating inefficient hand-offs, and by targeting the easy problems and convenient answers. What makes this all so difficult for many organizations is that they are not starting at ground zero. It is often easier to build a new community from scratch than to attempt to reform an existing one. Yet reforming existing organizations into communities of practice is a challenge that senior executives must embrace. Such a process begins, we believe, with value-driven leaders willing to fundamentally reexamine organizational capabilities, values, and practices and ask, “What kind of firm are we committed to being?”


The PSFs’ traditional areas of weakness — narrow specialists who see only their own solutions, self-centered egoists unwilling or unable to collaborate with colleagues, fragmented perspectives and interest group politics that stymie institutional change — are the areas in which the firms studied have found their sources of sustainable advantage. The people in the firms have the self-confidence and independence that such demanding professional work with clients demands, yet they remain willing to acknowledge their need to learn from and rely on each other. The firms celebrate and capitalize on the diversity of the people who compose them, yet they maintain strong, commonly held values and institutional identity. They grant their employees significant autonomy, yet they enjoy unusual firm unity and consistency. They encourage calculated risk taking and innovation, yet they do not sacrifice quality, reliability, speed, or efficiency. Finally, they lead their respective industries in creating value, yet they feel, to their partners, like families. All organizations, we believe, have much to learn from these extraordinary institutions.



1. R. Normann and R. Ramirez, “From Value Chain to Value Constellation: Designing Interactive Strategy,” Harvard Business Review, volume 71, July–August 1993, p. 65.

2. J.B. Quinn, Intelligent Enterprise (New York: Free Press, 1992).

3. The three firms that we will discuss participated in our study on condition of anonymity. All three are recognized as outstanding performers by both industry experts and competitors.

4. P. Senge, “The Leader’s New Work: Building Learning Organizations,” Sloan Management Review, volume 32, Fall 1990, pp. 7–23.

5. D. Leonard-Barton, Wellsprings of Knowledge (Boston: Harvard Business School Press, 1995).

6. For a more in-depth discussion of single- and double-loop learning, see:

C. Argyris, Strategy, Change, and Defensive Routines (Marshfield, Massachusetts: Pitman Publishing, 1985).

7. Leonard-Barton (1995).

8. G. Day, “The Capabilities of Market-Driven Firms,” Journal of Marketing, volume 58, October 1994, pp. 37–52.

9. M. Iansiti, “Shooting the Rapids: Managing Product Development in Turbulent Environments,” California Management Review, volume 38, Fall 1995, pp. 37–58.

10. Leonard-Barton (1995).

11. M. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990).

12. Quinn (1992).

13. H. Mintzberg, “Crafting Strategy,” Harvard Business Review, volume 65, July–August 1987, pp. 66–75.

14. J.B. Quinn, P. Anderson, and S. Finkelstein, “Managing Professional Intellect: Making the Most of the Best,” Harvard Business Review, volume 74, March–April 1996, pp. 71–80.

15. We borrowed the term “community of practice” from learning theorists Lave and Wenger who define it as “an activity system about which participants share understandings concerning what they are doing and what that means in their lives and for their community. Thus they are united in both action and in the meaning that that action has, both for themselves and for the larger collective.” (p. 98) See:

J. Lave and E. Wenger, Situated Learning: Legitimate Peripheral Participation (Cambridge, England: Cambridge University Press, 1991). See also:

T.A. Stewart,“The Invisible Key to Success,” Fortune, 5 August 1996, pp. 173–176; and

B. Manville and N. Foote, “Harvest Your Workers’ Knowledge,” Datamation, July 1996, pp. 78–81.


The authors gratefully acknowledge the support of Judy Rosenblum. From our collaborative work together, the initial development of the model presented here evolved.

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