Industry leaders utilise knowledge transfer

Developing highly knowledgeable employees is important for all service sector businesses, but it is especially so for companies who sell advice, such as strategy consultants and law firms. The effective recycling of expertise and experience into new solutions is what allows the firm to tackle problems that other companies cannot handle internally. The leading firms in these sectors owe their positions to the comparative advantage successful knowledge transferring provides.

The major law and consulting firms work to provide an encouraging environment for knowledge transfer. Employees are encouraged to move between departments and offices to develop a range of experiences and to cross-pollinate ideas. International law firm White & Case even makes it compulsory for its trainee solicitors to take a secondment abroad. The unity of the whole firm is often stressed and differences between sub-organisations played down to prevent the rivalries that can hamper knowledge transfers. The successful strategy consultants, such as the Boston Consulting Group, also pride themselves on an innovative culture and an acceptance of new ideas.

Effective knowledge transfers on their own do not necessarily mean that the firm will establish a comparative advantage. Knowledge that can be transferred within the firm can often be transferred to its competitors. Once the knowledge has spread through the industry, the original firm’s edge is eroded. This is particularly the case in manufacturing companies where knowledge is embedded in tools that can be easily replicated. Knowledge embedded in employees is more likely to remain within the firm instead of leaking out to rivals. A successful law firm like Clifford Chance or a consulting firm like McKinsey rely on the human capital of their employees. However, this is only built up at great expense with training and experience. They need a way of ensuring long-term loyalty. This is why firms in these sectors are usually structured as partnerships. The possibility of a lucrative partnership keeps the associates loyal; without this possibility they would more readily jump ship to a rival firm taking the knowledge investment with them, leaving firms to free ride on one another and be reluctant to invest in training themselves. A firm like Slaughter and May, is even able to invest heavily in the knowledge of its employees and develop lawyers with multiple and even cross-departmental specialisms. This allows the firm to tackle a range of client problems despite being much more compact than many of its rivals.

Investment banks manifest a completely different approach. When advisory work, which was reliant on embedded employee knowledge, was the dominant source of profits, many investment banks were structured as partnerships. When trading became a large source of profits, access to capital became more important than passing the knowledge of a banker’s extensive contacts or experience of past flotations. Gradually the major investment banks went public; the last major partnership, Goldman Sachs, sold out in 1999.

However, some smaller advisory only banks, such as NM Rothschild and Perella Weinberg, have managed to survive. They pride themselves on being close-knit teams and developing well-rounded bankers who can leverage the experience of the senior partners. Effective knowledge transfers allow them to sell themselves to clients based on the quality of their advice.