The measures in Exhibit 2.14 represent the number of finance employees relative to the organization as a whole and whether the finance departments are staffed to adequately address the firms’ needs. This percentage can be used as an indicator of the departments’ ability to design and plan work effectively.22
Leading companies improve performance on this measure by increasing the expertise and productivity of the finance professionals, while reducing the total number of finance employees. Strategies to accomplish this may include BEST IN
PROCESS
BENCHMARK
(%)
Total finance
0.145%
Payroll
0.010%
Travel and entertainment accounting
0.002%
Accounts payable
0.030%
Billing
0.005%
Accounts receivable
0.001%
Close-the-books/financial reporting
0.027%
Financial budgeting and analysis
0.002%
Fixed-assets accounting
0.004%
Internal audit
0.002%
Tax
0.005%
Exhibit 2.13
Finance Department Cost as a
Percentage of Revenue by Process
Professional Services Firm Benchmarking
41
0.0
Benchmark Group
1st Quartile
2.0
Min .43%
Median 3.88%
2nd Quartile
4.0
Max 13.89%
3rd Quartile
6.0
ge
8.0
ercentaP 10.0
4th Quartile
12.0
14.0
16.0
Exhibit 2.14
Total Finance Head Count as a Percentage of
Total Business Unit Head Count
centralizing the finance functions; implementing technology that reduces routine, repetitious work; and employing fewer staff in total, while elevating the level of expertise for each position.23
Benchmarking Information Technology
Information technology is one area where there is nearly universal agreement: Costs are both mysterious and confusing. Executives generally do not know how to determine what their firm’s IT costs should be. We provide some guidance to help answer the following questions:
• What are considered reasonable IT expenses?
• What are the key drivers of IT costs?
• What is a reasonable spending level for the IT function?
MEASURING INFORMATION TECHNOLOGY EXPENSES. IT expenses in a
professional services firm should be considered as a percentage of revenue. For example, in a mid-size firm, IT costs should range from 1 percent to 3 percent of revenue. This is a key metric used in all organizations and is a helpful planning and benchmarking tool. Remember, though, that the range can be significant based on the nature of the users and the type of business. The
42
Managing and Governing the Professional Services Firm
higher end range would be applicable to financial consultants, who work long hours, often on the road at client locations. They are considered “intense users” requiring laptops, connectivity (the ability to dial in and have access to Internet and firm servers), and a 24/7 help desk. By comparison, a medical practice typically requires desktop computers for select staff, has set work schedules, and deals more with application-based requirements such as billing and Health Insurance Portability and Accountability Act (HIPAA) compliance.
One significant factor that increases a professional services firm’s IT
costs is multioffice locations, which typically need to communicate with both the front and back offices of an organization. The thinner the spread of the firm, the greater is the potential for diseconomies of scale. The topic of benchmarking and IT costs is discussed in detail in The Executives Guide to Information Technology, (Wiley, 2002) Chapters 3 and 13.
INFORMATION TECHNOLOGY COST DRIVERS.
There are many poten-
tial IT cost drivers. Exhibit 2.15 outlines a number of factors to consider when analyzing a firm’s IT spending.24
ECONOMIES OF SCALE IN INFORMATION TECHNOLOGY—ARE THEY
ACHIEVABLE?
Scale economies have an impact on spending levels and are
an important consideration when looking at purchasing power and the ability of size to drive down costs. This makes perfect sense—but current trends and recent IT benchmarking show that, as companies grow, so do their IT requirements. When growing or expanding through acquisitions, firms want more technological capability. That means more service (e.g., they want to expand help desk hours from five days to seven days a week), more sophisticated software, or upgraded hardware. They perceive larger competitors as awash with IT perks or simply believe they have been sacrificing until now and that their growing organization should have all the bells and whistles.
As law firms expand, all costs expand as a percentage of revenue, not just IT costs. In addition, labor costs are a significant expense for firms’ IT departments. Labor costs are 30 percent to 40 percent of the average IT budget.
Five key drivers determine IT staffing levels:
1. Number of end users supported
2. Number of systems supported
3. Number of sites supported and geographic dispersion
4. Support requirements
5. Complexity of the environment (number of different types of applications, systems, and networks)
Professional Services Firm Benchmarking
43
IT COST DRIVER
COMMENTS
AREAS AFFECTED
Industry
Some industries dictate higher
General spending
IT spending, e.g., Transporta-
tion-airline reservation systems
Company size (sales, profitabil-
Company revenue
General spending
ity, number of end users, type of
Number of knowledge workers
Support
end users)
Number of professionals
Capital items
Number of computers per
IT costs rise with the number of
Purchase of PCs
knowledge worker
personal computers deployed
Support
Complexity of internal operations
Outsourcing functions should
Personnel
lower IT costs since no longer
Hardware
have to support
Maintenance
Computational intensive envi-
Integration
ronments will increase IT costs
Historical capital spending
Historical CapEx spending does
Depreciation
not drive increased cost, how-
Capital expenditures
ever increased depreciation
expense will affect the IT
budget, e.g. purchasing Main-
frame will affect depreciation for
3 to 5 years of useful life of the
equipment
Current economic/marketplace
Economic pressures will increase
Personnel
condition
need to cut IT spending
Overhead
Profitable companies tend to
spend more on IT
Competitive initiatives
Major business transformation
Personnel
projects such as supply chain
Software
reengineering will precipitate
Hardware
major IT expenses to support
Demands from customers or
Pressure from customers or sup-
Software
suppliers
pliers for electronic information
flows and other types of com-
puter-related messaging can
drive up IT expenditures in the
short term
Merger and acquisition activity
Acquisitions and mergers acqui-
Personnel
sitions will drive IT integration
Integration
costs
Potential economies of scale in
the long term
Exhibit 2.15
Key Drivers of IT Cost
(continued)
44
Managing and Governing the Professional Services Firm
IT COST DRIVER
COMMENTS
AREAS AFFECTED
Age of infrastructure
As age of infrastructure
Maintenance
increases, cost to support gen-
erally increases
Central vs. decentralized IT
Decentralized IT operations
Personnel
operations
tend to increase IT spending
Software
due to lack of controls and vol-
Hardware
ume discounts
Number of platforms
Costs increase in relation to the
Personnel
number of supported platforms
Maintenance
Standardization of environ-
ments lowers IT costs
Application complexity
Application complexity drives
Maintenance
higher support costs
Application age
Application age drives higher
Maintenance
support costs
Central v s. decentralized
Decentralized purchasing tends
Personnel
purchasing
to increase IT spending due to
Software
lack of controls and inability to
Hardware
leverage purchasing volume
Standardization of environ-
Hardware
Standardization
ment, technical platform and
Support/Maintenance
tools reduces IT spending
Chargeback mechanism
Chargeback mechanism can
General spending
employed
lower IT spending by driving
more rationale behavior with
business units, for example,
market pricing
Exhibit 2.15
Continued
Creating an IT budget requires the analysis of a large number of variables and the weighing of multiple competing priorities, while devising the most cost-effective approach for delivering mission-critical services. Because of the impact the budget has on the IT department’s ability to run effectively, budget creation is one of the most important jobs of an IT
manager.
One area to consider for benchmarking is the breakout of spending for an IT budget. A professional services firm IT budget should have these spending ranges:
Professional Services Firm Benchmarking
45
Labor (staff, professional services)
25 to 35 percent
Software/software maintenance
10 to 20 percent
Hardware/hardware maintenance/hardware depreciation
20 to 30 percent
Data communications
5 to 15 percent
Miscellaneous/supplies/travel expenses
5 to 10 percent
Determining IT spending decisions is a critical factor in enhancing firm profitability. Estimation and benchmarking of IT spending provides focus and validation of the firm’s current spending and investment strategy. This process can also educate senior management and provide deeper insight into company-specific IT spending and its impact on profitability. Regardless of the outcome of the benchmarking exercise, firms should invest only in projects that meet the business or strategic criteria of their organization.
Benchmarking Human Resources
HR departments should be managed as strategic assets and that HR performance should be measured in terms of its strategic impact on the business of the firm. Such an initiative forces managers to regard HR as an entity that must be structured and managed to create value.
While viewing HR as a strategic asset is certainly a best practice, planning and implementation can be successfully undertaken only if staff understand how their jobs contribute to company success. Often, employees don’t understand how their job fits into the big picture.
The people factor is a simple concept: Investing in human creativity delivers high returns in terms of job satisfaction and shareholder returns. Implementation requires sustained attention to a set of basic rules. In a poor economic climate, managers who are overly focused on achieving short-term returns through cost cutting often run against the grain of the people factor.
People must understand where they fit into the overall strategy and believe they are valued. Evidence suggests that companies with the foresight to see beyond immediate business difficulties will emerge from a business or economic downturn with renewed strength.25