The ingredients for successful benchmarking can be found in best practices, committed management, and a well-run business. Effective management of a company or department is not achieved simply by reducing costs; it is also demonstrated by managing and controlling the business. Whatever pressure executives may be under to improve the bottom line quickly, they also face the danger of eliminating key resources that are essential to managing or growing the business or practice. It is smarter and safer to strike the right balance between functional cost and overall business value.
In a growing firm, it is easy to lose sight of the excessive costs, duplicate support services, and lack of consistent processes and procedures. But in today’s competitive environment, these costs can’t be ignored, even in the short term. The result of implementing best practices achieved by benchmarking is greater operational efficiency and effectiveness.
For those who believe they should benchmark but are hesitant because of time and resource constraints, some last words of advice: Do a quick mental inventory of your firm. It is a safe bet that there are certain elements of your operation that are not entirely satisfactory or could use improvement—
Professional Services Firm Benchmarking
51
whether those areas manifest themselves through complaints from clients about billing errors, a competitor charging higher rates with no trouble attracting business, or a certain department in the firm isn’t pulling its weight in billable hours. Pick just one of those bothersome areas and begin benchmarking.
You will find it easier than you could have imagined. Implement the
changes that seem appropriate. Then tackle the next area. You’ll wonder why you didn’t use this cost-effective tool earlier.
RESOURCES
Practitioners and students who are interested in further reading and research surrounding the topic of benchmarking are encouraged to consult the following web sites:
www.abanet.org
American Bar Association
www.ama-assn.org
American Medical Association
www.metricnet.com
Metricnet
www.globalbestpractices.com
PricewaterhouseCoopers LLP—Global
Best Practices
www.shrm.org
Society for Human Resource
Management
www.hackettbenchmarking.com
The Hackett Group
NOTES
1. Norman Vincent Peale, Words I Have Lived By (Peggy Pinson, 1993).
2. Robert J. Kennedy, “Benchmarking and Its Myths,” Competitive Intelligence Magazine (April 2000).
3. Jeff Stimpson, “The Benchmarking Engagement,” Practical Accountant (February 2003), p. 26.
4. Susan Leandri, Managing Director, PricewaterhouseCoopers, LLP, “Global Best Practices,” telephone interview by author, New York, March 8, 2004.
5 Mark Tibergien and Philip Palaveev, “Advisors Are Better at Client Service than at Practice Management,” Journal of Financial Planning (October 2002), pp. 5052.
6. “National Interpretation Project: Definition of Project Terms,” American Association of Museums [accessed July 2004]. Available from http://www.aam-us
.org/initiatives/other NIPglossary.cfm.
7. PricewaterhouseCoopers LLP, http://www.globalbestpractices.com.
8. Catherine Lennon and Andrew Tank, eds., “Benchmarking in the Finance Function,” The Conference Board (1994).
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Managing and Governing the Professional Services Firm
9. Charles B. Green, “Benchmarking the Information Technology Function,” The Conference Board (1993).
10. Altman Weil Inc., 2001 Managing Partner & Executive Director Survey (Newtown Square, PA: Altman Weil Publications, 2001).
11. Kennedy Information, Inc., Partner Billable/Nonbillable Hours by Firm Size (Peterbourough, NH: Kennedy Information, 2002).
12. Altman Weil Inc, 2003 Survey of Law Firm Economics (Newtown Square, PA: Altman Weil Publications, 2003).
13. Altman Weil Inc, 2002 Survey of Law Firm Economics (Newtown Square, PA: Altman Weil Publications, 2002).
14. Kennedy Information, Inc., Quartile Analysis of Billing Rates by Position (Peterbourough, NH: Kennedy Information, 2002).
15. Kennedy Information, Inc., Billable/Nonbillable Hours by Employment Level (Peterbourough, NH: Kennedy Information, 2002).
16. See note 12.
17. See note 10.
18. See note 12.
19. See note 13.
20. PricewaterhouseCoopers LLP, Finance and Accounting Global Best Practices (New York: PricewaterhouseCoopers, LLP, 2004).
21. See note 20.
22. See note 20.
23. See note 4.
24. Barbara Gomolski, Mid-Size Company Summit (Stanford, CT: Cartner Measurement Services, 2002).
25. James Pickford, ed., Mastering People Management (London: Prentice-Hall, 2003).
26. Kennedy Information, Inc., Partner Leverage (Peterbourough, NH: Kennedy Information Inc., 2002).
27. See note 12.
28. Anne Evans, Avoid These 10 Benchmarking Mistakes (Melbourne, Australia: Benchmarking PLUS, 1999).
29. The Hackett Group, http://www.thehackettgroup.com.
30. Michelle Porter, Group Manager, PricewaterhouseCoopers, LLP, Global Best Practices, telephone interview by the author, New York, March 8, 2004.
31. Christopher E. Bogan, “Benchmarking for Best Practices: Winning Through Innovation Adaptations” (New York: McGraw-Hill, 1994).
32. Iv y McLemore, “Just Do It! Part One of a Series,” Business Finance Magazine (March 1999).
3
Partnership and
Governance Structures
JOHN J. REDDISH
What do we live for; if it is not to make life less difficult to each other?
—George Eliot, Middlemarch, 1871
This chapter identifies and clarifies the key issues governing the leadership and governance structure of the firm: legal protections; allocation of equity, compensation, perks, and benefits; and procedures for making and communicating both policy and operational decisions. Each profession has its historical way of organizing, and within each profession, individual firms adopt unique forms, yet the basic tenets of good management apply. Like any other business, the professional services firm is engaged in two businesses—the business of the profession and the business of managing—and both present distinct challenges.
Traditional top-down management structures are the exception rather than the rule, because firm performance encompasses the sum total of the contributions of many peer professionals, professionals with other specialties, as well as other support personnel within its ranks. Most professional services firms operate in project-based environments where individuals with specialized knowledge come together in ad-hoc teams to handle an assort-ment of individual and multiple projects and /or complex cases on a more collegial basis.
Outside business development or rainmaking activities, firm performance is seldom attributable to a single individual’s contributions. And, while individual performance is always important, a better understanding of overall 53
54
Managing and Governing the Professional Services Firm
performance is achieved when everyone’s contributions are factored into assessing organizational success. More likely, several professionals cooperate to achieve the desired result. When cooperation is lacking and results are not forthcoming, key players (and the best move fastest) tend to vote with their feet, making new combinations with like-minded individuals or firms when differences become too severe or too prolonged.
Professional services firms range in size from the sole practitioner to the multinational megafirm. Resources on managing the business abound for entrepreneurs and for the largest firms in virtually every profession but not for the mid-size firm. Therefore, we have chosen to focus our attention on midsize firms employing multiple professionals in, or with near-term expectations of, ownership and (potentially) a more junior group with ownership aspirations. We also address the issues associated with growth through acquisition and the need to create ownership structures f lexible and scalable enough to facilitate growth.
Why This Topic Is Important
Structure is often a major contributing factor in how well staff perform and get along in the professional services firm. A structure that is not appropriate can:
1. Lead to stakeholder (owners, employees, suppliers, customers) disaffection
2. Impede corporate development and growth, including the raising of capital
3. Limit exit strategy options
4. Result in inordinate, and unnecessary, liability being assumed by the principals
After structure, equity must be allocated and compensation plans must be designed and aligned to reinforce the business objectives of the firm while recognizing the individual contributions of each principal and professional employee. Allocation of initial ownership interests is critical, and the ground should be laid to prepare the firm for future growth by setting scalable standards as early as possible in the firm’s life. Equally important is to think of future ownership participation when the founder makes the first allocation of ownership interest to key professionals at a later date. Fairness and constancy are two elements of this process that will save the company from needless problems down the road. The decisions made must be documented to ensure orderly transitions. They include, but may not be limited to (depending on the structure chosen and various federal and state statutes and industry requirements for professional service licensure and ownership):
Partnership and Governance Structures
55
1. Equity agreements between the principals, providing for:
a. A definition of the ownership interests of each principal
b. Terms under which ownership can be transferred, including re-
strictions
2. A mutually agreed on valuation approach and an ongoing valuation
schedule
3. Employment and noncompete agreements for all principals and key
employees, including provisions for termination
Firms failing to adequately separate equity and performance issues run the risk of eventual failure. Falling prey to the notion that the owner gets his or her compensation through the profit of the firm is faulty. Firm profit is only one element of compensation. In addition, there is the need to provide fair pay, perks, and benefits to principals as well as employees. Particularly in the early days of an enterprise, failure to account for performance, whether money is actually paid or merely accrued (and the taxes paid), can lead to major problems at a later time.
Compensation issues include base salaries, incentives, leverage items (commissions or gain sharing fees), bonuses, “sweat equity,” options/warrants, generally accepted employee benefits packages, and executive perks.
Once structure, equity, and compensation for performance are estab-