e. Always have a plan B for handling firm expenses (e.g., payroll) in case cash does not materialize. Have you established a line of
credit at the bank? Have you adequately planned for receivables
and payables?
These steps should put you well on your way to building the scalable firm.
Always think strategy, system, process, and people—if you’re constantly thinking about the next client sales call or delivering another document to a customer, chances are no one is thinking about how to grow the firm.
With the right leadership in place and enthusiastic engagement from the senior management team, you can lead your company to the next level. As evidence that you can lead your entire firm toward growth and success, we share a note received from the CEO of a client for whom we had previously completed an extensive effectiveness engagement:
Managing the Firm
15
We are a totally different company today than when you started working with us. It all started with the assessment you completed. We eliminated a number of the services we were providing and focused on what we do best. We are now one of the largest providers of our services in the city, our consultants are fully utilized, and our bill rates have increased by 50 percent. Thanks to a number of other things you suggested, we have been able to grow and manage our firm effectively.
Note
1. Laurence J. Peter, Peter ’s Almanac, Sept. 24, 1982.
2
Professional Services
Frim Benchmarking
GINA GUTZEIT
It is a funny thing about life; if you refuse to accept anything but the best, you very often get it.
—W. Somerset Maugham1
Professional services firm benchmarking is an often-overlooked process that is one of the most powerful management tools the firm has at its disposal.
While firms can measure the most important financial benchmark, profitability, when it is underperforming (or doing well), does the firm have the ability to drill down further to understand why? And, even if the firm is profitable today, what do the leading indicators (such as turnover and pipeline) say about tomorrow? And, how is the firm doing relative to the industry and to its competition? Perhaps the firm is profitable, but not as profitable as it could be. In sum, benchmarking can help ensure both the present and future success of the professional services firm.
Profit is the number one unit of measure in any professional services firm.
Profits are a factor of bill rates, billable hours, labor costs, sales, and general and administrative expenses (SG&A) taken into account as well.
Bill rate × hours = revenue
Direct labor cost × hours = direct costs
Revenue − direct costs = gross margin
Gross margin − SG&A = profit
Leverage can significantly alter the number of billable hours. Leverage is the number of senior professionals (partners/vice presidents) in relation to other 16
Professional Services Firm Benchmarking
17
professional staff. Key strategic decisions have a significant impact on profits (e.g., bill rates, staff ratios, billable hours). One of the best methods to determine whether the professional services firm is operating at an optimum profit is to benchmark these critical areas.
Why This Topic Is Important
Benchmarking is an analytical tool that measures and compares a company’s key functions, systems, and performance to respective industry standards.
Benchmarking is a straightforward concept for improving business practices and financial performance. Although it can seem daunting or complicated, particularly to firms who have not done any benchmarking, it is nothing more than taking a snapshot of other firms’ practices, comparing them with your firm’s current methods, and then implementing the best practices. Or, put another way, “Benchmarking allows a company to climb the learning curve quickly by benefiting from the experience of other companies.”2
Used effectively, benchmarking is a practical means of spurring action or change within an organization that results in increased profits, reduced cycle time, higher client satisfaction, and a better understanding of the business and the underlying drivers of profit, staff retention, and client satisfaction. It allows executives to pinpoint areas for improvement, set more meaningful goals, and provide external criteria against which to measure progress and achievement. Whether benchmarking is focused on one particular area of operations or across a range of business functions, it provides a common basis for comparison and discussion between line and functional leaders.
Professional services firms must ensure the consistent, efficient, and optimal delivery of client services. Benchmarking is potentially more important for professional services firms than any other type of firm because client service is their product; thus they must always strive to ensure their service offerings and business practices are best in class. Unlike a manufacturing operation, where the tolerances and quality of a product can be measured directly, a services firm must measure as accurately as possible conceptual things like “satisfaction levels.”
Benchmarking is a tremendously powerful tool for improving business performance, yet it is not as commonly employed as other well-known management techniques such as project management, budgeting, or demand
management. According to one estimate, among businesses in the $1 million to $20 million annual revenue range, only 5 percent of all business owners understand and implement benchmarking.3 Given the potential benefits, it is surprising that benchmarking is not more frequently used by business owners and executives. Are there invisible barriers to benchmarking? Does it seem too difficult an exercise to undertake or perhaps too expensive? Is the data on best practices not readily available?
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Managing and Governing the Professional Services Firm
There is surprisingly little written about the process of benchmarking for professional services firms beyond the occasional journal articles and even less practical information about the benchmarking performance measures themselves. In addition, much benchmarking data is proprietary or difficult to locate. However, benchmarking is a highly worthwhile endeavor and one of the most cost-effective and least disruptive ways to assess and improve a professional services business.
This chapter demystifies this important tool to make it more accessible and useful to professional services firms. We provide a primer on the basics of benchmarking, then focus on four areas that can be most valuable to professional services firms: revenue and expense, finance and accounting, information technology (IT), and human resources (HR). We then review the philosophy, objectives, and process. Although there are no formulas, hard-and-fast rules, or fixed schedules for conducting this analysis, guidelines can aid the professional services executive in planning and implementing benchmarking and related business improvement initiatives.
The Value of Benchmarking for
Professional Services Firms
The busy professional services executive may think that benchmarking sounds sensible but that it will take time that isn’t available to the firm or its staff. Days are already too full, and time is a scarce resource (and valuable commodity) in the service industry. However, the benefits of improving service and profitability can be significant, and the benchmarking initiative can be as simple or complex as the firm needs or can handle at a particular point in its business cycle. It is even possible to benchmark just one area of business—associate unbillable time, for example—and to reap tangible benefits from improvements made to that single business variable. Or, a firm may choose to analyze its billing rates: If the rates have not been changed in two years, it is likely that the firm could and should adjust the amount charged for its professionals’ time. Susan Leandri, managing director of Global Best Practices, with PricewaterhouseCoopers says, “Benchmarking provides you with the tools to know where you are at, but once you know where you are at, where are you going? That’s where best practices come in. They are the roadmap to process improvement.”4
Another incentive for conducting benchmarking is to survey best practices among other service firms. Best practice learnings can yield important advantages for professional services firms, particularly since advisors tend to be better at client service than at practice management. In 2001, most advisory firms experienced growing revenue yet declining professional productivity and higher professional compensation along with increased overhead expenses. As a result, partner/owner income at advisory firms declined.
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There is a cure: Focus on strategy, control operations and overhead costs, leverage the business, and build depth in the practice. Benchmarking best practices can help achieve many, if not all, of these goals and others as well.
For example, a study that examined the financial and operational characteristics of 566 participating advisory firms demonstrated that strong management increases partners/owners’ compensation, provides opportunities for the staff, and adds value to the business.5
Firm size is a key factor in achieving best practices, and larger firms may have a distinct advantage when it comes to realizing the benefits of best practice benchmarking. Larger firms are better able to achieve economies of scale in and across geographic markets where they have a large market share, and since many expenses are fixed, the operating costs can be leveraged over a larger revenue base to achieve higher profit. In addition, these firms have a larger employee base and thus an advantage in recruiting, training, and retaining employees. Size also enables large firms to invest more in technology, benefits, and marketing, which further increases the leverage of their resources.