The Professional Services Firm Bible

By John Baschab Jon Piot

John Wiley & Sons

ISBN: 0-471-66048-5

Chapter One

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 Maugham

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 x hours = revenue Direct labor cost x 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 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."

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. 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?

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."

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.

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.

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.

Role of Professional Services Executives

As all successful executives know, to be "average" is never an acceptable standard for a growing business, particularly in professional services where client expectations are high and controlling costs are low. For the executive of a professional services firm, this is a critical business fact-the caliber of the enterprise, of its people, and of its operations has a direct impact on the firm's service offerings and client satisfaction. Benchmarking can play a key role in helping the firm achieve or maintain best in class standards and practices, but the execution of the findings and actions requires the commitment and quality of its senior leadership. This is the foundation for a successful benchmarking exercise. At the heart of every flourishing professional services firm are executives who demonstrate characteristics that drive their businesses to excel. These executives share similar characteristics of introspection, critical business analysis, assessment of operations, and benchmarking. They:

Know their firm inside and out and continuously examine the organization closely and objectively. They are not micromanagers but they are aware of all critical policies and procedures and demand that they be followed and consistently applied to enable the firm to operate efficiently.

Are involved, proactive executives who continuously seek improvement and desire to innovate and exceed industry best practices. Even when the business appears to be running smoothly, they compare individual areas against competitors with an eye toward improvement.

Look for opportunities to drive for positive change, particularly when fact-based such as benchmarked versus competition.

Know that execution is critical to realizing this change. If they do not execute, they will have missed an opportunity to make improvements and will have wasted time and money on an exercise that served no purpose.

Understand that introspection can help identify unnecessary costs and dismantle levels of complexity that have built up over the years.

Value the fresh thinking that benchmarking can generate because the process gives license to look at a situation or problem from a different perspective, one that encourages long-term solutions and not quick fixes.

For many firm managers, having an external perspective comes automatically-they are always focused on clients, the marketplace, and how they and their organization are perceived by critical audiences. But introspection is necessary for benchmarking. Executives need to spend time understanding their organization, its functions, and processes. No matter how beautiful the veneer or elaborate the carving, the inner workings of the grandfather clock are what keeps it running. How an organization functions internally is a clear indicator of its attention to details-and how well it serves its clients, both today and in the future. It may be a cliché, but the devil is in both the detail and in the execution of a well-thought-out plan or process.

An example of the types of key questions that can indicate whether it is time for a critical analysis of the professional services firm includes:

"Do I know how many client invoices on average are prepared per month?"

"What is the firm's average bill rate over the past 12 months?"

"What is the profit margin for any specific client?"

As this example indicates, the typical executive may know the firm's revenue or expense dollars by category but be unaware of things at the next level of detail.

An appropriate starting point of any analysis of the firm is to begin by listing the questions for which you would like answers. Which activities might be accomplished by the staff more efficiently? Why has the staff utilization declined by 5 percent over the past year? The overall process starts by understanding the questions that need to be asked and the information needed to formulate answers.

Knowledge First, Benchmarking Later

An experienced HR director recently began running the HR function for a newly formed property management firm. The firm has 100 full-time and 75 part-time employees. Without any staff, she set up the HR department from scratch and handles all health care and COBRA benefits, 401(k) plans, and disability, immigration, and disciplinary issues-and those are just some of her responsibilities.

She knows she should conduct benchmarking in a number of areas but feels certain that now is not the right time. "I'm still establishing policies and procedures," she said. "I must go through one complete cycle of coverage enrollment and at least one full year of assessing the existing benefits offered before I have enough grounding in the company. Prior to benchmarking, I must understand the firm's needs, strengths, and weaknesses. That takes time."

A Primer on Benchmarking

This section outlines the key elements of implementing a benchmarking program and outlines the specific steps and analyses that should be part of the program.

Performance Measures

Benchmarks are performance measures. Benchmarking is an action that involves discovering the specific attributes that lead to higher firm performance, understanding how these practices work, and adapting and applying them to your organization. Benchmarks are facts that, when applied, enable real business improvement.

Performance measures are the "vital signs" of a business. They quantify a process or the results. There are many ways to measure a company, a department, or a person's performance, but all share a single trait: They are fact-based, not subjective. They are measurable and quantifiable. Performance measures focus on cost, quality, and time:

Cost-based measures cover the financial aspects of performance (e.g., direct labor cost).

Quality-based measures assess how well a company's products or services meet customer needs (e.g., client satisfaction).

Time-based measures focus on the efficiency of the process (e.g., how long it takes to produce a proposal).


Excerpted from The Professional Services Firm Bible by John Baschab Jon Piot Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.