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of the organization and that the incentives are aligned to the major
goals of the organization.
g. Write down the principles and doctrine that define the firm™s cul-
ture and communicate these regularly to employees.
3. Develop simple, straightforward processes for recurring activities.
a. Like any company, you will die the “death of a thousand cuts” if the
professional staff is always reacting to the latest business issue.
b. The only way to avoid reacting is to develop standard processes and
checklists for your top issues.
c. The typical processes that can be standardized include recruiting,
HR, on-boarding employees, training, cash f low management, ac-
counting, quality assurance, customer satisfaction surveys, weekly
progress reports, and so on. Anything that is repetitious and man-
aged by routine is a candidate for standard operating procedures.
d. Take the firm™s top 20 standard activities and make sure there is
a repeatable process written down with job responsibilities for
each one.
e. Through this process, the next time the firm encounters the activ-
ity, it will be handled with an automatic response from an adminis-
trative employee versus a decision or activity that you or, worse,
multiple professionals in your organization are reacting to.
f. Add rigor and objectivity into hiring plans such as cognitive or
other testing and other non-interview data points.
g. Make sure the organization routinely counsels underperforming em-
ployees and eventually eliminates them from the firm if their per-
formance does not improve.
13
Managing the Firm

h. Set hiring triggers by quarter or annually based on revenue or in-
coming business. This schedule will help the firm proactively re-
cruit instead of reacting to the next project on an ad-hoc basis.
4. Eliminate any non-core service lines and focus on what you do best.
a. Ask the question: How many service lines do you have? Service
lines are services that your firm performs for customers. Service
lines generally include a concept, a set of offerings, a methodology,
a process, standard pricing, standard work plans, and standard re-
sources.
b. If you have no service lines, you probably view your firm as gener-
alists, and you may have too few differentiators.
c. On the other hand, 10 service lines are likely too many for the
mid-size professional services company. It is difficult to be expert
at a wide range of activities with limited resources. A large num-
ber of service lines will hurt delivery quality and confuse your
customers to the point where they won™t know what your firm
does well.
d. Determine what you are good at; determine what you can be the best
at. Develop that into a service line and focus on it. The marketplace
rewards focus, particularly for small and mid-size services firms.
e. The firm must develop intellectual capital, build qualifications, and
train employees on how to sell and deliver if they are to provide dif-
ferentiation in the marketplace.
5. Improve your relationship with customers.
a. Each piece of business you have should be profitable and reference-
able. If it is not, then it either needs to be cleaned up or the customer
may need to be given up.
b. Make sure you are staying in front of your customers. A quick lit-
mus test for ensuring external focus is this question: Have you met
with your top five customers in the past month?
c. Ensure that the firm is engaged in “good business.” Produce a
spreadsheet with each customer listed in the left column and the
profitability of the customer along the y-axis. Any customer that
does not generate the gross margin that is your goal should be
dealt with in one of two ways. First, attempt to set up a meeting to
discuss rates. If rate discussions are not successful, try to reduce
your cost to serve the customer. As a last resort, stop providing
services to the customer.
d. It is easier to have these discussions with customers when you know
them well. Make an effort to visit your clients or take them out for
nonbusiness lunches and dinners to solidify the relationship. Re-
member: Your services help them.
14 Managing and Governing the Professional Services Firm

e. Additionally, while with customers, ask for feedback on your ser-
vices. You will be surprised what you hear and the suggestions that
they have for you. Often, important new services will emerge from
direct customer feedback.
6. Ensure that your sales and marketing plan is leveraged.
a. What are the sales steps from finding a prospect to completing a
deal?
b. Outline and define these steps clearly.
c. Determine how much time is involved and by whom in the
organization.
d. Develop standardized proposals, qualifications, and reference sheets.
e. Train professional staff on how to sell your services.
f. Track metrics on each step outlined. You will begin to understand
better how your marketing and business development efforts trans-
late into work for the firm.
7. Improve fiscal management /budgeting.
a. Based on your leverage model, there should be an assumed utiliza-
tion rate for all staff. What is the actual utilization rate for your
staff ?
b. Crack down on frivolous spending by tightening expense policies
and holding up capital expenditure requests that are not important.
This step will alleviate cash f low pressures and ensure that all em-
ployees are carefully monitoring expenditures.
c. Plan major capital expenditures so they are spaced out appropri-
ately and allow adequate preparation time.
d. Watch cash daily. Develop a one-page scorecard that shows incom-
ing and outgoing cash on a daily basis.
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 think-
ing about the next client sales call or delivering another document to a cus-
tomer, 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 ev-
idence 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:
15
Managing the Firm

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, prof-
itability, 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 in-
dustry and to its competition? Perhaps the firm is profitable, but not as prof-
itable 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
17
Professional Services Firm Benchmarking

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 deter-
mine 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 opti-
mal delivery of client services. Benchmarking is potentially more important
for professional services firms than any other type of firm because client ser-
vice is their product; thus they must always strive to ensure their service of-
ferings and business practices are best in class. Unlike a manufacturing
operation, where the tolerances and quality of a product can be measured di-
rectly, a services firm must measure as accurately as possible conceptual
things like “satisfaction levels.”
Benchmarking is a tremendously powerful tool for improving business per-
formance, yet it is not as commonly employed as other well-known manage-
ment 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 under-
stand and implement benchmarking.3 Given the potential benefits, it is sur-
prising 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?
18 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 pro-
fessional services firms: revenue and expense, finance and accounting, infor-
mation 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 bench-
marking 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 ser-
vice 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 busi-
ness”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 advan-
tages 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 ex-
penses. As a result, partner/owner income at advisory firms declined.
19
Professional Services Firm Benchmarking

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 character-
istics of 566 participating advisory firms demonstrated that strong manage-
ment 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 prac-
tice benchmarking. Larger firms are better able to achieve economies of scale

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