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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 retain-
ing employees. Size also enables large firms to invest more in technology, ben-
efits, 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 prac-
tices, 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 f lourishing professional ser-
vices firm are executives who demonstrate characteristics that drive their
businesses to excel. These executives share similar characteristics of intro-
spection, critical business analysis, assessment of operations, and bench-
marking. They:

• Know their firm inside and out and continuously examine the organi-
zation 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 oper-
ate 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.
20 Managing and Governing the Professional Services Firm

• 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 ex-
ecute, 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 automati-
cally”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 clich©, 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 rev-
enue 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 list-
ing 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 un-
derstanding 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
21
Professional Services Firm Benchmarking

department from scratch and handles all health care and COBRA bene-
fits, 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 cov-
erage enrollment and at least one full year of assessing the existing ben-
efits offered before I have enough grounding in the company. Prior to
benchmarking, I must understand the firm™s needs, strengths, and weak-
nesses. That takes time.”


A Primer on Benchmarking
This section outlines the key elements of implementing a benchmarking pro-
gram 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 in-
volves discovering the specific attributes that lead to higher firm perfor-
mance, 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 depart-
ment, 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 ser-
vices 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).

There are two different types of performance measures. Outcome mea-
sures identify the results of a process and allow firms to evaluate how well
they are performing in a particular area. Typically, they are based on a com-
pany™s overall goals and objectives and are intended to demonstrate the ef-
fect of a process on the company™s finances and efficiency.
Activity measures focus on the incremental efforts that are necessary to
enhance process improvement, specifically issues that concern the employees
22 Managing and Governing the Professional Services Firm

in charge of process-specific activities. Therefore, managers identify prob-
lems in a business process as soon as they occur, which allows for correction.
One example of an activity measure is full-time equivalents (FTEs) ver-
sus number of invoices, as compared to revenue. For the professional ser-
vices firm, it is critical to invoice clients and collect cash. How accurate,
fast, and efficient these processes operate has a significant impact on rev-
enue and cash f low of the organization. A three-day reduction in the invoic-
ing process can improve cash f low by 10 percent. Conversely, a three-day
bottleneck in the invoicing process can reduce cash f low by 10 percent. No
matter how great the client service delivery of a company, there is an bot-
tom-line impact if the firm can™t bill correctly or collect revenue in a timely
manner. Billing rate and hours billed errors also erode client satisfaction
and trust.

How Are Benchmarks Determined?
To conduct benchmarking, measurements are required”ones that can be per-
formed consistently and reliably with a basis in fact. The specific benchmarks
are typically determined through surveys, questionnaires, and interviews.
Question sets are designed to establish qualitative as well as quantitative met-
rics for the following performance dimensions:

• Process
• Technology
• Leverage
• Organization
• Strategic alignment
• Partnering activity

Qualitative tools are used to gauge where a firm stands in relation to best
practices for a particular business process. They are subjective, judgmental,
and focused on activities behind a particular business practice.
Quantitative tools are used to see how an organization compares itself to
others for a particular business process. They are objective and focused on
the measurements of specific operating or financial performance metrics.

Best Practices
Best practices are a key focus of benchmarking. Simply stated, they are the
best way to perform a business process or practice within specific parame-
ters, as perfected by the leaders in a given industry. Best practices, docu-
mented by quantitative and qualitative data, serve as a framework for
achieving or striving for excellence. Benchmarking is one of the fastest ways
23
Professional Services Firm Benchmarking

to determine where the firm stands with industry best practices and to iden-
tify areas where best practices may be of highest benefit to the firm.
The American Productivity and Quality Center (APQC) offers a defini-
tion of best practice:

There is no single “best practice” because best is not best for everyone. Every or-
ganization is different in some way”different missions, cultures, environments,
and technologies. What is meant by “best” are those practices that have been
shown to produce superior results; selected by a systematic process; and judged
as exemplary, good or successfully demonstrated. Best practices are then
adapted to fit a particular organization.6

The best practices method is an integrated, comprehensive way of doing
business more efficiently or with greater operational effectiveness. Best
practices are determined by interviewing experts, sifting through company
experiences, reviewing current business literature and academic research,
and gathering information from employees, experts, consultants, and field
specialists.

Potential Benchmarking Targets
What processes are typically benchmarked? A benchmark target can be any
function within a firm that is important in enabling the organization to suc-
cessfully deliver its products and services. Almost all professional services




Operating Processes 5
Produce
and deliver
products and
1 2 3 4 7
services
Understand Develop Invoice
Design
Market
markets vision and
products
and 6
and and service
and
sell
customers strategy customers
Produce and
services
deliver for
service
Management Processes
organizations
8 Develop and manage human resources
9 Manage information resources and technology
10 Manage financial and physical resources
11 Manage environmental, health, and safety issues
12 Manage external relationships
13 Manage improvement and change



Exhibit 2.1 Operating and Management Processes
24 Managing and Governing the Professional Services Firm

organizations perform similar business functions that are categorized as
either operating or management oriented. Exhibit 2.1 shows a process classi-
fication framework codeveloped by PricewaterhouseCoopers™ Global Best
Practices® and APQC™s International Benchmarking Clearinghouse with its
founding members. The framework targets the objectives behind bench-
marking the major operating or management processes.
“These categories create a common ground for business professionals in
different industries to compare similar processes, ensuring an ˜apples to ap-
ples™ approach to benchmark processes against one another and against best
practices,7 as business processes are the lowest common denominator of
companies,” says Susan Leandri, managing director of Global Best Practices,
for PricewaterhouseCoopers.

When Is It Time to Benchmark?
There are no predetermined points in a firm™s life cycle when executives
should initiate benchmarking. Still, there may be some clues or triggers. It
could be the realization that the HR department isn™t running as efficiently
as possible. Or, it might be when the firm reaches the next plateau in size,
such as when a law firm that had comfortably run with 15 employees sud-
denly expands to 50 employees following a merger. Or, it could arise in con-
sidering, “Are there ways to bring administrative costs per professional staff
down?” Change is difficult, but the stress of change on staff can be miti-
gated by implementation of benchmarks that have a visible, positive impact.
Furthermore, the objective nature of benchmarks can help highlight the
need for change and reduce the impression that the firm is simply “re-
arranging the deck chairs.”

When There Isn™t Time to Benchmark
The chief financial officer of a medium-size consulting firm of 1,100
people, of whom 850 are billable professionals, has 70 people reporting
to him in the areas of finance, HR, real estate, and IT. He believes in
running a lean operation, with staffing for each function kept at exactly
the headcount required to get the job done.
Still, he tries to stay ahead of the curve; since 1999 there have been
six acquisitions, and as a result he maintains a staff that verges on over-
staffing because he never wants to be caught at the next acquisition with
inadequate back office support. His mission at the time of an acquisition
is to physically integrate functions such as billing almost immediately

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