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after the transaction closes. When the company was launched five years
ago, it had $35 million in revenue. It went though a public offering and
today has revenue of approximately $500 million, with SG&A coming in
at 20 percent of revenue.
25
Professional Services Firm Benchmarking

“Should I benchmark to be more efficient?” he asks. “Of course I
should. But I don™t have the time. My one concession: I try to pay close
attention to billing rates and how billable the professionals are, as well as
establishing criteria for billing hours at each level that are market-based
and cost-driven. And one day I™ll do a formal benchmarking study. For
now, this interim system works for us.” This chief financial officer
(CFO) has discovered that whether he likes it or not, triage is often the
operative phrase in a professional services firm. The outlay of time for a
benchmarking exercise won™t equal the benefits”at this point in the
firm™s life.



Getting Started
An early decision in the benchmarking process is whether to handle the proj-
ect internally or whether to hire an outside consultant. For a number of in-
dustries with large and organized professional associations, such as the
American Bar Association (ABA), Society of Human Resource Managers
(SHRM) or the American Medical Association (AMA), the data required for
benchmarking can be easily and reasonably purchased. For example, the
ABA can provide statistical data on the industry standards for billable hours
for associates and partners and for hourly fees, broken down by firm size and
geographical location. There are numerous other large industry organizations
that offer dependable information and forums in which they discuss perfor-
mance issues and other useful information resources.
If the internal benchmark targets are complex, if there are too many areas
to benchmark, or if it is difficult to access data for your particular industry,
the firm should consider hiring an outside consultant. To minimize the costs
of consultants, a firm can do a great deal of preparation work itself and /or
pare down the list of possible benchmarks to critical categories so that there
are fewer areas to explore.
Whether conducting the benchmarking internally or using an outside con-
sultant, the following multistep process will help achieve reliable bench-
marking results:


1. Decide specifically which area(s) to benchmark.
2. Identify and communicate the objective of the benchmarking study.
3. Understand and communicate the processes involved.
4. Recognize and understand the best practices.
5. Compare performance data.
6. Import and adapt new standards.
Implement change.8
7.
26 Managing and Governing the Professional Services Firm

Other factors for success are less obvious or process-driven but are just as
critical to the success of any benchmarking effort:

• Management commitment
• Clear objectives and plans
• Consistent and accurate data
• Openness/willingness for improvement (and change)
Implementation9


It is essential that the firm identify the objective of the benchmarking
process. All too often firms do not identify the objective of the project and
find themselves losing sight of the targeted goal for the exercise, whether it
is continuous improvement, understanding the process, or just for informa-
tional purposes.



Benchmarking a Professional Services Firm
We now take a closer look at the benchmarking process in four areas that
are key functions in any professional services firm: revenue and expense,
finance and accounting, IT, and HR. These benchmarks are best developed
through collaboration with the professional and administrative staff in each
area. They are in the best position to suggest changes and innovations”and
they will know best which changes will work.


Benchmarking Revenue and Expense
Within the actual “business” of the services firm, there are five critical
areas to examine: time management, revenue drivers, controllable costs, pro-
fessional costs, and profitability.

TIME MANAGEMENT. Executives, partners, and vice presidents™ time is
usually oversubscribed between competing priorities and activities. These
activities could include but are not be limited to:

• Client service
• Marketing and business development to sell and promote the firm and
related tactics to build the business pipeline and generate future rev-
enue for the organization
• Managing and developing people”the firm™s principal asset
27
Professional Services Firm Benchmarking

• Performing support /administrative services to ensure that the organi-
zation runs smoothly, efficiently, and in accordance with the firm™s
business requirements

Time allocation should ref lect the tasks required to achieve the business
plan and strategic goals set by the organization. However, even that may be
difficult because professionals tend to focus on tasks they are comfortable
doing (usually client service), as opposed to tasks at which they are not as
proficient. We next examine time allocation of managing partners and regu-
lar partners.

Managing Partner Time Allocation. By definition, managing partners or
chief executives must devote more of their time to managing the firm and
less to client work. How much time allocation toward firm management is
reasonable? The answer to this depends on the size of the firm. One study
found that the larger the size of the law firm, the more time partners spend
on firm management rather than practicing law. In fact, the study found that
the managing partner typically spends 12 percent of his or her time on firm
management if there are fewer than five employees but more than 60 per-
cent once the employee count reaches 100 or more. This is a staggering ad-
justment and in one sense seems counterintuitive. Certainly, a 100-attorney
law firm would have additional administrative support for a managing part-
ner; however, this support is counterweighted with the complexities of the
business thus requiring greater attention from the managing partner. The
finding is congruent with the laws of leverage. If the managing partner can
improve the efficiency and effectiveness of 100 or more attorneys, even a
slight improvement in this efficiency would greatly outweigh the economic
benefit of the managing partner billing a few more hours that month. Why
wouldn™t a managing partner drop all client service work altogether? The
main reason is that they want to stay sharp and “practice” the business; oth-
erwise, over time, their client skills, knowledge, and capabilities would dull
to the point that they may not be a good representative of the firm, which
would jeopardize their managing partner status. As the firm gets larger, it
will take more and more time to manage, and this time usually comes from
the managing partner.
Regardless of the size of the firm, managing partners spend approxi-
mately 10 percent of their time on business development to ensure a steady
f low of new prospects and revenue stream (see Exhibit 2.2).10

Partner Billable/Nonbillable Hours. Regular partners/vice presidents have
large time demands similar to the managing partner; however, the driver of
these demands will be more client focus and staff development. Each firm
will have its own economic model for partner target utilization. Time spent
28 Managing and Governing the Professional Services Firm



100
90
80
Median percentage of time




70
60
50
40
30
20
10
0
Less than 5 5 to 14 15 to 29 30 to 49 50 to 99 Over 100
Number of attorneys in firm
Business development
Firm management Practicing law




Exhibit 2.2 Managing Partner Time Allocation (average hours per week)



on other areas such as professional development, administrative tasks, and
marketing will all depend on the partners™ strengths and the needs of the
firm. Typically, time spent is 50 percent on billable activity, 10 percent on
client relationship development, 20 percent on sales activities, 10 percent on
personnel development, and 10 percent on administration. As the firm grows
and the administrative management time increases, the partner will typi-
cally work more hours to keep the same number of hours in the other activi-
ties. Exhibit 2.3 demonstrates this trend.11
Partners in smaller consulting organizations spend approximately 50 per-
cent of their time on billable work and 50 percent of their time on nonbill-
able work. Partners at midsize management consulting firms spend the
same number of hours as their small company counterparts, yet the per-
centage of billable time decreases to 36 percent. Hours have been added to
manage the overhead of a larger company. The trend continues to a great
degree for partners of larger size firms. Again, these partners spend the
same number of hours billing, yet that billable time is now only 31 percent
of their workweek.

REVENUE DRIVERS. What differentiates professional services firms
from other industries is that they bill clients for the time incurred by their
29
Professional Services Firm Benchmarking



30
Billable hours

24.2
20 23.4
20.3
10

0

10
Nonbillable hours




20
27.3
30
36.2
40
49.6
50
Small Midsize Large
firms firms firms



Exhibit 2.3 Partner Billable/Nonbillable Hours by Firm Size
(average hours per week)


professionals instead of charging for delivering a packaged product. The
billing can be based on an hourly rate, a set fee for performance of a project,
or a set fee for a recurring service. Revenue is a factor of the following:

1. Bill rates
2. Billable hours
3. Professional staff leverage

In addition, the following definitions of firm size are useful:

• Small: Less than $5 million in annual revenue
• Midsize: Between $5 million and $25 million in annual revenue
• Large: Greater than $25 million in revenue

Primary metrics besides these factors are used to understand revenue trends,
including:

1. Utilization: Billable hours divided by hours available
2. Realization: Actual hours billed times actual bill rate divided by bill-
able hours times standard bill rate.
3. Sales pipeline: Initial contacts through bids/proposal submitted
30 Managing and Governing the Professional Services Firm

While it doesn™t drive revenue, accounting efficiency can have a dramatic
impact on it, notably:

• Are the proper billing rates being used?
• Has all time and expense incurred during a particular billing period
been accurately captured?
• Was the project profitable (billed versus incurred)? If not, it is crucial
to identify why and how the project could have been approached
differently.
• Is the client paying its bills? If not, do we continue working on the
account?

There are two methods to develop bill rates. Most firms develop billing
rates by professional staff level (e.g., consultant, associate). In the first
method, they start with the level™s average direct labor cost (average salary);
burden this cost with taxes, benefits, and overhead (i.e., occupancy, general
administrative, technology); and add on a target profit margin. The billing
rate for a particular professional staff is generally fully loaded with certain

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