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Exhibit 2.8 Total Compensation
37
Professional Services Firm Benchmarking



800
Highest partner Lowest partner
Median hourly rate (in thousands of dollars)



700 Managing partner Executive partner
Average partner
600

500

400

300

200

100

0
5 to 14 15 to 29 30 to 49 50 to 99 Over 100
Number of attorneys in firm




Exhibit 2.9 Median Total Compensation by Firm Size


Average Total Expenses per Lawyer. Contrary to intuition, there appear to
be no economies of scale in a private legal practice, as Exhibit 2.11 demon-
strates. Larger firms almost always spend more per lawyer on staffing, occu-
pancy, equipment, promotion, malpractice and other nonpersonnel insurance
coverage, office supplies, and other expenses than do smaller firms.19 This is



Paralegal
Other Occupancy
4.0%
10.2%
Promotional 7.0%
1.6%
Support staff
Reference material
14.8%
1.1%

Equipment
2.3%




Lawyer income
58.9%


Exhibit 2.10 Average Income and Expenses per Lawyer
as a Percentage of Receipts
38 Managing and Governing the Professional Services Firm



200
Total expenses (in thousands of dollars)



160


120


80


40


0
<9 9 to 20 21 to 40 41 to 75 76 to 150 Over 150
Number of attorneys in firm



Exhibit 2.11 Average Total Expenses per Lawyer




likely due to firms spending more on such things as their size increases to im-
prove productivity, firm perception, and so on. For example, a successful
firm may move into a more upscale office space.

Benchmarking the Finance Department
The finance and accounting department in a professional services firm pro-
vides nearly the same functions as that of any other industry. In a profes-
sional services firm, a well-functioning department is critical to delivering
outstanding client service. The primary business objective of a finance
department is to provide accounting services and financial information in
an efficient, accurate, and timely manner. A finance department includes
the following processes:

• Accounts receivable
• Accounts payable
• Billing
• Payroll
• Travel and entertainment accounting
• Financial reporting (closing the books)
39
Professional Services Firm Benchmarking

• Budgeting and analysis
• Fixed assets accounting
• Internal audit
• Tax

The objectives of a highly efficient and effective finance function are to pro-
vide users (senior management, board of directors/partners, operations, and
outside constituencies) with the right information, at the right time, and in
the right format. PricewaterhouseCoopers™ Global Best Practices® created a
benchmark report profiling companies in the $7 million to $486 million range
with the average at $195 million. This report attempts to understand the mul-
tifaceted characteristics of a finance department through benchmarking.
Their report includes the following critical best practices benchmarking data:

• Total finance department cost as a percentage of revenue
• Total finance head count as a percentage of total
• Finance department cost as a percentage of revenue by process

As ref lected in Exhibit 2.12, if the percentage is above the benchmark
group™s median, it may indicate:20




0.0
Benchmark Group
1st Quartile
0.5
Min .14%
Median 1.57%
1.0
Max 3.79%
2nd Quartile
1.5
Percentage




3rd Quartile
2.0

2.5

3.0 4th Quartile

3.5

4.0




Exhibit 2.12 Total Finance Department Cost as a Percentage of Revenue
40 Managing and Governing the Professional Services Firm

• Revenue is disproportionate to the cost.
• Compensation to the finance and accounting staff may be high.
• Excess staffing exists.
• Processes are highly decentralized.
• Technology is underutilized.

Exhibit 2.13 represents the most favorable percentage in the benchmark
group.21 Firms can improve performance on these measures by reducing
costs to operate the departments. Strategies to accomplish this may include
redesigning work processes to eliminate the causes of errors and wasted
time, implementing technology that speeds the transactions, and addressing
excess labor costs.
The measures in Exhibit 2.14 represent the number of finance employees
relative to the organization as a whole and whether the finance departments
are staffed to adequately address the firms™ needs. This percentage can be
used as an indicator of the departments™ ability to design and plan work
effectively.22
Leading companies improve performance on this measure by increasing the
expertise and productivity of the finance professionals, while reducing the
total number of finance employees. Strategies to accomplish this may include



BEST IN
PROCESS BENCHMARK
(%)
0.145%
Total finance
Payroll 0.010%
Travel and entertainment accounting 0.002%
Accounts payable 0.030%
Billing 0.005%
0.001%
Accounts receivable
Close-the-books/financial reporting 0.027%
0.002%
Financial budgeting and analysis
Fixed-assets accounting 0.004%
0.002%
Internal audit
Tax 0.005%

Exhibit 2.13 Finance Department Cost as a
Percentage of Revenue by Process
41
Professional Services Firm Benchmarking



0.0
Benchmark Group
1st Quartile Min .43%
2.0
Median 3.88%
2nd Quartile
Max 13.89%
4.0
3rd Quartile
6.0
Percentage




8.0
4th Quartile
10.0

12.0

14.0

16.0



Exhibit 2.14 Total Finance Head Count as a Percentage of
Total Business Unit Head Count



centralizing the finance functions; implementing technology that reduces
routine, repetitious work; and employing fewer staff in total, while elevating
the level of expertise for each position.23

Benchmarking Information Technology
Information technology is one area where there is nearly universal agreement:
Costs are both mysterious and confusing. Executives generally do not know
how to determine what their firm™s IT costs should be. We provide some guid-
ance to help answer the following questions:

• What are considered reasonable IT expenses?

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