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 isnt 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? Thats 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 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.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 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 firms 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 cliche, 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 firms 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 firms 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