 |
 
|
 |
 |
 |
 |
 |
 |
 |
 |
 |
|
|
Press Room |
|
|
Your Firm's Score
For years, firms have used a client's industry figures and standards to identify areas that need improvement. Now firms are doing the same thing to benchmark themselves. By Jeff Stimpson - Reprinted from Practical Accountant Marc Rosenberg of The Rosenberg Associates in Wilmette, Ill., a management and marketing consultant to CPA and law firms nationwide, once asked a CPA firm in a small market city a simple question. 'Do you feel your billing rates are high, low, or just where they should be?' The response was 'high,'" Rosenberg recalls. "I then showed them a schedule of billing rates of comparable firms; to their surprise, their rates were 30 percent below the others. The firm raised its rates 30 percent over the next two years; no clients left. The additional fees fell directly to the bottom line." That's the power of benchmarking. Firms should always strive to be the best they can be, "but how do you know what the best is if you don't know what your competitors are doing? That's why we benchmark," says Rosenberg. Consultant Donald Scholl, of West Chester, Pa.-based D.B. Scholl Inc., confirms that many firms are looking at various surveys these days. "Most surveys are broken down by firm size or geography," he says. "Firms want to know how they're doing, as well as what they should be doing in various categories, such as partner-to-staff ratios, success in AR and process management, volume per partner, net income per partner," and other categories. Bill Hubly, president and managing partner at the 45-staffer, four-partner firm of Corbett, Duncan & Hubly, in Itasca, Ill., says his firm has participated in the Rosenberg survey for years. "For us what's good about it is we get a lot of information about local firms, good quality information about the local environment," he says. Rick Jenson, president of the Salt Lake City, Utah-based firm Tanner + Co., typically uses his annual benchmarking report, obtained through an association membership, to quickly make a list of 10 firms to contact. "I ask about their rates, or how they grew revenues, or how they started a new niche," he says. "Some firms had a rough year, and I can ask what they did so I don't make the same mistakes. We've also learned how to bill and collect better through benchmarking." Increasing operating costs and the recent tighter regulatory environment have only heightened need for the process. John Niemann, director, Business Development Unit, Advisory Group, in St. Louis, Mo., believes that the larger firms, those of more than six partners/owners, have always used benchmarking and continue to do so. "It's the smaller firms that are benchmarking more than in the past," he says, "largely in an effort to develop a strategic plan to maximize profits." Stephen Weinstein, Connecticut-based practice management consultant to CPA firms, specializing in ownership issues, retirement, mergers, and enhancing profitability, and who has been performing an annual benchmarking survey for his clients for more than 15 years, says firms are indeed benchmarking more. "Partners are very interested in how they're doing relative to their peers. In addition, attaining strong profitability and growth are becoming more difficult in the profession, so people want to know what they need to do to improve." Starting the Process According to Rosenberg, whose company's surveys expects to elicit responses from more than 200 firms this year, benchmarking is the process of: Measuring your firm's performance by computing various performance statistics; Analyzing performance by comparing those statistics to other firms and industry norms; and Changing your firm's performance by taking action in areas where your firm needs improvement. Rosenberg says firms should measure fees per partner and per person; the ratio of client service staff to partner; income per partner; realization and utilization; the average annual billable hours of client service staff and of partners; billing rates of each level, from partner to staff to secretaries; and the ratio of administrative staff to total personnel. "The key to firm profitability is leverage and rates," he points out, "the ability of partners to leverage themselves by maximizing the number of staff they can keep busy." He adds that there are three main ways to measure leverage: fees per partner, fees per person, and ratio of client service staff to partner. High billing rates are also highly correlative to high profitability. "Many firms suffer under the misguided business philosophy of accepting any business that comes in the door, thus becoming a high volume/low priced operation," Rosenberg says. "A key to profitability is to be a high-priced/lower volume shop." Especially hot areas in these surveys currently include healthcare, CPE, and other fringe benefits for staffers, says Scholl, as well as issues of partner buyout. Earl Holtzman, managing director with Michael Silver & Co., in Skokie, Ill., says his firm has quadrupled in size over the past 20 years by paying close and continuing attention to benchmarking. "It has to be a full-time job for somebody," he stresses. Holtzman says that MS&C started scrutinizing its operations "as a business," looking at everything from cost-control and marketing to how to do the billing, hiring and insurance to salaries. Partially as a result of benchmarking, MS&C has added financial services, insurance, computer consulting, valuation, and support litigation for divorce work, among other fields. "We've diversified, and increased the amount of services we render to our clients," Holtzman says. "You learn from experience," says Bill Cloppert, managing director at Barnes Dennig & Co. Ltd. in Cincinnati, which has been benchmarking for almost 20 years. "You start benchmarking some items, then you realize you have to benchmark a few more." He adds that BD, which gets its benchmarking figures from an association membership, likes to key on net fees for employee, and total employee cost relative to net fees, among other details. Cloppert adds that annually he looks at perhaps a third of the information and statistics of firms in his grouping. He also notes that among recent trends in other firms, he finds it most interesting that chargeable hours have been flat yet revenues have been increasing. Niemann believes firms who look to benchmark themselves should first identify their critical success factors: leverage; productivity; rate; write-ups or write-downs; and efficiency. "Assuming the firm is tracking the appropriate metrics, the benchmarking process is simple: compare your results with best in class," he says. The real challenge is developing a strategic plan to achieve the desired results." Benefits and Drawbacks Some of the profession's noteworthy benchmarking surveys have included that of Rosenberg, and the Texas/AICPA MAP survey, among others. Some surveys share the results for free with firms that participate. Benchmarking can help firms tackle some of the most nagging problems of their practice, such as effective billing. "Many firms have shown a continuing decline in individuals' chargeable time, especially at the partner level," says Weinstein. "Accordingly, a firm may decide to discuss or analyze how partners and staff are viewing what time is 'chargeable.' I've found that sometimes staff don't charge all their time to clients although they spent an entire day doing client work. They view their day as 7.5 hours chargeable and .5 administrative. This can add up. I perform studies for clients that help them isolate all kinds of chargeable time issues. These studies result in the development of clear policies designed to increase the coding of time by partners and staff as chargeable." Holtzman also attends two roundtables a month, with one of the major reasons being benchmarking input. "Every meeting I come back with something new, and I'm in this business 45 years," he marvels. Innovations at his firm that were occasioned by benchmarking have included recording time by exact minutes instead of fractions of an hour, examining every bill, decreases in insurance coverage due to spiraling healthcare costs, and receipt of daily cash reports and monthly, detailed financial statements that include an accrual statement based on earned fees. "There are never any surprises," he says. "I can monitor our realization on an hourly basis. I spend 60 to 70 percent of my time monitoring and running the practice." Complete data is one key, however. "The most important thing about benchmarking is finding other firms that are truly comparative and information that is truly accurate," says Weinstein. "In my survey, which is only available to my clients, I personally establish the comparability guidelines, and review the input data closely. Participating firms are often asked to resubmit data to assure that it's correct and comparable." "It stands to reason that if a firm uses a survey whose data is either inaccurate or not comparable (i.e., relevant to the firm's fee size, or the market population), the firm will form the wrong conclusions as to which targets to shoot for, and how to evaluate performance," notes Rosenberg. He adds the example of a popular survey he once examined, and noticed that of the states in the survey, with the exception of Texas, virtually all large population states such as New York, Illinois, Ohio, and others were "grossly unrepresented. This popular survey was in fact, a survey of firms in small population markets, which is meaningless to the thousands of firms in the top 100 cities in the country." Rosenberg also warns about settling for averages in surveys. "Several years ago during a retreat I was facilitating for a firm, the partners asked me what the national average was for billable hours. I responded with 1,625 (to the dismay of firms today, this number has sunk to the low 1,500s). One of the partners looked at another and said, 'Great, we're at 1,628.' To which I said, 'Congratulations. You're a nice, average firm.' Don't be content hitting averages. If your firm is way below the average, then the average may very well be a good target to shoot for. But if you're close to average, strive to be above average." "I think firms are finding more and more today that there is a little bit of the 'apple/orange' effect," says Allan Koltin, CPA, president and CEO, PDI Global, Inc., a Chicago-based management consulting firm, "in that firms are facing so many different issues based on overall firm philosophy and life cycle that it's getting more and more difficult to compare firms." "Firms need to be careful," says Weinstein. "They shouldn't overreact. Some data submitted in many surveys is carelessly prepared and often incorrect. Also, data never tells the whole story. A well-leveraged firm may often be very profitable, but a low-leveraged, specialized practice with high billing rates, strong partner hours, and a strong client base may be equally profitable. So although leverage is a very important benchmarking measurement, differences in practices need to be evaluated." Koltin believes that the hardest thing about benchmarking is "taking into account many of the investments that some firms choose to make and others don't," he says. "The other thing that I think makes benchmarking difficult is the way in which many firms classify partners. Often when I look at comparative statistics among firms, I find that some firms only include equity partners in their calculation, thus elevating their average partner income, while others may only have one class of partners and include all in the calculation, thus producing a lower average partner income. If there's one area that benchmarking has lagged, it's in providing guidance to firms in terms of how to classify partners in the calculation so that there's consistency." Proper Follow-Up Rosenberg stresses that "it's easy to buy a survey, compute your own statistics, make comparisons and identify areas where you lag behind industry norms. It's much harder to take action." "The numbers tell the story," says Hubly. Firms that make this a management tool sit down with the managing partners and make explicit evaluations between themselves and other firms in their groupings, says Scholl. Hubly's firm has established a template for follow through, and even keeps a record of its benchmarking findings for seven to 10 years. Cloppert says he first examines the annual benchmarking report, then takes it to his firm's executive committee. "We use the benchmarking when we set our plan and budget for the coming year," he says, adding that he also uses the report as a kind of reference book as the year goes on. "Failing to benchmark is poor planning," adds Niemann. "But benchmarking is merely one way to measure your firm's performance. Absent a strategy to improve, benchmarking alone is useless." Finding the benchmarks and making the comparisons is much easier then developing and implementing a strategy, he says. "It's difficult to reach a consensus amongst all the partners in a firm. The problem with most accounting firms is that they're good. But the enemy of 'being great' is 'being good.'" He adds that a thorough benchmarking experience can occasion tough, ultimately profitable questions for a firm, such as: Does your firm have too many partners? Or does it make sense to merge with another firm, work longer hours, or hire more people? The Alliance Factor Benchmarking, especially among firms in the same association, can act not only as a method of improvement of a single firm, but a way to lift the entire profession. "I'd consider joining a national association, as virtually all of these groups offer practice management surveys," says Koltin, "or contacting one's local state society, as many offer surveys." Niemann advises joining a global network, many of which offer frequent benchmarking surveys, roundtables, and discussions. "Clients are going to be constantly exposed to alternative service offerings. The only way to be a serious contender in these circumstances will be to become an active member of a network of firms that utilize technology to share experience and knowledge." His firm is a member of The Principa Alliance, "and the ROI has been enormous," he says. Jim Flynn, president of the association CPA Associates International Inc., in Rutherford, N.J., says his group issues an annual benchmarking survey of members that runs some 60 pages. The report incorporates "a wealth" of information from many of its 43 U.S. firms, covering such areas as fee volumes, partners' chargeable hours by areas of responsibility, chargeable hours by staff expertise and practice, professional staff turnover and compensation, billing rates for staff and professionals, AR, percentages of operating expenses to total fees realized, fringe benefits, partner benefits and retirement, billing rate determination, niche services offered, and other factors. The report is also discussed at the managing partners' forums at CPA Associates's fall meeting. Rudy Beilfuss, president of the Duluth, Ga.-based PKF North American Network, says his group has offered members benchmarking surveys for more than 25 years. PKF's surveys cover the financial details of what Beilfuss estimates is 90 percent of the group's 92 member firms, even though participation is not mandatory. PKF also discusses the results at their annual meeting, and also issues a second survey covering personnel and HR statistics, including fringe benefits and ranges of compensation. "It's pretty much everything you'd want to know, probably more than you'd want to know, about their operations," he says. Cloppert says his firm has been participating in benchmarking since joining PKF almost 20 years ago. Jenson also says that his firm has been a member of PKF for more than a decade, during which Tanner + Co.'s profitability has jumped 400 to 500 percent. "One of the main reasons we joined and the best benefit is benchmarking ourselves," he notes. One reason firms that are association members can be willing to share operational statistics and information is because some groups, such as Flynn's, limit membership to one firm per market area. "I'd suggest that every firm that wants to be progressive join an organization where they can share processes and thoughts," Jenson says. Know Where You Are Accountants have a natural affinity for comparative numbers, and are in a great position to make the most out of them for their practices. "We're numbers people, and we all want to know how the others are doing," says Holtzman. August 2004 Three Simple Tips
Picking a Survey
|