This article will address a topic that is underappreciated and sometimes misunderstood in a transaction environment: benchmarking. With the dramatic rebound in merger & acquisition (M&A) activity and a steady flow of transactions in the turnaround and restructuring arenas, the potential synergies offered by strategic transactions are critical to the justification of purchase price, the creation of value and the ultimate success of a deal. Frequently the potential synergies and cost savings associated with a strategic transaction are calculated by way of simplistic or unsophisticated mathematical formulae. For example, two $100 million professional services companies merge with back office (finance, information technology, human resources) costs of $20 million each while the projections reflect a combined back office cost of $25 million. Is this target realistic? Within what timeframe can it be achieved? And more importantly, will the reduced back office be able to provide the services necessary to support this new $200 million company? All are reasonable questions for which senior management presumably has a plan. But is that plan realistic? How does it compare to the marketplace, the industry as a whole or its proximate peers? This is where benchmarking can be a valuable tool. This article will attempt to provide an overview, some insights and key terminology to help demystify the benchmarking process.

What Is Benchmarking?

Benchmarking is an analytical tool that measures and compares a company's key functions, systems and performance against established industry standards. Used effectively, benchmarking is a practical means of spurring action or change within an organization or across an industry. It pinpoints areas for improvement, sets meaningful goals and provides external criteria against which to measure progress and achievement. Whether benchmarking is focused on one particular area of operations or across a range of business functions, it provides a common basis for comparison and discussion between functional and organizational leaders.

Role of the Executives

Executives play a key role in benchmarking. The commitment and quality of leadership are the foundations of success in this exercise. Many of you reading this article are executives of professional services firms and instinctively bring an external perspective into a situation—always focused on clients, their marketplace and how they and their organizations are perceived by critical audiences. But introspection is necessary for benchmarking. Executives need to spend the time to understand their organization, its functions and processes. No matter how beautiful the watch on your wrist is, it is the inner workings that keep it running. How an organization functions internally is a clear indicator of its attention to the details—and how well it serves its clients. It may be a cliché, but the devil is in both the details and in the execution of any well-thought-out plan or process.

Performance Measures

Benchmarks are performance measures. Benchmarking is an action that involves discovering the specific attributes that lead to higher performance, understanding how these practices work and adapting and applying them to your organization.

Performance measures are the vital signs of a business. They quantify a process or the results. There are many ways to measure a company, department or person's performance, but all share a single trait: They are fact-based, not subjective. Performance measurements focus on cost, quality and time:

• Cost-based measures cover the financial aspects of performance.
• Quality-based measures assess how well a company's products or services meet customer needs.
• Time-based measures focus on the efficiency of the process.

There are two different types of performance measures. Outcome measures identify the results of a process and allow companies to evaluate how well they are performing in a particular area of business. Typically, they are based on a company's overall goals and objectives and are intended to demonstrate the effect 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 in charge of process-specific activities. Therefore, managers identify problems in a business process as soon as they occur, which allows for prompt correction.

One example of an activity measure is FTEs (full-time equivalents) to the number of invoices, as compared to revenue. It is essential to bill and collect for services provided, but how fast and efficiently the process is completed can have an impact on the revenue and/or cash flow of an organization. No matter how skillful the delivery of client services by a company, there is a negative impact on its bottom line if the firm can't bill correctly or collect revenue in a timely manner. Billing errors also send a bad message to clients.

Best Practices

Best practices are a key focus of benchmarking. Simply stated, best practices are the optimal way to perform a business process or practice within specific parameters, as perfected by the perceived leaders in a given industry. Best practices, documented by quantitative and qualitative data, serve as a framework for striving and achieving excellence.

Potential Benchmarking Targets

What processes are typically benchmarked? A benchmark target can be any function within an organization that enables the organization to successfully deliver its products and services. Organizational structures vary throughout diverse industries, but for the most part all organizations perform similar business functions that are categorized as either operating or management processes.

Getting Started

An early decision in the benchmarking process is whether to handle the benchmarking internally or to hire an outside consultant. For a number of industries 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 performance issues and other useful information resources.

Time Management

Some might say that there is no good time to benchmark because there is no available time to conduct it. As an executive of a professional services firm, you may find yourself juggling priorities that take many forms. They could include but are not limited to:

• focusing on client service
• performing support services to ensure that the organization runs smoothly, efficiently and in accordance with the firm's requirements
• marketing and business-development projects to sell and promote the firm and related tactics to build the business pipeline and generate future revenue for the organization
• managing the most important aspect of a professional-services firm—its people

That is why it may be important to narrow your focus when considering benchmarking. If possible, concentrate on the tasks required to achieve the business plan and strategic goals set by the organization. Even that may be difficult because professionals tend to focus on what they are comfortable doing (usually client service), as opposed to what needs improvement.

Benchmarkers Beware

While it can provide insight for improvement in areas such as quality, costs, revenue and time, benchmarking does not provide the definitive answer to every business problem. As with any analytical tool, benchmarking has a number of limitations and can even pose potential challenges. However, none of these need be insurmountable.

Just Do It!

Benchmarking is not just about identification of best practices, but implementation as well—putting the data to use. Changing the way a firm or department performs a business process generally requires the involvement of both the human and financial resources dedicated to the task over a period of time. In addition, successful implementation needs a single point of accountability, realistic goals and the ability to track the progress toward those goals.

Finally, it is important to keep in mind that benchmarking is not just a tool but a process—not an end in itself, but a means to improving performance. Thus, it should not be viewed as a one-time event but as an ongoing commitment to continuous improvement.

Summary

The ingredients for successful benchmarking can be found in best practices, committed management and a well-run business. Effective management of a company or department is not achieved simply by reducing costs; it is also demonstrated by managing and controlling the business. Whatever pressure executives may be under to improve the bottom line quickly, they also face the danger of eliminating key resources that are essential to managing or growing the business or practice. It is smarter and safer to strike the right balance between functional cost and overall business value.

In a growing firm, it is easy to lose sight of excessive costs, duplicate support services and lack of consistent processes and procedures. But in today's competitive environment, these costs can't be ignored, even in the short term. The result of implementing best practices brought to bear by the benchmarking process is greater operational efficiency and effectiveness.²

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Footnotes

¹ Includes excerpts from Chapter 2, "Benchmarking," written by Gina Gutzeit in The Professional Services Firm Bible by John Baschab and Jon Piot.

² If you are interested in further reading and research on the topic of benchmarking, you are encouraged to consult the following Web sites: http://www.abanet.org (American Bar Association), http://www.ama-assn.org (American Medical Association), http://www.shrm.org (Society for Human Resource Management), http://www.metricnet.com (Metricnet), http://www.globalbestpractices.com (PricewaterhouseCoopers LLP Global Best Practices) and http://www.hackettbenchmarking.com(The Hackett Group).