Benchmarking – Some results (and Limitations)
A warm welcome to new author Joe Reevy MSc FCA. Joe says about himself:
“I became a full equity partner within 2 years of qualifying and grew my practice quickly but steadily by organic means. My other expertise is ‘fixing things that are broken’ (mainly professional practice firms). A serial innovator, I retired from practice in 1998 and consulting in 2008 after creating www.words4business.com and then legalrss.uk which assists law firms throughout the UK by increasing PEP through increasing turnover whilst reducing costs and saving time for the firm’s BD staff and fee-earners.”
I would only add that Joe works extremely hard, he produces a great newsletter, and that he knows everything that is going on, everywhere! Ben
I attended PKF Francis Clark‘s briefing for solicitors recently. Great event, and I was impressed how they had identified areas offering good planning opportunities internally and also business development opportunities for law firms arising out of changes in tax law in particular.
Very well worth attending or asking them in to train your people, which they said they were willing to do.
Assume you contact Andrew Allen for that.
The first session, on benchmarking, appealed most to me – well it would really and their findings from current (as opposed to historical) benchmarking out-turns reinforced the point in our latest e-newsletter that commercial firms reporting 10% fee growth aren’t tearing up anywhere near as many trees as they think. Firms with strong IP departments and active in property are showing much better growth rates according to Andrew and the market average is 8-13% right now.
What was even more interesting is that firms that have rebranded their tax/trust/probate services have achieved very strong growth. These results tally exactly with what our clients have been telling us and in particular, those clients who have ‘niched’ seem to have enjoyed the experience a lot.
One other interesting thing is that their clients, like ours, seem to have out-performed the market: as much as we’d both like to claim credit for this, I think at least part of the answer is that we (and they) tend to be engaged with firms that are taking a more business-like approach to practice than some of their competitors.
However, one thing that Andrew didn’t comment on (he is way too polite!) was the implication in the benchmarks (PKF FC’s own survey was more than 100 firms) which could be worked out pretty easily – that most law firms sell less than 40% of the fee-earner hours available to them.
Frankly, this is terrible and if you want a good reason why the median PEP of equity partners across the nation is about £140,000, not £240,000, that’s it. Can you imagine BMW paying their full time staff to only make cars 18 hours a week? Andrew did, quite properly, point out that if an equity partner in a typical firm managed to get an extra hour a week of chargeable time out of each fee earner the effect on PEP would be sensational (about 40% uplift of most firms).
So, want bigger profits? Find out all the unnecessary stuff your fee-earners are doing, or are doing which could be outsourced, done by cheaper people etc. and get them back on the tools. Easy.
PART 2: LIMITATIONS ON BENCHMARKING DATA
After attending the session above, I did some more thinking…
And, some alarm bells rang…
Firstly, firms that outsource will have accounts that look very different from those that don’t, because traditional accounting allocates costs by expenditure type, not the purpose of the expenditure. (For those who want to consider a different approach, which allows making better business decisions, any book on Activity Based Costing should help).
Here’s an example. Suppose a mid-sized firm outsources its content creation and distribution via the web, email etc. to us at Words4Business and LegalRSS.
The resultant economic effects are (for example):
- A reduction in ‘hard’ marketing costs (non-replacement of junior business development staff) of £22,000 less the cost of our service £3,000 = £19,000.
- Time savings for fee earners who no longer produce content (say £40,000).
- Times savings for the rest of the BD team – say £3,000 pa.
Here’s the rub. The second saving isn’t in the accounts at all, because it isn’t recorded as a cost. Neither is the third. The real value here is in the second instance that the firm can do more fee-earning time and in the third case that the BD people can be doing things that are much more valuable for the firm than content management.
Now, what does this mean in a benchmarking exercise? Well, the ‘pre-outsourcing’ firm appears to have a higher BD spend per £ of turnover, not only because the ’hard’ costs have fallen, but because the turnover is less than the ‘post-outsourcing’ era, because it has lower staff utilisation rates (assuming at least some of the time savings are turned into charged client time). One change produces two changes, both of which affect the benchmark.
If the fee-earner time were originally charged to BD however, the reduced BD cost per £ of turnover would have dropped much more significantly. But how many firms do that?
Outsourcing capabilities are proliferating. but this type of effect will be true for any activity which is outsourced. How would you compare the costs of a firm that has three receptionists with a firm that has one and uses Moneypenny? You can, but does your accounting system actually do it?
How would you compare a firm that has an ‘in house’ IT establishment, who do maintenance, program implementation, development and so on with one that outsources all those functions?
The issue is how costs are allocated and that is a real weakness in most, if not all, benchmarking exercises.
Premises costs (especially where there is homeworking), and travelling expenses (especially relating to partner cars) and so on are all really difficult areas in which to achieve a proper comparison. Not only do the practices amongst firms vary – and the variance is increasing as the number of ‘ways of doing business’ proliferates – but the recording and analysis are often quite different to start with.
…which brings me to the last point. You do a benchmarking exercise. You agonise over the results. But so what? Can you really change your property costs short-run? Can you change to a more efficient IT system without a large costs and loss of productive time while your staff go through the inevitable learning curve?’
If you can’t change things, there’s not much point in worrying about them, except as a long-term strategy.
I commented a while back that one of the discouraging things about the benchmarking data I saw last were how few hours firms actually sell compared with those available to them. The problem as I see it is that this is inadequate generally, so a firm that is just so-so at this looks great according to the benchmark data and could be forgiven for thinking that they are doing well.
Staff utilisation rates are the main thing undermining the PEP for law firm partners. Sort that out and you can afford to be mediocre at a lot of ‘below the line’ things
For more thoughts on the limitations of benchmarking, see my linkedin post here.
Next up is Crosselerator, which does what it says on the tin (intelligently).
Joe, I like the results part. On limitations, I see your point. I guess you would need to look at the benchmark data together with the profit and loss report in the relevant firms accounting software to get a full picture. On changing things, I think many changes could be made both in the long and short term (including property costs) which justify the expenditure and short term pain.
May I preface this by thanking you for your comment(!)..but I just wish I knew everything…indeed, the older I get the more I realise how little I know. I do throw myself into things I enjoy though and do think a lot about things.
The problem is a bit bigger than the P&L account (I’ve blogged a lot on this). One of the big problems with understanding accounts is that they are set up to describe expenses by type not function.
Here’s an example. A partner drives to see a client and back. Then he/she drives to another office to do some admin, then to a networking event.
The function of the first is client work (probably), the second is management of some sort and the third is business development. Where to the moor expenses go in the P&L? – motoring expenses.
Multiply this over the loads and loads of expenditure lines of a normal firm and you have descriptive accounting, but not accounting that helps you run the practice profitably and law firm PMSs aren’t great at sorting this out…nor is the persistence of not analysing non-chargeable time.
Costs attach to people. Want to understand costs? Understand what your people are doing…but a surprising number of law firm managers don’t get this and probably won’t until margins get squeezed to levels more typical of other industries.
Lawyers should make a lot more than most of them do. Their systems don’t help them do that as much as they should.
Great stuff Joe…
“Costs attach to people. Want to understand costs? Understand what your people are doing…but a surprising number of law firm managers don’t get this and probably won’t until margins get squeezed to levels more typical of other industries.
Lawyers should make a lot more than most of them do. Their systems don’t help them do that as much as they should”.
My belief is that systems won’t improve at all unless and until management strategy improves.
When owner/managers in particular fully realise how people are wasting most of the owners’ real profit potential, they will become much better focussed on systems that identify where the waste is so redeployment can be addressed as a simple continuous improvement process.
The dramatically improved profit can be partly re-invested, and partly drawn to improve whatever in the owners’ lives they want to improve…reduction in cash flow stress, better holidays, improved retirement provision, just for starters.
You aren’t wrong there Rob. I found when I was consulting that once the firms started to DO what they needed to do, the financial benefits flowed through fast…and they became much happier!