Limitations in Usefulness of Benchmarking
So you’ve done your benchmarking exercise and done well. Hooray! But are you sure things are what they seem?
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:
- 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, even if the score you get in the benchmarking actually gives you the clue as to why you under or overperform.
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.
Benchmarking exercises are bedevilled by failing to compare like with like and ‘good’ results in them can slow down the management from doing what they should be doing – making sure that the firm is as good as it can be at everything it does.
Joe Reevy, Crosselerator