Benchmarking Your Organization- with Ric Payne
Session Moderator: Good afternoon to you! I'm excited about our workshop this afternoon. Benchmarking is truly one of the things that can impact your firm's performance. We are thrilled that Ric Payne, CEO and President of Results Accountants’ Systems, is here to lead this workshop.
Please allow me to introduce Ric Payne to you. Richard Payne is CEO, Worldwide Operations of Results Accountants' Systems, a company he jointly founded with Paul Dunn in 1992. Prior to the formation of Results Accountants' Systems Mr. Payne was a Partner in the firm of Rutherfords, one of the largest and most successful accounting practices in New South Wales, Australia. In that capacity he headed up the firm's Management Consulting Division.
Before joining Rutherfords, Mr. Payne taught in the Business School of what is now Southern Cross University. He was also at various times a Visiting Fellow at other Universities in Australia and the USA. His teaching and research interests focused on strategy and operational excellence in small- and medium-sized business. He carried this experience to his career as a practicing accountant and quickly developed Rutherford's reputation as a leader in business development consulting.
Mr. Payne has a reputation for his deep understanding of the dynamics of the accounting profession and has consulted to hundreds of firms throughout the world ranging from the Big 6 to small local practices. He has documented his experience as a consultant in his systematic Consulting Manual and various software applications that are used by clients of Results Accountants' Systems around the world. Mr. Payne is an accomplished speaker who is able to blend his practical experience as a consulting accountant with his teaching skills to articulate complex concepts and ideas in a coherent and entertaining manner.
Mr. Payne received his Bachelors and Masters degrees from the University of New England. He is a CPA (Australia) and member of the Australian Institute of Management.
Thanks for being here Ric. I'll hand it over to you now?
Richard Payne: Hello everyone and thank you for joining us today. The topic we'll be discussing is how you can benchmark your firm as a means to outperform your competitors. Before we start, does anyone have any specific questions that you would like addressed in today's chat session? Has anyone ever been engaged in a benchmarking assignment?
Merrill Carmichael: No.
Cary Selby: No.
Richard Payne: In any industry you care to choose there are always some firms that outperform the rest of the industry by an order of magnitude. In effect this means that they are fundamentally better at what they do than other firms. If we were able to perform critical processes as well as those firms we could expect to get similar outstanding results. This is the underlying argument for benchmarking.
Let's start by defining the term. Strictly, benchmarking is a performance improvement methodology that involves identifying, understanding and adapting best practices and processes found inside and outside an organization. It is also rather loosely used to mean who an organization compares on various performance dimensions with other organizations in the same industry. This is the focus I'll have today.
The only data that I am aware of that relates directly to the accounting profession is the annual MAP survey published by the Texas Society of CPAs. It contains a lot of useful comparative firm data but the sample size is relatively small. Has anyone seen these reports?
Lisa Patterson: I have, but I didn't think they were very useful.
Ann Smith: I saw them in a firm I worked in several years ago.
Richard Payne: Why do you say that Lisa?
Lisa Patterson: Our firm just seems to be different and really not comparable to the "average"
Richard Payne: Different in what respect if I could be so bold as to ask?
Lisa Patterson: I don't know why specifically, but our "benchmarks" weren't even close to the survey.
Richard Payne: Were they better or worse?
Lisa Patterson: Both.
Richard Payne: I thought you'd say that Lisa
Cary Selby: The Ontario Institute of C.A's does a survey every few years - I'm not sure when the last was done.
Richard Payne: The problem with inter-firm comparisons is that they do not necessarily show best practice but reflect averages and medians. Given that it is dangerous to think that you're doing OK simply because you fall within or even above the "average" range. On the other hand they do provide some objective information that is useful especially to firms that find themselves below the levels being achieved by the top performing firms in the survey. If nothing else it gets you thinking about where you need to improve. If you don't use some benchmark how do you know if you're doing well or not - is that important?
Merrill Carmichael: Extremely, especially if you are trying to set apart from competition.
Richard Payne: In RAS we expect our clients to achieve the following performance benchmarks: fees per person - $120,000, number of people per owner - 7, net profit margin before owner compensation - 45%. This will yield a net profit per owner of $378,000. Any comments on that?
Let's get back to the benchmarks I referred to above. Let me put that another way, if you were not making $378k per owner, what questions would those benchmarks raise for you? The next person to answer a question will be sent a Koala bear.
Merrill Carmichael: Why are we "underperforming."
Richard Payne: Yes, and that does not qualify.
John: I would like to see revenue and expense comparisons. The numbers seem high but it makes me want to look at my clients and the net per client.
Richard Payne: You win John.
Those benchmarks give rise to questions about how you can achieve them. So let's throw it open for some ideas relating to each of the 3 benchmarks.
How can you increase fees per person?
Ann Smith: Raise fees.
Merrill Carmichael: Reduce # of people or increase fees.
Linda: By adding value.
Richard Payne: OK Linda -- get more specific.
Linda: Packaging services for clients that exceed their expectations and meet their needs will allow for a firm to easily raise fees, increase A clients, make sure the clients are aware of the initiatives.
Richard Payne: You're right Linda.
John: You can sell more business with increased value. Cross-sell in your firm.
Richard Payne: Yep
Fees per person: put up prices, improve productivity, add higher value service lines, distribute 3rd party products or services to your clients etc. But each of these initiatives have strategic implications...what are they? How can productivity increase fees per person?
John: It will allow them to do more work in the same amount of time.
Richard Payne: Absolutely -- people tend to fill the time available with the work that's there so the more work you get the higher your productivity will be.
Ann Smith: It also will allow them to focus on work at which they are most productive and do more of it.
Richard Payne: By the way, how do you think productivity should be measured? Would benchmarks help in productivity measurement?
Lisa Patterson: Yes-if they are very specific.
Ann Smith: Dollar amount of work billed and satisfied clients
Richard Payne: Ann, please explain that in more detail
Ann Smith: I looked at the dollar volume of work my employees billed during this past tax season. I think that focusing on that meant that they didn't just work to fill the time. However, the work has to be done right--that's where happy clients come in.
Richard Payne: Ann it would be neat to have a metric that captures what you're looking for.
Ann Smith: Yes-I'm not sure how to quantify happiness!
John: The interesting thing to me is that if you give a staff member a budget somehow that budget is met or exceeded. Rarely does it come in below budget. Yes benchmarks would help.
Richard Payne: Agree John. But is the budget too low perhaps?
John: Not normally. We have been doing the work for years. In some cases, yes.
Richard Payne: Some cynics would say the team member cheats on the timesheet.
John: Cheating - not believing just not incentivized to perform at top level.
Richard Payne: So, the $64,000 question John, are you getting $120k per person?
John: Not in the Dallas market.
Cary Selby: When you say $120K per person, are you referring to chargeable team only, or also including admin?
John: That seems to be easy to measure but it seems it would include admin and CPA.
Richard Payne: All people Cary. It's big but very possible.
John: You poll your clients and determine where you are meeting their needs. Approx. 64% of clients leave because of perceived indifference not because of price.
Richard Payne: Yep. It would be interesting to have a benchmark on client defection too.
Ann Smith: But will unhappy clients respond to your poll or just ignore it?
Richard Payne: What about the next benchmark - people per owner?
Lisa Patterson: We are overleveraged-3 partners for 12 team members. Fire partners or hire more team members?
Richard Payne: Your choice
John: What is your chargeable time per partner?
Lisa Patterson: From 500 to 1700 hours.
Richard Payne: Firms that have lower chargeable time for partners tend to grow faster.
Session Moderator: Lisa, what do you mean by over leveraged? Is that truly possible?
Lisa Patterson: SM-we don't meet the 1 partner to 7 team members benchmark. It seems that for us, the partners are sometimes the most productive in terms of fees. Only one partner is typically selling-little production, except for big projects. The other two partners are "working in the business." Comp based on whatever the managing partner decides-another issue altogether.
John: How does a partner sell and charge 1700 hours? I would buy life insurance on the partners working all the time.
Richard Payne: I agree with you John.
Ann Smith: So is it more important for the partner/owner to spend time on firm development than to actually do chargeable work?
Cary Selby: We are 2 partners plus 4 team members - would like to add another 1-2 but hard to find the people.
John: Is your comp based on sales or production or both?
Richard Payne: Lisa, the fees they make this year is value they are not creating for future years.
Lisa Patterson: I agree Ric.
Cary Selby: Yes, but they still have to eat!
Richard Payne: Cary, everyone is finding it hard. Ask yourself the question; what would I have to make my firm look like for me to want to work there? Leverage is the key. Email me after this and I'll send you a spreadsheet to prove it.
Cary Selby: I'm with you 100% - the amount of material RAS is flooding me with is forcing me to cut down my chargeable hours!
John: I would like a copy of that spreadsheet also
Session Moderator: Ric - can we make that spreadsheet available to our AccountingWEB members?
Richard Payne: Sure SM.
Lisa Patterson: How do you get your other partners to really believe in this? Even after boot camp?
Richard Payne: You fire those who don't.
John: We are going thru a process of moving the partners to less chargeable time and selling more. It is painful but it is starting to prove to be profitable.
Richard Payne: Make sure you don't put good technical partners in a sales role -- they are valuable as producers. Let the rainmakers sell but not do technical work.
John: The techies can usually sell wonderfully with current clients. Once they get to know her they love her.
Ann Smith: What about a one-owner firm?
Richard Payne: Ann, you just have to get more people of find a very valuable niche. At the end of the day your income is limited to the time you have available.
Ann Smith: I have staff but am not really interested in having a partner--how do I split my time between selling and technical?
Lisa Patterson: How many staff do you have Ann?
Richard Payne: I can't answer that Ann.
John: Hire a technical manager and then go sell.
Ann Smith: 2 CPA candidates and a part-time college student.
Lisa Patterson: And how long have you been in practice?
Ann Smith: Three years.
Richard Payne: But what I do know is that more time has to go into selling to build a practice quickly and that means an investment.
Kerry Pickering: So leverage is the key. People don't need a 'partner' label to perform a specific role.
Lisa Patterson: Ric-sometimes it seems like you just can't afford the extra people.
Richard Payne: Can you afford not to? It's about building a business. We are not good at thinking about it from that perspective. We have to give something up to get more down the track.
Ann Smith: I agree with Lisa. I stretched to get college graduates with the idea that it would pay off in a couple of years. But I can't look at hiring anyone else just yet.
Richard Payne: OK Ann, that's fine as long as you are aware of what you need to do. A key is not just to hire but hire RIGHT and possibly pay more.
Ann Smith: They were former students of mine so I knew I was hiring right, but at this point they still require a good bit of supervision.
John: I went through this for 10 years thinking I could do the work and I would make more money. I left my practice for three years for a specific project and find out the rest of the world works. Boy I was wrong for a long time.
Richard Payne: Could you explain more John?
John: I have more fun selling. Some people have more fun researching. I worked approx 800-1000 hours OT a year. I always thought I did not need to hire someone else I could do the work. I almost killed myself. It was when I left and found out that business people work on their business and not in it that I began to understand that I was going to make a sacrifice to make my life better.
Richard Payne: Thanks John. You've earned your Koala.
Richard Payne: Let's go to the third benchmark: Improve margin - how do you do that?
Lisa Patterson: More efficient procedures.
Richard Payne: What's that mean Lisa?
Kerry Pickering: Measure twice, cut once.
John: Being more productive; concentrating on work that is not standard to all firms.
Lisa Patterson: Use the internet for research instead of heavy books, for example.
Richard Payne: Improve net profit margin: reduce expenses without reducing revenues at the same rate or increase revenues without expenses rising at the same rate. Productivity and pricing are keys here. PRICING is SOOOOOO important.
Lisa Patterson: I read the value pricing workshop script-can you really just ask your clients what the services are worth to them?
Richard Payne: I did but only when they felt my assessment did not accord with theirs.
John: I would think pricing comes into play with the classification of your clients.
Richard Payne: You get a double whammy effect with pricing - increase fees per person and increase margin.
John: Do you think you have to be a full service firm to do what you are stating?
Richard Payne: Not really John but if you are selling a commodity the "market" price is not to be ignored but not to be slavishly followed either.
Kerry Pickering: Not at all John - people pay for the value they receive, not the hours it took you to do it. Same applies for compliance.
Richard Payne: John, if you haven't already done so you must read Ron Baker's Book - the Professional's Guide to Value Pricing
Kerry Pickering: I'll help you out then - Setting and meeting profit targets, identifying profit drivers in the firm.
John: I have been value pricing since I returned. I do not look at a project by time I look at it for value. Thanks for the book suggestion.
If it is $378k per partner then is comp the highest expense item and how does it measure to my competition.
Richard Payne: OK John, calculate the price you need to get to achieve that. Then calculate how many clients you could lose without being any worse off. You may be very surprised.
Richard Payne: So what has all of this got to do with benchmarking? Do I hear nothing? I'm having a problem with character placement!
Could I poll the group, of those in practice…Who is getting a NP% of 45%?
John: Not me.
Lisa Patterson: We are not.
Ann Smith: I am, but as a young firm it all goes to service start-up expenditures.
Richard Payne: A caveat - if you are a very small practice that is possible because you are not paying wages.
Cary Selby: Our problem is NP% is too high - ie. too much chargeable time by partners.
Richard Payne: The whole point of benchmarking is that it gives you a reference point to target. Then all you need to do is figure out the best-practice strategy to achieve that. Your clients BTW find benchmarking extremely valuable.
Kerry Pickering: So many businesses operate in isolation, they like to know how they're going against their competition.
Richard Payne: In my own firm we simply started by saying that we wanted to be in the top 5% on all critical dimensions for firms in our industry based in the interfirm comparison data we could find. That gave us a target and we got there quickly.
John: When dealing with clients and helping them benchmark in their own industry we often times have difficulty finding info to benchmark against. Any suggestions for places to go?
Richard Payne: John, try www.integra.com. I think that's the site. if not, add that request to your email to me. Prentice Hall and Robert Morris also have some data.
Ted Jackson: John, another good place to go is www.1stresearch.com
Richard Payne: Thank you Ted.
Kerry Pickering: 1st Research specializes in providing this data to Accountants and financial providers.
Richard Payne: There are various other sources too -- try the clients' industry association
John: Client's industry is almost all private- very difficult to get info.
Kerry Pickering: Or local government business departments.
Richard Payne: A good general site for benchmarking is the American Productivity & Quality Center (www.apqc.org)
Richard Payne: The BIG point of all of this is that it is very much a value added service for business people and the target gets you positioned to work with the client on strategy and then monitoring the metrics. Clients will pay a lot for this type of service
Kerry Pickering: So it's valuable for the client and give you a lead into other value added services.
Richard Payne: And so they should because it significantly increases the value of their business.
John: What tools do you suggest for monitoring.
Richard Payne: John, that's another topic. But first get the strategy in place, determine the implementation tactics (initiatives) then define the key performance indicators and then measure them. The main tool is your brain and common sense.
KPI's are really just common sense. PPC in Fort Worth have an excellent Manual on Performance Measurement. So does RAS by the way.
Kerry Pickering: John that's where systems and processes will help you to leverage.
Richard Payne: I think we are drawing to the end of the hour. Any final questions? Has this been useful for you?
John: This is my first time and it was helpful.
Cary Selby: Has been great - thanks Ric.
Lisa Patterson: Thanks Ric.
Session Moderator: Thank you all. I wish each of you a successful week!
Download the spreadsheet referred to in the above session by clicking here.
Voice of the Editor
Which isn’t completely true. I mean, occasionally I drop by when I manage to sneak out of the nonstop frat party over at Going Concern, but I’m mostly a wallflower over there. I’m happy to say that I’ve been given express permission (or explicit orders, if you like) to wander over here to AccountingWEB more often.
Why is that, you might ask? My job is to replace the irreplaceable Gail Perry as Editor-in-Chief. What does that mean? I don’t really know! I think it’ll be fun getting a feel for things, throwing in my own thoughts here and there, and listening to the discussions you’re having about the accounting profession.