Guide to The Management of The Professional Services Firm
Many professional service firms measure their performance based primarily on financial measurements, such as the total number of hours billed, revenue generated per partner or net income per partner. But there are at least three other worthwhile ways in which to measure firm performance, besides the commonly-used, financial perspective. These other methods are:
- The Client Perspective: "How do our customers see us?" For instance, if a CPA firm says it is concerned about meeting the clients' needs, it should be measuring key indicators relating to the client. This could mean formally tracking the firm's client retention rate to see whether it is rising or falling and if so, how much. Once tracked, this could help draw the firm's attention to trouble spots that could then be remedied early on, before affecting such key items as net income per partner.
- Internal Business Perspective: "What must we excel at?”: What must firms excel at from an internal perspective? Each firm would have to determine this for itself. However, some key indicators might be measuring the time between when work is performed for a client and the date the bill is sent out, along with monitoring the time that passes between when the bill is sent out and the cash is received in. Other internal performance measurements could be how quickly the service provider returns clients' phone calls, how long it takes for a fax, once received by the firm, to be delivered to the appropriate party or even determining the level of staff turnover at the firm.
- Innovation and Learning Perspective. "Can we continue to improve and create value?": To turn a professional service firm into a "Learning Organization," to take a term from Peter Senge's book The Fifth Discipline, it must pay attention to the ways in which it encourages learning and growing. As defined in the Fifth Discipline Fieldbook, "learning in organizations means the continuous testing of experience, and the transformation of that experience into knowledge - accessible to the whole organization, and relevant to its purpose." So what might be measured from an innovation and learning perspective in a professional service firm? In the case of a law firm, how about usage level of the firm's database of all its previously-filed law firm briefs or memoranda, assuming it has one. Couldn't a firm's MIS department help track this information? Knowing who is using the "brief bank" and how often will help the firm determine whether firm lawyers are still reinventing the wheel when it comes to writing briefs or are availing themselves of knowledge accessible to the whole organization. And if the utilization rate proves to be low, how about having a training session in the use of and value in the database and then measuring whether usage went up after the training?
You can read the full story below and view some helpful tips of establishing performance measurements for your firm.
Story and Tips:
Why would a professional service business, such as an accounting firm, insurance or law firm, want to measure itself based on indicators in any of these other three areas? Because what occurs in each of these three other areas also influences the firm's overall performance. Below we touch upon each of the three items listed above, Client Perspective, Internal Business Perspective and Innovation and Learning Perspective. We have also included some key points and tips to help implement these within your firm.
For instance, if a CPA firm says it is concerned about meeting the clients' needs, it should be measuring key indicators relating to the client. This could mean formally tracking the firm's client retention rate to see whether it is rising or falling and if so, how much. Once tracked, this could help draw the firm's attention to trouble spots that could then be remedied early on, before affecting such key items as net income per partner.
If a CPA firm's business manager was tracking its client retention rate, say, and it finds the rate was falling in one area (audit) and rising in another (tax), he or she (or the two together) could then begin to ask why this is happening? Were the factors external, such as a rise in interest rates, or internal, such as one of best lawyers in the real estate department in terms of serving clients' needs had recently retired and no one of his caliber had been found to replace him?
Looking at the firm's performance from the client's perspective could also mean coming up with ways to track the firm's client-referral rate. Is it rising or falling? Tracking the number of people who are key in terms of referring work to the firm might also be important to measure. Of course, it follows that acknowledging and in some way rewarding the efforts of these key work referrers would also be important.
It might be a good idea, too, to track the number of client complaints received by the firm each week or month and log the kinds of complaints. This could help the firm determine whether a pattern exists and if so, guide it in taking appropriate steps to improve processes and methods in those areas that clients consistently had complaints about, such as billing or fees.
What must firms excel at from an internal perspective? Each firm would have to determine this for itself. However, some key indicators might be measuring the time between when work is performed for a client and the date the bill is sent out, along with monitoring the time that passes between when the bill is sent out and the cash is received in. Other internal performance measurements could be how quickly the service provider returns clients' phone calls, how long it takes for a fax, once received by the firm, to be delivered to the appropriate party or even determining the level of staff turnover at the firm.
Innovation and Learning Perspective
To turn a professional service firm into a "Learning Organization," to take a term from Peter Senge's book The Fifth Discipline, it must pay attention to the ways in which it encourages learning and growing. As defined in the Fifth Discipline Fieldbook, "learning in organizations means the continuous testing of experience, and the transformation of that experience into knowledge- accessible to the whole organization, and relevant to its purpose."
So what might be measured from an innovation and learning perspective in a professional service firm? In the case of a law firm, how about usage level of the firm's database of all its previously-filed law firm briefs or memoranda, assuming it has one. Couldn't a firm's MIS department help track this information? Knowing who is using the "brief bank" and how often will help the firm determine whether firm lawyers are still reinventing the wheel when it comes to writing briefs or are availing themselves of knowledge accessible to the whole organization. And if the utilization rate proves to be low, how about having a training session in the use of and value in the database and then measuring whether usage went up after the training?
How about tracking the firm's utilization rate of its training and development resources? For instance, what is the firm's budget for training staff in such areas as improving their customer service skills or using new software such as spreadsheet or database programs? How much of that money is being spent?
How about measuring firm morale? To begin the improvement process, the firm could do an internal survey of what people consider to be the leading hassles (not counting individuals) in the organization? This would undoubtedly result in some valuable information to help the firm improve operations firmwide and also help move in the direction of a learning organization.
To truly gauge improvement in the professional service firm's ability to be a learning organization, an internal survey asking primarily the same questions each time would need to be done on a regular basis. For instance, a firm could survey employee and/or partner attitudes about the organization annually, asking each person to give a 1 (lowest) to 5 (highest) score to their feelings about different aspects of the firm, such as "When you want information or help on a difficult, job-related problem, how likely are you to get help?" or "Are you encouraged by your attorney or department supervisor to offer ideas and suggestions for new or better ways of doing things?" (These two questions were taken from an internal survey done by the law firm Plunkett & Cooney in Detroit, MI, as part of its continuous process improvement effort).
One Firm's Approach to Measuring Its Processes
One firm that is measuring its processes as part of its continuous improvement method of management. This 130+ firm measures how it is doing in five general areas: 1) Finance, 2) Client Complaints, 3) Human Resources, 4) MIS and 5) Office Services. Although not truly a balanced scorecard approach, it monitors its performance from three perspectives: Financial, Client Perspective and Internal Business Perspective, which encompasses Human Resources, MIS and Office Services.
What kinds of things does this firm measure in these general areas? Key statistics in the financial areas cover such items as net income per partner, operating expenses per lawyer, chargeable hours for partners, associates and legal assistants and realization rate on its accounts receivable and work in progress. It also tracks the speed of its billing and collection, including charting the average number of days between work performed and the date of the bill and the average number of days between the date of the bill and date cash was received. The firm has also established goals in terms of how quickly it would like these processes to take.
The firm also tracks the number of client complaints it receives and breaks them down into what type of complaint, such as whether it was an issue related to billing, fees, attorney responsiveness, the client engagement letter and so on. Secretaries, receptionists and people working in the accounting department are the ones responsible for tracking the complaints. They then pass this information on to the firm's managing partner, who speaks to the individual responsible for the particular matter.
Since 1993, the firm has also been tracking the revenue generated by each of its top 50 clients to see when the numbers are rising or falling. Tracking this information can be a key indicator of client satisfaction. "If the numbers are falling for a client, this might mean it is dissatisfied, particularly if you know that the client is financially healthy," explained the firm's administrator, Sam Wilder.
To respond to client concerns, this firm has implemented a client manager system last summer. This means one person is designated to be the responsible person on each engagement, and he or she is the one who manages all elements of the client relationship. In fact, the firm has put into writing what the duties of this person are so it's clear to everyone what is expected. Wilder said having such a system has helped increase the revenue it is generating from its top 50 clients, as reflected by its tracking system.)
From the internal business perspective, the firm also tracks the average amount of time it takes to deliver a fax after it was received, the number of employee absences per month, the amount of time the computer system is down and the number of monthly impressions made by each of the firm's copy machines.
Wilder explained that tracking usage on each of their copiers helped them determine that they could afford to have one less copier since it wasn't being used very much. Having this data, he then sent the underutilized copier off to a branch office where it was needed, saving the firm money by not having to purchase a new copier.
Why does this firm measure all these different items? "Because how do you know if you are successful if you don't measure how you are doing?" asks Wilder. "Financial indicators alone don't provide all the data you need to make sound decisions. You need to manage by fact, not by gut feelings. Plus, what gets measured, get's improved."
ABA Quality Improvement Demonstration Project
This firm is one of 10 firms invited to be a "demonstration firm" in implementing a continuous improvement method of operation. During this training session, the group came up with 90 different items that professional service firms could measure to help improve their operations. These included measuring and charting:
- the time it takes to issue bills
- telephone/voicemail response time
- time that accounts receivable are outstanding
- time it takes to find files
- the number of new referrals the firm receives each month
- employee retention and job satisfaction rate
- client retention rate
Firms Must Be Committed to Continuous Process Improvement
Clearly, there are a number of ways professional service firms can begin to measure key processes. This can be done either by using the Balanced Scorecard Approach and finding, perhaps, three critical processes to measure from each of the four perspectives. Or it could just pick a handful of processes it considers critical to measure, regardless of whether each one fits into one the four key areas discussed in this article.
In either case, however, measuring critical firm processes in a firm presupposes that firm partners want to journey down the road of continuous improvement. There is little point in determining key items to measure, set goals for performance, take the time required to measure the processes and then not use the information received to make improvements in operations.
Although it has been said again and again in continuous improvement literature, it bears repeating here. That is, top management must be committed to improving processes within the firm before a continuous process improvement effort can succeed. Although some people might wonder why everyone isn't interested in improving processes inside their organizations, this "continuous process improvement mentality" frequently requires a new mental model. Indeed, in a law firm environment, a new paradigm would have to be adopted to enable continuous process improvement to really take hold. And that paradigm is: success is measured by the quality of the service provided rather than by the number of hours billed.
And the quickest way to alter the current paradigm would be to de-emphasize number of hours billed as the key criteria for compensation. As long as total billable hours is the key determining factor in a partner's compensation, regardless of how effectively the client was served, what is the motivation for changing? To bring about a shift in attitudes firmwide, service providers compensation must be more directly linked to serving clients needs. And a good place to begin would be to regularly survey clients on how effectively service providers are meeting their needs and then use the survey results to help determine compensation.
Some firms have already altered their compensation system to de-emphasize billing hours and instead reward more effective client service and other activities they value. These other activities include: how much time the partner spends on marketing responsibilities, management responsibilities, mentoring of associates and his or her level of responsibility in the firm's quality improvement efforts.
"A compensation system that measures performance based on the number of hours billed is not effective, because it rewards the staff for being inefficient, for spending as much time as possible on a engagemetn to increase their total billable hours," declares R. Wayne Byrd, a member of Turner, Padget's Management Committee and a leader of their continuous improvement efforts. Another new paradigm that would need to be adopted for a professional service firm to take maximum advantage of the data it gathers around its performance measurements would be "that an organization can be most effective when people work together in teams to solve process-related, business problems."
If this notion were accepted, then when certain performance standards were not met, small teams of people most connected to the process being measured could flowchart the current process, brainstorm about why they were unable to meet the goal, gather data to confirm their hypothesis, and if correct, propose and implement a solution that would improve performance in the studied area and indirectly, improve performance firmwide.
Despite objections from vocal naysayers who aren't interested in changing the way they think or operate, it seems that "all this talk about quality and client satisfaction" is finally beginning to affect professional service firms. Although hundreds of other businesses, such as Motorola, Federal Express, Eastman Kodak, Toyota, American Express, First Chicago Corporation, and IBM, have already successfully incorporated continuous improvement principles and methods into the way they do business, including measuring key processes to drive improvements, professional service firms are just now beginning to explore the tremendous possibilities.
Tips of Establishing Performance Measurements
for Your Professional Service Firm
- Decide who will determine what to measure. Should it be the Business Manager? Director of Human Resources? Executive Director? The Management Committee? A combination of these. Perhaps the business manager could come up with a proposed list of what to measure and have the management committee review it before the measuring process begins.
- Once it is decided who will draft the list of proposed processes to measure, that person must determine what the firm wants to measure. This might best be based on what the firm's long-range goals and stated values are. This material would come from the firm's strategic plan or its mission statement, if it has one. If no mission statement exists, then hammering out measures will be more difficult. For instance, is improving the work environment in the firm a priority? If so, then it's important to measure the level of staff turnover, for as long as turnover remains high, then more work needs to be done to improve the work environment or internal culture of the firm.
- Once the measures are established, determine who will be responsible for keeping track of and regularly reporting on how the firm is doing in each of the areas it decides to measure.
- After the chosen processes has been measured for a few months and the current performance level of each one has been established, set goals or benchmarks for improved performance in each area. To help establish a benchmark, firms might want to ask clients or other, non-competing, professional service firms what their standard is for performing a specific process and if their standard is worth emulating, why not ask them what steps they take to achieve such an admirable cycle time, number, rate or percentage. Also be sure that once a goal has consistently been achieved to come up with a new process to measure. Remember, this is continuous process improvement.
- Don't try to measure too much or establish measurements of processes firm service providers and/or staff have little control over. It might be best to begin with two or three processes to measure in each of the four areas identified by the Balanced Scorecard approach.
- If the firm has a number of departments, it might be good to measure the same process in each department. This way, if one department is consistently outperforming another in terms of accomplishing its goals relating to a certain process, then the firm administrator or someone from each department could compare notes and see how the process differed in each area. Then the department with the more effective processes in place could become the internal benchmark and the other department could then replicate their best practices in its own area.
- Don't use measurements results as a stick to attack peoples' performance. Use results to give feedback and help the firm become a more effective, "learning organization."
- Determine in what manner and how frequently the performance measurement data will be collected and presented. Who will be involved in helping to collect the data? Who will prepare the charts and graphs and how often should the data be presented in order to be meaningful?
- Decide on who will see the performance measurements. In most cases, it is best to share the results with the entire firm, or at least with all those people involved in the process that's being measured. Sharing the information to a large cross-section of people sends a message that these measurements are important and everyone is then encouraged to work together to achieve the goals connected with the performance measurements.
- If, over time, certain processes don't meet the desired goal, a cross-functional team of the people most directly affected by the process should be formed to meet and brainstorm about the possible root causes for the problem, while gathering data to confirm or refute whether the suggestion it proposed to ameliorate the situation is the most effective one.
- Remember: "What Gets Measured, Get's Done!"
This article is courtesy of Nancy Blodgett located in Palatine, IL, owner of Performance Excellence