Adding the muscle

Third article on how to develop a workable strategy explains how to measure how well a business is doing in chosen target areas, compared with other firms

The Journal, April 2005, page 28

This is the third article in a series of four which provide a useful guide to developing and implementing a business strategy. Article 1 looked at the true financial returns required to create value and generate true wealth. Article 2 looked at the tools available to identify the optimum business strategy. We now look at the difficult step of converting a business strategy into a business operation. How do you actually turn your desire to be the best at delivering legal services in Britain into a reality?

Hopefully, having followed the five stage process in the second article, you now have a great strategy which all the owners agree is the way forward for the business. In addition you should have this strategy broken down into strategic areas of importance, like customer service or specialist legal advice. From this you can start to focus your operational management and budgeting priority on those areas of the business that are strategically important to it. In this way you can ensure that the management focus is on the strategy and the financial investment is also biased towards the strategy.

In the last article we also mentioned briefly the tools available for implementing a strategy, from-to analysis and balanced scorecards. These two tools provide the answer to the question “What do we do next?” What these tools don’t do is give us any indication of how to do it well. This is where benchmarking comes in. From-to analysis identifies what parts of the business need to change and how. Balanced scorecards provide a balanced set of measures, some financial and some not financial, to chart progress in the “from-to” change process. Benchmarking provides the comparative measures which actively demonstrate that your business is improving and eventually becomes “best in class”, or top quartile, or better than average in the field or function in question.

Try someone else’s clothes

Of course, you could ignore all the other businesses that have struggled with similar constituent parts to their strategy, and through trial and error build an operational plan that does deliver your strategy. However, benchmarking enables you to save time and implement your strategy faster, and thereby give it the optimum chance to be successful.

So how does benchmarking work in theory? Find an organisation that does something really well that you want to do. Find out what measures of success they have, copy those measures of success and then ensure that the business is managed so that those measures of success are replicated or bettered. In this way, your organisation should deliver the operational effectiveness that your benchmark organisation or group of organisations delivers. The benchmarking process also should, if done well, allow you to get under the skin of your business processes and, through discussion with other benchmark organisations or intermediaries, understand how they do it well. If you want to be the most customer-focused law firm there is, then being better than a renowned leader in customer care and attention, using their measures for success and beating them, should mean that your customers get an even better experience than the customers of your benchmark.

Two birds with one stone

In practice there are a number of factors which you should consider:

• Where do you get benchmark data from?
• What measures are being benchmarked?
• What underlying discussion is available surrounding the benchmarking exercise?
• How do you measure your organisation against benchmark scores?
• How deeply do you make the benchmark scores a core part of the business?

Part of the answer to these questions depends on where you gather your benchmark data from and how much time, effort and money you are prepared to invest in this process. The following identifies a number of sources of benchmarking data and discusses the pros and cons of each.

The Law Society of Scotland has an annual Cost of Time survey. This analyses the finances of responding law firms, and groups the results into regional and size categories. With this you can compare the percentage of fee income that you spend on IT or marketing, for example, against the industry norm for a 10 partner firm in the regions. The benchmark report is available from the Society. The only real cost in using the data is the cost of time involved in either collating that data to submit as part of the benchmark or collating the data after the report has been published and comparing your firm’s data against the benchmark report. Given that the amount of work is the same whether you submit your data to the survey or not, it is sensible to be part of the survey and obtain the analysis for your firm in return.

Money well spent?

However, knowing that you are spending less than the average in Scottish law firms on marketing doesn’t really indicate whether you are spending money wisely. A targeted and well thought out marketing plan that relies on fee earners delivering more than clients expect, and then asking for personal recommendations for further work, will result in a lower marketing spend than a pan-Scotland media advertising campaign. The question is, will the first strategy be more effective than the second? Benchmarking, to be useful, needs to help you identify the effectiveness of your operations as compared to organisations that are known to be very effective in that area. In this respect, focusing on the pure financial number can never help you understand how well you operate part of your business.

PWC, the accountancy firm, produces a similar benchmark survey of law firm finances across the UK. The data collected cover more than just costs: each year the report moves to collect more and more operational as well as financial data. In addition the survey has a bigger population of responding law firms as it includes English and Welsh firms too. If you take part in the survey and submit data, you get the survey report free. The cost then is only the time and effort taken to complete the survey. If you don’t submit data you can buy the survey results from PWC. Again whilst there are some additional measures that are not purely financial, most are and the same issues hold as with the Society’s survey.

Sleeping with the enemy?

Some groups of similar organisations begin confidentially to compare detailed data and business issues. Meeting quarterly or six-monthly they analyse what each is doing and generally learn from each other’s experience. This tends to result in the group members raising their game to the level of the best member. Obviously the success of this depends on every member being open and honest and feeling that they have something to get out of the process. Essentially it becomes a trade-off between group members. Give up to the group how and what you do really well, help the other members improve in this area and in return get help and advice enabling you to improve in areas you are weak in but other group members are strong in. This can be relatively cost effective, although the better groups tend to work with external and impartial co-ordinators and facilitators. The downsides to this are however that you are directly helping your competitors to improve and the best you can hope to do is to get as good at something as someone already in your business sector. However, this does allow detailed discussion and understanding of specific market and business issues and does work very well.

Finally you can use an external national database like the DTI benchmark index. This contains financial data from over 156,000 companies and performance data from a further 12,000. Access to this database of comparable benchmark data is via one of a number of approved organisations or individuals. The DTI collects benchmark data on a huge number of business operations and functions, and does not only measure financial outputs. As a source of large scale UK business data this is great and the only downside is the potential cost in consultancy time to collect data and analyse it against the DTI database. However as a source of measures and a process for business improvement that will really help you chart your progress in implementing your strategy and give you an operational direction for implementation, this is second to none. The real beauty of benchmarking like this is the diagnostic tools that accompany the process. This process is more than just number crunching and collation: by reporting on the right numbers it enables the business to understand how it is performing in the right areas; by comparing your business’s performance against businesses that perform very well in this area you are setting stretching but achievable targets; and by making your managers responsible for meeting or beating the benchmark targets you will ensure that they manage your operations so that you achieve your strategic objectives.

In summary, having determined what financial returns you need to ensure that you create wealth, you can make realistic decisions about the financing of your business. You can get capital levels right and investment levels right and still be certain that your owners are getting a return on their investment that means their capital invested is better off in your firm than not. Then by working through a five stage process you can invent and develop a business strategy that will enable you to earn the returns you have identified, based on the investment you have. Now, with benchmarking, you have a tool that gives you a means of measuring and managing the way you go about implementing your business strategy.

Shaun Gillanders was Finance and IT Director at Pagan Osborne and is now a freelance finance director and interim manager. He can be contacted on 07730 001052 to discuss anything raised by this article or any other finance issues.