Your competitors are your benchmark

For any small business, benchmarking is a valuable process to support business owners with the planning and financial management of their business.

Business planning can be likened to driving a car — it is all about getting your business from point A to point B. Most advisers, however, start the process by defining B — establishing goals, setting objectives, defining desired outcomes and so forth. However, what is most important is to actually start the process by defining A — where are you today?

Think about embarking on a journey after hiring a car from an airport in a foreign country. The first thing you would do is to check a map to determine where you are, before you set off on the journey to your hotel or first tourist destination. It is the same with business. Before you travel towards your goals, it’s important to assess your situation — what are the current issues you need to resolve, what are your strengths that you can build upon, and what are your weaknesses that you need to address?

While an assessment of operational issues is useful, such as can be determined through a SWOT (strengths, weaknesses, opportunities and threats) analysis, a financial assessment is even more valuable. How is your business performing on key performance indicators? Relative to other like players in the industry, how is your profitability, productivity, cost control, efficiency and so on? Unless you know what is average and what is good in the industry, how can you ever determine how well you are tracking or pinpoint which areas you should work on to enhance your performance?

Whether you benchmark internally, through a dealer group or through an external provider, the key is drawing a line in the sand, clarifying the results you are actually achieving compared to what you could be achieving, compared to your peers, on various key performance indicators. Once you understand the benchmarks, you can then set plans in place to lift performance and then, by maintaining a benchmarking program over time, track your journey towards best practice.

Most benchmarking programs will deliver analysis of both ‘averages’ and high performing or top quartile firms, often also sorting results by size or geographic location. When reviewing benchmarking analysis, ask yourself, who wants to be just average? In aspiring to best practice, firms should review their current performance and seek to achieve an outcome in the best practice range.

There are numerous benchmarks that can be measured and are worth tracking — both over time and relative to others.

For example, based on Dashboard and CCH benchmarking results, the average advisory firm spends between 30 to 35 per cent on non-salary expenses, while the best only spend 20 to 25 per cent. Participating in a comprehensive benchmarking program would not only highlight any weaknesses in a firm’s cost control performance overall, but would also highlight which specific expense items were high, relative to other like firms, and therefore which expenses need to be reviewed and better managed. Action can then be taken to improve performance and in this example, directly increase profits.

In productivity terms, average firms generate $100,000 to $120,000 in income per person working in the practice, while the best firms achieve results up to $150,000 per person and beyond.

These productivity benchmarks are a great way to assess how well you are organised and how effectively your people operate relative to others in the industry. Of equal importance, your productivity benchmarking should also track income per adviser, as well as income per person.

Other useful indicators that could and should be benchmarked by advisory firms are such measures as salaries as a percentage of income, clients per adviser, income per client, income as a percentage of funds under management, appointments per client per year and so forth. Hours worked per principal per year is another interesting benchmark.

Nearly every time I have seen benchmarking results, in any industry, and compared hours worked between average and high profit firms, the principals work less in the high profit firms, reinforcing the fact that they are more efficient and better organised.

So how does benchmarking work? At its most basic level, it is all about having someone consolidate financial results and other key indicators of a group of firms.

Having collected the information, the benchmarker would then average the numbers and analyse not only the raw averages, but also the averages of groups of firms in the sample, such as the high performing participants. Whether carried out by a dealer group or an external provider, the broad approach should be the same. Submissions should be kept confidential — the benchmarker just consolidates the figures and provides the output as a sample result and analysis. Individual figures should not be released to anyone except to the respective firm itself, as a comparison to the results of the sample.

Even without external benchmarking, internal benchmarking can also be valuable to track a firm’s performance against some goal or desired outcome. As the old saying goes, ‘anything that cannot be measured cannot be managed’. Well, anything that can be measured can be benchmarked and can aid in management.

Good internal benchmarks worth tracking include the number of client contacts per year, the number of client referrals, the results of client satisfaction surveys and indeed any of the financial measures outlined previously. With internal benchmarking, the key is tracking the results over time and striving to continually improve performance — equally as valuable as comparing results to peers.

In a keynote address to the recent CFP annual conference, well-known futurist Richard Neville suggested that “your competitors are not your enemy, they are your benchmark”.

This is spot on. Benchmarking is a significant input to a firm’s business planning, in order to identify gaps between current performance and best practice. It gives a firm the numbers to strive for and the targets to achieve. With this information at hand, a firm is better placed to plan and implement initiatives to bridge the gap and be a best practice business.

Richard Rasker is manager ofadviser services atZurich FinancialServices Australia .