The advent of benchmarking and the “Balanced Scorecard” have provided many Australian advisory businesses with some fabulous information over the last few years. However, the statement popularised by Mark Twain, “lies, damned lies and statistics”, provides some timely advice for practice principals perhaps considering using industry benchmarks as part of their planning process.
While there is no doubt that measuring your practice against the best of your peers can add enormous value, external benchmarking should only be one of the inputs into your decision-making process. Building your business strategy solely around a comparative industry standing is fraught with danger. To help put your results in the right context, you may like to consider the following top five Business Health benchmarking tips.
1. Quality of information
Traditionally in the financial services profession, many practices have struggled to produce an accurate, timely and detailed set of “real” numbers for their business. The outcome of some benchmarking processes can at times best be described as “dodgy”. Does the phrase, “garbage in equals garbage out” ring any bells?
The more detailed or complicated the financial benchmark, the more cautious you need to be in analysing the results. In our view, information or data should primarily be used as a guide. For example, information gained from a website which provides “free” analysis with little scrutiny of the data being entered or of the business actually providing it, might sound alarm bells for some.
2. NUMBERS in isolation
One of the major problems with benchmarking is looking at any metric in isolation – numbers in a vacuum are very dangerous! Drawing accurate conclusions purely from financial benchmarking can sometimes be difficult. For example, a practice gearing for significant growth may well be investing significantly more in staff salaries than the marketplace average. In this case, the fact that they have fallen outside of the industry benchmark is probably a positive.
3. The qualitative versus the quantitative
While they are extremely important, in most businesses the numbers are “lag” indicators – they are the result of your strategies and actions. To get the best possible picture, your benchmarking analysis should include both qualitative and quantitative information. Consider the areas of your practice that drive financial output, not just the results themselves. Client interaction, business planning, risk management, IT and staff development (to name just a few) are all critical drivers of success.
4. Long term or short term
To decide on the most appropriate benchmarks for your practice, you must first determine where your firm sits within the “business life cycle” – what are your time frames? There are always trade-offs to be made between short-term results and long-term plans – short-term profits can be maximised by carefully managing expenditure. But by not investing in practice infrastructure, you may be jeopardising sustainable long-term success.
5. Fit with your strategy
Avoid the disconnect between measurement and strategy – make sure you are measuring “apples with apples”. If you have built your practice to attract and retain high net worth investors and you operate a deep relationship/high touch model, ensure you are comparing yourself against other similar firms in this space (or better still, the best in class providers in this market). The key benchmarks will vary significantly between practices specialising in a narrow client demographic or offering a select service.