Benchmarking in context

Business Health is delighted to be a part of the Advisely initiative and is looking forward to providing practical, meaningful support to its community. One area where we believe we can truly bring value is through benchmarking data and, in doing so, provide business owners with the opportunity to gauge their performance against peers and best practice.

It’s our experience that the benefits of benchmarking far outweigh the effort! For example, benchmarks help you to compare key indicators against similarly placed firms in the industry and, in doing so, allow you to gain insight into the full potential of your business. Benchmarking will also allow you to:

• learn which operational strategies the top-performing practices utilize,
• ascertain from the poorer-performing businesses the pitfalls to avoid,
• get ahead of any issues before profits start to fall, and
• be prepared for a potential buyer or merger partner (or bank manager!) – who will invariably demand a comparative analysis against industry norms.

 What to benchmark

“If you don’t know where you are going, every road will get you nowhere.” – Henry Kissinger.

Your business model, target markets and goals will lead you to the most relevant benchmarks for your business. For example, if your practice is planning to grow quickly over the next few years, and you intend to do this organically, then best-practice benchmarks around lead generation, referral rates, conversion ratios and marketing spend will be of interest and relevance to you. For a practice looking to consolidate after a recent acquisition, perhaps benchmarks relating to technology spend, staff productivity, skills and support ratios will be more relevant.

A few tips (avoiding pitfalls)

1. Quality of information – including yours

Unfortunately, many practices struggle to produce an accurate, timely and detailed set of “real” numbers for their business. And, if your own data is somewhat less than reliable, you could be creating a minefield of misinformation and disconnect. Does the phrase, “Garbage in equals garbage out” ring any bells?

Ensure the data you are capturing from your own business is accurate, complete and current.

2. Align benchmarks to strategy

Avoid the disconnect between irrelevant benchmarks and your 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).

Specific target markets require unique value propositions and tailored business models. Key benchmarks will vary significantly for practices who specialise in a narrow client demographic or offer a select service offer.

3. Avoid benchmarking in isolation 

One of the major (and most common) mistakes to make when benchmarking is to look at any metric in isolation - numbers in a vacuum are very dangerous! Drawing conclusions purely from financial benchmarking can sometimes be problematic.

For example, a practice gearing for significant growth and keen to employ the best available talent 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 a positive.

4. Qualitative as well as quantitative

While they are extremely important, in most businesses the qualitative numbers are “lag” indicators – they are the result of your strategies and actions. To get the best possible picture, your benchmarking analysis should also include the “lead” indicators. For example: client satisfaction ratings are a key lead indicator for client retention and referral rates. If you’re clients are satisfied, they are more likely to stay and refer you to others. If you’re clients are not satisfied, it is likely that retention and referral rates will be lower.

5. Too much choice isn’t necessarily a good thing!

A precautionary word of warning: there is a lot of choice in this area and for most small businesses new to benchmarking, there is a danger of ‘paralysis by analysis’. So, in the spirit of ‘less is more’, we think it wise to begin by focusing on a few of the constants;

• Clients (satisfaction levels, retention rates, referral rates),
• Staff (productivity levels, retention rates, compensation), and
• Practice performance (growth, profitability).

We hope the above points will help you to avoid the potential pitfalls. Remember, if it can’t be measured, it can’t be managed. But if it can be measured, it can be benchmarked!

As you start your planning for the year(s) ahead, now is the perfect time to consider which benchmarks you intend to focus on and, not only meet, but exceed.

Yours in best practice.

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