The preliminary results of the 2006 Boomer Survey are in, and the survey shows that firms broke the $100-an-hour barrier for the second time in the past five years (2002-2006). Most of you are wondering what that statement means. You probably thought you broke the $100-an-hour barrier years ago.But did you?
I will explain this statement in a moment, but first you should examine the trends in revenue per full-time equivalent for the past five years. Remember that an FTE is defined as 2,080 hours. From 2005 to 2006, revenue per FTE grew 8.5 percent to $141,165. This has been a period of prosperity in the profession, but the metrics indicate less than inflationary gains until 2006.
The top section of the accompanying table also provides the following story:
* The average hourly rate remained flat until 2005, when it rose to $125 per hour, with a further jump to $136 in 2006.
* The percent chargeable remained constant at around 50 percent. (This includes all personnel in the firm.)
* The investment in technology as a percentage of revenue has declined, even though the definition of technology has increased to include telephones, copiers and scanners. Technology includes hardware, software, labor, communications, depreciation and sourcing.
* The investment per charge hour has increased slightly to $7.54 per charge hour. This is a key number on which my premise starts.
* The ratio of IT support personnel is 1:32. At this level, firms are maintaining, rather than innovating.
* The market has an impact on the numbers (e.g., firms in New York, Los Angeles and Washington, D.C., can't survive on average).
* Small firms' results are approximately 6 percent less than the largest firms, while their investment in technology runs about 6 percent more. There is an economy of scale.
Now for the $100-per-hour claim. Firms spent $7.54 per hour on technology. Assuming the $7.54 had been spent on labor, rather than tech, firms would have marked it up and passed it on to clients. Since it was tech, they either assumed it was built into their rates or simply absorbed it as overhead.
Too many firms view technology as overhead, rather than as a strategic asset. They also tend to undervalue the time-savings gained through technology. Often technology becomes the whipping boy and is blamed for lack of training, planning and efficient processes. A majority of partners who price engagements often don't know the amount of the technology investment. They tend to underprice engagements.
Let's assume the $7.54 was marked up 3.5 times like labor (many firms now use a multiplier of four times or higher) - the amount would be $26.39. If you subtract this amount from the average of $136 per hour, the labor portion of the rate is only $109.61. Given the fact that firms are just about 50 percent chargeable, the effective rate becomes approximately $54.81 per hour.
Now consider the bottom two lines of the table.
Yes, my conclusions are based upon assumptions that you may or may not agree with. However, a trend is emerging. Today, companies are starting to develop charge-back methods to the business units, rather than just absorbing the cost of technology as overhead.
Some will argue that the market sets hourly rates. I will ask how you know how to maintain profit margins if you don't know the cost of production. Based upon audience surveys, few CPAs and partners know the metrics in the charts, yet they all have an opinion when it comes to how much their firm is investing in technology. The answers fall into two categories: too much or too little. Those with the strongest opinions tend to have the least knowledge.
Firms can improve their margins by budgeting for technology and developing a charge-back methodology. Years ago, I recommended that firms utilize a technology surcharge. Today, I recommend that firms move to tighter fixed-price agreements with a well-defined scope, money in advance and payment during the life of the project. Change orders should be implemented before work outside the engagement letter is completed.
Many accountants do not like this approach, as they have been trained to be fire fighters, go back to the fire house and then attempt to bill an additional amount. The client always wins in this type of negotiation. It will require communications and negotiations to use a fixed-price agreement and change orders, but the power remains with the firm if they get a signed change order prior to completing the work.
You have a simple choice: Let the clients dictate the rules and control the fees, or put the firm in a position of strength and increase margins. The construction industry has used this approach for years. Clients value fixed-price agreements, as they perceive the agreement as reducing their risk. Billing by the hour is perceived by clients as an open checkbook approach without an incentive for efficiency.
I suggest the following plan of action for your firm:
* 1. Calculate your metrics and compare them with your peers.
* 2. Get every partner and manager in your firm to read this article and inform them of your firm's metrics.
* 3. Develop a technology plan and budget in order to project the future investment in technology.
* 4. Implement fixed-price agreements and change orders.
* 5. Set collection policies to include upfront payment on projects. Commitment starts with the writing of a check.
Take action today by calculating your firm's metrics.
Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
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