Managing your accounting firm with metrics

November 28, 2005, 12:00 a.m. EST 6 Min Read

Average is where the best of the worst meet the worst of the best. Most firms don't consider themselves average, yet many are not performing to their capabilities due to outdated attitudes toward billing and technology.Poor billing policies are only exacerbated by technology and vice-versa. Value billing is talked about, but in reality few firms are utilizing it and maximizing the potential return on their technology and training investments.

Before we discuss the reasons and how firms can improve, let's examine the metrics we have accumulated over the past few years.

Accounting firms with revenues of over $1.5 billion participated in surveys we have conducted, and the results were reviewed for reasonableness. Firms were asked to enter data into a standardized form in order to produce comparable numbers. Firms of all sizes are represented in the survey. We did not exclude the extremely large firms due to the fact that the difference in results over the three years was insignificant. I encourage you to evaluate the metrics for the years 2002, 2003 and 2004, and compare them to your own firm's numbers (see Table 1).

Before these numbers are meaningful, you must understand the definition of a full-time-equivalent and what is included in the technology investment. An FTE is defined as a person working 2,080 hours. Simply take total hours worked in your firm and divide by 2,080. Include all personnel. Then divide net revenue by the number of FTEs to determine revenue per FTE.

The definition of technology has continued to evolve and expand over the years. Today, anything that plugs into the wall is typically the responsibility of the IT department. This includes hardware, software, communications, personnel, telephones and copiers. In most firms, reduced copier costs are starting to be offset by increased costs in digital content management systems.

The following factors will impact your firm's metrics:

* Leadership and the attitude toward billing (hours vs. value);

* Your market and type of services offered (metropolitan versus rural markets);

* Firm standards, policies and procedures (shared vision versus shared services firm);

* A training/learning culture (integrated continuing professional education, technology and soft skills); and,

* Your firm's attitude toward technology (overhead or strategic asset).

The tendency is to say that our firm is different, or that we are better than the numbers in Table 1. I encourage you to think of metrics much like a handicap in golf. It is personal and your goal should be improvement. If you are at the lower end of the metrics, perhaps this will provide the confidence and incentive to look at your pricing strategies.

It may also change your attitude toward technology and training programs. Most firms still use hourly rates to price projects, even though technology continues to play an increasing role in the production of traditional services like tax return preparation and financial statements.

For those who say they have not seen a reduction in time, I pose four questions:

1. Are you doing more work for your clients today than you were in the past?

2. Are your time sheets accurate?

3. Have you adopted firm standards, policies and procedures? Are they adhered to?

4. Have you provided adequate training?

Let's go back to the metrics and examine some of the trends. The first trend that is somewhat alarming is that revenue per FTE, although increasing, is not increasing at the rate of inflation. Average hourly rates are also remaining stable.

Secondly, the rate of investment is decreasing as the definition of technology increases and firms are adding increased communications capabilities and implementing paperless initiatives - dropping from $7.47 to $6.39 per charge hour.

From our observations, we see the firms that are successful in implementing content management systems, training and supporting their end users are at a ratio of 1:20 to 25, rather than at 1:30. In other words, they are investing resources in people with the right skill sets to accomplish the job. Support personnel are defined as:

* Network administration;

* Engineering;

* Application support;

* Help desk;

* Communications;

* Technology training (an integrated part of a firm's training/learning culture); and,

* IT leadership and vision.

It is not uncommon to source many of these services, especially in smaller firms. The key differentiator, however, is leadership. Leaders have a vision and have put together a unique ability team that can accomplish their vision. Without IT leadership, firms tend to try to solve technology problems with departmental solutions, and generally do not allocate adequate resources to the projects. Often, the firm lacks integration in the back office and in core production applications (multiple databases). The saying, "It is what you don't know you don't know that costs you money," often applies.

The most important question: What is your true hourly rate, net of technology? Table 2 should provide some insight.

Here, we are assuming a similar mark-up on technology as on labor (3.5 times). Granted, most firms do not make this assumption in determining their billing rates. Should they?

While I am sure this will create debate, the facts show that labor margins are being pressured, and old hourly billing formulas do not produce the desired results. The purpose of this article is not to debate billing methods, but rather to present the metrics as a basis for improvement in the future.

Furthermore, many firms are experiencing their highest net income per partner. Why should they worry or change? I believe the answer comes from the fact that we currently have a severe shortage of labor in our profession and we must look at utilizing technology in order to allow our people the opportunity to do more in less time. To do so, we will have to evaluate our pricing strategies and technology investments. Otherwise, we will simply pass the savings on to our clients, rather than obtain a reasonable return on our investment.

There are several steps firms should take in order to improve their results:

1. Start with a technology plan and budget that integrates with the firm's strategic plan.

2. Monitor and manage to a targeted revenue amount per FTE.

3. Evaluate pricing strategies and make appropriate changes.

4. Hire personnel with the required unique abilities (generally not CPAs) or source.

5. Hold people accountable, including partners.

6. Participate regularly with peers to share best practices and metrics.

Confidence that your firm is moving in the right direction is very important. There will always be skepticism among partners due to the required investment and necessary changes. Great leaders always vote for growth and ultimately growth requires personal and organizational change. Resistance is natural. A well-thought-out plan and accurate budget will build consensus and move the firm forward with reduced resistance. An independent review can also be helpful.

For those firms that are at the top of the metrics or in markets where revenue per FTE runs between $175,000 to $200,000, don't become complacent. The shortage of quality people and commoditization are alive and well in those markets, and the recommendations above pertain to your firm as well. The key is to learn from the formula of how the best get better!

Table 1

2002 2003 2004

Revenue per FTE $126,137 $129,947 $130,468

Average hourly rate $123 $124 $124

Percent chargeable 49.2% 50.5% 51%

Percent of revenue invested

in technology 6.06% 5.55% 5.15%

Investment in technology

per charge hour $7.47 $6.88 $6.39

Ratio of IT personnel

to end users 1-31 1-30 1.32

Table 2