by L. Gary Boomer
Is your firm funding technology at “good enough” levels, or at a level indicative of the fact that technology is a strategic asset in today’s professional services firm?
Firms that choose the “good enough” level often do not comprehend the connection between funding constraints and performance constraints. The end user (including partners) often concludes that the firm’s IT department is delivering low value, which may be true, but is there a reason? The old adage that you can pick any two of the three (price, quality and speed) still holds true today.
IT is driven by supply, demand and price. This is no different than any other business entity. If this is the case, what are the primary differentiators that make firms stand out from their peers?
As with any business issues, there is no one answer to that question. There is a combination of items and I see these as the most important ones:
- Leadership from the managing partner and the chief information officer;
- IT planning that is integrated with the firm’s strategic plan;
- A reasonable ratio of IT personnel to end users;
- A training/learning program that incorporates IT skills and traditional continuing education and soft skills; and,
- The level of funding.
Since accountants are normally interested in “the numbers” first, let’s look at the level of IT funding. Before we give you statistics, we must caution that averages are where the worst of the best meet the best of the worst. Also you need to know that included in our metrics for IT spending are the following items: hardware (cash investment or depreciation); software, including online research; training; communications; outsourcing of IT services; supplies; communications; and labor, including benefits. This, though, is a more inclusive definition than many firms use, due to their departmental accounting and allocation methods.Furthermore, our statistics come from “leading firms” rather than the entire population of firms. The metrics represent information from small firms (under $1 million in annual revenue) to the mega-firms (who are $50 million and above). The differences are fairly insignificant when you separate the mega-firms from the rest of the population.
With this said, the most important indicators are:
- Revenue per full-time equivalent;
- Average hourly rate;
- Percent chargeable;
- The ratio of IT support personnel to end users; and,
- Percent of revenue invested in technology.
There are certainly other indicators, such as utilization and charge hours, that have long been key indicators in management of accounting practice studies. Today, revenue per FTE is one of the more relevant benchmarks.IT investment
Let’s get back to the investment in IT. The average investment for 2003 was 5.6 percent of revenue. This is comparable with 2002, but down from 2001. Caution: The leaders are closer to 7 percent.
Most firms would agree that they are underinvesting in the training of end users. Learning coordinators in top firms continue to confirm that IT skills in accounting are low, particularly in the partner and administration group. This should provide firms with an incentive to invest in more training and learning.
IT support
Again, definitions are important when describing IT support ratios. For our purposes, an IT support person is defined as anyone involved in systems design, hardware, help desk, software support, IT training and IT management. Often, these positions are filled with part-time people in smaller firms.
The average from the 2003 survey was one IT person for every 30 end users. Interestingly, the firms that have advanced with projects, such as the paperless transition, tend to be closer to one IT person for every 20 end users.
The IT talent on a team produces synergy. Many firms are missing out on opportunities because they don’t have a good understanding of IT capabilities at the leadership level.
Finally, firms need more IT skills than their clients, due to the number of applications on a firm’s servers. It is not uncommon for a firm to have in excess of 50 applications. Many of these applications and require continual updates.
Percent chargeable
For the first time in three years, accounting firms have exceeded 50 percent chargeability. In 2003, firms were 50.47 percent chargeable. This may come as a surprise; though I must reiterate that this statistic is based upon total hours worked in a firm and total chargeable hours.
Some of this non-chargeable time should be spent on training and learning. While some may react that their firms have too many non-chargeable personnel, I will counter that current billing practices may be outdated, and simply billing by the hour is no longer relevant when you enter the impact of technology and other factors. This will become more evident as labor supplies continue to tighten in the profession.
Interestingly, we see firms that are way below the average chargeable, but have revenue per full-time equivalent significantly above the average. This can be the result of a combination of factors, such as the market/location and the use of value billing strategies. Firms that are below both the average in percent chargeable and revenue per FTE are the ones that are struggling.
The accuracy of time sheets in most firms is also questionable. This is particularly true in firms that do not require daily entry of time. Partners are generally the biggest problem when it comes to time sheets.
Average hourly rate
The average hourly rate for 2003 was $124. When you exclude the firms over $50 million in revenue, the average rate per hour drops to $116. This number varies among firms depending upon such factors as the partner-staff ratio, types of services and market location. Again, it is a statistic that firms monitor, but it is not as important as revenue per full-time equivalent.
Revenue per FTE
The average revenue per full-time equivalent in 2003 was $130,000. The amount was $123,000 when firms over $50 million were excluded.
This is the number that firms should use for management and benchmarking purposes. Too often, firms overhire in order to meet busy season requirements and then lose their profits the last eight months of the year while trying to retain their staff.
More profitable approaches are available, such as part-time employment, outsourcing or simply employing people full time during busy season and then on a part-time or as-needed basis for the balance of the year. Improved technology and remote access make these strategies more viable today than ever before.
Revenue per FTE is like a handicap in golf. You should be more interested in where your firm is today than in the averages provided in this article. All progress starts with the truth. Take the time to calculate revenue per FTE over the past three to five years and look at trends in your firm. Based on your firm’s strategic plan, you will be more able to predict personnel and office requirements.
Conclusion
IT spending must be aligned with a firm’s strategic initiatives in order to ensure return on investment. Be sure that your firm is not funding IT at a level that makes it impossible to meet the demands of the firm’s leaders and its end users.
L. Gary Boomer, CPA, is the president of Boomer Consulting, in Manhattan, Kan.
