At this time of year we normally collect financial and inventory metrics from BTC member firms. This year our collection process is delayed until around May 1st because of revisions to our website input tool. There is still plenty to consider, though, using metrics from prior years’ collections. In the ongoing, tough financial times many firms may be wondering if they are getting the best return on their IT investment dollars. I believe Circle firms can use existing data to help answer this question.
One question that firms must answer is how they view technology. Is it a cost center which accrues expenses? Or is it a strategic multiplier that makes the whole firm better? Fortunately, most Circle firms take the strategic multiplier approach. With that in mind, let’s look at some metric indicators.
There are several cost measurements which firms might want to track. All of these can easily be drawn from the metrics data collected through the Circles.
- IT support cost (the cost of the IT department: staff, training, etc.) per Full Time Equivalent (FTE)
- IT support ratio (the number of FTE users supported by each IT staff member)
- IT expense (the complete hardware, software, communications, and people cost to the firm) per FTE
- IT expense per charge hour
- IT expense as a percentage of revenue
Likewise, there are several key performance measurements. These, too, come straight from the Circle metrics data:
- Revenue per FTE
- Revenue per charge hour
Firms that are doing a good job of managing technology should see, on a year to year comparison basis, the revenue measurements increasing at a faster rate than the IT expense measurements. On a Circle wide basis, this is exactly what we saw between Fiscal Years 2006 and 2007, the most recent data on file. Remember that the Fiscal Year 2008 data will be available after May of this year. Here is a snapshot of some of these key indicators:
Year Over Year Change
Number of firms reporting
Revenue per FTE
IT Expense per FTE
IT Support Cost per FTE
Revenue per Charge Hour
IT Expense per Charge Hour
IT Support Ratio
IT Expense as Percentage of Revenue
While it would be misleading to attribute ALL of a firm’s revenue increases to technology improvements, these Circle firms are clearly managing technology in such a way that the investments made in technology products and services help feed the revenue increases. As we see above, Revenue per FTE increases over 10% year to year while the corresponding IT cost measurements are just over 4% in one case and actually decrease in the other!
Likewise, when using Charge Hour measurements as a baseline we see that revenue increased over 8% while IT costs increased less than 3%. Given the magnitude of revenue growth compared to IT costs, it’s not surprising that the actual percentage of revenue expended on the IT function went down!
Interestingly, a recent PWC study of IT related productivity gains [PDF] noted that only 13% of the “average” IT budget (all industries, not just accounting!) supported innovation in business processes while 87% was devoted to existing system maintenance. While our metrics aren’t designed to answer this specific question, I believe our Circle firms likely score much higher in the innovation category.
When we consider the number of firms that have invested heavily in paperless processes (to include innovative technologies such as direct data import scanning, paperless workflow control, and others), I intuitively believe Circle firms are leading the pack in innovation spending. This, in turn, drives the higher revenue productivity demonstrated above.
So how is this analysis relevant to the decisions firms are making today? We have heard from many firms that all areas of their budgets, not just IT, are under strict review to look for potential savings. In addition, many IT Directors have told us that they are having to defend their budgets line by line. If this is going on in your firm, be careful of wholesale cuts in your IT budget!
The numbers from the past two years indicate that Circle firms are spending wisely and productively in their IT departments. Don’t take the easy approach of mandating an x% cut across the board. Be especially careful of cutting back on IT staff and increasing the support ratios that allow for responsive support to your production staff!
Instead, follow the lead of the PWC study and be careful to preserve those spending areas which are innovative in their technologies and are the ones most likely to drive increased revenue performance. You might be able to get one more year out of each notebook computer or even a file server, but now is not the time to back away from investments in scanning, workflow control, help desk management, and other technologies which directly help your staff work better and faster.
Now is a good time to remind yourself that technology isn’t really an expense; instead it’s a strategic asset to the firm! Keep making wise investments in your IT future and you will be postured to ride a productivity skyrocket when better times return—as they surely will.