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 Most firms don’t consider themselves average, yet many are not performing to their capabilities due to outdated processes, attitudes toward billing and technology. Poor billing policies are only exacerbated by technology and visa 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. The economy has forced firms to manage and make tough decisions.
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 ranging from $1M to over $250M participated in the survey 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 the difference in results over the five years was insignificant. (Smaller firms tend to earn approximately 10% less per FTE and invest 10% more in technology than larger firms.) I encourage you to evaluate the following metrics for the years 2004-2008. Compare them to your own firm’s numbers.
Revenue per FTE (see definition below)
Average hourly rate
% of revenue invested in technology
Investment in technology per charge hour
Ratio of IT personnel to end users
Before these numbers are meaningful you must understand the definition of a full-time-equivalent (FTE) and what is included in the technology investment. A 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. Many now say it goes beyond the walls of the firms with notebooks, PDAs and remote computing. The total investment includes hardware, software, communications, personnel, telephone and copiers. In many firms, reduced copier costs are starting to be offset by increased costs in digital content management systems and storage.
You will notice that revenue per FTE in 2008 was down approximately $10,000. Likewise the average hourly rate decreased by $7 per hour from 2007. This is the explained by the fact many firms were overstaffed and the economy declined through 2008. The majority of firms waited until after the busy season in 2009 to make staff reductions.
The following factors will impact your firm’s metrics:
- Leadership and the attitude toward billing (hours versus 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 CPE, technology and soft skills)
- Your firm’s attitude toward technology (overhead or strategic asset)
The tendency is to say our firm is different or we are better than the above numbers. 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, performance and staffing levels. It may also change your attitude toward technology and training programs. According to the Gartner Group, you gain 5 hours of increased capacity for every hour of training.
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 (reduction of time). For those who say they have not seen a reduction in time, I pose the following questions:
- Are you doing more work for the client today than you were in the past?
- Are your time sheets accurate?
- Have you adopted firm standards, policies and procedures? If so, are they adhered to?
- Have you provided adequate training?
- Are your workflow processes efficient and effective?
- Are you leveraging or simply using technology?
Let’s go back to the metrics and examine some of the trends in addition to revenue per FTE and average hourly rates. The rate of investment in IT is flat as the definition of technology increases and firms are adding increased communications capabilities and implementing document management, workflow and portal initiatives. From our observation, we see the firms that are successful in implementing content management systems, workflow, portals, training and supporting their end users are at a ratio of 1 to 20-25, rather than at 1-30 plus. In other words, they are investing resources in people with the right skill sets to accomplish the job. Support personnel are defined as:
- Business analysts
- Application support
- Help desk
- Web development and management
- Technology training (an integrated part of a firm’s training/learning culture)
- 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 often do not allocate adequate resources to the projects.
Often the enterprise (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. We anticipate the level of IT spending to stay level or increase as firms move toward SaaS in the future. Software costs are increasing as are the number of applications utilized by firm personnel. Workflow, document management, portals, collaboration and email management are just a few of the areas where expenditures are increasing.
An important question: What is your true hourly rate, net of technology? The following table should provide some insight.
Average hourly rate
Investment in technology per charge hour
Assume a multiple of 3.5 times on technology
Net hourly rate, excluding technology
In the above exhibit we are assuming a similar markup 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, until 2009, firms are experiencing their highest net income per partner. Pressure on partner income should be enough to evaluate pricing, billing and collection policies. Why should they worry or change? I believe the answer comes from the fact that we currently are asking everyone to produce more with less. Granted the labor shortage in our profession has subsided, but don’t be lulled to sleep. The retirement of the Baby Boomers and the pressure for skilled labor in the U.S. will soon put retention and attraction back as a high priority.
To maintain margins, we 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 in people and technology.
There are several steps firms should take in order to improve their results.
- Start with a technology plan and budget that integrates with the firm’s strategic plan.
- Monitor and manage to a targeted revenue amount per FTE.
- Evaluate workflow procedures, especially in tax, billing and audit.
- Evaluate pricing strategies and make appropriate changes.
- Hire personnel with the required unique abilities or source. (They often are not CPAs.)
- Hold people accountable, including partners.
- 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. 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 closer to $200k, 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. This key is to learn from the formula of how the best get better! IT professionals, your roles are changing from highly technical requirements to innovation and increasing revenues. Are you prepared and willing to change?