Technology and metrics have become integral tools for accounting firms striving to stay competitive and profitable. In my work with many of the country’s top firms, I’ve witnessed firsthand the transformative power of measuring what matters.
One question we often get is, “Which metrics should we track?”
Unfortunately, there’s no one-size-fits-all formula for selecting the right metrics for your firm.
Finding balance in the numbers
There are a variety of metrics you can use to monitor various aspects of your firm's operations. However, blindly adopting them without considering your firm's unique needs and goals can lead to counterproductive outcomes.
Remember, metrics can be both levers and constraints; pulling one lever may negatively impact another.
For example, consider utilization and realization, two commonly tracked metrics in accounting firms. Utilization measures the percentage of time your employees are billable, while realization tracks the percentage of billable time that is eventually collected from clients.
Say you set a goal to increase utilization and incentivize your staff to bill more hours. At the end of the quarter, you realize that while utilization increased, realization dropped. Your staff put in more hours, but those long hours meant tired employees made more mistakes, and the firm was forced to write off time spent on rework.
This example illustrates an important aspect of tracking metrics: the goal isn't to increase all metrics indiscriminately but to find the right balance between them. This approach helps ensure improvements in one area don’t come at the expense of another.
Revenue per FTE: A useful metric for firm-wide profitability
One of the most valuable metrics we've discovered for enhancing firm performance is "Revenue per Full-Time Equivalent" (FTE).
The first thing to understand about this metric is it’s not “revenue per full-time employee.” It’s full-time equivalent, meaning two part-time employees (or independent contractors) working 20 hours per week equal one FTE. One employee working 80 hours per week equals two FTEs.
In many of our Circle community firms, this metric has shown consistent growth in recent years, with typical increases of $10,000 to $15,000 per FTE annually. One notable exception was 2020, the start of the pandemic.
Revenue per FTE is a powerful metric because it directly addresses the challenges posed by rising talent and technology costs. As these costs continue to increase, failing to increase the revenue generated by each FTE can put your firm at a disadvantage. This metric also provides insights into the effectiveness of your technology and processes. It highlights whether your firm is leveraging technology as a force multiplier to increase productivity and output.
Choosing your five dials
So beyond revenue per FTE, what other metrics should you track? Again, there’s no right or wrong answer. The right metrics for your firm depend on your strategic objectives.
To effectively identify and leverage metrics in your accounting firm, consider the following steps:
Have a strategic plan. Start by defining clear, meaningful goals for your firm. What do you want to achieve? Is it increased profitability? Enhanced client satisfaction? Reduced employee turnover? Greater operational efficiency? Your metrics should align with these goals.
Select your five dials. Avoid the temptation to track every available metric. Instead, identify the top five metrics most relevant to your goals. These metrics should provide a comprehensive view of your firm's performance without overwhelming your team with data.
Analyze and refine. Continuously analyze your selected metrics to identify trends and areas for improvement. Regularly review your metrics to ensure they remain relevant and aligned with your firm's evolving goals.
Drive the right behaviors. Be mindful of Goodhart’s Law: When a measure becomes a target, it ceases to be a good measure. People will attempt to manipulate the system. We see this when firms place too much emphasis on billable hours and employees pad hours to hit their targets. Ensure that your metrics encourage the desired behaviors that align with your firm's values and long-term objectives.
Flexibility and adaptation. Recognize that your firm's needs and priorities may change over time. Be prepared to adapt your selected metrics accordingly, and don't hesitate to replace or modify them as circumstances dictate.
Metrics are powerful tools for guiding your accounting firm toward success, but they are not a one-size-fits-all solution. Instead of falling into the trap of analysis paralysis, focus on what truly matters to your firm's growth and profitability. Find the right balance between metrics that drive your desired outcomes, and be flexible in your approach.
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Marc Staut, Shareholder and Chief Innovation & Information Officer at Boomer Consulting, Inc., helps meet the growing needs of CPA firms by leveraging his experience to provide strategic technology assessments, planning, visioning and coaching. He feels that “technology should be an enabler – something that’s approachable, aligned with and integral to the success of each firm.” Marc is a regular speaker, author and panelist on technology in the accounting profession, cloud computing, mobile technology, leadership and vision.