How Benchmarking Increases Profits
By Marc Rosenberg
The integrity of CPAs is consistently rated among the highest of all professionals. A primary reason is dedication to client service and delivery of high quality products. Partners at many CPA firms pursue this dedication to the point of neglecting the management and profitability of their own practice. Benchmarking helps firms track their profitability as they continue to serve their clients.
CPA partners often operate in a cocoon
“Do you feel your firm’s billing rates are high, low or just where they should be?” This is an interview question I often pose to partners. A common response is “high.” I then show them a schedule of billing rates for comparable firms. To their surprise, their rates are well below those of their competitors. More often than not, the firm takes my hint, raises their rates and the increased revenues fall directly to the bottom line. And no clients leave. All while the partners still manage to perform their work with the same high degree of dedication and commitment as before the rate increase.
This scenario illustrates the power of benchmarking. Firms should always strive to be the best they can be. But how do you know what the best is if you don’t know how other firms like yours are performing? That’s why we benchmark.
Benchmarking is the process of:
- Measuring your firm’s performance by computing various performance statistics.
- Analyzing performance by comparing those statistics to other firms and industry norms.
- Changing your firm’s performance by taking action in areas where your firm needs improvement.
Without benchmarking, firms inevitably lead a provincial existence, blissfully unaware of what reality is.
Numbers don’t lie
We’ve all heard this saying. If your firm’s profits are below average, benchmarking will quickly identify what’s holding you back. I’m not suggesting for a moment that “numbers” or benchmarks are the end-all to high profits. Factors such as management, leadership, talent, accountability and people skills are also major factors in achieving strong profit levels. But benchmarking is a good start.
10 key metrics to benchmark
The data below is from The 2010 Rosenberg Survey, the country’s largest and most authoritative survey of CPA firm statistics serving mid-sized firms. The data is for the calendar year 2009.
Annual Net Fees
Over $20 Million
|$10-20 Million||$2-10 Million|
|Income per partner*||$448,000||$403,000||$323,000|
|Fees per partner*||1,802,000||1,319,000||1,042,000|
|Fees per person||168,000||162,000||151,000|
|Partner billing rate*||356||308||263|
|Average annual billable hours for partners*||1,047||1,099||1,142|
|Average annual billable hours for staff||1,408||1,483||1,471|
|Ratio of admin staff to total firm headcount||19%||20%||19%|
* Equity partners only.
If you do nothing else, benchmark your firm’s metrics against these ten metrics. For weaker areas, research the causes and take corrective action.
Make sure you use the right benchmarks
The two key ways to ensure that you use the correct benchmarks are:
- Compare your firm to comparably sized firms.
- Compare your firm to firms of comparable market size, as defined by the metropolitan population.
The data below, from The Rosenberg Survey, illustrates how metrics can vary significantly by size of market:
Population of the Metropolitan Market
|>2 Million (1)||1-2 Million (2)||250K-1M (3)||
< 250K (4)
|Income per partner*||$372,000||310,000||324,000||274,000|
|Partner billing rate*||309||264||244||216|
|Fees per partner*||1,259,000||1,015,000||1,061,000||834,000|
* Equity partners only.
(1) Examples: New York City, Houston, Atlanta.
(2) Examples: San Jose, CA, Birmingham, AL, Tucson, AZ.
(3) Examples: Lancaster, PA, Tulsa, OK, Akron, OH.
(4) Examples: Sioux Falls, SD, Carlsbad, CA, Abilene, TX.
A word about averages
Several years ago, during a retreat I was facilitating for a CPA firm, the partners asked me what the national average was for staff billable hours. I responded with 1,625 (obviously, this was many years ago; to the dismay of CPA firms today, this number has sunk to the low 1,500s.). One of the partners looked at another and said: “Great, we’re at 1,628.” To which I said, “Congratulations. You’re a nice… average firm.”
The moral of the story is: don’t be content hitting averages. If your firm is way below the average, then the average may very well be a good target to shoot for. But if you’re close to average, you should strive to be above average.
The 5 biggest mistakes people make in reading and compiling benchmarking metrics
I never cease to be amazed at the lack of understanding that CPA firm partners – including many Managing Partners – have about reading a MAP (Management of an Accounting Practice) Survey and computing MAP statistics. These difficulties prevent partners from properly using a MAP Survey for the purpose for which it was intended: to improve firm performance.
Five of the biggest mistakes partners make in reading and computing MAP statistics is presented below, in no particular order.
- Overreliance on partner income percentage as a measure of profitability. This metric is impacted as much by the firm’s staff-partner ratio as by true profitability. Therefore, we caution firms to over-rely on income percentage as a measure of true profitability.
Many partners have a rule of thumb that 33% is an acceptable partner income percentage, and that to be “truly profitable,” this metric must be 40% or more. But as the data below illustrates, one must take into account the staff-partner ratio before determining norms for partner income percentage. If a firm is heavily leveraged, partner income percentages in the 20s and low 30s may be perfectly acceptable.
The following statistics are based on data from firms with annual fees of $2 to 10M. (Data is from a recent Rosenberg Survey):
- Firms with a staff-partner ratio in excess of 8:1 had a robust income per partner (IPP) of $491,000, yet their partner income percentage was “only” 23%.
- Firms with a staff-partner ratio ranging from 6 to 8:1 had IPP of $450,000, yet their partner income percentage was 30%.
- Firms with a staff-partner ratio of under 4:1 produced a much less impressive IPP of $260,000, yet they enjoyed a seemingly high 39% partner income percentage.
- Average salary data. I’ve seen many MAP surveys that tabulate the average salary for various positions at firms throughout the country. Examples: A 2-year tax person, a 4-year audit person, a firm administrator. This is one of the most senseless pieces of information I’ve ever seen, yet surveys love to report on it. The problem is that personnel from firms in New York City are mixed in with personnel from very small towns. Also, personnel from a $30M firm are combined with personnel from a $3M firm. The resulting averages are utterly meaningless. Compensation data is only relevant if it is taken from surveys of firms comparable to your own in firm size and market population, which is something that most MAP surveys cannot possibly do. If your firm is in Memphis, only surveys of Memphis salaries will produce valid results you can use in setting compensation levels for personnel at your firm.
- Utilization percentage. This metric is the total billable hours of a firm divided by the total work hours of the firm, with all personnel included. Firms also track utilization percentage for departments, partners, managers, seniors, etc. I’ve never been a big fan of utilization percentage because it is easily manipulated by the total hours a person works and by the extent to which people record all of their billable time. I’m more interested in knowing how realized, billable hours (per person or by department) compares to budget, than I am in knowing the percentage of billable to total hours. You can’t take a percentage to the bank, but you can with hours.
- Net firm billing rate. This is calculated by taking the total annual net fees of the firm and dividing it by the total firm-wide billable hours. This rate is dramatically impacted by the firm’s staff to partner ratio.
Here’s a great example. A client of mine with long-standing profitability problems called me after reading our latest MAP survey. He commented that, as usual, his firm lagged almost every industry norm. But with great pride, he told me that his firm’s net firm billing rate was 20% higher than the industry norm. I had to puncture his balloon by telling him: “Yes, you did well in this category. But that’s because you have 10 partners and 9 staff!”
Net firm billing rates in MAP Surveys are only relevant if your firm has a reasonably normal staff-partner ratio.
- Computing the average charge hours for any category of personnel, such as partners and professional staff. Most firms make the mistake of computing the number of full time equivalents (FTEs) by adding up their firm’s total work hours and dividing by 2,080. This causes firms to count people with more than 2,080 hours as more than one FTE, which should never happen. This practice understates the average.
The only proper way to compute average annual charge hours for a personnel group is to only include personnel who were with the firm for a full year AND were full time the entire year. So, in computing the average, one needs to omit part-time personnel and personnel who began working at the firm after the year began or who left the firm before the year was concluded. Average annual charge hours cannot be annualized because of the skewing effect of the tax season.
Unless you follow the above approach, your computations can be off by as much as 20-25%.
The hardest thing about benchmarking
Taking action – plain and simple. It’s easy to review a survey, compute your own statistics, make comparisons and identify areas where you lag behind industry norms. It’s much harder to take action and implement programs to improve performance in key areas.