In the September 24, 2007 issue of Accounting Today, Gary Boomer, noted consultant to CPAs, has an interesting article, “Firms may not have broken the $100-per-hour barrier.” Because this link is to the on-line version of the article, it does not include the tables.
Interestingly, the Boomer Survey found the following:
Firms broke the $100-an-hour barrier for the second time in the past five years (2002-06).
This calculation is based on revenue per full-time equivalent (FTE), defined as 2,080 hours. The Survey found that 2006 revenue per FTE increased 8.5 percent to $141,165, while the average hourly rate went from $125 to $136 in the same period.
The percent chargeable remained constant at around 50 percent. (This includes all personnel in the firm).
The investment in technology, as a percentage of revenue has declined.
Firms spent $7.54 per hour on technology. If this amount had been spent on labor, rather than technology, firms would have marked it up anywhere from 3.5 to 5 times and passed it on to the customers.
My response to all of this is: So what? I don’t dispute Gary’s claim that “Too many firms view technology as overhead, rather than as a strategic asset.” Unfortunately, I think far too many firms have this view about their talent.
I learned from Mark Koziel, who works for the AICPA, that based on the PCPS MAP Survey, the average firm spends .8% of gross revenue on continuing professional education, approximately equal to what they spend on broadband Internet. This is an appalling statistic.
As important as technology is, human capital is where the real wealth-creating potential of a firm resides, roughly 80%, according to economists and the World Bank. It’s obvious that firms are under-investing in this most vital capital.
Nonetheless, put aside the fact that the Boomer (and AICPA) Surveys are not random, hence are not scientific, which makes it very dangerous to draw any definitive—let alone useful—conclusions. Here’s the major problem: the metrics all of these surveys look at are completely irrelevant for a Professional Knowledge Firm (PKF).
I wonder why one doesn’t read of Microsoft’s, Oracle’s, or any other technology company’s investment per hour? Could it be that these companies don’t think they are selling time? These companies do look at revenue per FTE, but that’s it.
They don’t go to the next absurd step of dividing that number by hours. We might just as well divide revenue per FTE by the number of square footage in the firm. Either one is meaningless.
PKFs don’t sell time! One wonders how many times this must be proven before the consultants realize this basic fact? All of the metrics reported in the article are lagging indicators of performance. They measure the effect, but ignore the cause of firm performance.
Gary suggests firms calculate their metrics and then compare them to their peers. But this navel gazing is of little value, and I would argue a waste of precious intellectual capital.
One does not change one’s weight by weighing themselves more frequently, accurately, or comparing themselves to their peers. You have to change the process, not the measurement. Want a better golf score? Change your swing, and don’t bother with your peer’s scorecard.
The entire edifice of billable hours, charge hours, multiples, etc., are precisely the wrong metrics to assess the effectiveness of a PKF. If firms really want to enhance their performance, they should reevaluate their pricing strategies, not bother with silly hourly calculations.
And on this topic, I give Gary two cheers for advocating fixed price agreements (FPAs) and change orders. He even writes how his mind has changed on this issue, stating:
Years ago, I recommended that firms utilize a technology surcharge. Today, I recommend that firms move to tighter fixed-price agreements with a well-defined scope, money in advance and payment during the life of the project. Change orders should be implemented before work outside the engagement letter is completed.
Many accountants do not like this approach, as they have been trained to be fire fighters, go back to the fire house and then attempt to bill an additional amount. The client always wins in this type of negotiation. It will require communications and negotiations to use a fixed-price agreement and change orders, but the power remains with the firm if they get a signed change order prior to completing the work.
You have a simple choice: Let the clients dictate the rules and control the fees, or put the firm in a position of strength and increase margins. The construction industry has used this approach for years. Clients value fixed-price agreements, as they perceive the agreement as reducing their risk. Billing by the hour is perceived by clients as an open checkbook approach without an incentive for efficiency.
I remember, vividly, the days when a lot of consultants would advise firms to put a technology surcharge on their customers’ invoices. It drove me crazy. Any good pricer knows not to focus customers on things they don’t value. No customer cares about a firm’s internal technology investments.
How would you feel if your airline assessed a surcharge for using AutoLand, or computerized navigation? It’s absurd, yet some consultants still recommend this tactic. With advice like that, we don’t need consultants.
Besides the useless metrics, here’s another major problem with Gary’s article. He states:
A majority of partners who price engagements often don’t know the amount of the technology investment. They tend to underprice engagements.
I agree that the majority of partners who price tend to underprice. No doubt. But it’s not because they don’t know their technology investment, or even their costs. All PKFs, especially CPA firms, know their costs to the penny.
That’s because an overwhelming majority of those costs are fixed in the short-to-medium term. Any college intern can calculate a firm’s costs accurately enough for purposes of pricing.
The real problem is the partners don’t understand—nor does the firm track—the value being created for the customer. Value drives price, not costs, another point that seems to be lost on the consultants.
Price-led costing works like this: Customer > Value > Price > Cost > Service
Notice the customer determines the value, and this sets the upper boundary on the price the firm is able to charge. Only then should the firm worry about its costs to provide the service at an acceptable profit.
This means firms are doing cost accounting, but they are doing it before they begin the service, not during or after (as with timesheets). Toyota is so good at this it doesn’t even have a standard cost accounting system. Toyota calls is target costing, and it will not build a car without first assessing value and price to the customer.
Hence, price drives cost, not the other way around. If all firms followed this simple value chain they would increase margins and wouldn’t have to worry about hourly rates, or what their peers were doing.
Since price is the number one driver of profitably in a PKF—nothing else even comes close, including increases in efficiency, cost-cutting, and rainmaking—it makes sense for firms to invest more intellectual capital into the pricing function, not better cost accounting or more comparisons with peers.
The deleterious effect of Gary’s advice is it keeps firm leaders mired in the mentality they sell time. They will never be able to effectively implement FPAs and Change Orders until they get a far better understanding of their value. This won’t happen until they stop worrying about hours and trash their timesheets.
That’s why Gary only deserves two cheers, not three. But they are two big cheers and I once again commend him for being a strong advocate for more strategic pricing among PKFs.
When will the other consultants make the connection and call for the elimination of both the billable hour and timesheets? Better still, when will firm leaders?