productivity isn’t the same as putting in the hours.
by alan anderson, cpa
transforming audit for the future
getting the right clients and projects goes a long way toward building a profitable and successful firm. but that’s only part of being business-minded about your firm. cpa firms have followed the same overall business model for generations, based on billing clients for the hours worked on a file. while that has been successful and has allowed many partners to achieve great wealth, a few forward-thinking firms are successfully challenging that model.
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many firm owners obsess about chargeability and realization rates. but that’s missing the big picture: the only thing your revenue model needs to accomplish is bringing in enough cash to cover your expenses with leftover profit. we know how much we’re paying the staff working on the audit, and we need to collect two to three times their salaries for that work. that will give us the cash we need to pay them and all our other expenses, plus a return to the partner, and make up for the weeks when they’re not as busy or are in cpe or taking pto.
that’s why, instead of obsessing about chargeability and realization rates, a better way to measure success for your firm is by looking at your collected rate.
let’s say you don’t have any staff available to do the work, so one of your managers has to do the work. this is pushing the work up, as opposed to pushing the work down. the fee realization stinks, but you’re still getting a decent collected rate.
which is better? the money you collect per unit of work that’s completed.
when the world first went remote during the covid-19 pandemic, all types of companies noticed an uptick in productivity. some were in panic mode – team members feared losing their jobs if they didn’t do a tremendous job working from home. however, some of that boost in productivity came from having fewer distractions as they worked from home, which meant they could get the work done more quickly.
i talked to many firm owners who were puzzled by that. some told their teams that if they weren’t doing billable work, they had to make up the difference with pto to get to their 40 hours per week. perhaps not surprisingly, those same firm owners noticed that time on projects was about 10 to 20 percent higher than the previous year.
so my question to those firms is, was either measure of time accurate? were team members eating time last year by not recording the full time they worked, or are they padding time this year to avoid being penalized? who is responsible if people don’t have enough billable work during a given week? should we punish the staff who find more efficient ways to get the job done, or do we need to bring in more work for them to do?
focus on deliverables, not chargeable hours.
if there had ever been a time to challenge the chargeable hour, it would have been during the covid-19 pandemic when everyone went remote. many firms worry about productivity and getting things out in an all-remote world. but most of that worry is because all they’re doing is measuring hours. that’s the wrong thing to measure. you can’t measure completion in hours.
in a remote world, a better way to monitor productivity is based on deliverables, not hours. making the shift is simpler than you might think. if you’re doing an audit for $25,000, your fee is based on budgeted time. in planning, you break down the deliverables by person and time. for example, if joe is working on cash and fixed assets and the time budget for those two sections is usually a week, that will be the measurement. the number of hours it takes joe to complete the work is unimportant. if he can get it done in less than five days, more power to him. joe can go fishing or play with his kids, but we’ve completed the deliverable at the right time.
at the end of the week, what matters is whether joe completes his assigned audit tasks and gets the work done right the first time. the number of hours it takes to get the job done is irrelevant. you’ll still pay him his salary whether he completes the work in 35 or 60 hours. the most important metric is that joe is accountable for his assigned tasks so you can deliver the audit on time. that’s how to measure productivity, not by tracking people’s chargeable hours.