Blake Christian
The benefits of benchmarking for CPA firms

Comparing firm metrics against those of peers can help leaders set realistic goals.

December 2, 2013
by Blake Christian, CPA

Being a managing partner, or in charge of a business unit, can be one of the most daunting roles in a CPA firm. In addition to staff management, administrative partners must deal with everything from regulatory issues to quality control to economic and industry cycles and more.
CPA firm leadership also must juggle a wide variety of unique partner personalities, work styles, and skill sets combined with equity holders’ deep financial skills—which can contribute to each partner calculating inflated self-worth. To mitigate these issues, refine expectations, and improve firm performance, firm leadership should develop benchmarking criteria for both the firm and individual partners.

All team members need to understand the department and firm goals and know how each partner, manager, staff member, and administrative worker fits into those goals. Because not every partner and employee will buy in to every department or firm goal, it is equally important for each team member to understand the consequences of meeting (the carrot) or missing (the stick) his or her individual goals.

Why benchmarking is helpful

Goal-setting is critically important to establishing personal, department, and firm strategy. Managing partners or department heads must evaluate the past performance of their team and individual team members against their potential performance levels.

This can be a challenging exercise, especially since most partners (other than relatively new partners) will say that they are working at full capacity and cannot take on additional client or administrative responsibilities. However, a review of year-to-date and prior year partner-level chargeability, billings, and other statistical trends against other partners and industry peers will generally yield some areas of opportunity. 

Examples of areas that should be reviewed include:

  • Partners may be holding on to low-margin (or loss) clients for a variety of reasons. A review of project efficiency and fee structure with the client service team and the client will be in order, along with evaluating whether another partner and/or manager may have capacity or a better skill set.
  • A significant portion of profits may be coming from 20% or less of the partner’s clients. Opportunities to expand firm services to these clients should be evaluated.
  • Niche or industry concentration will typically be trending positively for more experienced partners. Developing a firm strategy for capitalizing on these niche relationships can result in long-term expansion.
  • Success (or failure rates) on new client proposals will require new approaches to the process for that partner and possibly firmwide.
  • Staff and manager utilization may exceed or be underperforming as compared to firm and industry norms. In such cases, rebalancing workloads or evaluating project processes is in order.
  • Is the firm’s technology—including website, social media, and paperless initiatives—resulting in efficiencies and employee and client satisfaction?
  • Are the professionals and administrative staff sharing information in an efficient manner to ensure that best practices are being adopted throughout the firm?
  • Which departments or firm resources are limited or have overcapacity?
  • How are recruiting and training policies affecting the firm’s practice?

The key to reviewing these areas is to compare your results to those of other firms. Such information sometimes can be hard to come by since virtually all firms are privately held and only release limited information. However, the AICPA collects various benchmarking data, as do some accounting publications.  

Sample statistics and benchmark measures available from these sources include:

  • Net revenue growth rate;
  • Net revenue per charge hour;
  • Net revenue per equity partner;
  • Net revenue per professional;
  • Net revenue per square foot;
  • Firm utilization—chargeable vs. total hours;
  • Percentage billable for professional staff;
  • Charge hours per professional;
  • Personnel costs as percentage of revenue;
  • A/R management—days outstanding;
  • WIP management—days invested;
  • Net income as a percentage of revenue;
  • Net income growth rate;
  • Net income per charge hour;
  • Net income per equity partner;
  • Average equity partner compensation;
  • Average non-equity partner compensation; and
  • Average professional staff salary.

How to use the data

These industry benchmarks will vary by geographic region and firm size, but being able to compare statistics at a partner-by-partner level, as well as against comparable firms, can assist leaders in identifying both risks and opportunities in their firm.

This data can be developed into customized dashboards, which can provide management with important evidence that shows whether or not the firm and its partners are performing below, at, or above their peer groups. In addition, this data can provide line partners with real-time information about where they should be focusing their efforts. These insightful statistics also can be invaluable in evaluating past performance, as well as establishing achievable future partner and firm goals.

Once these goals are implemented, management must measure performance at least several times per year and, if needed, take corrective action. Waiting until year-end (or after) is woefully late to get things back on track—and sets firm leadership up for painful discussions with underperforming partners.

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Blake Christian, CPA, MBT, is a tax partner in the Long Beach, Calif., office of CPA firm HCVT LLP.