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Monitoring and Benchmarking Key Performance Indicators: Part One
by Stuart Black, IFAC SMP Committee Member, and Paul Thompson, Director, SME & SMP Affairs | July 21, 2014 | 2
Monitoring your practice performance over time and against budget is a given. Benchmarking its performance against others, especially a peer group, adds further value and is a big step on the road to continuous improvement for any organization, accounting firms included. A firm without a realistic benchmark is like a boat without an anchor or compass. If you want to stay competitive and develop your business, then you need to monitor and benchmark key areas of practice performance. The question is what key performance indicators (KPIs) to monitor and how might they compare with peers.
Part One of this two-part series looks at selecting KPIs, while Part Two will look at benchmarking and using the data.
As a manager of an accounting firm, you are faced with the challenge of getting partners, managers, professional staff, and support staff working as a team toward a common goal. KPIs, at the level of firm, department, and individual, will engender goal congruence. To ensure all team members pull together, everyone needs to understand the department and firm goals, how each person fits into those goals, and what will happen if individuals achieve, or fail to achieve, their goals. As an accountant, you recognize that what gets measured gets managed and this is what benchmarking is about.
The first step is to establish whether the firm’s information system is capable of producing the data on a timely basis, without adding too much to the firm’s cost base. Assuming the firm can capture and report data, the next step is to identify the firm’s overall KPIs that drive business performance. These KPIs are then cascaded down to departments and individuals.
Before identifying KPIs, we need to understand the drivers of practice profitability, as this is what we need to measure. A simple way of representing the drivers of a typical accounting practice is illustrated below.
[Click on diagram to enlarge]
In addition to the profit-and-loss KPIs, such as gross margin or net profit (see above), there are the balance-sheet KPIs, which are important to maximizing return on capital employed (ROCE) or return on equity (ROE). Combined with absolute profit, ROCE or ROE is the ultimate measure of a practice’s financial performance. The main balance sheet KPI for accounting practices and a fundamental driver of practice profitability is the number of lock-up days, that is, the number of days when cash is tied up, either due to work in progress or debtors. The object is to optimize ROCE, by maximizing productivity and recoverability while minimizing lock-up.
Blake Christian, in his article, The Benefits of Benchmarking for CPA Firms, sets out a number of potential quantitative KPIs, including: net revenue growth rate; net revenue per partner; firm utilization—chargeable versus total hours; percentage billable for professional staff; personnel costs as percentage of revenue; average partner compensation; and average professional staff salary. Meanwhile, in a two-part series, the Institute of Chartered Accountants in England and Wales (ICAEW) presents its top five practice KPIs: profitability; net gains; productivity; recovery; and lock-up.
Lauren Prosser stresses that some metrics can provide more qualitative feedback, such as how effective existing processes are at helping to identify opportunities with clients. She describes 12 such metrics in her article, The Defining Dozen: 12 Metrics CPA Firms Should Track. These metrics include: cost of client acquisition; client retention rate; average number of services per client; average number of top-client “touches” per month; average client response time; the number of cross-selling opportunities vs. those won; and request for proposal (RFP) win percentage.
Firms new to KPIs should perhaps start by identifying a few areas to focus on and selecting a handful of relevant KPIs, such as those mentioned above. There may be some initial resistance from staff to implementing KPIs, but timely and constructive feedback, particularly if it is used to improve systems and make their jobs easier and more rewarding, can help alleviate this resistance over time.
See Practice Management Resources, strategy and planning for additional articles on this topic.
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