Written by Tom C. Davis, CPA -Davis Nichols and Associates (reprinted with permission)
There is good news and bad news for accounting firms. Business has been great. The economy has been excellent and looks to remain good for the foreseeable future. Clients are requesting more services and there are many opportunities to offer new services to new and existing clients. The bad news is that staffing resource is in short supply. Hiring, training, and retaining quality staff is becoming very difficult, and is projected to get worse.
This means that firms have to become more efficient. Using more of computer technology and changing work processes is one way that firms will handle increasing client service demands and tight staff resources.
Making a decision to acquire new technology tools involves many steps. One very important aspect of this decision process is determining the cost and benefits of implementing the new technology. Strangely enough accountants are really no better at performing this cost/benefit analysis than their clients are.
The cost side of the analysis breaks down into two elements. Let's call the first cost element “hard costs”. These costs are the resources that will be expended for hardware, software and infrastructure. Hard costs are not too hard to project, although they will “evolve” over the course of detailing out the specifics of the project. In most instances, the final hard costs will be very different from those projected in the initial stages of the planning process.
The second cost element is much more difficult to project. These are the costs of staff and management time spent planning, learning, and implementing the new tools and processes. They include specific time expended for the project, as well as time and other costs (emotional) spent dealing with the disruption caused by the new technology tools and processes. This type of cost is very seldom included in the cost analysis performed by accountants.
On the benefits side of the equation, things really get dismal. In most cases, there are no value estimates as to the benefits expected from new tools and processes. This lack of benefits projection makes it almost impossible to gauge the success and value of the project.
There are several reasons for this absence of benefit projection. First of all, it is just plain hard to determine the dollar amount that will actually inure to the firm. In most cases, technology tools mean better efficiency and in many cases, more efficiency does not mean more dollars to the bottom line. Many firms are still in the business of selling hours. Since hours are fixed (except by adding more staff), being more efficiency often means doing more work for the same production. Sure, in the short run, fees will increase with efficiency, but often these gains erode as client service needs increase. We end up providing more service for the same dollars.
Another reason projecting benefits from technology changes is difficult, is that benefits often do not come as expected. For example, adopting a new workpaper tool or approach that produces final quality financial statements will produce only minimal benefits in most firms because the impact is to reduce the amount of clerical time spent actually producing the financial statements. In fact, if firms take the change in workpaper software as an opportunity to have accountants produces the financial statements in the field, time typically skyrockets. However, if the firm implements new workpaper software and changes its formatting requirements and production processes to standardize and simplify statements, benefits are very substantial. It usually takes both new tools and changes in traditional firm processes to get benefits.
This lack of benefits analysis / projection is one of the most frequent reasons technology projects are viewed as not being successful. Also, benefits also represent “opportunity costs”: the cost of not doing something. Opportunity costs are usually the highest cost in the entire equation.
There is a way to simplify the benefits/opportunity cost analysis problem. This is to calculate some minimum performance improvement needed to recover hard and soft costs. Here’s how this works:
First of all, the components of this calculation:
- Project costs: These are the projected hard and soft costs.
- Recovery period: Set a reasonable recovery period. Do not go longer than 3 years. A 2-year recovery period is appropriate in most instances, given the speed of technology change.
- Profit multiple: To be justified, the project must make money, not break even. Use at least a 300% multiple. Projects that meet this criterion will be profitable enough for the firm to expend the resources and efforts needed to make them successful. This high-profit requirement will also provide a safety net. Technology projects that only generate half the expected results will be beneficial to the firm.
- Unit measure: This calculation component makes the answer meaningful and easily understood. For most analysis, average firm billing rates per hour is the unit of measure to use.
- Result: The result will be the number of hours that must be achieved, per year to justify the project.
Here is the formula to use:
((Cost/Recovery period)*Profit multiple)/Dollars Per Unit = Efficiency savings needed (in hours)
For example, a $50,000 technology project with a 2-year life performed at a 30-person firm with a $100 per hour average billing rate would require a 750-hour efficiency saving. To break it down further, if the project generates 28 minutes of savings per firm member, per week, the firm will realize a 300% return over the 2-year life of the technology project.
With this approach it is easy to evaluate the “reasonableness” of getting the required hours savings, without bogging down with specific savings. It allows the users of this information to make their decisions based on their own perceptions of the values of the new tools.
The expanding need for accounting services and the tightening of staff resources are hurting CPA firms. Technology tools offer accounting firms an opportunity to improve efficiency and effectiveness.
A successful implementation of a new technology tool or process requires planning and the quantification of expected costs and benefits. Many aspects of technology benefits are difficult to quantify. Taking an approach that projects the hours needed to profitably justify the project makes it easier to evaluate the chance of a successful engagement.
©2000 Tom C. Davis. Tom Davis is a consultant to CPA firms on using practice management technology and other applications. Contact him at (888) 832-4823 or [email protected].