BENCHMARKING CPA FIRMS FOR
PRODUCTIVITY AND EFFICIENCY

By Scott I. Jerris and
Timothy A. Pearson

CPA firms are being ranked and compared to each other, more now than ever before. Most rankings are based on total revenue or total clients and convey a measure of prestige. But is ranking by total revenue the best way to compare firms, and benchmark and judge performance? Linking revenues to the resources used to generate them would give a more meaningful basis for evaluating firm performance regardless of size.

For comparisons or benchmarking among firms to be reliable, it is often assumed that the firms should be restricted to a relevant peer group. For CPA firms, it is very difficult to clearly identify a peer group based solely on total revenue. There are wide ranges of firm revenues across CPA firms and much to learn from the operational performance of firms of different sizes. Benchmarking only similar-sized firms ignores the potential for improvement by comparing to high performing other-sized firms.

CPA firms can benchmark and evaluate firmwide performance relative to other firms using ratios of firm revenue to resources, such as revenue per partner, revenue per professional, revenue per employee, or revenue per office. Each of these revenue ratios provide measures of average productivity or efficiency of resources within the firm. Set forth below is the distribution of total revenue and resources (number of partners, professionals, employees, and offices) of the top 100 CPA firms providing accounting and auditing, tax, and management advisory (MAS) services in 1994 as published by Accounting Today.

You will see that productive and efficient CPA firms can be large or small, and their ability to be productive varies with their mix of services. Ranking of firms based on the production of revenue per resource utilized can provide more useful benchmarks. The Big Six CPA firms produce the most revenue, but are not consistently as efficient or effective as some smaller CPA firms in utilizing firm resources. The pattern of outstanding performers, in productivity and efficiency measures, vary based on their relative percentages of revenues from accounting and auditing, tax services, and MAS. The top performing CPA firms have significantly higher percentages of revenue from MAS, and significantly lower percentages of revenue from tax services.

Productivity and Efficiency Measures

Most CPA firms provide clients with accounting and auditing, tax, and MAS services. In the following paragraphs and tables, only those firms with revenues in all three components were considered. Seven firms in the top 100 were excluded due to non-CPA status (e.g., Triple Check and H & R Block) and one CPA firm (Campos & Stratos) was excluded because revenues were generated from only two areas.

Five separate and complementary ratios are calculated to provide a more complete evaluation of each accounting firm's production and efficiency. While revenue per firm measures total productivity and demand for CPA services, this measure does not indicate how effectively the firm utilizes its resources to create those revenues. Two alternative measures of productivity are revenue per partner and revenue per professional. The primary objective of each firm organized as a partnership is to maximize the contribution of each partner to the bottom line. Revenue per professional measures the ability of the firm to effectively generate revenues by providing client services. Firms generate revenues by billing for the hours their partners and professionals work for clients. The relationship between revenue per partner and revenue per professional provides information on the relative
distribution of partners to other professionals.

Comparing revenue per partner and revenue per professional to other CPA firms may reveal a firm's structural and productivity problems. A firm with high revenue per partner and low revenue per professional compared to other firms may indicate that the firm has too many professionals not effectively contributing to the bottom line.

Two other measures of efficiency are revenue per employee and revenue per office. Revenue per employee measures the effective utilization of the CPA firm's entire supporting workforce. Revenue by office indicates the effective utilization of capacity to meet clients needs geographically. For example, a firm with high revenue per office but low revenue per employee may mean the firm is meeting their client's needs geographically, but is overstaffed. If the same firm also had low revenue per professional, then a review of both the professional and nonprofessional workforce might indicate excessive staff, necessitating a strategic workforce reduction.

In the seven tables below, these productivity and efficiency measures are used to create alternative rankings of the top CPA firms. The use of these ratios as benchmarks should help firms of all sizes to assess themselves and determine the need for structural changes in their delivery of client services.

In Table 1, the largest ten CPA firms in total revenue for 1994 are listed in descending order (rank). Not surprisingly, the Big Six are the top producers of total firm revenue with Arthur Andersen ranked first. The other firms include
Grant Thornton, McGladrey & Pullen, BDO Seidman, and Kenneth Leventhal & Co.

Table 2 lists summary statistics of the productivity and efficiency measures for the 92 CPA firms being considered.

Table 3 lists the top ten CPA firms in descending order of revenue per partner. The Big Six are all included while the other four firms rank as low as number forty-seven in total revenues. This indicates that size alone does not result in greater returns per partner. Smaller firms can be as effective as the largest firms in generating revenue from their partners.

Table 4 lists the top ten CPA firms in descending order of revenue per professional. Only two of the Big Six are included. The other eight firms rank as low as number ninety-two in total revenue (the smallest firm as measured by total revenue in this study). These results also indicate that size is not a guarantee of the most effective use of professionals. On average, smaller firms appear to be as effective in generating revenue per professional as the Big Six. Larger firms may have excessive numbers of professionals which is consistent with the current reduction in workforce for many firms.

Table 5 lists the top ten CPA firms in descending order of revenue per employee. Only three of the Big Six are included. The other seven firms rank from number ten to number ninety-two in total revenue. This confirms that size is not a guarantee of most efficient use of support personnel. On average, smaller firms can be as efficient in their use of support personnel as the Big Six.

Table 6 lists the top ten CPA firms in descending order of revenue per office. Four of the Big Six are included while the other six firms rank as low as number thirty-eight in total revenues. Again, size alone does not result in more effective use of office capacity. Smaller firms can be as, or more, effective in utilizing facilities in meeting client needs than the Big Six.

Service Mix

Tables 3 through 6 illustrate alternative measures of productivity to total firm revenue. These measures clearly show that total revenue, a proxy for size, does not result in increased productivity or effectiveness in utilizing resources in CPA firms. One reason for the ability of smaller firms to generate greater returns with fewer resources can be explained by the mix of services they provide to their clients.

On average, the 92 CPA firms had the following service mix:

MAS 21.1%

TAX 29.9%

A & A 49.0%

Table 7 shows the distribution of total revenue into three components for each measure of productivity discussed above. This table demonstrates that the top ten firms for each measure of productivity have significantly larger percentages of their revenue from MAS. Specifically, the top ten firms for each productivity measure have percentages of revenue from MAS ranging from 26.4% to 39.0%. Firms not in any top ten category have percentages ranging between 18.9% and 20.4%.

In addition, the top ten firms for each productivity measure have significantly smaller percentages of their revenue from tax services. Specifically, these percentages range from 19.8% to 24.7%. Firms not in any top ten category have percentages of revenue from tax services ranging from 30.6% to 31.0%.

Last, there is no significant difference in the percentage of revenue from accounting and auditing services between the top ten firms in each productivity category and other CPA firms. The percentages cluster in the high 40 to low 50 percentiles with the one exception, firms in the top 10 of revenue per partner.

A dramatically different result can be seen in the analysis of revenue per partner ranking. Not only do the top ten CPA firms have significantly greater revenue from MAS than other firms, they also have substantially less revenue from tax services and accounting and auditing. *

Scott I. Jerris, PhD, CPA, is an associate professor of accounting, and
Timothy A. Pearson, PhD, CPA, is an assistant professor of accounting, both at West Virginia University.