Benchmarking IT Expenses Revisited

An April post on this subject generated many excellent questions. Today we’re following up with additional insights we’ve gleaned since then in response to these queries.

Initially, a reader asked how to benchmark IT expenses. We referenced two main sources: Roman Kepczyk, the #1 IT consultant to CPA firms in the country, who cited $6,500-$8,500 per workstation, and The Rosenberg Survey, which cited IT expenses as $5,700-5,800 per person.

How should we measure IT expenses?

Most MAP surveys, including The Rosenberg Survey, instruct firms to include hardware, software, compensation of full time IT personnel, outside consultants, computer training, supplies and other computer related items in the category “IT expenses.” Since we don’t audit survey responses, we will never know if firms follow our instructions.

We polled the 20 members of my large firm Chicago roundtable on how they categorize IT expenses. Here are the results:

Expenses classified as IT: 70% of firms we polled include the following – Hardware purchases that are not capitalized, software, scanners, internet access, salaries of IT personnel who devote full time to IT and external IT consultants.

Not classified as IT:  Compensation of people who spend less than half their time on IT (mostly COOs and firm administrators) VoIP, conventional phone systems, copiers, cell phones, IT training.

50-50: Hardware depreciation. The issue here is that most firms lump the entire firm’s depreciation, including IT, into one account.

As you can see, the inconsistencies in how firms categorize IT expenses can lead to some significant variance in response. The Rosenberg Survey shows that IT expenses comprise 3.3-4.2% of revenues. What is it really? That’s anyone’s guess. But I think it’s safe to say that its higher than 3.3-4.2% of revenues; maybe 4-5% is a safe estimate.

Categorizing IT labor is a big complication. At larger firms, say, over $15M, most IT labor consists of non-partners who spend 100% of their time in IT, making it easy to classify these people as IT expenses. At firms under $10M, firm personnel who are NOT full time IT people such as partners with IT oversight duties and COOs/firm administrators, often devote a sizable portion (though usually under half) of their time on IT matters.

The vast majority of CPA firms are  under $5M and it’s unlikely that these firms will have even one full time IT person. If a firm wishes to sort the time and expense of these people between IT and other areas, then the IT portion certainly should be included with other IT expenses. But most do not take the time to allocate labor between admin and IT.

What accounts for the significant disparity between cost per workstation ($6,500-8,500) and the cost per person ($5,700-5,800)?

The biggest factor is whether all admins have a dedicated workstation. At small firms, more admin personnel have their own workstations because they perform a wide variety of tasks, some of which require a computer. But at larger firms it’s more common for admin staff to either share workstations or not to use them at all, given their duties in the firm.

When the average number of workstations for admin personnel goes down, a gap opens up between the two metrics.

The 2015 edition of Roman Kepczyk’s The Quantum of Paperless: Guide to Accounting Firm Optimization is an indispensable resource for technology-related issues confronting your firm.