Rosenberg Spars with MP Over Billable Hours

I have had the pleasure and honor of exchanging spirited emails for years with the MP of an amazing CPA firm. We sometimes disagree but when I tell you the metrics of this firm, you’ll understand why I respect him so much. The firm’s revenue is $30M; 7 equity and 6 non-equity partners; income per equity partner is $1.4M. The MP earns $4.5M.

The opening salvo

I recently wrote a blog entitled, “Proof That CPA Firms Earn MORE Money When Their Partners Work LESS Billable Hours.” I began by stating why some firms erroneously believe they will be more profitable when partners work high billable hours: (1) Partners do the work faster, more accurately and at a higher billing rate and realization, (2) Partners’ work often doesn’t need to be reviewed and they don’t have to spend time supervising staff and (3) It’s easier to meet time deadlines.

Huge problems arise when partners do too much staff-level work

Here’s why having your partners rack up high levels of billable hours reduces profitability:

1. The more time partners spend on delegable work, the less time they have for critically important duties such as business development, firm management and mentoring staff.
2. When partners do staff-level work, they shirk one of their most important duties – the training and mentoring of staff, helping them learn and grow.
3. It promotes a “me” vs. “we” attitude because partners game the compensation system by propping up their billable hours.
4. Since firms make more money when partners do LESS billable work, partners who work excessive billable hours are tanking profitability.

Proving the point with hard data

To prove that firms earn more money when partners work less billable hours, we harvested data from the annual Rosenberg MAP Survey (now in its 23^rd year) of 350 firms. Here’s what we found:

• For the 50% of firms with the lowest partner billable hours, their partners worked 12-17% of the total time spent on their client bases.
• For the 50% of firms with the highest partner billable hours, their partners worked 23-31% of the total time spent on their client bases.
• The group with the lowest partner billable hours posted income per equity partner that was 13-22% higher than the group with the highest partner billable hours.

Response by the MP earning $4.5M

He began by stating “I confess I am a data guy and look at things through a numbers prism.” He compared two different partners, each with a billing rate of $480.  One partner works 800 billable hours and the other 1,600. That’s an 800-hour difference, which at $480 per hour and 80% realization comes to $307,000, which the MP claimed was “lost” revenue. Therefore, the partner working only 800 billable hours would have to generate a remarkably high amount of value from those 800 non-billable hours to bridge this gap.

Rosenberg’s response

I made three points:

1. An axiom I strongly believe in (that I didn’t invent) is: It’s more important what partners do with their non-billable time than their billable. Partners should limit their client hours to partner-level work while delegating as much as possible to staff.  This frees them up to perform critically important tasks such as management and leadership (not administration that should be done by a firm administrator), mentoring and developing staff, helping them learn and grow and business development.  These activities more than makeup for the “lost revenue” posited by my friend the MP.

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2. One of the biggest weaknesses in CPA firm management is the lack of partner productivity. In the MP’s example above, the first question that needs to be asked is: For the partner working 800 less billable hours than another, what is he doing with those extra 800 hours? I have always described this enigma as the “black hole of CPA firm management.” If the partner mostly uses these 800 hours to work less, or less hard, or less smart, then this is not acceptable and he should be required to work more billable hours. But if he uses these 800 hours to do the things described in the previous paragraph, then this is a win-win because firm profitability goes up, revenue increases, the firm is better managed, and perhaps most importantly, the firm develops a great, productive staff.
3. Shame on the firm that allows a partner to work low amounts of billable hours and fails to use his non-billable time productively. This happens because of an egregious lack of leadership by the firm’s management. This is the other major weakness at CPA firms when it comes to their partners: Lack of partner accountability.

The saga continues

Let’s see if my MP friend will continue the discussion. Or maybe those of you reading this might want to join in the foray? I welcome your comments below.