Utilization is for Suckers

It's really exciting to see how quickly PE ownership in large accounting firms is driving much needed change in this very traditional industry. The focus has suddenly gone from optimizing what is to "maximizing what could be. Those are two completely different strategies that lead to very different tactics. It appears that it took PE ownership to change this long-standing status quo.

For as long as I can remember, accounting firms have had a very short-term focus (monthly, even weekly) on optimizing the business they already had. This usually resulted in business as usual with a touch of increased efficiency.  This approach led to strong and consistent profits but little room for growth. It also starved firms of the investment and innovation needed to make sure these firms remain relevant in the future.

Now with PE investors, firms are quickly shifting their focus from optimizing current profits to maximizing growth and future value of the firm. This is going to be good for everyone - firms, investors in firms and the clients they serve. Everybody wins when something of greater value has been created. This now aligned approach has the potential to super charge these firms and truly maximize what could be.

This new strategy will result in new tactics, which include measuring the things that drive that new strategy.  One of the early signs of change is the diminishing emphasis on utilization.

Utilization

Utilization is defined as the % of hours recorded as chargeable time to a client vs. the total time available. The higher the utilization %, theoretically the higher the productivity and revenue generation that is created. There are so many flaws in this approach it's hard to believe how well accepted and unquestioned this metric has been for so long:

• PRODUCTIVITY - Utilization does not necessarily equate to productivity. An hour charged isn't necessarily productive and productivity doesn't have to come from hours charged.
• REVENUE - Utilization does not necessarily equate to revenue. Not all hours recorded can be charged to a client and not all client revenue has to come from hours charged.
• EFFICIENCY - Measuring utilization does not promote efficiency. Can charge hours be reduced through better processes, automation and use of technology without decreasing value to the client?  Might client value actually increase?
• RESOURCE ALLOCATION - Measuring utilization does not promote the best allocation of resources. Who/where/how can the work be performed adequately in the shortest possible time span, lowest cost and using the most available resource? If we reward high utilization, our perceived highest performers will focus on daily production vs. growing and optimizing the business in a leveraged way.
• CAPACITY - Measuring utilization implies a false limit on capacity. The less you rely on charge hours for production, the more capacity you can have. There are only so many good people to hire and only so many quality hours they can produce. What if you shift the focus of your more experienced team members from direct production to managing leveraged production?

What Should Firms Measure Now?

Measuring what matters is not a one-size-fits-all approach that utilization attempted to be.  Instead, performance measurements are going to have to be customized by service line, staff level and role.  Sometimes we’ll have to customize the performance metrics down to the unique strengths of each individual.

This will be especially true at the highest levels, where people have the biggest opportunity to impact the business. These subjective measurements could include:

• Client satisfaction
• Team satisfaction - morale/upward evaluations/turnover/promotion
• Non-client facing contributions to the business - sales, marketing, mentorship, infrastructure building, tech stack development, etc.
• Teamwork and collaboration within the group and across the firm

This approach won't be able to be measured in complete objectivity. Instead, subjective evaluations will have to be performed by subjective human beings. This will put a premium on making sure that there is effective communication to stay focused on the goals that matter for each situation. 

Fear not traditionalists, there will still be objective measurements even without utilization.  These might include:

• Number of clients or amount of revenue supported
• Deadlines met/missed
• Client satisfaction
• Quality control scores
• Transactions processed

These more objective measurements might have to be mined from the internal systems firms already use, such as task management, scheduling, HR, CRM, practice management, etc.  Could we start to harness that information to better understand how well things are getting done?

• Who are our clients and what do we do for them?
• What are our people good at vs. what they are doing?
• Which processes are less efficient and how can we improve them?
• Are deadlines met?
• Are quality control standards met?
• Is each client project performed to reasonable profitability or otherwise meeting strategic objectives?
• Do team members meet reasonable efficiency and profitability standards?
• How are different segments of the business, such as industry verticals, performing in terms of sales, client retention and profitability?

It is an exciting time to be part of a firm operating in this kind of environment. With so much opportunity also comes challenges. Adapting to those challenges is going to be the key to success over the journey.

As always, I'd love to hear your thoughts.