The Future of Accounting: Rosenberg Survey Insights on the Metrics That Drive Profitability

the rosenberg survey

In my first two articles on The Future of Accounting as reflected in The Rosenberg Survey—a comprehensive annual survey of the accounting profession authored by The Growth Partnership—I addressed emerging patterns we’ve seen regarding changing partner compensation systems and the issues of partner buy-in and buy-out. In this article, let’s talk about a topic that’s of lively interest to us in the accounting world: the metrics that drive CPA firm profitability.

the rosenberg survey

Which Statistics Correlate Most with Firm Profitability?

For many years now, whenever we’ve analyzed the top 10 metrics with the strongest correlation to profitability, as measured by income per partner, the same four factors keep reappearing. They might interchange, but they’re the same.

The results from our 2020 survey (based on 2019 figures) are listed in order of income per partner (for firms over $2M in annual fees):

Rank 2019Rank 2018MetricAverage of the Top 25% Best Performers
for Each Metric
Average Partner Income of the Top 25%
Performers in Each Metric
11Fees per partner3,046,992775,073
22Fees per person258,099717,496
34Partner billing rate445707,098
43Ratio of staff to partner12.4698,023

Avg. IPP for all firms >$2 million – $497,417 ($469,542 in 2018)

The best path to profitability is a combination of high leverage and high billing rates. The top four items on this chart are all measures of leverage or rates.  In this case, leverage assumes three forms; these are the biggest leverage ratios:

  1. Fees per partner
  2. Fees per person
  3. The Ratio of professional staff to partner

When you put these three factors together, they form a reinforcing pyramid that supports a firm’s success. But there’s a fourth factor that plays a decisive role in determining firm profitability: high billing rates.

How Do Partners Billing Rates Compare Within the Same Population Markets?

Speaking of the power of higher billing rates…  In the table below, you’ll see that having aggressive billing rates is a significant factor in achieving a high level of profitability. As consultants, we consistently see firms with aggressive rates outperform those with lower rates. Here is some convincing evidence — regardless of market size.  (Note: in the chart below, IPP stands for Income Per Partner.)

Population RangeAverage Partner Billing
Rate
IPPAverage Partner Billing
Rate
IPPAverage Partner Billing
Rate
IPP
>2M467643,000351524,000276357,000
1–2M420536,000320405,000246371,000
250K–1M381708,000300437,000238308,000
<250K325491,000261322,000220277,000

What patterns emerge here? Firm members in the upper 25% are making almost double ($643,000) than those in the lower 25% ($357,000), regardless of population size markets. Firms with the highest billing rates will have the highest profitability.  But it’s just not the billing rate—some firms charge flat fees. It’s clear that the firms that charge the most for their services reap the rewards. 

Our advice? Don’t cut your rates to get new business—it’s a short-term fix at the expense of the long term.

Do Firms with High Billing Rates Have Lower Realization?

Our chart below shows that even if firms with high billing rates have lower realization, they have higher “net” realized rates. See the results below:

 Average Standard Partner Billing RateRealizationNet Realized RateAverage Income
Per Partner
Average Annual Net Fees
Highest 25%44585.1%379710,00019,866,000
Middle 50%32987.2%287450,00010,654,000
Lowest 25%25787.9%226363,0006,854,000

The lowest 25% have higher realization (87.9%) than the highest 25% (85.1%), but the net realized rate is almost half (226 vs. 379). As I’ve said in the past, you cannot deposit percentages into the bank account; you can only deposit dollars.

The Fantastic Four

At the Rosenberg Survey, what have we learned about the metrics that drive CPA firm profitability?  First and foremost, income per partner is the ultimate measure of profitability. The surefire way to increase profitability (income per partner) is via the four factors: leverage (the pyramid with three sides: fees per partner, fees per person, and ratio of professional staff to partner) and rates.  When assessing the key metrics crucial to profitability, those are the four factors we analyze. 

But what else new has happened in the accounting world in the past dramatic year? By the time you read this article, the deadline for the new Rosenberg Survey (July 30) will have already passed.  But if you’re interested in obtaining a copy of the 2021 Rosenberg Survey when it’s ready November 2021 so you learn what’s changing in the accounting world today, please contact us. 

The Future of Accounting: Rosenberg Survey Insights on Partner Buy-In and Buy-Out

The Future of Accounting

In my first article on The Future of Accounting as reflected in The Rosenberg Survey—a comprehensive annual survey of the accounting profession that The Growth Partnership has authored—I examined emerging patterns we’ve seen regarding partner compensation systems. In this article, I’ll address the related issues of partner buy-in and buy-out and what recent trends we’ve observed.

Partner Buy-In

We’re all keenly aware of the succession crisis currently gripping the accounting profession. The shortage of experienced CPA employees in our profession has created a shortage of potential partners. At the Growth Partnership, we deal with accounting firms exclusively—and in our experience with the firms we work with, we have noted that they’re trying to make it easier to become a partner, by decreasing buy-in amounts and making terms more favorable.  

 

Partner Buy-Out

In The 2020 Rosenberg Survey, looking back at 2019, we reported the percentage of firms that offer mandatory retirement provisions:

 20192018201720162015
Over $20M95%94%91%87%88%
$10-20M78%81%74%77%72%
$5-10M70%69%70%70%69%
$2-5M47%53%51%49%49%
Under $2M26%25%19%17%29%

The number of firms that have mandatory retirement provisions in their partner agreements remained relatively steady, after an upward trend for the past few years. In working throughout the industry, we have noted a general acknowledgement of the importance of mandatory retirement provisions. Mandatory retirement does not mean it is mandatory to stop working. It means the partner must relinquish their equity and begin the capital and goodwill payment process. A well-structured succession strategy allows for a partner to continue working so long as it’s a win-win between him/her and the firm.

 

How Are Partner Buy-outs Being Funded?

From the table below, taken from our 2020 survey, it’s visible that the multiple of compensation method has become the gold standard in the industry at all firm sizes, particularly at firms with five or more partners, as the basis for calculating partner buy-outs. 

 
 2-4 Ptrs5-7 Ptrs8-12 Ptrs13+ Ptrs2019 Total2018 Total2017 Total
Multiple of Compensation34.1%49.4%58.2%60.7%47.347.6%46.4%
Book of Business8.0%14.6%7.3%0.0%9.2%10.4%9.3%
Ownership Percentage25%15.7%3.6%3.6%15.0%14.8%17.9%
AAV18.2%11.2%21.8%25.0%17.3%16.4%15.4%
Fixed12.5%9.0%7.3%7.1%9.6%8.8%8.6%
Equal2.3%0.0%1.8%3.6%1.5%2.0%2.5%
Firms with no retirement provision23.8%7.2%5.1%9.4%13.5%12.0%13.0%

A rather disturbing note, as we see in the bottom row, that in 2019, 13.5% of all firms had no retirement provision (compared to 12% last year). Why wouldn’t a firm have a buyout agreement in place? From our experience, agreeing on the terms is a very sensitive  subject, one that’s difficult for partners to address. As a result, they postpone the development of a   plan.

 

In Closing

From our experience with the firms we work with, it’s clear that firms of all sizes are struggling with partner retirement. First, many firms are realizing their existing partner buyout arrangements aren’t viable: payout terms are too short, and amounts too high. Second, there an insufficient number of CPAs on the “partner-to-be bench” to replace retiring    partners. Consequently, firms are struggling with client transition, responsibility transition, and oftentimes leadership transition, asking themselves, “Who is the next Managing Partner?” While it may be difficult, we feel it’s critical that partners engage in these discussions and put together a viable succession plan or update the existing one.

 

We’d like to know how your firm has been doing the past year. The 2021 Rosenberg Survey (covering 2020) is now open, and we’re canvassing CPA firms and soliciting their input until July 15, 2021. If you’re a CPA firm, how do you participate in The Rosenberg Survey and learn its findings? 

Simply go to www.rosenbergsurvey.com to begin the process. The survey is open and will remain so until July 15.

The Future of Accounting: Rosenberg Survey Insights on Changing Partner Compensation Systems

accounting

In the accounting world, there has been a shift in the way CPA firms have been compensating their partners and allocating their profits. Historically there was a lock-step system dictated by a direct correlation between age and compensation; the older you were, the more you got paid—regardless of the value you were bringing to the partnership.

However, there was a pitfall to that approach. What if you have a senior partner who’s now kicking back and not producing much, while an aggressive younger partner is busy racking up more hours, yielding a bigger book of business? Clearly, the younger partner is more valuable, but under the old system, the senior partner got paid more.

Today it’s changed completely. The majority of partner compensation systems are based on the value you bring to the firm. You can see the reality of this change clearly in the latest Rosenberg Survey, a widely respected study I author that reviews the previous year’s changing accounting landscape. 

For the past several years, we’ve seen the number of firms moving to the compensation committee method increase; in 2019, it leveled off (just slightly down). For firms of 13 partners or more, this method is still the overwhelming choice. 

Based on our consulting work and discussions with other top consultants in the profession, it appears the compensation committee is the system of choice for larger firms. Why is this? Here are some of the reasons: 

  • It allows for subjectivity, so firms can reward intangible contributions.
  • It takes the sole responsibility out of the hands of the Managing Partner.
  • It possesses advantages over a pure formula-driven system, which has numerous flaws (such as overlooking intangible contributions).
  • It creates a trusted group that looks out for the firm as a whole.
  • It’s often the only system the partners can agree on.

In the table below, here’s the nitty-gritty of what we learned about the current state of partner comp systems: 

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In our latest Rosenberg Survey, published in 2020 but covering the state of the CPA profession in 2019, we learned a surprising fact: over 60% of all firms are using a compensation system that allows for recognizing intangibles such as leadership, niche responsibility, and department responsibility, using such methods as Compensation Committee, Paper and Pencil, MP Decides, and All Partners Decided.

Fifteen years ago,it wasn’t this way. Now we’re seeing more partner compensation systems that reward for intangibles and ultimately, overall value.

Here’s another interesting set of figures regarding the range in partner income, from high to low: 

  • Firms over $20M: 3.3 to 1 (3.6 to 1 in 2018)
  • Firms $10-20M: 2.8 to 1 (2.5 to 1 in 2018)
  • Firms $5-10M: 2.4 to 1 (2.2 to 1 in 2018)
  • Firms $2-5M: 1.7 to 1 (1.9 to 1 in 2018)
  • Firms under $2M: 1.4 to 1 (1.3 to 1 in 2018

However, I should add that the findings I’m citing are all pre-COVID. But good news: the 2021 Rosenberg Survey (covering 2020) is now open; we’re canvassing CPA firms and soliciting their input until July 15, 2021. If you’re a CPA firm, how do you participate in The Rosenberg Survey and learn its findings? 

Simply go to www.rosenbergsurvey.com to begin the process. The survey is open and will remain so until July 15.

In our next article on The Future of Accounting, we’ll discuss partner buy-in. Stay tuned!