Realization, as discussed here, is a metric used by accounting firms to determine the profitability of a job or task. Realization can be computed by taking the total number of hours invoiced to the client divided by the total number of hours it took to complete the job. For example, if a tax return took 10 hours to complete but the client was only billed for 8 hours then the realization rate is 80%. Most accounting firms would be happy with a rate of around 80% and look to staff members to continually reduce time on the job while keeping fees constant. However, simply looking at realization rates can be potentially harmful for the firm and its bottom line.
Misguided View of Realization
Some, if not most, partners look at realization as an indication of individual employee performance. The immediate response to poor realization is often times directed towards staff members. “Why did this take you so long? It took half the amount of time last year,” a partner might say. Simply putting the blame on staff members ignores important factors that contribute to poor realization rates. For example:
- Increased complexity
- Slow client response time
- New staff members training on the job
- New controller or bookkeeper
However, even after addressing these factors, clients will be leery of increased accounting fees. So, the only way to increase realization is by decreasing the time it takes to complete a project year after year.
Chasing Realization Rates
Partners might have a misguided view of realization rates, believing it is an employee related problem, and try to pressure staff members into finishing tasks sooner. This pressure could lead employees to take short cuts and miss important details – chasing realization rates is a losing game.
One would expect poor realization rates when there is a new staff member on a client’s account. There is increased cost with becoming acclimated to the requirements of the job, and being unfamiliar with the new workplace will bring down their overall efficiency. Over time this staff member will significantly increase their efficiency and therefore improve the realization.
Not only will the staff member’s efficiency increase but, eventually, this staff member’s billing rate will increase as well. This means that any efficiency gain will be nullified by increasing billing rates. Soon the staff member will not be able to complete the project without busting the budget with their high billing rate. Eventually they must pass the work onto a less experienced staff member with a lower billing rate which starts the realization cycle all over again.
Focus on Efficiency
Instead of pushing employees to increase their own efficiency, partners should instead focus on the overall firm’s efficiency. Firms can radically increase realization rates by asking and answering the following questions:
- Is there a way to leverage technology to reduce time on the job?
- Is there a better way to perform tasks within the job?
- Is there a way to automate this process?
- Is the job properly staffed?
By setting standard practices and utilizing current technology firms can expect high realization rates year after year. Simply focusing on realization does not boost efficiency and firms must think outside of the box to increase their bottom line.
The Price is Right
The main reason why simply looking at realization rates is ineffective is because price dictates everything. Whether or not a partner would agree, most clients are on a fixed budget. Even though the firm charges by the hour there is a limit to the amount a partner is willing to bill a client – this is why realization rates are below 100% in the first place.
So, why even keep track of hours or realization rates if partners know they are going to invoice the client the same fee as last year? If employees are consistently eating their time and efficiency is at its maximum, then a pricing issue exists which is more problematic than low realization rates. For this reason more and more firms are turning to value pricing as an alternative to billable hours and realization rates.