Firms that have pushed for increased charge hours one year and then realization the next have failed to capitalize on available opportunities and profits. When management focuses too heavily on one or the other, the teeter-totter effect takes place.
What's the teeter-totter effect? Well, if you tell your people to increase charge hours, you'll get charge hours. But realization goes down. So you shift the focus to higher realization. And while you get higher realization, charge hours are down. Hence, the teeter-totter.
In theory, increasing charge hours and realization is a good thing. However, most firms fail to recognize that those two goals require more than mere words. Luckily, CPAs are beginning to acknowledge that some traditional performance metrics can have drawbacks if they are not communicated properly as part of a firm-wide strategy. You shouldn't just preach a goal. Give your employees what they need to achieve them.
Most employees want to do well and hit their goals. They'll strive to give you want you ask for, and do whatever it takes to make that happen. But all kinds of unintended consequences may result if you don't give them the proper tools, methods and processes to achieve them. For example, if you tell your staff to focus on realization, but don't help them become more efficient and effective, chances are they skimp on client work or not record all their hours. The same is true with charge hours. People will "milk" jobs or find creative ways to record hours, and then realization turns bad.
The problem with these historical metrics is that firm management is not focusing on performance metrics that drive the right behavior. Nor are employees given the tools, methods and processes to be successful. Really, only one thing matters - delivering superior client value.
If you give your team the tools and processes to focus on delivering superior client value, it will naturally lead to increased profitability. Then and only then will the historical metrics play out how they should and not like a teeter-totter. Charge hours should initially go down as you gain efficiencies and effectiveness in the process, then they should start increasing as you begin filling in the new capacity with new business. Realization and dollar per hour will also trend upward while write-offs will fall.
The next time you're sitting in a firm meeting and someone mentions that you need to focus on increasing chargeable hours, remember the teeter-totter. Instead, take a holistic approach to your business by focusing on what really matters - your processes and methods to deliver superior client value. Unless you plan on raking in a ton of new clients to give your people more work to do, there's no way you going to see an effective increase of charge hours.