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The productivity factor: justifying your computer purchase.

How can an accounting firm incorporate the estimated increase in office productivity in justifying new equipment purchase? How is a capital budgeting analysis performed? This article will attempt to shed light on these issues through a case study of a typical firm that has recently gone through the process, demonstrating how the costs and benefits can be used in the analysis.

As the degree of competition for clients and business becomes ever higher, accounting firms face the need to increase efficiency and productivity in their offices. Furthermore, since the revenue from consulting services has taken an important portion of many firms' revenues, more than accounting revenue in some large firms, there is an even greater demand for higher office productivity these days.

In reality, however, many accounting firms suffer low productivity because of inadequate office equipment, including computers. While professional consultants advise clients on the need to purchase state-of-the-art computers and other office equipment and on how to go about doing it, they themselves quite often do not have access to such equipment due to management inertia.

The Firm and Its Current


The firm in this case generates income from consulting as well as tax and accounting services. Recently, the consulting department has become more profitable with varied practices in MIS, hospitality, appraisal, real estate, financial and litigation support. While the firm frequently recommended to its clients to upgrade their computer systems, it had only minimal MIS resources in its office. The word processing capabilities were out-of-date, requiring a card and software to be placed in a PC before it would communicate with an IBM machine, and then it could only transfer an outdated version of a word-processing software.

The accounting practice had one early model IBM XT and only one dot matrix printer. All proposals and reports, including any charts and tables, had to be typed by hand.

Management agreed that in order to continue to improve the quality and speed of the work they were producing, they had to put new computer and equipment on their desks. In addition to the quality and speed, the appearance of their work also suffered.

For example, one manager showed the partner-in-charge a copy of proposal prepared recently by another firm and their own proposal. Compared to their own proposal, which was hand-typed, the other proposal made an impressive presentation, incorporating graphics, scanned images, etc., using a desktop publishing package.

The demonstration of the visual differences in the two firms' proposals yielded an immediate response from the partner-in-charge, who instructed one of the managers to do a capital acquisition analysis.

Capital Acquisition Analysis

The team (two computer specialists and the manager) first identified that the primary needs of the office were in the areas of spreadsheets, graphics, databases, word processing and tax and accounting, and desktop publishing. The team also decided that the focus of the analysis and recommendation had to be on the productivity gains the new systems would produce.

The feasible alternatives for the systems were:

1. A small mainframe with PC terminals;

2. A local area network of desktop computers, with a small number of laptops to take on jobs; and

3. A local area network of portable computers.

How to Estimate Productivity


Productivity gains in the office are produced in two different ways:

1. Additional jobs can be performed by the same staff due to the labor efficiency increase.

2. New projects can be attracted thanks to the new technological capability in the office. For example, with the installation of new computers, the firm could now take on some information processing projects they had to pass up before.

In the case of the mainframe alternative, the estimated 10% reduction in the staff time would be translated into a $300,000 productivity gain for the total billings of $3,000,000. The firm also estimated a 2.5% increase in the billings for the new technological capability.

The average profit margin ratio was used to calculate the profitability improvement of the firm. The 20% profit ratio yielded an increase in the firm profit of $75,000 for the total productivity gain of $375,000. This is presented in Table 1.

The desktop-laptop alternative was estimated to produce a 7.5% [TABULAR DATA OMITTED] labor productivity gain, which was translated into an additional billings of $225,000. This and the second type of productivity gain of 2.5% generated a total profit increase of $60,000, as presented in Table 2.

The portable computer alternative was estimated to generate an 8% labor productivity gain. When the second type of productivity gain of the same amount was added to the labor productivity gain, the increase in profit was $63,000, as presented in Table 3.

Net Present Value and

Investment Justification

Future earnings were inflated 5% annually to make the projections more realistic. A six-year life was used for the investment considering the technological obsolescense. The cost of capital used for the project was 11%. When the discounted cash flow analysis yielded not present values of $46,857, $28,200 and $2,831, respectively, as tables 1, 2 and 3 show, the partners chose the second alternative, desktops with laptops. This alternative was the only one which promised a positive net present value.


The article has presented a simple, yet realistic analysis of how productivity gains could be incorporated into a capital budgeting analyasis for accounting firms. In order to stay competitive, accounting firms need to have a long-term view and be willing to invest in new technology. The approach, which is illustrated here, should be of help to those firms when a capital acquisition is being considered.
COPYRIGHT 1991 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Lee, John Y.; Arentzoff, Steven
Publication:The National Public Accountant
Date:May 1, 1991
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