Alphacution defines technical leverage as the difference between revenue per employee (RPE) and technology spending per employee. In the parlance of our T-Greeks benchmarking framework, this difference is also known as T-Spread.
I stumbled over the chart below – 50 companies in the S&P 500 with the highest RPE rankings for 2016 – recently and thought it would be notable to add to the knowledgebase. Since our modeling and analysis currently focuses exclusively on companies related to the financial services sector, much of what we find in this exhibit provides illuminating context.
Clearly, energy and healthcare companies dominate the RPE metric, with 3 companies producing astonishing RPE levels greater than $5 million. Only 3 companies from the Financials sector (2 insurance – Aflac, XL Group; and, 1 exchange – CME Group) make this list. From our own modeling, the highest RPE we have found to date is Virtu Financial – a high-frequency trading firm – with a 2016 RPE of $2.8 million. Among the world’s major banking groups, Goldman Sachs leads with an RPE of roughly $1 million.
Now, here’s the thing: RPE represents only half of the technical leverage story. Based on Alphacution’s definition, we need the cost of “leverage” – whether it be based on information technology in the case of services companies or mechanical technology in the case of manufacturing companies. It is the “spread” between the cost and result of technical leverage that allows us to benchmark companies in the same or similar businesses. Either way, a high RPE is typically a good indication of high technical leverage.