A common theme is emerging in our business right now, especially with large firms— but certainly not limited to them. Firms need to improve their profits. Volume is up, optimism is up, backlog is growing, and the possibilities look great— yet there’s a profit squeeze on that has to be addressed.Here’s some of what we see firms doing to improve their bottom lines:They’re carving off unprofitable divisions and offices. Many large companies are taking a hard look at some of these weak sisters— business units or offices that just never seem to stop losing money. But instead of just closing them down, the smart companies are packaging some of these units up and selling them, lock, stock, and barrel. If they have clients, backlog, and experienced staff, they are bound to have some value. And this money may be better invested elsewhere. They’re flattening out their management hierarchies. One source has it that CH2M Hill (Denver, CO) eliminated several hundred largely non-billable management jobs with their latest reorganization, turning these people back into project managers from administrative managers. That’s just one case of a firm taking a hard look at its entire management structure. We’ve seen many more. Boards of directors are being shrunk, operating committees eliminated, and senior executive vice president positions reduced in number. The fewer of these people there are wasting time on overall company management, the better. They’re getting their senior people more billable. This goes hand in hand with point #2. Just getting a high-priced manager from 0% billable to 30% billable has huge ramifications on the bottom line. At 30%, most people can at least cover their raw costs. For a typical senior manager, this is anywhere from $75K to $150K per year. Multiply this by 3, or 13, or 33 senior managers, and pretty soon you’ve got some real money that flows directly to the bottom line. They’re taking a hard look at salaries. We often find that firms we consult with think they aren’t profitable (or conversely, they think they are very profitable). But the fact is, their bottom lines would look a lot different if they paid their top people within the industry norm. I have seen paychecks as high as $400K from owner/managers working in relatively small companies. What this really translates into is $100K base pay and $300K in profits. The moral is, before you panic (or get too boisterous), take a look at your salaries to make sure you are really getting an accurate picture of your profits (or lack thereof). They’re using more lower-paid people in their various billing categories. Many companies don’t use billing rates set for each person. Instead, everyone fits into a “billing category,” such as “senior engineer.” Within the senior engineer category, there may be some people earning $60K per year, where others make as much as $87K. The more of those earning $60K the firm uses on jobs, the better the effective multipliers, and the more profit is made (as long as the other people aren’t twiddling their thumbs, that is!) They’re quoting more fixed fees. Old advice, but it still needs to be said. How many hourly jobs can be turned into fixed fees, if you just try? More than people think. And the fact is, a fixed fee rewards efficiency and encourages you to do things the best way to maximize your profit. Hourly jobs, on the other hand, reward inefficiency. They’re outsourcing non-critical functions. Whether it’s payroll, recruiting, or graphic design, more and more companies are getting rid of overhead staff where they can. They’re replacing them with outside sources that can grow (or shrink) with the rest of their workload, thereby improving firm-wide profits. We are even seeing some of the largest firms get out of the detailed design business and outsource this, since they can never be the low-cost producer, and this function is considered secondary to project planning and conceptual design. They’re getting into new, higher-margin services. If mechanical system HVAC design services performed for architectural clients on standard building projects carry a 2.7 multiplier, what’s wrong with getting into the indoor air quality consulting business that has a 4.0 effective multiplier? What else can be sold to those same clients? What else does the firm have the capability to do? How can more revenue be extracted for each labor dollar paid? Firms that are maximizing their bottom lines are looking at this carefully. Because it doesn’t take much higher multiplier work to really make a bottom-line difference in profits. They’re watching their nickels and dimes. This is always good, and not just because of the money any cost containment measure in an of itself helps to save. More importantly is the message it sends to the rest of the employees that you don’t need to stay at The Ritz, that a Taurus is a perfectly acceptable rental car for most situations, that only two people from the firm need to go to the professional association annual conference, or that the CEO is perfectly willing to use the standard issue portable cellular phone that you get free for signing up with the local telephone company. Every little bit that can be saved falls to the profit line, and a lot of these expenditures tend to creep up during good times. The bottom line on improving the bottom line: No one thing will cure your profit woes, but there’s always something you can do to increase profits.Originally published 11/17/1997
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.
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