Conventional Wisdom isn’t Always Right
Mar 14, 1994
Conventional wisdom (CW) isn’t always so “wise.” Let’s take a look at some of the wisdom frequently heard in the halls and conference rooms of A/E and environmental consulting firms: The company will be profitable if every job it takes on is profitable. This has to be one of the most common misconceptions. The fact is this— you can make a profit on every single job you perform and still lose money. How can that be? It happens when the firm is not doing it enough (in other words, the firm does not have enough work). The firm may do four jobs, all of which make a “profit” based on the project budget, but it really needs eight of these jobs to make a profit as a company. What the firm thinks is profitable currently won’t make money in the long term if the real overhead is fully factored in. You can’t make money if you take jobs below your breakeven multiplier. This, too, is B.S. The error here is assuming that your firm is operating at peak production capacity, which is rarely the case in most firms. The truth is, if you can add any revenue without increasing your costs, you’ll make money. Consider a firm with 50 employees and a 170% overhead rate. Management figures that it should price services at around 3.02 times raw labor. An opportunity comes in with a 2.0 multiplier and is immediately passed on. But if that 2.0 job can be done by salaried people who do not get paid overtime and the company does not need to add any more staff, it might be foolish to pass on it. Look at how manufacturing firms make pricing decisions— the breakeven point varies based on plant utilization and capacity. Every job should go through a formal, go/no-go decision-making process. This, too, is preposterous, unless a firm does only a few jobs in the course of a year. Most firms are doing lots of jobs with fees in the range of $10,000 to $25,000. We have one client with 200 employees that did over 4000 projects last year— if they had to make a go/no-go decision on every job, they’d have spent all their time in meetings doing just that. Proposal and marketing expenses should be tracked by job. I have vacillated on this issue over the years, but have decided that tracking these costs is usually a waste of time. The real question is: Do you want to go after the job or not, and if so, what do you think you will have to spend to get it? Is the risk worth the potential reward? If so, go for it. Don’t waste time trying to collect nickels you can roll into the job cost— charge what the market will bear, no more and no less. You have to have better-than-normal benefits if you want better-than-average employees. This may make sense for some businesses, but not A/E or environmental consulting firms. When’s the last time you heard of a star performer who quit his or her job because the employer didn’t provide dental insurance? It’s just not happening. I’m more interested in the employee who wants a chance to work hard, take on a lot, and get paid well if the company performs— not the one looking for eyewear coverage. Match your benefits to what other firms are doing, but don’t try to outdo them. Today’s employees demand flex-time. No doubt, many employees like it, but flex-time policies have no place in a design firm. The problem is this. Because flex-time schedules usually revolve around fitting in your “eight hours” each day, it sets an expectation of a 40-hour work week. And a 40-hour work week for salaried people isn’t good enough, especially when the most competitive firms in this business have their people working 50 to 55 hours per week. Let those employees who want flex-time go to work for another firm and get laid off two years from now when the firm experiences “economic difficulties.” I’d rather be employed over the long haul than be home by 4:00 each day for the next year or two so I don’t miss Oprah. Satellite offices won’t make money for the first couple of years. I cringe every time I hear this. You can make money right away in a satellite office if you match the labor and the overhead to the work you can generate. You will not make money if you rent a lot of space in anticipation of expansion and hire a secretary and three technical people before you have the work. Principals who set such low expectations for the performance of satellite offices are the reason too many branch offices don’t make any money. Keeping score causes unhealthy internal competition, which is bad. Internal competition can be good if it exposes those people or groups not carrying their weight, inspires people to do more or better work than they would otherwise, and increases the firm’s overall success. When I hear people complaining about internal competition, it’s usually the ones who head up groups that have 55% utilization rates and 2.35 earned multipliers. The people they are complaining about as too competitive are the ones with 83% utilization rates and 2.95 multipliers who aren’t happy with their performance. Is the answer to stop measuring so the weak link feels better? I think not. Originally published 3/14/1994
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