Editorial: Self-deceiving numbers

This article first appeared in The Zweig Letter (ISSN 1068-1310) Issue # 999 Originally published 3/18/2013 If you have rosy outlooks on profitability, marketing, proposals, and backlogs it’s time to clean up your numbers. A/E/P and environmental firms are usually owned and run by really nice people. Problem is, sometimes they tend to be overly optimistic and not hard-nosed enough to run their businesses profitably. One tendency I have observed in firm owners and managers over the years is a propensity toward self-deception to make things seem better than they really are. Certain numbers that firms track are used – in part or as a whole – to justify bad decisions such as not cutting salaries, benefits, or staff when they should be. Here are a few examples: · Profitability. Some time back, we worked with an engineering firm in the Midwest to help with their business planning. I don’t mind saying the owners were pretty arrogant. They knew everything and were better managers than anyone else because they were far more profitable (in the mid- 20 percent range, according to their financials). The problem was their salaries were so low it artificially inflated their bottom line. Once you took all the principals and other key staff and adjusted their salaries to what was normal for people in their roles in a firm that size at that time, their bottom line was average. I never trust a profit number until I investigate the numbers that went into it! · Marketing expenditures. I’ve said before that marketing expenses in A/E/P and environmental firms are almost always inflated and the reason is that people charge time to marketing when they really aren’t doing anything marketing-wise. The fact is, if you aren’t billable just about anyone would look better if some of their time went to marketing versus general administration or some other overhead activity. Everyone knows that, so they tend to dump their unbillable time in marketing and it flows through the system, inflating the appearance of spending money on marketing. That makes companies feel like they are doing something to stave off flat or declining sales. · Total value of proposals pending. This is always a B.S. number because no one cleans it out like they should. So it grows and grows and becomes a source of pride for the principals to point to. “We have $XXX million in proposals pending!” Subtext is, “We don’t have to worry about a thing – let’s go have an expensive lunch!” I never look at total proposals pending. It’s a waste of time. I DO, however, look at total proposals MADE during the month. Then I see if this number is trending up or down. It’s much more valuable. · Total backlog. This is another frequently overstated number. Again, I see jobs that are on hold; open end contracts where the full value of the contract IF it was used up would be (you should only show the value of work orders in “hard” backlog), as well as jobs where the fee won’t be expended for years to come. All of these things – along with including subconsultants and reimbursables in backlog – can lead to a false impression that there’s no urgency to get more work. And once again, we have fooled ourselves into a false sense of security. If you do any of these things, it’s time to clean up your numbers. You cannot afford to look at the world through rose-colored glasses! Mark Zweig is the chairman and CEO of ZweigWhite. Contact him with questions or comments at mzweig@zweigwhite.com