We’ve long known that one of the keys to profitability and long-term viability for any firm in the AEC industry is having a high effective labor multiplier. The mass of firms in this industry are stuck somewhere in the territory of 3.0, yet a few companies are able to achieve firm-wide effective labor multipliers of 3.5, 4.0, or even higher. Most firm principals come to this realization at some point, but struggle with raising their firm’s effective labor multiplier.
First, they try measuring and reporting this performance metric and holding managers responsible for achieving some minimum number. This rarely, if ever, actually helps the situation. A common response from project managers is to protect their jobs by doing work on a project, but not charging time to it. This only works for so long and results in lower utilization rates. The net effect on the company is zero.
A constant emphasis on keeping overhead rates as low as possible also works on holding down the effective labor multiplier. Think about it— if an effective multiplier is, to a large extent, an indication of how clients view the value of the services the firm provides, at some point, you have to ask yourself if keeping overhead down also means keeping down marketing, IT, and hiring and training investments. My guess is “yes,” and that this misplaced emphasis on the wrong financial measure is backfiring. In no other business that I am aware of do the companies with the highest pricing have the lowest overhead! It is the exact opposite.
There are other reasons for a low effective multiplier. Some firms are in the wrong markets or are trying to serve the wrong clients. Be careful, however; too often these conclusions are just an excuse. More commonly, firms don’t start out asking for a good fee. “Ask and ye shall receive.” And if you don’t believe that, know that you will not get a decent fee without asking. We instead spend all our time refining project management processes and techniques and trying to squeeze every ounce of efficiency out of a process that may not be worth squeezing.
So, if you really want to raise your effective labor multiplier, these are some things I would be trying:
- Spend more on hiring and training. Firms with better talent can charge higher rates.
- Kick up your marketing expenses. Firms that lead in their market sectors will have the highest pricing. You have to look for ways to spend the marketing dollars on brand-building stuff that raises your image, not business development activities from people with no knowledge in selling.
- Increase your investment in IT. Greater efficiency in production leads to more work accomplished with the same labor. That increases an effective multiplier.
- Stop reporting on overhead rate. You are pushing the wrong number. Low overhead usually equates to a low multiplier. Find out what the market leaders in each market you serve are achieving in terms of effective labor multiplier. Make THIS your target, NOT the median of typical firms in your same business.
- Try to do more work on a fixed-fee basis. This will encourage you to be more efficient with whatever fee you have.
- Use younger, less expensive talent for every task that you can. This is a tactic many firms will say they cannot employ, but more could if they had smart processes, including standards and ongoing quality reviews.
- Operate the firm in a chronically understaffed condition. Being overstaffed leads to budget overruns— people are looking for somewhere to charge their time. Being understaffed reduces the likelihood any budget will be exceeded.
Now is the time to raise multipliers. Demand is high for what most of our readers do. Make hay while the sun shines!
Mark Zweig is founder and chairman of Zweig Group. Contact him at firstname.lastname@example.org.