Profit Maximization… for How Long?
Jul 15, 2002
I’m seeing a lot of firms following a program of short-term profit-maximization right now. It’s easy to understand. Industry profits are down as the results from our 2002 Financial Performance Survey of A/E/P & Environmental Consulting Firms show.
No one wants to take a beating for long. Everyone has his or her own personal overhead to support, and for many of us that’s gone up during these good times that we have had for so long. And for most principals in design and environmental firms, a good chunk of their income comes from profit distributions, disguised as bonus payments or not.
That means the owners need to make some money! Not to mention the fact that if investing in the stock of the firm does not result in a decent return on that investment then the ability of the firm to remain capitalized is jeopardized.
The problem is when this strategy of profit-maximization results in little or no hiring of new staff members. That can create a number of negative consequences, including:
Not responding to client inquiries effectively. When the key people are overloaded and have no backup, they start passing up the opportunity to submit proposals. Either they don’t feel they could actually do the work if they were to be successful in landing the proposal, or they just don’t have time to follow up with a phone call, e-mail, visit, or proposal of some sort.
This perceived lack of interest in landing new work could taint the firm’s image in the marketplace.
Quality of the work suffering. With the key people who know how to do things being overloaded, it’s inevitable that a certain amount of work will get rushed out the door. And when that happens, quality slides because there isn’t time to plan properly, there isn’t time to consider alternatives, and there isn’t time to check.
People getting burned out. This is quickly followed up by a decline in morale and then staff turnover. We all know that work tends to flow to the most competent individuals in the firm. And if these people have no support, no backup, and no one competent who they can delegate tasks to, they are going to have to do more work themselves. Those who travel or have to be at night meetings constantly— and who regularly come back to the office where a thousand things await them— are particularly subject to burnout.
Few seeds being planted for the future. Some of these people who aren’t coming into the firm (and obviously going elsewhere, either inside the industry or to a totally different one) could be future stars. But if hiring is completely curtailed, where will the new stars come from? And as far as hiring any experienced people who don’t fit neatly into a box (we call them “opportunistic hires”), the answer is always a quick “no.”
Breeding a sense of entitlement in the present staff. Because the firm is not hiring it becomes completely dependent on everyone who is already there, good or bad. That results in management being more tolerant of poor work performance or a bad attitude much longer than they should.
No growth. This is bad for morale, profitability, and the value of the firm’s stock. Stock value is always closely tied to growth.
Permanent cultural damage. The firm’s management forgets how to grow. Every new hire proposed seems risky unless it’s 100% billable from the get-go. Everyone has to fit into a tight box. Management’s attention flows to expense control instead of how to win new jobs and hire good people. The staff’s assumption is that the firm won’t grow, and it’s not a good place to be in the long term.
The bottom line is that while many firms are looking at some mediocre forecasts for the immediate short-term future, most should probably still be doing some careful hiring of people who could make a difference.
Originally published 7/15/2002.
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