Realism

Nov 27, 1995

Sometimes I think the owners and managers of A/E and environmental firms need a strong dose of realism. We seem to want to bury our heads in the sand to avoid the obvious, or wish that a problem would go away without ever admitting that we have a problem. What do I mean by that? Consider the following: Sales and backlog tracking: It’s hard to believe, but many firms in this business do not track either sales (defined as a job that you can work on, usually one with a contract and notice-to-proceed) and backlog. We know what we are billing, and we know what we are collecting, but not what we are selling or what we have left to consume in the way of budgets on jobs, in total. To top it off, when we do actually collect and track this data, we kid ourselves by expressing it in terms of gross numbers versus net (net revenue is gross revenue less subconsultants, reimbursables, and other direct costs). If you, as a principal, really want to know what’s going on in your firm, track net service revenue sales and net service revenue backlog every month— and show it to everyone in the firm. Determining whether or not someone is carrying his or her weight: Once again, in the A/E and environmental business, we tend to live in the past when it comes to our people. We aren’t asking the question: “What have you done for me lately?” We instead remember the times 15 years ago when “old Joe and I used to work till midnight regularly to get a job out.” Stop using subjective data and start looking at the real data that you can easily put together to find out what your people are doing for you— track and report objective data on their performance. Objective performance measures include: utilization rate, based on direct labor dollars divided by total labor dollars (most firms in this business look at direct labor hours over total labor hours, which gives the wrong picture); revenues by person (most of us have no way to do this at all); and sales by person (this points out exactly who it is that’s bringing work into the firm.) For real accountability and positive peer pressure to perform, share this information with everyone in the firm. That way, you will know (and so will they) exactly who is carrying his or her weight! Ownership transition planning: I have seen more cases of wishful thinking applied to internal ownership transition planning than in any other area of concern to management in A/E/P and environmental consulting firms. What am I talking about? I am talking about plans that will require a firm that has historically grown by 10% a year to suddenly grow by 30% per year for each of the next five years to fund the buy-out of departing shareholders. Or the firm that will have to double its historical 8% annual profit rate to avoid being a self-liquidating entity over the coming 8-year period. Or the firm that has a deferred compensation plan that puts such a burden on the company as shareholders retire that the company will have to double in size and triple its profits over the next three years to fund it. Don’t laugh— I have seen all of these scenarios. And the scary thing is that in many cases, outside experts were hired to assist with development of the plan, yet they never ran any numbers in a projection scenario to see if the firm could actually afford it. Budgeting: Budgeting is always a problem for us in this industry. We ask our unit and office managers to build a budget for the coming year. The budgets that they show us usually show a significant profit— much better than anything they have been able to produce before. When you dig into the numbers, you discover that the assumptions that went into the budget are ridiculous. These budgets predict things such as the effective multiplier on all of the unit’s work leaping from 2.85 to 3.34, while at the same time, real utilization rate jumps from 67.8% to 76% across the unit. Folks— when it comes to budgeting, the old adage that “the best indication of the future is the past” almost always applies. If you have a unit that has consistently produced work in the 2.8 to 2.9 multiplier range, it is highly unlikely that it will change much in the coming year. Utilization is another matter— it can go up more easily than multiplier can. The right question to ask is: “How likely is it that an 8% utilization rate increase could be achieved in light of the current backlog?” When budgeting, force your people to start with their existing workload and raw labor budget and work backwards to see what they can really afford. But please, be realistic— don’t let them set the stage for another losing or marginal year! How much we make: Here, too, we need some realism; but a different kind of realism. So many of us complain about how little we make, yet if you look at our total compensation— in terms of base salary, overtime (if any), bonus, stock equity growth, profit distributions from ownership, company vehicles or vehicle allowances, various extra life and disability insurance, deferred compensation plans, 401(k) matches and profit sharing distributions, club memberships, and other perks— we don’t fare too badly. Sure— there are some inherent risks that go along with being in this business, and they are not insubstantial. And personal injury lawyers will probably make more than we do, as will radiologists. But this business offers many satisfactions that some of these other professions don’t. Let’s not forget to be realistic about that, too. Originally published 11/27/1995

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.