Sharpening the Axe

Feb 13, 1995

While 1994 was a truly great year for most architecture and engineering firms, and even for some environmental consulting firms, there were still firms in our industry that lost money. And it’s not unusual for us to hear from one of those unprofitable companies— particularly mid-sized and large firms that have been around a while— with a request for our help to turn things around. Turnarounds almost always involve some cost cutting, and that’s what I’m going to address in my article this week. But before we get into issues you should be looking at, I want to say this— it doesn’t take a lot of talent to wield an axe. I know a few consultants and managers, who probably aren’t the smartest people in the world, who make their living doing just that. To really judge the effectiveness of these characters’ management philosophies, you need to look at the long-term performance of firms that have been through their “slash-and-burn” programs. It’s not always great. To turn around a company in the mid- and longer-term, you have to figure out how to cut expenses and invest in the business at the same time. I have written numerous articles about the necessity of investing in your firm, so this time I thought I’d stick to ways of cutting costs. While every turnaround situation is undoubtedly unique, we have seen many of the same cost issues over and over in 50- to 400-person companies. In virtually every case, management could do something to solve the problem if it really wanted to. Here are four major problems most firms face in turnaround situations, with suggestions for solving them: Creeping benefits increases. The larger a firm is, and the longer it has been around, the more likely it is to have this problem. The “human relations” era of the 1980s, coupled with a few good profit years and well-intentioned top management, resulted in many situations where employee benefits got out of control. Fully paid dependent coverage, overly generous profit-sharing contributions, too many company vehicles and club memberships, and short-term disability insurance are some areas that may warrant reductions. There’s nothing wrong with getting employees to bear some of the cost of their health benefits— it encourages them to use the program wisely. Profit sharing is great, but most firms would be better served by directing these same dollars into a 401(k) fund. That way, those who are worried about retirement can take advantage of the company’s generous matching program, and those who aren’t don’t get any profit-sharing money. Idle vehicles or unused club memberships are a waste of money. And short-term disability insurance (required by law in some states, including California) is probably the most expensive insurance this side of credit life that you can buy. It’s more appropriate for blue-collar workers who live paycheck to paycheck than it is highly paid professional staff. If you’re not required to have it, you probably shouldn’t. Lack of turnover contributing to increased labor costs. We are all told that turnover is a bad thing, and that effective human resources management reduces turnover. Both statements are largely true. On the other hand, most companies base vacation time or sick leave benefits on longevity with the firm. So a firm that has 40% of its employees with 20 or more years of seniority could easily have lots of folks getting four or more weeks of vacation each year. I really don’t think anybody in this business ought to get more than three weeks of vacation or 60 hours of sick leave per year, unless he or she is taking it as unpaid leave. This industry just can’t afford it. Underemployed principals who still show up for work every day. I hate to say it— because I consider some of these people friends— but too many principals in firms that have been around a while don’t sell work, don’t manage anything, and don’t bill anything. No firm— healthy or sick— should be stuck with hangers-on who have outlived their usefulness, and who just hang around because they have nothing better to do or because their egos are too big to admit their problem. And let me tell you, many times the cost to buy back the stock of one of these folks is less than what it costs to keep them there as an employee. Too many support people. Most cost cutters look here first. The problem is, most of these support staffers are busy. But that can be deceiving for two reasons. First and foremost, they are often doing busy work created by the bureaucracy that tends to evolve as a firm grows. This bureaucracy is evidenced by too many unnecessary forms, steps, meetings, and activities that don’t help get anything done. Second, the firm has probably fallen behind in its office technology. The phone system requires too much attention, or there’s no company-wide E-Mail or electronic filing scheme. Or else professionals are discouraged from doing their own typing due to a shortage of computers and the aging management’s attitude that it’s not the best use of their time. This all results in more secretaries, word processors, receptionists, clerks, and administrative assistants than necessary. No doubt about it— cost cutting can be painful and hurt people. And it doesn’t take a genius to do it. But it may be necessary at times for a firm to survive. Originally published 2/13/1995

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