These misleading statements often stem from naivety and perpetuate harmful conventional wisdom.
I’m sure I spend too much time on LinkedIn and reading AEC business-related stuff. I can’t help it. It’s the industry I have spent my last 45 years working in. Let’s just say I have a lot invested in it!
That said, I sometimes see things written that I think mislead people and perpetuate “bad” conventional wisdom. Many of these are just borne out of naivety. Here are a few examples of that:
- You should always have X percent utilization rate or higher. Wrong. It completely depends on the services you are providing and the market sector you are serving. The single most profitable company I ever worked with in this business did $60 million in revenue and made a 40 percent profit three years running. Their company-wide utilization rate was 50 percent. But their effective labor multiplier was 4.6, with some people working at a 6.0 or higher. They also had highly billable principals including a CEO who was about 75 percent billable.
- You should always have an X or higher effective multiplier. Not true. Once again, it depends on the services provided and markets served. If you are providing construction administration services to a state DOT you might be doing it at a 2.3 multiple and it’s still a good project because your people are 90 percent billable. CRS corporation – they used to be one of the big firms in our business years ago until they were broken up and sold in pieces – had a Spanish-style inquisition committee that line managers had to appear in front of if their units fell below that number. It didn’t work. They would work on jobs and not charge time to them so they looked profitable. Then the utilization rate declined.
- You can’t make money on hourly work. I love it when I hear this. It’s just not true at all. You have to be naive to think all work can be done on a fixed fee. There is absolutely no way to tell how long some things will take, and hourly is fine if your billing rates are high enough. If my billing rate is $500 an hour no one can tell me hourly work isn’t profitable.
- Every project has to be profitable for the firm to be profitable. Again, wrong. Not true. There are times you have to do favors for clients out of a desire to provide real service to them. Not every project will be profitable. View it as a marketing cost. Don’t do too many of them and everything will be OK!
- Management’s goal should be to minimize overhead. Not necessarily the case. There is good overhead and bad overhead. Good overhead gives you a competitive advantage. It could be better IT, or better marketing, or better employee benefits that give you a lower staff turnover rate. Bad overhead is the boss who spends a half million dollars annually at his favorite bar and charges it all to the company. I will never forget when I was at a birthday dinner for a friend, sitting next to the late Jerry Sincoff who was chairman of HOK at the time, when Jerry told me that the two most profitable revenue-generating units of their firm – sports and healthcare – had the highest overhead of any of their other line units. What does that tell you?
- An AEC business is only worth what you can extract from it annually. Not true. That is what the old accountants used to tell their clients. These companies – if designed properly – are becoming increasingly valuable. Maximizing value usually requires forgoing personal extractions to reinvest in the firm. The long-term result of having a growing firm may be more valuable than the sum of excess extractions from a smaller firm over the same time period.
- Book value is the best way to value stock internally. It’s one way and it’s easy. But the best way? Not hardly. One problem with book value is that it rarely reflects the real value of the business. That means management is not necessarily going to be doing what is best for the business in the long-term. It also encourages management to strip all profits from the firm because why leave a dollar in there now to get paid a dollar 20 years from now when you retire or leave? Makes no sense.
- Internal transition is always better for your people than an external sale. No it isn’t. The reason is the buying firm could be better managed and have more resources and opportunities for its employees than the selling firm has. Working for an undercapitalized, no-growth or slow-growth company with little to no ownership opportunities is not necessarily the best way to maximize one’s career.
I could probably come up with 10 or 20 more of these, but am out of real estate here and have to get on my lengthy “do” list for the day!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.