Stop measuring success by utilization – revenue factor reveals what really drives profit in architecture and engineering firms.
It is hard to believe that after almost 45 years of working with architecture and engineering firms, firm owners and managers are STILL arguing about and debating what kinds of chargeability or utilization targets make sense for people or units in the firm.
It’s dumb, and who cares?
I’m sure this sounds like heresy to some of you. “How can Zweig say that? After all, we know if our people would be just 3 percent more chargeable we would make an additional $2 million in profit,” you may say.
Not necessarily.
In truth, all that REALLY matters is how much net service revenue (or labor revenue, if you prefer) you bring in versus how much you spend on labor, billable or not.
If all you do is measure, report, and push utilization, what happens? You get higher utilization. “Yay,” you may say. “That’s the point!” But is it? What if all that happens is your people charge more time to jobs but don’t get anything more done on them? What if they just charge time to jobs and run them over budget? Their utilization looks great. But the labor multiplier on the project erodes. The net result is the same. Same revenue and same labor cost. No change in the bottom line.
So should “Sue” in her job as a PM be 70 percent chargeable? I don’t know. How about “Randy"? He’s a licensed architect. Is 90 percent the right utilization target for him? Again, I don’t know. I certainly don’t know unless I know what kind of labor multipliers each is achieving in their units. Because if Sue is in a unit that gets a 4.2 multiplier and Randy is in one with a 3.0, all other factors being equal and each earning the same pay, we are making far more money on Sue than we are with Randy, even though Randy has much higher utilization. Sue’s revenue factor (utilization times labor multiplier) is .7 times 4.2, or 2.94. Randy’s revenue factor on the other hand is .85 times 3.0, or 2.55.
What does that mean, though? It means for every dollar of labor in Sue’s unit, chargeable or not, we get paid $2.94. And in Randy’s unit we get paid $2.55 for every dollar of labor. Sue’s unit therefore – if both are the same size and have the same non-labor overhead – is doing a lot better than Randy’s.
So the moral of the story is that just talking utilization makes no sense. All that matters – when we look at the firm overall, a unit in the firm, or any individual – is not their chargeability, but rather their revenue factor. How much revenue is generated versus the cost of doing so?
Stop using one-size-fits-all utilization targets. Stop pushing utilization. Start looking at revenue factor. And if you really want to up your game and truly develop an understanding of what makes money and what doesn’t, there is one more twist you could add to the equation. How about tossing in the difference in what you charge and what you pay for your subconsultants as an addition to the net revenue of any unit? Now we can really get a true picture of how much money any unit makes. Some groups may earn more money on subs than they do their labor revenue. Should we measure them the same way that other groups that employ no subs get measured? Should they be penalized for that? I think not.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.