The Push for Profits
Feb 11, 2002
Right now, everyone seems to be interested in profits. 2001 shook owners and employees alike. And even though most firms had a decent year (but “decent” is not the same as “great”), most made about half of what they did in 2000. That means bonuses were down, raises have screeched to a halt, and owner profit distributions were curtailed. So the talk around the conference room table in many A/E/P and environmental consulting firms now centers around how to get back to a bottom line of 15% or 20% of net service revenue (NSR). Of course, in most multi-owner companies, there are as many theories on how best to do that as there are owners. Let’s examine some of these profit-building approaches and their pitfalls: Divide and conquer. Left hemisphere-dominated logical thinkers love this approach. It involves turning everything the firm does into some sort of a profit or cost center and then eliminating every activity that doesn’t ostensibly pay for itself. This theory of profitability is often applied to technical or design discipline areas to determine which service lines the firm should provide. If something loses money, cut it. The problem with this approach to profit maximization is that any one service may not make money in itself but could still be valuable to the firm in that other work comes in as a result of the firm having that service. The effect of taking the service off the roster and firing everyone who provides it is also something that needs to be carefully considered in terms of the effect it will have on overhead. Many times, the overhead remains the same, and with the weak unit out of the mix, that overhead needs to be spread out to the other units (and a lower total revenue). In short, that means that cutting a “losing” service area could cause the company to lose even more money afterward! Cost containment and reduction. This approach says don’t spend any money that you can avoid spending, period. No one can disagree with this approach to making money— spend less! The only problem comes when a firm is so afraid to spend any money that it becomes a stagnant enterprise that cannot invest. And there are firms out there like this. Why spend 6% of revenues on marketing when we can spend 3%? Why buy a new computer for Sue when we know she only uses hers 17% of the time? Why not fire everyone who is less than 65% job chargeable, which will drive up firm-wide utilization? I have always said that there isn’t a firm out there that can’t get to a 25% or better profit in a year, but at what price in terms of long-term success? You have to invest appropriately, and managers of companies who are overly focused on cost containment don’t invest. The growth stops, there’s a limit to how far costs can be cut, and you know the rest of the story! Grow out of it. The advocates of growth as a means to profitability are far more interested in the top line revenue than they are dealing with costs. And while these are some of the most fun people to work with, they can also drive you into bankruptcy if they run out of control! Growing your way to profits has always appealed to me. We certainly did it for years here at ZweigWhite. But there are a couple pitfalls. What happens if you stop growing? The culture is so geared to growth that many times it is hard for these growth-based companies to take action on the cost front swiftly enough to stem big losses. The other problem is cash flow. I can tell you there are companies that grow quickly and make profits, but run out of cash. That’s a problem in an industry where the firms are for the most part privately held and don’t have the ability to quickly raise large sums of money. No matter what you’re thinking about how to make your firm profitable in 2002, I can tell you most other A/E/P and environmental consulting firms are dealing with this issue as well. There are many different strategies and approaches you can follow. None is a panacea, and none can be used exclusively over the long haul. Most likely, you will need to pursue all of the approaches above (and more) if you want to knock the cover off the ball this year. Originally published 2/11/2002.
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.