Those Tricky Labor Costs

Jul 08, 2002

I don’t want to be negative nor schizophrenic. Sure, there was panic after 9/11, but the fact is our industry (overall) has been remarkably healthy since then. The data still looks good in many sectors. But anecdotally, my senses are picking up again on the idea that the construction economy of ours may be slowing. And when things slow down, firms have to take a look at their costs. If you’re talking about an A/E/P or environmental firm, the first place you have to look is at labor because it’s usually about half of a firm’s expenses. That said, to some extent cutting labor for lack of work does represent a failure of management. Management never should have found itself in that situation! But not cutting it when profitability is threatened would also be a failure. Jeopardizing the entire company for the short-term benefit of a few isn’t responsible either! In any event, cutting labor is not that simple. It can be very tricky. You can easily cut in the wrong place, or the wrong kind of labor, and send the firm on a downward spiral that’s hard to recover from. It’s just not as simple as looking at the utilization numbers and cutting everyone who falls below a certain percentage. Here are some of my thoughts on labor cuts: Watch out for letting your emotions guide you on who stays and who goes. It’s easy to cut the people who make you mad or those you don’t bond with personally. But some of those people may be the most effective at what they do. Look at the facts. The whole point of any of these cuts is to reduce costs below income. If income will drop faster than expenses as a result of any particular staff reduction, maybe you shouldn’t do it. The tricky part comes in when it comes to the chronic malcontents who poison the morale of everyone who interacts with them. They may look like high producers themselves but they drag everyone else down more than they add. Take a real close look at your principals. Has principal pay risen too high? Do you need to cut salaries there? How about those principals with lower utilization than you want to see? If someone isn’t billable, is he or she selling a lot of work? If not selling, is he or she managing a large and successful group of people who are billing and selling? If the answer to those two questions is “no,” you may have found someone who needs to move on. But it’s still not that simple because this principal may have a following, and the company would lose more revenue than it wants to if this person were no longer with the firm. All of these issues need to be examined. Don’t let your desires to control labor costs keep you from hiring someone who could be a real difference-maker or keep you from paying a top producer what he or she is really worth. You don’t want to hold back on the investments that are going to get you out of the hole you’re in nor do you want to lose someone you’re counting on for revenues that you think are solidly yours. This is really tricky! It’s not always so clear what a new person can do for you and not always so clear who is really at risk to leave. Spend the time it takes to make good decisions on who stays and who goes. And whey I say “good,” I am not just talking about “good” in an obvious sense but am also talking about good from the standpoint of how these cuts will be perceived by the employees who don’t get cut. The damage to morale from making what the people on the floor think is a bad decision is really hard to overcome. It’s tough— but maybe some informal testing of these decisions should be done by some of your managers through some confidential discussions with people you know you care about. Labor may be your biggest expense and the easiest place to identify cost cuts, but that doesn’t make the decisions of who/how/where to cut easy decisions. Originally published 7/08/2002.

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