What is a High-Performing Firm?
Nov 23, 1998
At one of my “Managing a Growing Firm” seminars a few weeks ago, I had an attendee tell me how another attendee was handling his ownership transition program. When I asked him who was offering the advice, and heard it was a partner from a firm that has gone nowhere in the last ten years, I urged caution. What matters to me is how the high-performing firms are handling this and other issues. The principals of those firms have credibility!
“But what is a high-performing firm?” you might ask. I’ll define it as a firm that has a combined return of 35% or higher; that return is made up of profits on net service revenues (or “labor revenue” as some firms call it), coupled with the growth rate on net service revenues. For example, a firm that makes a 20% profit on NSR and has an 18% revenue growth rate is a high-performing firm. Or one that makes a 10% profit on NSR along with having a 25% revenue growth rate is a high-performing firm. On the other hand, a firm that makes a 20% profit with no growth is not. Nor is one that grows by 25% and makes no profit.
So this combined number— profits plus revenue growth— of 35% is the magic number. The longer a firm produces this kind of result, the better. That makes it more valuable. Firms that do this a couple years in a row are OK. Firms that do this ten years in a row are really great. Firms that do this even longer are almost unbelievable!
One of our clients used to be a low-performing firm and has moved in recent years into to the high-performing category. Here are a few of their secrets:
Billable principals. In this company, the average principal is probably at least 50% chargeable, with some being as high as 80%. They still like what they do, have a passion for the work, and are in the trenches fighting to do good work just like everyone else. And it means a lot!
Distribution of ownership. They have about 15% of their employees as owners. That’s good. It means that there are enough people worrying about the overall company because they have a stake in it to be successful.
Focus on the company, not just projects. This company treats their firm like a project. They used to only think about their projects and not worry about the firm. They have learned that if they worry about the firm, doing projects is that much easier.
Ownership that grows in value. The owners are not just motivated to make as much as they can in the short haul so they can suck it out. These guys reinvest. The reason they do is that the increase in the firm’s value is reflected in what they get at the end of their careers— and this is critical!
Continuous investments in information technology. They don’t worry about cost justifying every nickel of expense on information technology. Instead, they trust their people who are deciding what and where they will spend money and let them do what they have to in order to keep the firm on top in this area. Internet access from every desk, e-mail, on-line time sheets, fax server— these and other technologies are completely supported because they improve communications and efficiencies: one reason why this firm is doing better than a 4.3 effective multiplier on raw labor!
Focus on a couple of market sectors. They aren’t trying to do everything for everyone. They know that they can be number one in a few sectors and that’s what they are working on.
Significant spending on marketing. They have not shortcut marketing. Their ratio of full-time marketing people to other employees is about 1 to 25. That’s good. They also spend money on direct mail and PR.
No B.S. accounting. Uncollectible AR is written off. Unbilled work-in-process that will never be billed is written off. Project reports are accurate and timely. Timesheets get in on time. Bills are reviewed quickly and go out in the mail. The accounting department is happy and the staff is happy with them. Pretty neat, huh?
Annual business plan updates. Every year, this firm spends three or four days in a retreat (charge) meeting. They have fun, talk about the business, and decide what they are going to do in the coming year before the year starts.
A benevolent and unselfish founder. While he is a good designer, he’s not a jerk. He gives credit to other people. He has been reasonable as it relates to his stock buy-out. He did not retire on the job and keep drawing his pay.
A “never-give-up” attitude. Sure, they have had some bad months. And they have had some soft spots in offices or departments. But instead of throwing the towel in, or getting all hostile toward one another, they bore down and helped the group that was having problems. The result is they know they can fix their problems because they will confront them, and that’s good for their self-image.
Can you tell I like and respect these people? They grew by 26-28% and made a 16-18% profit. And last year they did well, too. They don’t have a lot of skeletons in the closet and feel like they are in control of their destiny. How could I not be thrilled for them?
Originally published 11/23/1998
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.