What it Takes to Grow

Feb 23, 1998

I think I know something about what it takes to make a firm grow. Three times in the last few weeks, I’ve conducted our new, 1½-day seminar, “Managing a Growing Firm.” I attended the “Inc. 500 Conference” for the fastest-growing privately held firms the last two years. I’ve been an active participant in managing our own rapidly growing firm, Zweig White & Associates, Inc., which has averaged 50.57% compounded annual revenue growth since 1989. And we’ve consulted to dozens of the fastest-growing firms in this industry. So I’ve been able to really formulate my thoughts on this subject. There are many good reasons to grow. It makes your firm more valuable (growing firms command higher multiples according to the Zweig White & Associates 1998 Valuation Survey of A/E/P & Environmental Consulting Firms). It’s more intellectually stimulating to the owners/managers (I think this is a valid reason in and of itself). And it’s necessary if you want to attract and keep the best people. It’s also easier to make money the larger a firm gets; look at any salary survey and see how pay goes up for just about every position in larger firms. So what does it take for an A/E/P or environmental firm to start growing, and perhaps more importantly, keep growing? Just three things: Investment in people. You will have to pay better salaries, have better benefits, and have more potential in your incentive plans than other firms that do what you do. It’s that simple. You want your firm to be a “talent magnet”— i.e., the company that reels in all the good people over time. There’s one of these in almost every market. You’ll also have to spend money on recruiting (most firms don’t), training, and office facilities so your people have a nice place to work. It takes a heavy investment in people to keep the morale up so your salaried people will work 50 or more hours per week, your turnover rate is low (below 10%, if possible), and your service and quality levels are high (the people care more about the company so they do a better job). Investment in information technology. You can’t grow if you don’t have the technology infrastructure it takes to grow. This means local area networks, wide area networks, Internet sites, an intranet, a client-tracking database, on-line project management reports and time sheets, central electronic files, e-mail, Internet access from each workstation, remote access for people on the road, and so on. This is essential. And it’s all necessary right now. Most firms in this business spend about $3,000 per employee on information technology. You may need to spend more than that, especially if you haven’t been spending that all along. You cannot delay the expenditures needed to make this happen and still be competitive, much less grow in the business environment we operate in today. Employees expect it, clients expect it, and more importantly, you need it to communicate, to build institutional knowledge in your company that doesn’t walk out the door at night, and to be efficient doing the actual work. Investment in marketing. If you really want to grow, you probably need to spend two or three times the industry average on marketing. The average firm spends about 5%-6% of net service revenues. The average firm also grows by 3%-4% per year. That means you need to spend 10%-18% of net service revenues on marketing if you want your growth trajectory to take off on a 15%-35% annual rate (or higher). While I’m sure that seems crazy to many of our readers, I can assure you it’s not. Most firms in this business cannot even conceive of spending that kind of money on marketing. They don’t think marketing really works. They see it as a cost to be minimized (just another overhead expense). So they don’t spend the money and they don’t grow. Obviously, this discussion centers entirely on organic (internal) growth. There are certainly many firms growing faster than the industry norms that aren’t doing these things. They are instead doing it all via acquisition. That’s another good growth strategy— it’s just harder to sustain and it may be more costly in the long run because of the equity you usually have to give away to get other firms to cast their lot with you. Also, it should be clear that all of this investment comes at the expense of short-term profits. Growing firms need to make a profit— it’s essential to keeping your banking relationship and staying in business! But maximizing profit is inherently in conflict with investing for growth. The reduced profits inevitably have to come at the owners’ expense (they make less). Although we don’t have any hard data on this, many founders of companies that grew rapidly frequently tell me that it took about 5-7 years before they started earning what they made at their previous job. One final thought: good cash flow is extremely important to a growing firm. There’s no room for 70-day average collection periods; 37 to 45 days is a lot better. Good billing, collection, cash management, and forecasting procedures are critical!! Originally published 2/23/1998

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.