Sometimes, firms get lost in utilization and project profitability, and end up solving the wrong problem.
People respond to what you track and report. The accounting really does matter. For example, we've helped companies dismantle their geographic office profit centers countless times over the years to implement market sector-based organization structures. It's interesting to observe all the resistance that we typically encounter. Usually that resolves around issues such as, "Who will be the leader of the office?" (Answer – no one – the office isn't a unit, it's just a location and the people there report to market leaders who may or may not be in that particular location). The other frequent resistance issue is management having a hard time letting go of whether or not they "are making money in that office or not." So, no matter what the new structure is they still insist on keeping a P&L for each office at the same time.
Doing this will completely defeat any attempt you make to change the structure. People will default to their old reporting relationships and behaviors because of the way you're handling your accounting. Nothing is going to change. They'll keep projects they should be getting others from inside the firm involved with because it best serves their interests. They'll cut people in one location while hiring similar talent in another. There are many other potential problems. The bottom line is the accounting has to match the new structure. That means sales are tracked by sector, revenue, cost, profit and loss, backlog, and more. This is how you'll get people thinking about the sector overall.
Another common issue we often see is the insistence of some companies on over-emphasizing employee utilization rates. You'll hear people saying things such as, "A one-percent increase in utilization makes us another $400K a year," as if that was the most profound thought anyone has ever had. Problem is, that’s the greatest over-simplification there ever was. Utilization is probably down because there isn't enough work to be done. You can't just increase utilization – people don't charge to jobs because there aren't jobs with budgets to burn.
So management still tracks it, pushes it, reports on it, and penalizes those who can't hit their utilization targets. And what is the result? Management gets what it has been wanting – higher utilization. Of course, they also get more project budget overruns and lower effective labor multiples. The increase in utilization was for naught. The problem is solved but it was the wrong problem!
One last example is the result of over-emphasizing project profitability. I have seen several companies that freak out the moment project profitability declines below a certain percentage. How could that be a problem, you may ask? It's a problem when PMs begin choosing contract labor over the firm's permanent staff because there's no multiplier charged to it. The firm's own staff suffers utilization problems while the PMs hire (theoretically) less qualified staff as contract laborers because it makes their projects "look better" financially.
We see countless incidences of how A/E firms measuring and reporting the wrong numbers can greatly impact their future. What examples do you have that you'd like to share with our readers? Email me at mzweig@zweiggroup.com. See you next week!!
Mark Zweig is Zweig Group’s founder and CEO. Contact him at mzweig@zweiggroup.com.
This article is from issue 1147 of The Zweig Letter. Interested in more management advice every week from Mark Zweig, the Zweig Group team, and a talented list of other guest writers? Click here for to get a free trial of The Zweig Letter.
