Why some firms grow and others don’t

Feb 15, 1999

One of the most interesting products we have put together is our new Fast-Growth Firm Survey, just released a couple weeks ago. It’s just fascinating when you look at the comparisons between A/E/P and environmental firms that have grown by at least 20% a year for the past three years compared with everyone else. Here are some of the findings: There is no apparent trade-off between profits and growth. In complete defiance of conventional wisdom the fast-growth firms from our studies were nearly twice as profitable as their “typical firm” counterparts— fast-growth firms averaged 16.4% pre-tax, pre-bonus profits, whereas all firms averaged only 8.5%! I have to confess, this finding surprised me. Return on equity for a fast-growth firm is higher, too. Fast-growth firms averaged a whopping 65.8% annual return on equity, with all firms averaging 42% (not bad, either!). Fast-growth firms have a lower staff turnover rate. It was only 10% compared with 12.5% annually for all firms. No surprise to me here, since firm growth rate directly relates to individual opportunity for advancement. Fast-growth firms give out bigger raises. The average annual pay increase is 5% in a fast-growth firm vs. 4.5% for all firms. They plan on spending more on future raises, too (5% and 4.5%, respectively). But at the same time, fast-growth firms are less likely to pay overtime to salaried staff (only 29% do so vs. 43% of all firms). You would think that fast-growth firms invest more in their people than the rest of the industry. Bonus is more closely related to percentage of ownership in fast-growth firms than it is in all firms (47% vs. 41% tie bonus to stock ownership, respectively). 85% of principals in fast-growth firms feel that their input to decision making reflects their share of ownership whereas 80% of all principals feel that way. This isn’t a surprise to me because I would expect fast-growth firms to have practices that encourage investments in the firm’s stock. Principals in fast-growth firms work more (52 hours a week vs. 50 for those in all firms). And they tend to be more billable (45% chargeable in fast-growth firms vs. only 40% in all firms.) Hard work leads to success— no kidding! More fast-growth firms give their employees remote access to their network (63%) than do all firms (48%). And 85% of employees in fast-growth firms have their own e-mail address whereas only 79% of those in all firms do. I am not surprised that fast-growth firms give their people the technological tools they need to work in today’s environment. Fast-growth firms tend to be less concerned about recruiting from their competitors (only 19% thought it was unethical) than their counterparts in the A/E/P and environmental industry as a whole (28% of all firms think it’s unethical to recruit directly from competitors). My opinion is that anyone who thinks it’s unethical to recruit someone from a competitor must be living in the Victorian era! It’s necessary today. The information technology managers in fast-growth firms spend an average of 80% of their time in that role, whereas those in all firms spend only 50% of their time on it. This just confirms a greater interest and investment in IT for fast-growth firms. Fast-growth firms are doing a better job managing multi-office situations. 67% of fast-growth firms polled say their satellite offices are taking full advantage of the headquarters office services that are available to them, whereas only 29% of all firms can make this claim. Another interesting statistic is that, on average, fast-growth firms get their new offices profitable within eight months of opening, whereas all firms, on average, take a year to accomplish this. Wow— it seems that one of the keys to fast-growth is the ability to use the talents wherever they are in the firm to the overall firm’s advantage. Marketing-wise, fast-growth firms are increasing their spending on marketing. Between 1996 and 1998, fast-growth firms ramped up marketing expenditures by a whopping 94% compared with an only 33% increase for all firms. I have known for years the relationship between marketing expenses and revenue growth; I just wish the rest of the industry would figure this out! What more can we do to convince the non-believers?? There’s a lot more to this survey. One thing is for sure: Fast-growth firms do not do everything like everyone else. There are reasons they get better results. I’m looking forward to our next new survey— the High-Profit Firm Survey, which will be coming back from the printer any day now! Originally published 2/15/1999

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.