Why We’re Making Money Right Now

Sep 20, 1999

“These are the good old days,” as Carly Simon used to sing. I’m talking about the current period of prosperity for just about everyone in the A/E/P and environmental businesses. Firms are making record profits. Optimism is at an all-time high. But why? It’s important to answer the question so we can keep it going! Here are my thoughts: We can’t hire. This is probably the single greatest contributor to the record profits being enjoyed by A/E/P and environmental firms today. The fact that hiring is so difficult for so many different types of talent means that firms in this industry are chronically understaffed. Yet, because we are so service-oriented and hate to turn away any client, we take on the jobs anyway and then work like the devil to get them out. More overtime. Less fiddling around. We can’t afford the time for endless consideration of alternatives. The result is that we make more money at the end of the month. But at what long-term cost? Are our staffers getting burned out? Is there a limit to what we can take on? We aren’t investing. In my opinion, firms in our industry are still hesitating when it comes to firm-wide infrastructure investments. We do need a client and potential client tracking database that is available to everyone. But if it costs $2,000 per seat and we have 200 employees, that’s a $400,000 investment. Not many 200-person firms will spend $400,000 on software and training that is not aimed at job production! Similar investments may need to be made in facilities (overhauls to gain space, improve communications, create better work environments), recruiting (databases, training, annual agreements with recruiters, web sites, etc.), benefits (free food, paid dependent health care coverage, disability insurance, etc.), and new ventures (offices, services, ancillary products, etc.) Any business can look good and make big profits for a few years if it does not invest. A/E/P and environmental firms are no different. Widespread use of Microsoft Office. Getting everyone onto e-mail, using shared calendars, reducing the need for secretaries and word processors— all of this is supported by good ol’ Microsoft Office, far and away the leading office software suite used in our industry. Just being able to hire practically anyone and know they already have experience in 99% of the software used by your firm means that new people get up to speed much faster than they used to. And the fact that most of us do our own typing these days means we can actually lower overhead by reducing unbillable administrative staff as a percentage of total staff. Higher prices. Good times and a demand that is greater than supply is causing some firms in our business to raise their prices. Yea! That’s great. We all benefit tremendously when this happens. It’s easier to be profitable when the inherent margins on labor are increased. Increased volume. Keep the top line growing and it’s almost hard to spend the money fast enough. That’s certainly happening in this business as many firms experience double-digit revenue increases without a corresponding staff increase. Difficulty in hiring, more overtime, and escalating prices allow volume to go up some without increasing staff size. But there is a limit! To me, it’s analogous to some of the health care cost containment measures that were taken in the late ‘80s and early ‘90s, such as pre-surgical review. That may have saved X% in one year, but the next year that same X% was not there to cut. Reduced marketing expenditures. Over the past three years, firms have spent less each year on marketing. It’s now down below 4% of net service revenue for many firms. Once again, the financial engineers can justify this based on continued revenue increases in spite of marketing cost reductions, but at what long-term cost? When demand exceeds supply, it’s easy to get work. Just have the capacity to do it, and clients will seek you out. But what happens when supply exceeds demand? The firms with the best name recognition and the established leadership position in their market sectors will keep on truckin’ and those that saw marketing as unnecessary overhead will experience quantum volume drops. That’s when the proof will be there in the pudding, illustrating the value of continuous (and high) marketing expenditures— even in the best of times. The benefit of understanding why things are happening is that you don’t fool yourself. Knowing why may help you get prepared for the future, in spite of the inability of anyone to accurately predict it. Originally published 9/20/1999

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.