Bump Up Profitability
The year is barely underway, and I am already hearing complaints from A/E/P and environmental firm owners: It’s time to be more profitable!
This will sound like a bold claim. But the truth is, I’ve never been in a firm that I didn’t think I could make more profitable.
There are several reasons I can say this. First, as an outsider to any firm, it’s easier for me to be objective. I can call it like it is and not worry about the interpersonal relationships getting in the way. Second, I have spent my entire post-MBA career working with firms in this business. I know what kinds of numbers are normal and what kinds of numbers are possible.
That said, there are certain areas that I always go to when it’s time to make more money. Here are five of them, in order of priority:
Commitment to growth. It’s almost impossible to manage your way to profitability, at least over the long-term. You need revenue growth to spread out your costs and make more on the bottom line. This starts with a business plan that emphasizes growth and sets a bold growth vision. It also means all of the firm’s owners and top managers must march in lockstep to the growth mantra. Those who don’t think growth is critical to profits are a cancer and must be dealt with. Leadership must paint the picture of how growth is essential, how growth and profits are related, and how all of this is good for the individuals who make up the company.
Labor. Too much of it is always at the top of the profitability list. Most often, the excess labor lies in expensive senior people, who should be selling and should be billable based on their role, but who aren’t. This situation just tends to develop over time. Maybe it’s human nature that the older we get, the less motivated we are to earn our keep every day. There are certainly many exceptions to this phenomenon. But, the bottom line is, we all need to earn our keep through creating revenue. That means selling and doing, both! We cannot afford to endlessly pay for those who don’t Ü want to earn their way if we want to be profitable.
Fees. Most firms don’t charge enough for what they do. Most clients will pay more. But don’t ask your clients if they will be willing to pay more for what you do for them and expect them to say “yes!” You have to do things such as raise your rates every year, do more on a fixed fee, drop clients who won’t pay good fees, mark-up all reimbursables, and, most importantly, ASK for the fee you need to do a good job in the first place. There is a lot of gold here to be mined if you want to increase profitability.
Demotivators. Demotivators can be wide-ranging, but the bottom line is they reduce your effective revenue-generation capacity dramatically. Think about the difference in two firms. One has an average work week for salaried staff of 42 hours. The other has an average workweek for salaried staff of 46.2 hours. The latter firm has a 10% advantage right off the bat. That 10% could be ALL of the profits they’ll make, so not having it would be devastating to the bottom line. Firms with poor morale have a hard time getting their staff to work the hours they need to make a profit. Morale goes down the toilet when the owners flaunt their ownership to the rest of the staff, when the firm makes arbitrary changes to benefits programs, freezes pay, or abandons long-standing bonus programs. It also goes downhill when expense reports don’t get paid quickly, when owners hire their incompetent relatives for jobs they aren’t qualified for, and more. If you want to be profitable, all demotivators must be systematically sought out and eliminated.
Numbers. You can’t tell if things are going the right way without having good numbers. This information needs to be widely available and be accurate, then updated continuously. It’s amazing to me the number of companies who tolerate poor performance from their accounting functions and act as if there’s nothing that can be done about it. Good numbers are the gauges on the firm’s performance. You cannot tell if any profit-boosting measure is working without good financial information!
Originally published 2/06/2006