Executive Corner: Managing by the Numbers
Although the pages of this magazine are largely devoted to the technical aspects of design and construction, this column will focus on the challenges executives face to ensure their firm’s prosperity and longevity.
Through two decades of work, I’ve found that the most effective executives have a strong command of finance and accounting, and constantly track the key financial metrics that measure a firm’s performance. Furthermore, they educate their managers and staff to understand these basic metrics and how their actions influence them.
As a professional services firm, most of these metrics relate to billable hours. Consistently strong profit margins are achieved by keeping labor-utilization rates high, overhead-expense levels low and labor-multiplier rates high. Below are definitions of these three metrics as well as the reported median levels from our annual industry study.
Labor Utilization: Direct (billable) labor cost (in dollars) divided by total labor cost (not including payroll taxes and benefits). Industry median: 59.3%
Overhead Rate: Total overhead expenses (including indirect labor costs) divided by direct (billable) labor cost. Industry median: 1.71x
Labor Multiplier: Net service revenue (gross revenue less sub-consultant costs and reimbursable expenses) divided by direct labor cost. Industry median: 3.12x
Of course, tracking these metrics and understanding your own firm’s performance relative to its peers is the easy part. Influencing the metrics to achieve peak performance is the real challenge, and it requires effective operational management married with long-term strategic planning.
For example, keeping labor-utilization levels consistently high requires constant attention to project backlog, and sometimes making tough decisions to retain or layoff staff. Firms with chronically low utilization levels often have become “top heavy”—employing too many highly paid, yet unproductive, staff.
Labor multipliers often are a reflection of the nature of a firm’s services as well as the markets it serves, with some services and markets simply more lucrative and/or less competitive than others. This is where effective executives employ long-term strategic planning to position their firm to take advantage of more-lucrative markets and transition away from commoditized services.
Efficient project management also can have a huge impact on improving labor multipliers. Highly profitable firms arm project managers with detailed and real-time information on their projects’ performance so they can manage time and costs, capture “outside of scope” fees and avoid write-offs.
Managing overhead expense is intertwined with all of the above, given that indirect (unbillable) labor costs often are the largest component of overhead. But it also requires attention to firm-wide cost management. One of the largest non-labor contributors to high overhead rates is excess office space, high rent or a combination of the two. Firms with large networks of very small offices tend to have the highest overhead rates due to the inherent inefficiency of such structures.
So if you’re an executive or aspiring executive, make sure you and your managers have a good handle on these and other financial-performance metrics. Sit down each year and set reasonable targets for your firm vis-à-vis these metrics, and track them continuously. You’ll be surprised at how tracking quantitative goals contributes to your firm’s overall performance.