By Ed Friedrichs
When I was CEO of Gensler I was often asked how I kept track of it all. At the end of my tenure, we had 2,400 people in 25 offices around the world, so we had to come up with some methodologies and metrics to keep us all informed – a dashboard of sorts.
At ZweigWhite, we publish an annual Financial Performance Survey of A/E/P and Environmental Consulting Firms that our clients find enormously helpful in monitoring their performance relative to their peers and competitors.
We use a series of metrics that provide you with a snapshot of what your peers think are the most important metrics in monitoring performance; things like your firm’s various revenue sources, direct and indirect labor and expenses, your effective multiplier, aging receivables and, of course, profit, all of which are important and helpful.
But sometimes these numbers are hard to get your arms around; a little like reading tea leaves. A meaningful and useful dashboard is only helpful if, at a glance, you and your colleagues can quickly gain a sense of how you’re doing and what you should be doing to enhance your fiscal performance.
Here’s what I wanted to know:
- Labor costs. My biggest concern was how much billable time we were generating compared to time we were paying for. That means knowing the ratio between time we could invoice to our clients for work actually under contract (and expected to be collectable) versus overhead hours (administrative staff or technical staff time that didn’t generate a bill to a client, such as vacation, illness, training, research and so forth). You’ll have to generate your own metrics because each firm measures time a little differently. I know of no magic number to give you to know how you’re tracking. I can only suggest that you start monitoring your ratios at your current level of profitability in order to understand where you are today and to develop a sensitivity to trends in your billability. Labor is your highest cost. Small movements in your ration of billable time will have a disproportionate impact on your profitability. Monitoring and comparing your effective multiplier is interesting and helpful but it won’t help you develop that feel for where to push to enhance your financial performance.
- Indirect expenses. With multiple offices, gross numbers for rent or telephones didn’t help me much, so we converted our numbers to a “cost-per-person” by office in each category in our chart of accounts. This allowed me to scan across multiple offices to look for best practices versus offices that could learn something about managing things like their reprographics or the budget for their holiday party. It was also a great tool to communicate to our staff how much it costs to run a business – made people a little more frugal about how they chose to spend the firm’s money. It “personalized” the cost side of our business.
- Direct expenses. Costs for which we were reimbursed by our clients – I wanted our folks to think of these charges as if they were coming out of their own pocket, so we made reprographics and messenger charges visible to project managers, so they would be a little more careful with how we spent our clients’ money. Our clients appreciated it.
- Accounts receivable. I was a bird dog about collections. Our contracts called for our bills to be paid by our clients within 30 days of receiving our invoice, so getting the bill into the clients’ hands early in the month was a whole lot better than the end of the month. Every day that a bill sat on a project manager’s desk, rather than on the client’s desk, represented dollars that we had to add to our capitalization – the funds it takes to bridge the time gap between the date by which we had to pay salaries and rent and the time our clients’ checks made it into our bank account. Every dollar we had to add to our retained earnings cost us nearly two dollars by the time we paid taxes for the privilege of keeping it. I wanted to know which project managers were “sitting” on our invoices.
- Collections. I also wanted to know which clients were paying their bills in a timely fashion, so I monitored invoices by days outstanding: 0-30 days, 30-60 days, and so forth. I wanted my team to start calling our clients as soon as bills were sent: “Did you receive our bill? Was it prepared properly for you? Do you have any questions?” If we didn’t receive a payment within 30 days, I treated it like a bad report card and expected the client relationship manager, whether it was the principal, project manager or designer, to call the client to find out what we were doing wrong. If the answer was, “nothing,” then the next question was, “Is there any reason why you can’t pay our bill right away?” After all, it’s our money and I’d far prefer it to be in our bank account than theirs.
These are some ideas about what I watched and what I expected our folks to pay attention to. This is what was important to make our business run well and be profitable
Sound like it takes a lot of time?
Not nearly as much as it does to keep a poorly performing business afloat or trying to collect invoices after they’re over 90 days in arrears.