| STRATEGIC PLANNING: KNOW THYSELF — A CASE STUDY
By Michael A. Webber, Allied AIA
Editor's note: This article was adapted from a presentation by Michael Webber, Allied AIA, at the joint
2004 AIA-California Council/AIA National Practice Management Knowledge Community Conference in
Palm Springs, CA.
Not all projects or clients are profitable. But it may go further than just individual projects or clients. It
could be that certain project or client types are not profitable for your firm. Or the converse could be true.
Certain project or client types — or projects of a certain size, or in a certain geographic areas — are
incredibly profitable for your firm. But do you know which
ones are? Regardless of the project-based accounting
software you use, your firm already has this information.
Consider a firm with $10.5 million of Net Revenues. This
could be the Net Revenues of a small or mid-size firm for
two, or three years, or it could be a larger firm for one year.
Important Terms:
Net Revenue is Total Revenue minus all Direct Expenses. Direct expenses include consultants, printing, testing, travel, etc., expenses directly related to a project—everything but labor. Net Revenue is what remains to cover your firm's salaries, and overhead, and produce your profits.
A Billing (also called Net) Multiplier is Net Revenue divided by Direct Labor. In other words, for every $1 you pay someone to work on a project, how many $s do you get? A Billing Multiplier can be calculated for every project.
An Overhead Rate is all Overhead (also called Indirect) Expenses, including Indirect Labor, divided by Direct Labor. An OH Rate is $s of OH expenses per $1 of Direct Labor. A firm's overall Billing Multiplier must be greater than 1 + its OH Rate in order to make a profit. |
Regardless, on these Net Revenues the firm realized 12.5%
profit, and a Billing Multiplier of almost 3.0. (Remember the
old rule of thumb of 3? ["If I can bill my people out at 3 times
what I pay them, we should be able to make money."] It still
works — and 3.00 is still the most common 'target' multiplier
in the industry.)
Right there, the firm might have said, "Hey,
looks great! We are already above average. Why do we have
to look any further?" Why? Because there is some very
interesting — and strategically important — information in the
details behind those numbers. Wait until you see some of the
information this case study uncovers.
Out of the numerous projects that made up this Net
Revenues-base, the firm identified seven basic project types
that it designs, and six basic client types for whom it works.
All the projects were sorted by these project and client types, and total Net Revenues and a Billing
Multiplier calculated for each subgroup, or market segment, leading to Exhibit 1.
Exhibit 1 shows the Net Revenues generated, and Billing Multiplier realized from each Project/Client
subgroup. The Billing Multipliers are color coded to indicate whether it is below average, about average,
or above average. Subtotals and % of Total Net Revenues also are included for each Project and Client
Type.
By Project Type, the firm had a balanced basis of work, with each type accounting for about 10% (Project
Types A & G) to 25% (Project Type C) of the firm's Net Revenues. But look at the variances among the
Billing Multipliers — from about a 2.2 for Project Type B to over a 4.0 for Project Type F! More on the
importance of this later, but suffice it for now to say that there is a major difference in how much profit
each of these Project Types contributed to the firm's bottom-line.
By Client Type, about 80% of the firm's net revenues came from just three of these, Client Types III, IV & V). But, again, there is a Billing Multiplier spread from about 2.2 for Client Type II to, again, a 4.0 for Client
Type III. Yes! The firm earned a Billing Multiplier of almost 4.0 on Client Type III, from which it also
realized 32% of its Net Revenues!
Let's go a step further and look at Operating Profit by subgroup. Yes, you can do that, too. Remember
that a Billing Multiplier has as its denominator Direct Labor. So does your Overhead Rate. This firm had
an OH Rate of 160%. Therefore, by however much the Billing Multiplier exceeds—or doesn't exceed—2.60 (1 + 160%) determines how much Operating Profit—or Loss—the firm realized from each subgroup.
Exhibit 2 has the same layout as Exhibit 1, but with Operating Profits instead of Net Revenues, and the
difference between its Billing Multiplier and its breakeven point (1 + its OH Rate) instead of the Billing
Multiplier.
In Exhibit 2, let's look at Client Type III again. Projects from this one Client Type, from which the firm
generated 32% of its business, generated over 90% of the firm's Operating Profits! This is strategic
information! Guess who I am inviting first to the next client party! Guess who I am going to develop an
entire marketing plan around! Guess whose industry I am going to learn inside and out! Guess whose
industry our people are going to learn inside and out! Guess whose associations I am going to join and
become active in!
Let's go back to Project Type again. As discussed in Exhibit 1, there was a fairly even spread of Net
Revenues from each project type. But look at Exhibit 2. By Operating Profit, Project Types C & F each
generated 49% of the firm's Operating Profits, and D generated 21%.
Wait a minute?! 49% + 49% + 21% = 119%! How is that possible? From Project Type B, the firm lost 28%
of its Operating Profits — over $350,000! This firm had Operating Profits of almost $1.3 million — but it
might have made over $1.6 million just by breaking even on type B projects! Similarly, there is Client Type II, whose projects lost 9% of the firm's Operating Profits, almost $140,000. This also is strategic
information!
Unfortunately, this also is where I must pause in my analysis. As a 'bean counter', I cannot tell you why
these losses occurred. Nor can I tell you why other segments made so much money. (Well, actually, I
frequently can, at least by asking questions: Was it the fees? Was it the execution of the projects? Was it
the PM or team on the projects? Was it client or project requirements? No, that analysis has to come from
managers and professional staff of the firm.)
But your 'bean counters' can provide you with all the information needed to conduct this same type of
performance review. Regardless of the accounting software you use, any project-based system keeps
financial information at the project level. The question is, "Are you using it?"
The strategic part of the analysis comes from a 'post mortem' review of each of the underlying projects in
a 'surprise' (a good or bad result) subgroup. Each individual subgroup had several individual projects
underlying its results — it is usually not just one project inducing the result. Managers and professional
staff of the firm should be able to figure out the reasons for each and every 'surprise'. They know what the
firm is, and is not, good at. They know where fees are difficult to negotiate. They know! They just may not
realize they know. |
