Owning a firm that will be profitable and grow over time requires a longer term view and a willingness to invest in the people who generate the revenue.
I can’t tell you how many business plans I have seen for AEC firms that have nothing in them that is only there to make things better for their existing people. Too many firm owners seem to be taking their people for granted.
They are keeping raises for existing staff to a minimum. They are reducing benefits versus increasing them. They won’t commit to a structured bonus program that rewards everyone if the business is successful. And all of these decisions are going to be costly for them in the long run in terms of hampering growth, reducing profitability, and decreasing the current owners’ options for exiting the business at some point.
Here is more on how taking your people for granted impacts you:
- Hampering growth. It’s hard enough to grow due to the difficulty of finding and hiring qualified new people to join the organization without having to hire additional people to replace those who are already there. The loss of other people when a key manager leaves and takes their protégé with them – or when someone who has developed and maintained a client or multiple client relationships – can be a big setback and hamper a firm’s revenue growth rate. Typically, a lot of this turnover is shrugged off as “normal” by firm management, but if you consider the fact that time is all a firm in our business sells and their available time to sell is decreasing, it’s going to be very difficult to grow the revenue stream. A modest staff turnover rate of as little as 10 percent combined with a relatively low 10 percent growth rate goal means 20 percent of the total employment of the firm at the beginning of the year needs to be hired throughout the year. When you look at it that way and consider the shortage of qualified people to hire, it’s an onerous task at best. Not taking care of your people can kill your growth. And that reduces opportunities for all and hampers morale of those who stay.
- Reducing profitability. We all know staff turnover is expensive, but it is difficult to pinpoint just how expensive it really is. What is the value associated with a successful working relationship between any two people that has been developed over a period of years? What does it really cost to get a new person up to speed so they can fully function? How costly is it to the business to replace a key manager who has had long-standing client contact responsibilities? At a minimum, we are talking tens of thousands of dollars for rank and file employees, and potentially much more for key employees who are managing large client relationships that could be lost due to turnover. Then there is the disruption and wasted time of everyone else talking about when turnover occurs. On top of it, there are the costs associated with a new hire. Interviewing costs, including travel and staff time, plus advertising fees, search firm fees, and relocation expenses can be a big number. Direct hiring expenses add up quickly. In short, it (turnover) is expensive!
- Decreasing options for current owners to exit. This, too, is rarely considered. But when the profitability declines and the growth rate slows or grinds to a stop, the current owners are much more likely to be trapped in their current situations. Firm valuations take a hit and individual retirement plans are put off. The internal stock market slows down because it’s not such a great investment. External sale options decrease because the firm is less likely to garner the interest of buyers. And what about the loss of someone who was being trained to take over a specific principal’s role? Opportunities for all to move up are decreased, and that can lead to even more turnover. All owner exit options are reduced which can hurt morale of the people who are most critical to the firm’s success.
The point of all this is that if firm management gets too selfish or fearful of increasing their staff-related overhead, it can really backfire. Owning an AEC firm that will be profitable and grow over time takes a longer term view and a willingness to keep investing in the people who generate the revenue. The output of firms in this business takes a team effort – it’s not based on a few stars. And the climate in any given firm is very fragile. When a firm is growing, it’s exciting for everyone. Everyone is more likely to be engaged in their work. Everyone is more likely to want to work harder. When people are leaving, everyone questions why they themselves should stay.
So, if you are honest with yourself, are you really doing everything you should be doing for your people – or not?
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.