When the Signals Contradict
It’s one thing to track each metric in your firm, and in isolation they pretend to tell you a lot. But the real story is in looking at the whole, and then looking deeper still at what those conflicting signals might be telling you. I’m not a doctor but I imagine this is what they deal with every day: “Well, that would point to X, but Y points to something else, so what’s going on here?”
If you want to know how your firm is performing, here are some links to help you explore that:
- Eight Important Gauges on your Financial Dashboard (free)
- Options for that Single Benchmark to Watch (free)
- Financial Management of a Marketing Firm (complete manual; $250)
- Benchmarking (consulting package, where we build a model for your firm, explain everything, and give you a tool to update on your own; $4,000)
I’m going to give you a few examples and try to help you understand what might be going on. What each one illustrates is why something that’s really good isn’t yielding the same good news in other places.
Everyone Busy; No Profit
This one is easy. You’re under charging and/or over servicing, though the first place to look is in your estimates. Admit it: you know it’ll take more work to do the quality of work you insist on, but you really want that job…and you’ll deal with change orders later, which means you probably won’t. More on the interplay between these two things here. I think that the default for timekeeping is “none” but there are five instances where it can make sense, temporarily.
Utilization High; Fee Billings/FTE Low
In this case, you’re capturing most or all of the time dedicated to client work, but if all that goodness is yielding a low fee billing per FTE employee, then it’s almost always that the hourly rate that you’re working with is too low. I really hate even thinking in hourly rates, but it’s a decent starting place until you start charging for value or productize things a bit. With that in mind, generalist firms are in the <$160/hr category, and specialist firms are >$160/hr, and often quite a bit higher than that, as in >$200/hr.
Good Profit/No Cash
This always occurs because of how accounting works. You are likely using accrual accounting (if you aren’t, you should, with zero exceptions). And because borrowing money isn’t classified as income, paying it back is not classified as expense (except for the interest). This applies to capital (not operating) leases, too. So if everything looks like it should be delivering profit but it’s not, it’s because too much of that profit is being directed to pay that debt back, which doesn’t count as an expense. Debt is bad for anything other than an appreciating asset. I’m not going to argue with you about that.
Multiple Partners; Lackluster Results
I’ll start by noting that there is actually a financial penalty associated with multiple partners, so the only way to justify having them (from a financial standpoint) is to achieve higher revenue and profit than you would on your own. This doesn’t always occur, and of course there are other good reasons to have a partner. (Here’s a framework for principal compensation.)
Unless you have the right kind of partnership, where each person brings unique strengths with little overlap, your decisions will be slower, they will avoid risks, and they will be unremarkable. On top of that, you’ll have a top-heavy compensation tree to make it worse.
Lots of Clients; Little Profit
It’s very difficult to make money on clients who represent <4% of your fee billings, regardless of size. (It’s even harder to get into their situation deeply enough to make a difference.) The two exceptions to this are new clients who aren’t yet using you for everything they will, or clients for whom you’ve already done large projects and are now in the maintenance/update phase.
You end up with more than 12 or 15 clients because you aren’t picky enough, because you have this crazy idea that you don’t want to risk any client bigger than that (you should be fine up to 25%), and because you have the mistaken belief that your systems are so good that it’s not an issue.
In that world, your account people are servicing more than the 1–5 that is considered healthy, and their switching costs, as they are called, are severe.
A Final One on Your Exhaustion
Maybe you’re saying something like this: “I’m leading a growing, thriving company, and the numbers are all good, but I’m exhausted.” Frankly, a lot of firms are in that category these days; more than you’d think if you just read LinkedIn. That’s because they chased growth without knowing what growth means in terms of their own role.
If this is the case for you, I would start by making sure you’re NOT doing three things (see the third section of that article), and then that’ll give you the time to do the few things that only you can and will do for your firm. And then make sure that your hiring strategies have kept up with your firm’s progress. See you next week. Hey, join us for an upcoming webinar on using small acquisitions to grow your firm…or take some time to reach up high on that ladder of lead generation and get that book out of your head with me in Atlanta.
