In the consulting services industry, companies are made up of a combination of a network of local offices doing recurring activity with repeat customers, with an occasional overlapping potential to perform larger and ‘one-off’ jobs. As companies grow in scale, they depend more and more on winning and delivering large jobs even if they come from different offices and clients. Large jobs are longer in duration and have more intense manpower loading that leads to higher chargeable time, and thus, much higher profit. Depending on the allocation process, they also absorb a disproportionate level of overhead from the regional and corporate levels.
If the company includes network of offices spread out geographically, one of the key missions of local offices is to detect and help sell large jobs through local relationships and knowledge. But those large jobs only come along occasionally for any given office. Therefore, the more geographical offices a company has, the greater probability of finding the next large job.
For larger jobs, companies often combine known local trust relations with corporate level delivery capability. Many clients would prefer to give their work to local qualified companies and known client server relationships, in order to reduce performance risk.
Branch offices, which routinely live off small and medium projects, occasionally discover and bring projects to the attention of the corporation that are above their usual scale to perform. In fact, a common strategic role of the corporation’s branch offices is to cover their costs with routine business and serve as “watch towers” for larger jobs.
When a large project is detected, the marketing resources, expenses and required systems are too much for the branch office to handle, resulting in corporate having to step in, if not take over total control. This creates the first struggle.
Who Has Marketing Control?
Does the corporate marketing force control the proposal and presentation for this large project, or does the local office, that has the historic client relationship? Smart companies find a way for corporate and local to cooperate together, but do not sacrifice the delivery sophistication of doing large jobs just to please the smaller office’s desire to maintain local control. Clients expect that large jobs will be completed by large company techniques and systems that have been proven on the global corporate level, with which the local office more than likely has no comparable experience. The local office leadership may not realize that difference, hence, they usually fight for a simpler approach that is more familiar with their historic delivery techniques on smaller projects. Winning companies overcome the local office “ownership” mentality; yet do not disenfranchise those people who developed those client relationships.
If the company is successful in winning the large job, then the second struggle starts.
How Do You Isolate The Economic Effect?
How do you handle the accounting for the large job so that the local office is rewarded, but the large job does not dwarf all other results of a steady-state business platform of that office? Most in the chain of command want the large job to be co-blended into the original operations’ financial results, claiming it is maintenance payback for past investment, but frankly, it makes management life much easier for all while the large job is active. There is a false rationale that another large job in the same unit will replace the prior one before the first large project ends. Unfortunately, this rarely happens!
Since large jobs are usually manpower-intensive and serve to create high staff or equipment utilization for long periods of time, if you account for them by blending them into the branch office (or region, or sector), the impact is so positive that they blind the profitability of the base business. The large job also absorbs a sizable amount of the base organizational G&A overhead, resulting in making all other sister units temporarily more profitable. When the big job ends, the base overhead rolls back over the smaller units.
You can’t blame anyone for wanting to blend the large jobs into the overall mix of the branch office’s projects as a reward for past investment of client relationships. The problem is that large jobs are temporary in nature. Co-blended, their net effect is to lessen the performance tension of the core business. Due to the overwhelming profitability of the larger job, there is a tendency to manage existing units less tightly. With less tension, these units deteriorate.
A large profitable job also takes the pressure off of marketing for the local office. After a big win, marketing celebrates and often goes on a long-term vacation. The marketing skills and client relationships atrophy.
Secondly, with higher profitability the unit feels it is the right time to add the overhead positions that they always wanted. If the large job absorbs allocated corporate overhead all of the other units get it relieved of that allocation and profit rises, temporarily.
When the big job is over you are stuck with a culture of complacency, deteriorated client relations, overhead that’s too high, and no backlog for that small local office. So, the result is usually that three years of high profit from the larger project are followed by an equal period of losses, which ultimately balance each other out.
The solution? Don’t co-mingle the accounting of large jobs with existing operations, regardless of how popular it is. Don’t let the one-off large job serve as a permission slip to increase G&A overhead. Don’t let the large job relieve the normal overhead distribution to the base adjacent operations. Separate the large jobs from the rest and consider their effect as temporary. Even if you have to run double accounting books or to give a “finder’s fee” to provide the local office credit, look at the residual units without the large job subsidy so you are assured that the base business is not being masked by the larger temporary job.
The takeaway simply stated: if you economically combine a single large profitable project with a set or one core business’ P&L, you are liable to take the pressure off the small businesses and be left having to scramble to recover after the large job completes. Separate your financial analysis and assume the large job will go away. The enlightenment from separate analyses creates transparency to the ‘large job effect’ and avoids decay of residual operations before it is too late. For the leader, this is trading popularity for operational efficiency. It is also called courage.
© 2017 Robert Uhler and THE UHLER GROUP. All rights reserved.