Management

I reviewed another corporate budget last week and it reminded me how much I don’t like the activity. In my 40-year career I have probably reviewed, negotiated and approved 300+ budgets and have felt, in retrospect, like my teams wasted hours and hours of valuable time. I often ask companies what their philosophical accuracy of the percent of the budget they expect to achieve is, and I get answers from 75% to 100%. But never over 100%.

So, what is the real purpose of the budget?
Budgets DO NOT:

Pay any bills
Pay any bonuses
Buy down any debt or provide any additional capital
Add to stockholders’ equity
Have much to do with the services you sell that clients want.

A budget is a ‘one point in time’ mental exercise that involves draining emotional interactions and often subordinate gaming for the lowest acceptable number. Management teams struggle with different techniques of bottom-up or top-down styles in repeated iterations to derive desired results.

So why do we spend so much time (and energy) on budgets and their iterations? Isn’t this really a topic where IBM’s Newton (or computer automation) could do well without much distraction, to leave you to lend your attention to more important company activities?

If I were to automate anyone’s budget, this is the analog I would give Newton: Start with the last year’s gross revenues and increase them by the sum of the growth rate of last year’s industry competitors plus additional 5 %-points. So, if your industry competitors grew by 4%, the top line revenue would increase 9%. Why? First, in a labor-based business, you should get +3- to 4%-point growth just from annual cost of living salary increases. The logic being this revenue level is level […]

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 […]

In 2002, after having been a CEO for a couple of years, I faced a looming liquidity crisis. I had several large stockholders who wanted their stock repurchased, total accounts receivables (AR) globally of >110 days (not unusual for significant offshore AR content), and the company was annually losing significant profit on four to six projects out of the firm’s portfolio of hundreds of jobs. I was quickly heading to a point of no return for liquidity that required urgent action. An independent director came to me and said, “Bob, you could make some money to solve your problems if you could just stop those bleeders.’ So simple, but so correct! I knew that was great advice but it required more than just doing that.

I immediately initiated three separate efforts:

A ‘war on the receivables’ to reduce them by 30 days within six months;
Continue to grow the best clients’ revenue as fast as possible; and
Reduce the number of losing projects by one half through better risk management.

I did not want to co-mingle, confuse and dilute the efforts, so I created three separate cross-discipline teams to set goals and implementation. I gave each team wide authority to institute policies by studying risk management from larger and more sophisticated firms. Perhaps it was just luck, but in 18 months we had repatriated nearly $200m of AR from our clients, doubled our profit margins (only by reducing the number of large losing projects) and had a demanding and disciplined risk management program in place going forward.

This article is on the topic of risk management.

Risk Management is certainly one of the most mundane topics to write about. If you ask a CEO whether they have a good […]

Most labor-based service companies run with a set of Key Performance Indicators (KPIs) for operations measurement. For service companies, often there are at least four: (1) billable time as a percent of payroll hours or dollars, (2) project profit assuming an applied company-wide overhead, (3) actual overhead or actual manageable overhead, and (4) receivables (bills) outstanding (unpaid). For companies that earn most of their income by selling hours, they also often have a measure of the labor multiple they are selling called the productivity index. This ration provides the average revenue received per dollars of salary. The numerator includes all profit from internal employees as well as subcontractors.

Each company defines their KPIs in different ways and calls them something different. For instance, project profit could be called ‘gross profit.’ Accounts receivables could be called ‘days turn of AR’ and can be further defined into unbilled and billed portions. In many companies, unbilled AR is the same as ‘work in progress’ (or WIP). This creates havoc when comparing companies and doing acquisitions.

There is no right or wrong with any of the identifiers. It is cultural and historical to each company in how they operate their levers. With that being said, I think the following is very important:

A management team must create an “apples to apples” historical base of data for at least the past five years—the longer the better. Line managers need to understand the bottom line profit effect of each parameter by its incremental change. For instance, you should understand from history that every 1% point of chargeable time affects the operating profit by approximately XX % per point. Understand what 10% points of overhead change will have on your bottom line, etc. Some smart […]

Compensation is a very tricky issue in a consulting company that sells its services by the hour to clients. In some ways, the clients dictate the salary by what they are willing to pay. Of course, it is indirect because the clients usually only care about the overall hourly rate after overhead and profit are added and then compared with like companies. If a company is willing to take less profit, or the company has very low overhead, they might get away with paying a higher salary.

The second way salaries are set is by what the market will bear. To attract new people to join your company, you have to pay what it takes to get them to say “yes.” What clients will pay and what it takes to hire people are related, but certainly not directly, especially with senior talent.

Relative to mid three- to four-level employees, you are selling their skills and experience, with the beneficiary being the client. It makes all the sense in the world that the client would be willing to pay for comparable talent from other companies. But when referring to employees at the senior level, the value of a person is not what they can directly sell, but their leverage value of selling teams. Senior people are often hired to open new markets or add key clients. They also start new business initiatives. So, for these people we set salaries not on what clients will pay but how they will affect our business platforms. When this happens, how do you set salaries compared to your existing base?

Each company’s HR department will show an orderly and gradually increasing set of raw salary brackets that is tied to your existing […]

In the consulting services industry, companies are made up of a combination of a network of local offices doing recurring activity with repeat customers and an overlapping potential to perform occasional larger and one-off jobs. As companies grow in scale, they depend more and more on winning and delivering large jobs. Large jobs are longer in duration and have more intense manpower loading that leads to much higher chargeable time, and thus, higher profit. Depending on the allocation process, they also absorb a disproportionate level of overhead from the regional and corporate levels than they create.

If the company is organized to have a network of geographically spread offices, 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. 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/or known client servers to reduce risk.

Branch offices, which routinely live off small and medium projects, occasionally discover and bring projects that are above their normal scale to perform to the attention of the corporation. In fact, a common strategic role of the 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 involvement, if not total control. This creates the first struggle.

Does the corporate marketing force […]