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 control the client for this large project, or does the local office that has the historic client relationship? Smart companies cooperate together, but do not sacrifice the delivery sophistication of doing large jobs just to please 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 probably 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. Winning companies overcome the local office ownership; yet do not disenfranchise those people who have developed the client relationships.
If the company is successful in winning the large job, then the second struggle starts.
How do you do 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? Most in the chain of command want the large job to be co-blended into the 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 in that the last large job will be replaced by another in the same unit before the end of the first one. Unfortunately, this rarely happens!
Since large jobs are usually manpower-intensive and serve to create high time 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 bury the overall profitability of peer units. The large job also absorbs a sizable amount of the base organizational 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 everyone wanting to blend the large jobs into the overall mix as a reward for past investment of client relationships. The problem is that large jobs are temporary in nature. Their effect is to blind the performance of the adjacent units while they are active.
I am an advocate of separating the accounting of large jobs and not allowing them to temporarily absorb base overhead away from sister units, as unpopular as that opinion may be. With the large job co-mingled and temporarily skewing positive results, the tendency is to manage existing units less tightly. With less tension, these units deteriorate. Therefore, if you co-mingle the large job accounting with local offices, when the large job is over, you are left with a mess of underperforming residual units that are no longer propped up. So, the result is usually three years of high profit, followed by a period of very low profit balancing 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 large job relief the normal overhead distribution to the base 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 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.
So perhaps the take-way is 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 will be left with a major recovery after the large job completes. Separate your financial analysis. If you don’t have the nerve to separate, then hire more accounting analysts whose job it is to constantly evaluate the organization without the large job. The enlightenment from separate analyses creates transparency to the large job effect and avoids gradual decay of residual operations before it is too late.
© 2014 Robert Uhler and THE UHLER GROUP. All rights reserved.
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