In a recent post I asked this question:  is investing in AEC firm business improvement really worth it?  There I offered four of the most common objections to working on improving the organization.  Today I’ll look at the first of these – the belief of some that the opportunity in their own firm is relatively small – and test whether that perspective really holds up.  And even for those who don’t see the opportunity as small – it’s useful to look straight away at the numbers, and the magnitude of the opportunity at hand.

Step 1:  An Opportunity for One Professional

Let’s start with some basic calculations – familiar to all – concerning an individual AEC professional.  We begin with a calendar year, and subtract out the days (generally) unavailable for work – weekend days (104), holidays (10), and a two week vacation (10).  What remains are 241 net available days, and at eight hours each (stop smirking) – 1928 available hours per year.

One percent of this time is 19.3 hours, and 3% totals 57.8 hours (the 1% and 3% choices are my own arbitrary picks).  With an industry median billing rate for this professional of $100/hour, the value of these slices calculates at $1,930 and $5,780, respectively.  Thus, a net increase of one point of utilization here is worth about $2,000 per year, and a three point increase $6,000.  Not an overwhelming result for the company – though note that this is in the target range of most AEC professional incentive compensation plans, so an increase in productivity of this magnitude could in fact self fund an incentive plan.

Step 2:  The Opportunity for Organization Improvement

While the improvement of a single professional is meaningful at the individual level, it’s the multiplicative power of leveraging the organization that really drives home the point – and excites progressive leaders.  As the table below details, it’s simply a matter of rolling up the assumptions and calculations across the entire team.  Since the firm can’t (typically) increase the billability of an otherwise unbillable employee – I’ve netted out 10-20% of the staff (depending on firm size) from the total.  Still, the magnitude of the opportunity – simple mathematics, in billable time and dollars – is quite substantial – and meaningful to organizations of all sizes.  And again, these figures represent annual contributions – though many business and organization improvements will in fact drive multi-year annuity benefits.

Table 1: Organization Improvement Potential

Firm Size 10 20 50 100 300 500 1000
Total Net Hours Available (hrs) 19,280 38,560 96,400 192,800 578,400 964,000 1,928,000
Net Billable Staff (%) 90% 90% 80% 80% 80% 80% 80%
Net-Net Hours Available (hrs) 17,352 34,704 77,120 154,240 462,720 771,200 1,542,400
1% of Net Available Time (hrs) 174 347 771 1,542 4,627 7,712 15,424
3% of Net Available Time (hrs) 521 1,041 2,314 4,627 13,882 23,136 46,272
Average Billing Rate ($/hr.) $100 $100 $100 $100 $100 $100 $100
Revenue Value of 1% Increase $17,352 $34,704 $77,120 $154,240 $462,720 $771,200 $1,542,400
Revenue Value of 3% Increase $52,056 $104,112 $231,360 $462,720 $1,388,160 $2,313,600 $4,627,200

 

Step 3:  Comparing the Improvement Potential to Current Reality

Is a 1% increase in firm billability a reasonable and achievable goal?  And what about 3% – is that possible, or just a dream?  Let’s shed some light on this by looking at the potential magnitude of waste – non-valuable time – in the firm.

Over much of the last decade, median firm chargeability tracked in the 60-63% range, before falling toward 59-60% with the recession.  And while chargeability obviously varies with the type of firm – services, projects, clients, markets, and such – the variability is not as much as one might expect.  There are of course outliers on both sides, but the curve is pretty tight around the median – indicative I believe, of the many similarities in how these (otherwise disparate) organizations are managed.

But let’s begin with the slightly higher chargeability target of 65%.  This amount represents the total within the firm – an average that often includes a slice of more junior staff with 80-85% utilization, project and general managers with billability of 50-75% (or less), and senior managers and support staff with much lower (to no) billable time.

Of course, even with this 65% chargeability, 35% of the firm’s time is not billed.  My work with many different firms suggests that the average non-billed, but still valuable time (think training and development, administration, sick time, etc.) is in the range of 10-15% of total time.  Using the higher end 15% figure still implies some 20% of time remaining – neither billable, nor of other investment value to the firm.

What’s more, not all time billed is really of value to the client.  Firm’s with significant T&M contracting often push back on this – understanding that efficiency improvements here might in fact result in lower billings.  Nevertheless, all organizations should stop, reflect, and consider today this reality.  Now is the time to squeeze out the non value-added for all clients – even if they are willingly (or unwittingly) paying for it.  Sooner – not later – market pressures will squeeze this waste out – or worse, squeeze the firm out – of the relationship.  And though many may argue– my sense is that a very large amount of billed hours are not of real value to the client – perhaps 15% of total billed time – or 10% of total firm time.

Adding the two – non billed waste (20%) and billed waste (10%) – yields 30% of the organization’s total available time!  We began with “dreaming” of a possible and potential improvement of 1-3% of total time.  In light of this overall pie, does the dream now really look that unrealistic – or unachievable?

You may disagree with any of the specific figures of my analysis – and of course please do use the more precise calculations available for your own firm.  But don’t lose sight of the magnitude and direction of the model.  Unless your firm is strikingly different from the norm, this opportunity – or something very nearly like it – is there for you, your leadership team, and staff.  All you need to achieve the goal is the courage and commitment to dream – and then to act.

Please let me know if you’d like to discuss this further, and explore the opportunity for enhancing business performance results in your firm.

Cheers,

John

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