Thursday, July 10, 2008

A point/counterpoint look at cutting overhead

Got an e-mail the other day from PSMJ colleague Dave Burstein, who heads up our consulting and training. Dave had some advice for firms looking to cut overhead. I thought I would share it here, followed by my thoughts at the end.


Over the years, we’ve seen many firms go on overhead cutting campaigns. Done right, overhead reduction can be a valuable tactic in the firm’s long-term growth strategy. Done wrong, it can devastate the firm. Here are three common mistakes we’ve seen – and how to avoid them.

1. Focusing on labor hour chargeability

The problem: Most firms track chargeability by dividing the labor hours charged to jobs by the total number of hours charged. When it comes to cutting overhead, they look at ways to increase this chargeability. The result is usually to cut several low-paid administrative staff who charge most or all of their time to overhead. While this may significantly increase the labor hour chargeability, it does little to lower overhead.

The solution: Instead of focusing on labor hour chargeability, measure labor dollar chargeability (total direct labor dollars divided by total payroll dollars) and make your cuts accordingly. You’ll find that eliminating one non-performing principal will save more overhead than cutting five administrative staff. (And it will have a positive, rather than negative, impact on employee morale.)

2. Looking at business development as a sacred cow

The problem: When markets are tight, many principals refuse to consider cutting business development expenditures for fear of losing out on new opportunities. They fail to consider which BD activities are really bringing in the business and which ones are merely draining the company’s coffers.

The solution: Break down your BD activities into the following major components:

· Marketing (looking for clients who may have projects coming up)

· Sales (winning the prospects you have identified)

· Client maintenance (getting more work from your current clients)

Then assess which ones are really bringing in the business. Here’s a hint: according to PSMJ’s annual surveys, almost 80% of revenues come from repeat clients and referrals from existing clients. Here’s another hint: one firm computed that each of its full-time marketers needed to bring in $2 million of additional work to justify their cost (salaries, benefits, office space, secretarial support, and time spent by technical staff writing the proposals they pursued).

3. Putting all their staff on a shortened workweek

The problem: The intent is to cut payroll costs without having to lay off staff. This sounds noble but here’s what really happens: The entire staff gets less take-home pay. And they get nervous about the firm’s workload, fearing future layoffs. So they start looking around for other opportunities. And when headhunters hear about it, they descend like vultures. The result is that the firm’s best people take a hike and the firm is left with those who can’t find other opportunities.

The solution: Do the “lifeboat drill.” Take an inventory of your people and figure out which ones you really need and which ones are expendable. Then cut those who are expendable. Make just one cut and do it deep enough that you have to put the rest on paid overtime in order to get the work done. Then let the “survivors” know what you did and assure them that there are no more cuts in the foreseeable future. You’ll find that the reaction you’ll get is, “What took you geniuses so long to figure this out?”

Dave will be discussing this in greater detail at an upcoming PSMJ webinar, but I wanted to add my thoughts on this issue. I disagree with part of Dave's second and third points, as you'll see below.

I don't like the idea of cutting back on BD/marketing. If anything, you need to expand your marketing efforts right now to find work. The notion that seeing BD and marketing as "sacred cows" is a mistake is only playing upon many firm leaders' preconceived notion that marketing and BD are a waste of money and that "anyone can do it." If that is in fact true, why are firms having such a hard time finding work?

I also disagree with Dave's third point. Firms are cutting people left and right so, if anything, there are more people on the streets now than at any point in the last few years. Unfortunately, firms aren't hiring so the notion of headhunters pulling people out of firms isn't necessarily a reality. That said, firms should always have on staff only the people they need. But cutting back on hours is a better alternative than being one of the growing number of professionals looking for work. Trust me, it's better to have a job at 80% of your salary than 100% of no job at all.

Those are my two cents, anyway. How do you feel? Drop me an e-mail and let us know!


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