Common misconceptions

After 37 years of working in one industry, you eventually become aware of just about every bit of what passes for “conventional wisdom” in this business. Some of it may seem logical on the surface but really isn’t. Some of it seems downright silly!

Here are some examples of what I am talking about:

  • You should have one principal for every “X” number of employees. I don’t know where these silly “rules” come from, but this one doesn’t make any sense. I have seen companies doing $200 million a year in revenue with one owner and happy employees and I have seen companies with 35 owners out of 50 total employees. There is NO rule here. Every company and every culture is different.
  • You need to make “Y” number of calls before a new client will buy anything from you. Again – these “rules” drive me crazy. I have personally sold clients work after 50 attempts to do so. Conversely, I have sold clients a job on the very first call and even gotten an advance payment. Every situation is different. “Rules” are dangerous because they could discourage people from trying.
  • Stock should be sold internally for book value because that way you should always have the money to pay for it. It is also a good way to ensure your owners strip all the money out of the company every year because a dollar left in the till now is worth a dollar 30 years from now. Not to mention that even at book value there is no guarantee cash will be there. The money could be tied up in old AR or office buildings or other illiquid assets – or assets improperly valued on the balance sheet.
  • Debt is bad and should be avoided at all cost. Another foolish “rule” to live by. If you can borrow money at 5.25 percent but earn a return of 35 percent on equity, you’d be crazy not to borrow at least some of the capital you need to run your AEC firm. And these numbers are TYPICAL today!
  • Salaries for people of equivalent education and experience should be roughly the same, with bonuses being used to take care of your best people. Great – so you make your BEST people assume all the risk for running a profitable enterprise while the worst get their money anyway? This is a fundamentally unfair situation that will run off your best people over time.
  • Marketing costs should be minimized because the best form of marketing is word of mouth. I always say, “Word of mouth – you aren’t doing any marketing then.” When I talk to companies that are losing money and I ask them about their lack of marketing, they all same the same thing – they believe in word of mouth. That’s great, except for one thing. People have to TRY you out before they can tell other people how great you are. And they won’t try you if you don’t spend some money on marketing to generate awareness of your firm.
  • Overhead should be minimized. The most profitable companies or units inside companies that I have ever worked with, serving any specific market, typically have HIGHER overhead than everyone else serving that same market. Why? Because they spend more on marketing, IT, and people, and then can charge significantly higher billing rates/fees as a result. Good overhead is good. Bad overhead (people not working, vacation houses, etc.) is another matter. You can’t lump it all into one category.
  • Profitability will increase dramatically if we can just boost our utilization rate by “Z” points. Always been a myth. Push utilization and there’s a real good chance that effective multiplier will erode accordingly. It’s much better to look at the revenue factor. That is defined as revenue divided by TOTAL labor. Emphasize that. There’s more than one way to boost that – beyond just overcharging projects.

Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.

Posted in Archives | June 19th, 2017 by