Pay to play

For multi-office firms, it’s important to monitor overhead allocations so one region doesn’t consume more than its fair share of resources.

Here’s the issue: Department managers, regional managers, and office managers all question the general overhead allocations they are levied at budget time. Nevertheless, whether it’s a function of payroll, labor billings, or gross revenues, the method of the allocation is generally equitable. So what’s the problem?

The habitual over-consumer. If your firm is like most, there is always some office, some department, or some region that seems to use more than what they are paying for – whether it’s collections support, human resources support, or marketing and communications support. With regard to the latter, I’m reminded of a manager who used to tell us we all needed to “swing for the fences” from time to time and stretch our market/geographic boundaries. But, when your marketing and communications resources are limited, what happens when doing so becomes the norm for one department or region and the burden of others? When does allowing the continued pursuit of such actions effectively amount to a subsidization of one group at the expense of another? What happens when one department or office consumes the value of its overhead allocation and then some? You’re probably thinking nothing.

Actually, something does happen. For every office, department or region that consumes more than their fair share, there is another that receives proportionately less. In most A/E firms, there’s only so much collections, human resources, and marketing support to go around. So, when swinging for the fences becomes the norm for a particular department or region, more times than not, others are left at the bottom of the queue. Understandably, when it comes to overhead, their allocation is effectively their money to use. But, when your allocation becomes their money too, there’s going to be a problem, and that’s exactly what happens when one department or office routinely consumes more than its allocated share.

Let’s be clear, swinging for the fences for the sake of a strategic initiative serves a noble purpose – the greater good of the organization. The question is, how does your firm’s process for administrating the allocation of overhead costs ensure equitability in the case of a habitual over-consumer; someone, some office or some region suspected of over spending as a means of bolstering their own stature or ego, literally at the expense of others?

The challenge. In many firms, the budgeting and allocation of corporate overhead among departments, offices, and regions is based on payroll as a percentage of the total. Generally, however, that’s where the process ends. Unlike project staff, who are conditioned to account for their time and budgets, that’s rarely the case for a firm’s accounting, human resources, or marketing employees. Accordingly, there is no reliable means by which the expenditure of these efforts can be tracked and administrated across the organization on a monthly or even annual basis. Hence, there is no way of knowing how much or how little service is actually being consumed by a particular department, office, or region.

The cell phone analogy. Think of your cell phone. Providers will sell you a plan that offers a fixed number of minutes and data usage. If you exceed the allotted amount, the provider doesn’t turn off your phone, but they do assess you for the overage on next month’s bill. In the case of under usage, some providers will even allow you to roll-over the unused minutes to the next month. In either case, it’s not rocket science; the phone company sells you a plan, tracks what you use, and charges you for it.

So, how would this concept work in a typical A/E firm? First, you would want to use payroll, labor billings, or gross revenues to establish a base plan – just like your firm is probably doing now. The next step would be to establish accounts for every department, office, or region against which the firm’s accounting, human resources, or marketing and communications efforts can be charged. Then, you would have to demand accountability on the part of corporate services personnel to track their time, just as you do project staff.

Like a cellular plan, if the cost of the corporate service effort exceeds the base allocation, the following month’s allocation would be adjusted proportionately. If it’s less, next month’s allocation would be reduced accordingly. The advantages are these: Departments, offices and regions basically only pay for what they use, and future budget allocations can be refined to reflect a base plan that is more reflective of actual usage, as opposed to simply payroll, labor billings, or gross revenues. Equally important, by tracking a firm’s accounting, human resources, or marketing and communications efforts, the managers of these services will be in a position to better know where their resources are being consumed, what type of efforts are being expended, and based on the performance of the department, office, or region to which they were expended, the effectiveness of their service.

And, for those over-consumers of corporate services who have routinely swung for the fences because there was little or no cost in doing so, they’ll have to pay to play.

Marc Florian is vice president for Environmental Consulting & Technology, Inc., a professional consulting, engineering and scientific services organization. He can be reached at mflorian@ectinc.com.

Posted in Archives | May 29th, 2017 by