Profit centers? Meh

Banish profit centers in small to midsize firms. Focus on your people by letting each do what each is best qualified to do.

An engineering, architecture or planning professional services firm can be very successful – maybe more successful – if it maintains a “one company” philosophy without multiple profit centers or a chief financial officer. The key priority should be to stay focused on people – employees, clients, teaming partners, our communities – and not measuring things that don’t matter.

Over the past 20 years, Mead & Hunt’s revenues increased from $10 million to nearly $110 million by using a “one company” business model and culture. We’ve grown from two civil engineering offices in Wisconsin to more than 30 offices in 20 states with very diverse service lines in multiple markets. Not only has Mead & Hunt been profitable every year despite economic upturns and downturns, but we have typically exceeded annual industry averages. Throughout this financial success and fast-paced growth, our employee turnover rate is less than 7 percent and we are regularly named a “best place to work.”

How? There is a lot at play, but two significant elements are: no high-powered, profit-driven CFO and no profit centers. Small to midsize companies (most companies in our industry are small to midsize) should function better using this model.

Do we have a CFO? Yes, but not in the traditional sense.

The traditional role of a CFO is to review financial statements to gain a perspective on past performance to forecast the future. The CFO analyzes financial data, compares that information with industry standards and metrics, and works with operations to develop and implement strategies to improve the company’s future performance. This approach means that the company is leveraging financial data that may not apply to their unique business model. Decisions are being made strictly on metrics instead of insider market knowledge.

At Mead & Hunt, our CFO does not worry about collections, bad debt, staffing projections, or claims. He relies on the project managers and operations employees to do their jobs well and leverage their industry and market insights to expand services. He and his team assist the operations employees by managing the financial and regulatory processes and our internal policies and procedures.

In my experience, A/E firms are more profitable when the operations managers are engaged in winning and delivering projects that exceed clients’ expectations, rather than a CFO (or CEO for that matter) monitoring irrelevant metrics. At Mead & Hunt, we compare ourselves against our best years of the past, not against other companies. Yes, we review some industry metrics. However, each company is unique and industry metrics are very generalized. Those comparisons therefore have limited value in my opinion.

We want our staff to take care of their clients and projects. We want them to deliver great projects that stay within budget, are delivered on time, and make our clients happy. And, we empower our corporate team (finance, human resources, IT, administrative support) to do their jobs. We want our professionals to do what they do best: employ their training, education, and experience to make Mead & Hunt successful.

Our somewhat unconventional business model may not work for very large A/E consulting firms. Having spent my career at Mead & Hunt, I know what works for small to midsize firms.

Departments or divisions within a company that are individually focused on generating revenue are called profit centers or cost centers. Cost and profit centers isolate expenses in hopes of improving profit generating operations.

Profit centers almost always create internal competition between departments or teams – competition for technical staff, budget allocation, access to corporate management staff, administrative support, and, at times, clients. Without profit centers, managers are encouraged and motivated to cross-sell and collaborate across offices and service lines. In our industry, there is tremendous competition for work and talent. To us, it is counterintuitive and unproductive to compete internally against ourselves.

Even with a clear strategic plan and business goals, profit centers have an overriding emphasis on revenue generation which can reduce risk-taking and innovation. Profit center managers will opt to pursue safe sources of revenue rather than those that might provide higher returns over the long term. The focus is on expenditures and budgets rather than on their team, their clients, and continuous improvement.

A “one company” philosophy encourages managers to share work and find the best internal talent for the task at hand. It encourages managers to share key staff with other business lines to win new work or to augment bench depth on big projects. This approach maximizes the use of all internal resources rather than leaving teams idle while they wait for new work.

An added benefit is that this practice broadens our employees’ expertise and increases retention by creating versatile employees who can work with multiple types of projects across multiple markets. Employees know that company leadership, from project managers to the COO and CEO, are focused on keeping them challenged, engaged, and productive.

My recipe for success? Banish profit centers. Focus on your people by letting each do what each is best qualified to do. Work to better execute every project. Continuously improve operations. De-emphasize industry comparisons by setting the bar for improvement against your last high. Don’t get hung up on metrics that don’t matter and that don’t make you money.

Keep it simple!

Raj Sheth is president and CEO of Mead & Hunt. He can be reached at raj.sheth@meadhunt.com.

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Posted in Articles | April 16th, 2018 by