Business Details

BY FRANK A. STASIOWSKI, FAIA

Cutting Expenses

A Profitable Alternative to Raising Rates

In the last issue, I explained the importance of putting your firm in a position to raise your rates with confidence. Now I will discuss how to identify needlessly high expenses and offer strategies on how to mitigate or eliminate them.

The Warning Signs

I have listed below several telltale signs that you have lost control of your expenses. If you diagnose even one of these problems, you have some work to do to develop an expense-reduction strategy in your firm.

• Wide variances from budgets
• Unexpected losses in certain profit centers
• Unexplained cost increases in overhead accounts
• Rising indirect labor costs with a corresponding decline in utilization rates
• Significant charges to overhead labor accounts by people who should normally charge their time to projects
• Significant changes to the "un-utilized time" account—for time that can't be charged to projects
• Lack of work, which indicates overhead costs will rise
• Significant project overruns

Individual Responsibility and Big-Ticket Items

The only way to attain lower overhead and higher profits is to carefully manage the number of dollars that you put into each of the overhead budgets. Some costs are more discretionary by nature, and others are either mandated by government regulations (e.g. payroll taxes) or are "carry-overs" from many years of operating with established policies (e.g. holidays, vacation accrual rates). Here are two ways to get a handle on overhead expenses right now:

• Identify the most discretionary accounts, establish appropriate budgets for each, and assign an individual (by name) to manage each budget. Assigning individual responsibility is the key to lowering overhead costs.
• Focus on the "big-ticket" accounts. For example, according to PSMJ's A/E Financial Performance Survey, the median firm spends 40 cents for general indirect labor for every dollar of direct labor. By comparison, the median firm spends only one cent on marketing-related travel. Attack the accounts that will provide the biggest return for your efforts. Managing indirect labor is the most critical aspect of controlling overhead. Most successful firms focus on chargeability (or utilization) as one of their key performance measures.

Maintaining too many people on overhead accounts—either in supervisory positions or "on the bench" waiting for the next project—will destroy profits and can put the future of the firm in financial jeopardy.

Cost-Cutting for Small Firms

In smaller firms, many of the overhead- and expense-control strategies employed by successful larger firms are not practical. What's more, many large expenses are simply out of the firm's hands. In these cases, firms must scrutinize every expense and cut corners one at a time. None of the following 16 items alone will make or break your profit, but if you focus your attention on areas of cost not normally examined and adopt a cost-conscious attitude within your firm, you'll see a dramatic bottom-line improvement.

1. Require all project-related printing to be done outside of the firm. Pass on the vendor invoices to clients as reimbursable expenses.
2. Implement a policy that no reimbursable expenses can be incurred and no purchase order given without the project manager's approval.
3. Add office staff without increasing the allocated space as workload increases.
4. Have the principal in charge of a project approve overnight delivery.
5. Charge all plots to the client; no free in-house plots.
6. Eliminate company cars.
7. Discontinue in-house lunches.
8. Limit company-paid professional registrations to one per person, per year.
9. Set up a bonus system that rewards individuals on project profitability, as well as utilization rate for staff under the individual's supervision.
10. Charge computer purchases requested by an individual to his or her department or to the specific job for which it was requested.
11. Establish individual productivity goals and tie them to periodic reviews by management.
12. Use a fixed schedule for ordering supplies (every Friday afternoon). Supplies ordered in bulk are usually discounted.
13. Include a substantial markup on all reimbursable project expenses as standard policy.
14. Print your stationery in black and white. Colored ink and textured paper increase costs by about 20 percent.
15. Eliminate lunch meetings and replace them with breakfast meetings. Food costs are lower and drinks aren't required.
16. Redesign your office to be more efficient and sublease the extra space.

A Word of Caution about Cost-Cutting

A comprehensive examination of expenses and a plan for cutting them will almost certainly improve your firm's bottom line. That said, it is also important to be pragmatic about cost-cutting decisions in order to avoid damaging your firm's culture. For example, discontinuing in-house lunches might do more to hurt morale (and productivity!) than you are likely to save by cutting them out. I suggest including your staff in identifying areas where expenses can be cut—getting buy-in from your people increases the chances that the cost-cutting will be done successfully and decreases the likelihood of damaging your culture.

What the Best Firms Are Doing

Here are some simple cost-cutting ideas implemented by firms in PSMJ's Circle of Excellence:

• EPS Group, Inc. of Mesa, Arizona keeps administrative costs low by stressing efficiency. They do this by actually paying extra for experienced administrative staff. The money they save by not having to correct foul-ups makes this a great cost-cutting technique.
• Lawson Willard Architecture of San Francisco keeps modest office space in a predominantly retail-oriented neighborhood, away from the more expensive areas of downtown San Francisco. "We're definitely a workshop environment—no frills," explains firm president Lawson Willard. "We prefer to spend money on technology and salaries and benefits for staff."
• Trudeau Architects of Latham, New York recognizes that the cost of any overhead expense (including insurance) is negotiable. The firm diligently reviews, analyzes and understands all of its expenses and uses negotiation as a strategy to drive down many of its overhead costs.