Driving Resilience: Integrating Quantitative and Qualitative Growth
Business growth, like the growth of a tree, is made up of two key components…the flashy, brag-worthy, brilliantly colored leaves and branches (quantitative growth) and the less flashy, work smarter, not harder, structure and root system (qualitative growth). Both components are key to a successful business that’s built to last.
Quantitative growth, the branches and leaves, occurs as an organization increases its reach; be it through new market sectors, geographical regions, or service offerings. This growth is about building a more extensive pipeline and “branching out.”
Qualitative growth, on the other hand, is getting more out of what you already do…queue the not-so-pretty but needed root system. This type of growth is often the most difficult because it takes time and attention. As leaders, this means we aren’t just working “in” our business (getting projects out the door) but simultaneously working “on” our business (processes, people, and strategy). When the levers move in just the right way, we see the growth that can compound year over year – like creating a healthy tree that won’t be uprooted in a storm; we need to cultivate a well-balanced approach to growth.
At Stambaugh Ness, we often partner with firms to strengthen their root system and drive qualitative growth through Performance Improvement, which includes analyzing existing processes, policies, and philosophies to ensure they efficiently and effectively serve the business. (Remember that sustained quantitative growth depends on continued investment in qualitative management systems – building roots!) By applying a Performance Improvement mindset now, you can strengthen your business to weather storms yet to come.
The first step in Performance Improvement is typically a gap analysis: where are we today, and what might need to change? To answer these questions, it is critical to know three things:
- How you generate revenue
- Where you incur the most expense
- Your resource-based revenue potential
How You Generate Revenue
In Architecture and Engineering, there are several ways a firm can generate revenue – and it’s primarily dependent on a firm’s skills and expertise and the markets they choose to operate in. These criteria define the Direct Profile of a firm.
This Direct Profile may be comprised of high-margin work with lower utilization rates, such as healthcare, or low-margin work with high utilization, such as multi-family housing; it may be a mix of public and private clients. Knowing where your company plays and what percentage of your revenue stream falls within each category is essential. Understanding the components of your Direct Profile and the trends for each market sector will allow you to think strategically about the future of your business and anticipate where you may need to grow or reinforce your roots.
Where You Incur the Most Expense
The most significant investment in a Professional Services business is in your people. The time spent NOT working on projects (indirect labor) can be as vital and influential to an organization’s success as the time spent getting projects out the door. The costs of doing business that isn’t tied directly to a single project are what define the Indirect Profile. These expenses include indirect labor, training, employee benefits, rent, technology, insurance, etc.
As a firm leader, you want to ensure you are right-sizing your investments in your Indirect Profile and leveraging areas where your employees, clients, and bottom line will benefit most. Evaluating your existing incurred costs, comparing them to peers, and right-sizing these investments helps ensure that every dollar spent is with intention (working smarter, not harder = good roots).
This approach is even more essential for firms that do significant work governed by the Federal Acquisition Regulation (FAR). Right-sizing investments build a healthy Overhead Rate, driving future profitability.
Your Resource-Based Revenue Potential
Utilizing industry benchmarks, a firm can forecast potential revenues per employee, but given today’s challenging labor market, Staff Mix is increasingly becoming a driving factor in firm success.
As the demographics in your workplace change, you may find yourself with senior-level individuals completing junior-level tasks, blowing a budget in what seems like overnight. With a better understanding of your Staff Mix and Staff Ratios, you can shed light on the impact they may be having on firm profitability. This insight is especially important when understanding the tasks and roles your Project Management staff handles daily – keep an eye out for our upcoming PM training later this year!
Awareness of your Staff Mix and Direct and Indirect Profiles enables you to analyze how much revenue and profit your existing staff can generate, a critical step in annual budgeting and business strategy.
Unless you have an accurate Revenue Capacity Model, you’ll never be able to truly understand the company’s revenue potential. It also allows a company to understand the impact of staff increases and reductions on revenues and profitability.
As stated, a gap analysis is the first step in Performance Improvement. Knowing your current state allows you to set intentional goals about where you want to see change and how it should be addressed. Within each of the above areas, there are key levers in the business that your firm can ‘pull’ to drive the change you seek.
To learn more about conducting a gap analysis, the essential business levers, and building your root system with intention, join us for our upcoming webinar, Cultivate Growth with a Performance Improvement Mindset, on June 1st.