Trying to survive in this economy is like being on the Titanic, right before she sinks into the icy depths of the Atlantic. As she's sinking, you will probably need to make some quick and calculated decisions regarding who is worth saving and who is not - only a certain amount of people can fit in one lifeboat.
Yes, this is a near-vicious and almost-cruel mentality, but the economy we're in is vicious and cruel to those who are still in denial about the true state of affairs.
The economy is without the slightest bit of rhyme or reason. The typical ways of doing business, thinking about business and running a business simply don't apply any longer except the tried and true standards of being ethical and honest in all your dealings. But if you think you can advertise or market your way back to a positive cash flow, bid every bit of work that you'll blind-pig enough hits to get the cash flow going again, or blindly cut personnel to reduce your fixed overhead, you will realize you are wrong. However, I'm sure you're smarter than that.
That said, keep in mind that your people, not your office building, trucks, tools or inventory, are your most important assets. You can keep your most important people on the payroll by treating them as just that, assets.
Doing the by-the-numbers analysis of your people is at the basis of the concept of “HARM,” which is the acronym for Human Assets Resource Management (this isn't a fancy new term for an old way of thinking). This is a new way of taking the emotion out of putting price-to-performance metrics on your management folks that make up the bulk labor cost of your SG&A.
The logic behind doing this isn't complicated. Plus, there is no one right way of doing it. It's simply a matter of figuring out the cost per sales ratios of your dead overhead.
Let's take a typical project manager. For grins, let's say he makes a base salary of $100,000 per year without benefits or bonuses. For the past five years, the project manager has averaged completing $5 million worth of work per year (this is completed work, not passed through).
Out of that $25 million total, the net of those jobs before taxes was 3% or $750,000. You've paid him half a million dollars in base salary over that time and with benefits, his salary bumps up another hundred grand, so that's now $600,000 and counting, which is without allocating 1% for SG&A or a quarter-million dollars, which leaves you $100,000 in the hole. You've not even paid taxes on the profit yet, let alone accounted for the other miscellaneous expenses assigned to the various jobs. So, how much money has this guy actually made you?
In times where huge multi-billion-dollar conglomerates are now literally counting pencils and not purchasing coffee for the office to help keep morale and productivity up, you're a tiny fish in an even more shark-filled sea and don't know why, other than the lack of work available. All of a sudden there's no money in the kitty? Take a math or business class, please!
I'm not saying you should fire this dude who has cost you profits on the jobs that he was hired to actually make money on. It's not his fault you hired him at the salary the two of you agreed to, knowing the price points of the labor market when you hired him (of course, it is a different time now). It's not his fault that you didn't care to or know how to create a simple cost metrics for jobs, assigning all proper costs to his jobs, including the cost of his own labor.
Are you willing to sacrifice your company and your own fortune in order to be perceived as a “nice guy” rather than having the gumption to figure out how much it will cost you to keep your top talent? You need to sit down and figure out how to “adjust” your employees' compensation to current market conditions.
Once that is done, present your worksheets to your employees, hide nothing, and begin a process of reality-based negotiation where all parties recognize the need to dial-down SG&A expenses to what the market and competition will now bear.
That's all the concept of HARM really is. There is no mystery or mumbo-jumbo, just minimal, if any, assumptions-based math, analyzing the actual attributable, traceable and accountable costs of your direct middle-management personnel. Also, with great care, always follow The Golden Rule in your dealings with your employees. Make sure to come up with a plan to keep them on the payroll for now, so their professionalism and expertise can once again be put into play when times become better.
Kent Craig is a second-generation mechanical contractor with unlimited Master's licenses in boilers, air conditioning, heating and plumbing. You may contact him via email at [email protected].
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