SBHD: You may be in the Top 100, but how’s your efficiency ratio? Ian Cochrane believes there is room for improvement in this area
THE new efficiency league table is the one that all design consultancies should aspire to be in since, unlike the Top 100, it is an indication of the quality of your business as opposed to the number of designers you employ. Most people would prefer to generate more fees with fewer full-time staff, assuming quality and service are both maintained.
The ratio of design fee-income to the number of people employed (efficiency ratio) means consultancies have to focus on driving up design fees while controlling and monitoring the number of people on the payroll. This means having quality clients, quality people and quality systems.
The top performers, some with fee-income per full-time staff member in excess of Ãº100 000 a year, have achieved an optimum balance between doing well for themselves and performing the best job for their clients. They deliver quality solutions to their clients and pay good bonuses at the end of the year. It’s a Catch 22 situation because good bonuses attract better people, who ultimately attract better clients. If your clients are getting a better deal than you are, then watch out because win-lose relationships do not last long!
A good tip is to focus on your improvement over the past year, rather than your actual efficiency ratio at any point in time. Is your efficiency ratio improving or deteriorating? In other words, are you moving forwards or slipping backwards?
We can identity four types of businesses by looking at the change in the efficiency ratio along with the change in design fee-income.
Type A is probably heading for rough waters! It is a shrinking business where both turnover and efficiency are declining. The spiral is often started for groups in this category by the loss of a key client or key member of staff. These businesses often, but not always, employ fewer than ten people and therefore do not have the critical mass to enable them to reduce fixed overheads. Staff morale can also be a big obstacle to winning new business.
Type B is often a volume-driven business where turnover is the key measure of success. But it may be lacking good financial and job-costing systems. The consultancy may have grown successfully from ten to 20 people, but the management is still trying to run the business in the same way as before, with the same people, the same structure and the same systems. Investment is often needed before efficiency in terms of fee-income per full-time staff member can pick up again.
Type C is normally a larger, more mature design business whose star has begun to fade and where turnover is dropping. Typically its high spot was in the mid to late Eighties. Financial and management controls are normally quite sophisticated and the focus has turned to cost-cutting exercises. The declining headcount means that efficiency is improving and the financial department is happy. Attention has not yet turned to the more difficult job of nurturing existing clients and bringing in new business.
Type D is the real winner of the four categories. A consultancy in this category is increasing fees and improving efficiency at the same time. It is not afraid to invest in the business and it is highly ambitious for its clients and itself. It focuses on adding value to its clients’ businesses, charges high fees for doing so and makes sure it controls its own cost base.
Every consultancy, no matter how big or small, should aspire to be a Type D business. Of the Top 100 consultancies, just over a third can congratulate themselves on achieving this over the course of this year. However, nearly a quarter fall into Type A and must start doing something about it if they are to return to profitability and increase efficiency.
Once you have decided which category your consultancy falls into, a good starting point might be to set yourself the goal of increasing your efficiency ratio this year by at least 15 per cent. If you follow this through, you’ll be amazed at the improvements it brings to you and your clients.
Ian Cochrane is chairman of performance and management consultancy Ticegroup.