Open Your Books
Find any person’s face online and cover half of it. Your brain will automatically envision the entire face. When you uncover the picture, the full image will be different than what your mind’s eye envisioned.
The same kind of thing happens in every AE firm that doesn’t share financial performance information with their staff. In the absence of data, when your firm is doing well, your people think it’s doing much better than it really is. They wonder, “Why haven’t I gotten a raise?” and, “Where’s my bonus?” And when your firm hits a dry patch, they think, “Are we in real trouble? Should I look for another job?” That’s just the way the human brain works—you can take it to the bank.
Your people make assessments about your company every day, whether you share information with them or not. But wouldn’t you rather they make grounded assessments instead of ungrounded ones? Their assessments lead to decision—sometimes about technical issues, sometimes about strategic alternatives, and sometimes about career options. The more information they have, the better decisions they will make for clients, the firm, and themselves.
Open book management is a great opportunity for AE firms to build trust, engage staff, and teach them about what it takes to run and grow an AE firm.
For starters, share as much information about the internal workings of the firm as possible with the entire staff (not just a select group of managers) to keep employees connected and to prepare the next generation of leaders. At least quarterly, issue to every person in the firm a streamlined one- or two-page company status report. The memo should present a concise narrative analysis of the firm’s quarterly and year-to-date financial performance, how the firm performed in the past quarter, what is important for the staff to focus on this quarter, and your thoughts and concerns for the short- and long-term. A copy of the memo should be sent to everyone in the company as soon as the quarterly financial results are available.
We have complete conviction, and know from experience, that tracking and reporting this data to all employees, along with a concise narrative interpretation from leadership of what it means to the company, will help open communication lines throughout the firm, build trust, and increase engagement.
Accompanying the memo should be the following key performance indicators:
- Sales— recognized when a contract is signed and notice to proceed received.
- Net service revenue— gross revenue less subconsultants and reimbursables.
- Cash in— what the firm collected in fees and reimbursables.
- Cash out— all cash expenses paid by the firm, including fees and subs/reimbursables.
- Staff utilization— direct labor divided by total labor.
- Profits— both on an accrual and cash basis.
- Net multiplier— net service revenue divided by direct labor.
- Revenue factor— net service revenue divided by total labor.
- Backlog— work under contract, not yet performed, expressed in number of months of workload (based on previous year’s gross annual revenue).
- Average collection period— average number of days it takes to collect accounts receivable from clients, measured from the time an invoice is entered in accounts receivable to the time it is credited against accounts receivable.
Additionally, schedule and lead a firm-wide meeting each quarter (connect through Teams, if necessary) to inform everyone how the firm is doing, pump them up about the future, address their concerns, and get their input on how things are progressing—these meetings shouldn’t be solely focused on financial performance— but this information will help to put all other communication in its proper context.
The typical objections to sharing financial information firm-wide include things like, “What happens if our competitors get a hold of this information?” and, “It won’t make sense to a lot of our people—it will just confuse them.” First of all, staff should be informed that the information is strictly confidential. And they should be trusted to keep it that way. If they cannot be trusted, you have a different issue to address. Second, don’t worry about the people who won’t get it and don’t care. Worry about the risers who would love to see that information. They put the majority of their lives into your firm and they want to know how its performing. If they have trouble grasping the information, help them out. Afterall, they are your firm’s future leaders.
A few years ago, I was working with an AE firm that had a dysfunctional leadership team and a great, big trust issue throughout the firm. A year after our strategic planning session, the firm’s CFO called me and said these exact words: “Mark, of all the great things we implemented in the last 12 months, sharing financial information has had the single biggest impact on our culture. If we only could do one thing from our plan, it would have been that.”
If you’re not practicing open book management, think about it. It could be just what your firm needs.
For help with making your firm the best it can be, call Mark Goodale at 508.254.3914 or send an email to [email protected].