Saturday, April 13, 2013

The Benefits of a Single Profit Center

One thing I've learned in 15 years as a consultant: The more organizational subdivisions you create, the more hurdles you have to jump to promote collaboration and consensus across the organization. This can happen in a single office with multiple departments. It's certainly a challenge with multiple offices. But the problem seems to escalate when you add multiple profit centers to the mix. 

Yet this is by far the prevailing model in the A/E industry, and professional services in general. Why? Some believe it promotes entrepreneurship. Others actually think the inherent internal competition is a good thing. The most common reason I've heard for favoring this model is that it supposedly enhances accountability among office or business line leaders.

Count me in the small minority who believe the disadvantages outweigh any advantages. I continue to encounter situations where it's apparent that having multiple profit centers has contributed to significant organizational dysfunction. One of my favorite examples is the large A/E firm that submitted four proposals for the same contract, each coming from a different office or subsidiary. Other problems I've seen that are related to this structure include:
  • Communication and coordination issues
  • Reluctance to share people and resources
  • Lack of consensus on corporate strategy
  • Poor cooperation on company initiatives
  • Limited sharing of market knowledge and client contacts
  • Difficulty promoting cross selling 
Of course, there are many firms that have thrived with multiple profit centers, finding ways to counter the kinds of problems mentioned above. My intent is not to try to discredit this business model. Instead, I want to propose an alternative to those firms that are struggling to make multiple profit centers work as well as they hoped—the single profit center model.

I worked for ten years for RETEC, a national environmental firm organized as a single profit center. I saw firsthand the benefits of such a structure, combined with a culture that highly valued collaboration and sharing across the organization. We stressed the value of community, of acting as one company in each of our 25 offices. Some of our distinctives:
  • We had no organizational impediments to pooling our best resources to serve clients, especially on larger projects. There was more collaboration between offices than I've seen in any other firm.
  • We worked hard to balance workload among our offices, sharing people to avoid too little or too much utilization in any location. Any local hiring decision involved an assessment of how it impacted other offices.
  • There was no lack of accountability among branch managers without the profit metric. We were measured by utilization, revenue factor, sales, staff satisfaction—and how well we worked with other offices.
  • We shared technical, market, and client information in part through various adhocracies designed to keep us at the forefront of our industry.
  • Despite lacking the supposed benefit of pushing the profit motive down to the local level, we routinely produced profits that were two to three times the industry average. As you might expect, those profits were shared with all employees based in large part on overall company performance.
There are a few notable firms in the A/E and environmental industry that similarly are organized as a single profit center—Carollo Engineers, Kimley-Horn, RK&K, Canon Design, and Haley & Aldrich are examples. Each of these firms seem to share more than a similar organizational structure; they have a common philosophy about the business. Kimley-Horn president John Atz summarized it this way in an interview:
We believe that a structure of multiple profit centers creates silos, with each group motivated to place their group’s performance ahead of the overall firm’s performance. We establish goals for each operating unit, but we only track profit for the firm as a whole. It is our experience that this approach increases efficiency, as we are not tracking charges between groups. It also increases teamwork and collaboration across the entire organization. We often shift resources to wherever the client needs are the greatest, regardless of location, which also allows us to balance our staff and workload across the firm. Operating as one profit center makes this easy. We also encourage staff to make decisions “one level up:” as an individual, make decisions that are in the best interest of your group; as a group, do what is in the best interest of the region; as a region, make decisions that are in the best interest of the firm. At the end of the day, we are one team, working toward one common goal.
If your firm aspires to have similar outcomes but has found them difficult to achieve with your current structure, maybe it's time for a radical rethinking. The recession has brought new challenges and opportunities that belie a "business as usual" approach. This business is tough enough without having to contend with unnecessary organizational barriers.

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