Tuesday, June 25, 2019

Get the Staffing Mix Right to Improve Profitability and Retention

The hot-button topic in the A/E business today is staffing. Most firms are struggling to find enough people to perform their growing backlog of work. The problem is particularly acute when it comes to hiring more senior professionals—say in the range of 8-20 years of experience. Demographic projections suggest that the supply of technical professionals is going to be a challenge for years to come.

The problem is exacerbated in firms that already suffer from a poor staffing mix. The labor shortage makes it all the more difficult to achieve the appropriate balance of senior, mid-level, and junior staff. Further complicating the matter is the fact that many A/E firms don't really have a grasp of what a good staffing mix looks like, nor how much a poor mix can impact their performance and culture.

How do you know if your staff mix is problematic? Consider these possible symptoms:
  • Staff complaining about the lack of upward mobility
  • Unacceptably high levels of turnover among junior-level professional staff
  • Senior managers and project managers running higher utilization rates than those working under them
  • Firm leaders not leading because they're too busy doing project work
  • Inability to make adequate profit on routine project work (i.e., projects not requiring highly specialized skills)
  • Too little business development activity, with common complaints by seller-doers that it will negatively impact their utilization
Any of these sound familiar? I commonly encounter these situations among the firms I work with. I suspect most would give me a puzzled look if I asked what their staffing model is. Most probably hire based more on their intuition than any mathematical model of staffing mix relative to the work to be performed.

While I claim no special expertise in this area, I am familiar with the concept of a staff leverage structure—a concept little discussed in our industry but commonly understood in other types of professional service firms. Leverage refers to getting the right balance of staff to match the needs of your project work. The figure below, taken from David Maister's classic book Managing the Professional Service Firm, illustrates the most common leverage problem I see in the A/E industry:

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Most firms are arguably a little top heavy for the work they perform. As I noted in my previous post, we are increasingly working on fairly routine projects where we have a limited role in diagnosing the problem and defining the solution (clients are handling a growing share of that preliminary work). Consequently, many of the design and consulting projects we perform have become rather commoditized. Short of finding ways to enhance the value of our services, we are often left to compete on price and struggle to achieve the desired profit.

Effective leverage is achieved when you assign work tasks at the lowest level they can be competently performed. This generally yields the highest profitability, especially on lump sum work. One analysis found that optimizing leverage can have a more positive impact on profits than more popular methods such as managing utilization or average billing rates. 

Leverage and Staff Retention

Maister observes that the relationship between leverage and the labor market is captured in a single sentence: People do not join consulting (or design) firms for jobs but for careers. They expect to advance upwardly at some reasonable rate (what is "reasonable" is of course subjective). When firms are overloaded with senior professionals, there are fewer opportunities for promotion. On the other hand, when firms promote staff without consideration of staffing mix, they can perpetuate the problem of being under-leveraged (i.e., top heavy).

Plus, when senior professionals carry too much of the load of getting the work done, they often do a poor job of delegating and investing time in developing younger staff. In my consulting work, I frequently uncover frustration among junior staff about limited opportunities to take on increased responsibilities and grow their skills. Ironically, as baby boomer managers complain about the higher turnover among millennials, they often are contributing to it by their inability to let go and let others take on tasks they unnecessarily hoard for themselves.  

How to Determine the Right Staffing Mix

A/E firms use various methods for defining their staffing needs, from mathematical formulas to relying on gut feelings. All approaches involve some level of subjectivity, but the following process—inspired by accountant Ken Burke—is the best I've seen for making an objective assessment of staffing mix:
  • Categorize the types of project work your firm performs. This assessment should drive your leverage structure. Routine work generally requires a lower principal/senior to staff ratio (the common way leverage is calculated). More specialized work inevitably necessitates a higher proportion of senior professionals.
  • Estimate the number of hours required for each type of work for the coming year, starting with work already under contract.
  • Define the right staffing mix for each work type based on the percent of time required from each staffing level. For example, you might determine that the optimum staffing mix for typical residential land development work is 15% principal level, 35% PM and mid-level managers, and 50% junior staff.
  • Determine the number of hours for each staffing level per project type. If you estimated 35,000 hours of residential development work for the year, the staffing breakdown would be (1) principal level: 15% x 35,000 = 5,250 hours; (2) PM/mid-level: 35% x 35,000 = 12,250 hours; (3) junior level: 50% x 35,000 = 17,500 hours.
  • Calculate total hours and project staff needs at each level. Total all hours across all project types for each staffing level. Then apply average utilization rates for each level to determine the number of staff needed in the right proportions.
  • Compare your projected optimum staffing mix with your current staffing. How closely do current numbers at each staffing level match what you've determined is the right mix for the work you have? What changes, if any, can you make?
Determining your preferred staffing mix not only helps you better allocate current personnel, but make better hiring and promotion decisions. If a senior engineer leaves your firm, do you automatically hire a replacement? Maybe not. Should you promote that staff architect without backfilling with an additional junior staffer? Maybe not. If a manager is running a high utilization, is that necessarily a good thing? Maybe not. Your staffing model, as determined through the process outlined above, will guide those decisions.

How is your firm making those staffing decisions? Do you have the right staff mix for the work you have upcoming? Do you even know what that mix should be? I welcome other perspectives in the comments space below.

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