Workplace

Business owners often seek extraordinary solutions to corporate growth problems; however, after making significant investments, the net results often are incremental improvements at best. There are simple corrective actions that substantially can increase business revenues, profits and corporate value.

The inverted pyramid

An ideal organizational structure reflects a pyramid with a large base of junior employees topped by significantly fewer senior leaders. The logic is that if you follow a standard pricing model, profit margins are much higher for junior employees than margins associated with senior employees. You can reach this conclusion by following what I refer to as "the rule of three," which considers direct costs (such as an employee's salary), overhead and profit.

For example, assume you pay a junior-level employee $17.50 per hour. Multiply that number by three to determine the amount you should charge a customer per hour for that employee's work. In this case, the amount would be $52.50 per hour.

Now, consider a senior-level employee. If you pay that employee $50 per hour, the price for his or her work would be $150 per hour. With senior-level employees, you often hit a competitive ceiling; the amount may be too much to charge your customers, so you would need to lower the price, ultimately cutting your profits.

Unfortunately, the economic downturn has forced many businesses to reduce their staffs, and business owners often mistakenly eliminate junior positions before senior positions, creating an inverted pyramid structure. This is problematic because senior-level employees have to perform tasks previously performed by junior-level employees; senior-level employees' salaries are not consistent with what you can charge customers for lower-level work, so businesses often are forced to cut prices for their products and services, essentially erasing profits.

Corporate chargeability

Suppose a roofing contracting company's owner was convinced his company was achieving high chargeability (the amount of time worked by employees for which you can charge a customer) with sustained chargeability levels exceeding 95 percent. But the owner was dismayed when his company's chargeability did not yield higher levels of owner compensation.

The problem was in calculating corporate chargeability; the company calculated its chargeability based only on employees who had the ability to generate chargeable hours (those working in the field, for example), omitting those in administrative and marketing departments.

When all company employees were included in the calculation, the corporate chargeability dropped to 54 percent. Because of the nonchargeable contingent, the company was not running quite as efficiently as it could; trimming some administrative and marketing positions would help accommodate the company's needs.

Too many industries

For most companies, effectively penetrating any industry is a costly, labor-intensive activity. However, of greater concern are companies claiming expertise in diverse industries and marketing themselves under one label.

For example, assume I work with various roofing entities and have broad roofing experience. However, when approached with a more specific request, such as whether I can install a vegetative roof system, I would be stymied. A more specialized roofing contractor with vegetative roofing experience would be able to price its services at a premium level—25 to 50 percent more than a less specialized roofing contractor could charge.

Good news

Fixing corporate growth issues does not require high levels of outside intervention or implementing the latest management theory. It merely requires management common sense. Are you ready to make your business exceptional?

Brad Dawson is managing director of LTV Dynamics, Catharpin, Va.