When founding ADD Inc in 1971, my partner and I were concerned as much about operating the firm as a successful business as with creating the level of quality design and client service that we hoped would be the signature of our architecture and interior design firm. About a decade into the business, however, things had changed, and we knew we had to change the way we managed it.
For one thing, our firm had become bigger. In the early days, we could say simply, “It’s been a great year, let’s go for next year.” But when we grew to about 70 employees and some $15 million in revenue by the end of that first decade, we knew we had to get organized about managing the increasingly complex practice.
At the same time, we had become more financially savvy. We had been reading management newsletters that said companies wouldn’t be in business at all if they were earning less than 20% to 25% of revenue. In the architectural business, the margin is much, much lower – often less than 10 percent. We set our goal to be as successful as the large corporations and real-estate development firms for which we were designing award-winning headquarters buildings, office parks and developments.
Crazy Business, Creative People
As we set our goal to be as profitable as some of our clients, we knew that we needed to take into account the business that we were in. As a professional service firm, we are in a crazy business. We’re always just a phone call away from a client that had wanted the project done tomorrow saying instead that the project is now on hold. Moreover, for three quarters of our business, the budget is determined ahead of time, based on our estimate of the amount of time the project will take to complete. To go back on that projection once work has begun undermines the kind of relationship we develop with clients that keeps them coming back.
Then there is the matter of the type of people who work for our firm, and perhaps for other professional services firms in the legal, accounting and consulting trades. Our designers and project managers, the people responsible for overseeing the actual work for clients, are architects and interior designers. Trained for the most part in design schools, they don’t have a natural inclination to bring projects in on or ahead of budget as they do for assuring quality design and production. Unfortunately, design schools don’t always do as good a job in training for financial performance as they do for design.
With the business as it is and the people in the business trained as they are, we knew that to move our financial agenda forward, we would need an organized approach to managing our finances. What follows are the four steps we took that have made a difference in our particular professional service practice.
Make Cash Flow a Priority
Shortly after we felt the need to regroup on the financial front, the first step we took was to hire an accounting professional. Subsequently, we went a step further, making him a member of our executive team with a vote that is equal to that of ADD Inc.’s other senior executives. In doing so, we sent a message to the company that managing our finances is considered as critical as managing the design of our projects and the relationships we have with our clients. Over time, this financial role has evolved so that our accounting executive now holds the title of Chief Financial Officer, as well as the degree of responsibility commensurate with that title.
2 – Manage the Business to the Budget
Once we made the commitment to having a CFO, it was a natural step forward to make sure others in the organization were setting budgets and that we were managing those budgets. Currently, we have five “resource” directors who oversee functional areas, such as Information Technology, Operations, MarCom, Project Delivery and Human Resources. Each sets a budget at the beginning of the year. When things change, as they did early this spring – that was when large technology clients began canceling projects in the wake of the tech downturn – we are able to go to those directors and ask them to pinpoint where cuts can be made. (To conserve cash during this year’s harder times, for example, we reduced the number of personal days employees could take, began charging for parking, and reduced the $100,000 a year of free food we had been providing that we couldn’t bill to clients.)
3 – Train and Involve the Troops
Given that the people who go into architecture and design are more likely to do so for love than for money, it is imperative that professional service companies make it clear to the entire staff that cash-flow management plays a central role. In our firm, it is even more important since we are employee-owned. Salaries are competitive, but some compensation comes from profit at the end of the year. The more profit there is to share, the higher every employee’s take – and vice versa.
Taking training seriously, we hold a number of regular sessions throughout the year. Emerging leaders from each of our three offices – Boston, San Francisco and Miami — gather together in person twice a year for a briefing with top executives, including the COO, the CFO and me. Four times a year, the chief operating officer and I address all employees through a video conference, bringing them up to date about how the company is performing relative to its goals for the year and what interim steps need to be taken to stay or get back on track. Finally, we hold educational sessions on a variety of financial topics, such as managing one’s own personal finances, to get people thinking along those lines.
4 – Tie Compensation to Cash-Flow Productivity.
With these three steps forming the backbone of our cash-management (and cash-imperative) program for the past two decades, we had long shied away from a fourth step that we are now evaluating and will likely implement next year. With annual net revenue now around $20 million (net revenue excludes pass through revenue to independent structural engineers with whom we work on projects) and 200 employees, ADD Inc. has entered yet another phase.
In an employee-owned firm, that fourth step – tying compensation to managing for financial results – had always been tricky. With more than one person working on every project, it has been difficult to measure the contribution of each individual. On the executive level, even though one principal might be responsible for garnering more business than another, how does a firm measure the contribution of, say, a CFO, who doesn’t bring in business but whose contribution cuts across all functions.
Historically, professional-service firms have turned to the compensation tactic to head off the devastation that occurs when top producers walk out the door – but ADD Inc hasn’t faced such an issue. Thus, in deciding at this time to revisit this strategy for the top executives, we are acknowledging that we have reached a size in which we need to take cash-flow management to the next level. It is no longer sensible to share equally among all. Increasingly, we are recognizing that accommodation must be made to account for individual performance.
In discussing these strategies for managing cash flow in a firm whose creative professionals work more for love than for money, I am not saying this is right or wrong for all firms. Rather, I am describing what we have done, which is to create a culture of openness, sharing and education. We are striving at ADD Inc. to manage creativity for the love we have for the work, as well as the finances we need to stay economically fit in an enterprise that is a business as well as a calling.