Take A Load Off

Ever have that feeling that you brought too much stuff, and now you’re stuck with it?

Last week, we likened Overhead to a heavy load that a firm must carry alongside direct salary costs.

Baggage, if you will.

Sometimes, we over-pack.  Then, we must carry all that stuff until we do something to lighten the load.

What can the firm do if it determines that its Overhead Rate is too high for its business model?  What if we want to lighten our load?

Of course, any reduction in Indirect (non-project) Expenses will lower our overhead.  Any dollar not spent on overhead is potentially a dollar of profit.

But, there are some ways to have a significant impact on Overhead Rate.  Here are five of them:

1. Increase Our Utilization Rate

Nothing presses downward on an Overhead Rate like more Direct Labor.  Hiring more project staff may seem counterintuitive, but if you’re busy, and can keep more project staff busy, this pushes more of your labor into the Direct category, on a percentage basis.

Understaffing may seem like a good way to increase profitability, but it can slow the pace of project billings, and therefore, profitability.  It also damages morale, and runs the risk of encouraging talented staff to look for greener pastures.

2. Decrease Indirect Labor

The twin to increasing Direct Labor is reducing our Indirect Labor, or non-billable salary costs.  We may need to more closely manage non-billable time by project staff, and set reasonable expectations for the percentage of staff time that must be spent on project work.  We might also consider reducing our administrative staff, or leverage them to do more project-related tasks.  Perhaps we can outsource some of these administrative tasks, such as IT or accounting.

3. Decrease Insurance Costs

For most firms, Professional Liability coverage is very expensive.  Consider going back to market for better coverage and premium options.  Find a broker who is not predisposed toward any particular carrier.  Ask another brokerage firm for a second opinion on your premium costs.

In order to manage health insurance costs, consider high deductible plans.  Another option, which may be less desirable in certain labor markets, is to move more of the premium burden to the employee.

4. Decrease Office Occupancy Expense

Rent is another one of our major overhead expenses.  We should take a hard look at our office space requirements– perhaps there are ways to increase our seating density, or to sublease a portion of our space.  Perhaps we can negotiate a lower rent rate by renewing our lease before it expires, or for a longer term.

And we can tighten the belt on all those costs associated with occupying an office, such as telephone, utilities, and supplies.  Can we live without a landline phone system if everyone has cell phones?  Can we postpone the purchase of new computers by upgrading some components?

5. Decrease Non-reimbursed Project Expenses

Those project expenses that come out of our pocket really put a dent in the firm’s profitability.  We should find a way to minimize these if we are unable to negotiate contracts with our clients to reimburse our project-related expenses, such as printing, supplies, travel, mileage, shipping, etc.  This is only fair, as they are incurred for the benefit of the project or the client.

Let’s unpack all that baggage, and see what we can leave behind.

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