Monday, July 09, 2007

What You Compensate is What You Get! Top Line Versus Bottom Line Growth and Why You Should Care.

I am having more fun blogging than ever before. . . finally, readers are asking the intelligent questions that will get us closer to making value pricing a reality. The last comment focuses on compensation systems:

"You mentioned that "we bonus our project managers for managing profitability". What measurement metrics do you use to do that? I had kicked around the idea of bonuses based on revenue per manager or % of deliverables completed on time... which would incentivize them to increase productivity but not necessarily profitability (they might use a quicker more senior resource to get the job done). How do you get to client profitability to incentivize lowest cost delivery?"

Let me first put my comments in context: The incentives that I discuss are ones that will work in a fixed price model but not in a billable hour world. The problem with billable hour firms is that the compensation systems are inherently short-sighted. They are based on lagging indicators of performance and are entirely focused on rewarding and promoting top-line growth (sales commission/origination credit), often at the expense of profitability. Since most law firms are still run by lawyers (and the ones running the show got to be the circus clowns by being the top top-line revenue producers in the firm), They simply do not understand their business well enough to know how to compensate for profitability (not to mention that the greedy bastards on the compensation committee, all who are top-producers and many who make the rules in their favor, have no incentive at all to explore the issue of profitability) I don't know about you, but I would rather have a $50Mil business that is 30 percent profitable than a $52Mil business that is 20 percent profitable.

Now onto some real answers. There were 2 questions presented here:

1) What measurement metrics do you use to bonus project managers for managing profitability
We take a top down approach to this. Remember, every organization has a 100 percent pie to divide up among its people. This game of compensation is really just about wealth redistribution in your organization. First, you should GRADE all of you clients, and instead of giving your people origination credits at the point of sale, wait a year and give the originator a bonus based on the "grade" of the client. After some time, you will realize that some rainmakers are generating top-line revenue growth by bringing in crappy clients. . . some who don't pay and others who are so happy that they will go tell all their cheap friends about you! Reward the RIGHT people for bringing in the RIGHT clients. You should always be grading your clients based on their profitability to the firm.

As for your project managers, the key is to think more broadly than professionals typically do. . . if your business is like ours in that we have long-term clients and not one-time deals, you want to compensate based on total profitability for the client account, NOT on a per-project basis. There are numerous valid business considerations for investing in loss-leaders or going above and beyond to wow a client. Project managers need the room to exercise discretion and then need to held accountable for making good decisions. I get hand-written letters from clients telling us how pleased they were with our service. I'll bonus any project manager who can produce a handwritten client letter! Why? If they took the time to write me a note they will certainly tell 10 of their business colleagues about us. . . and voila. . you have a sales force. Profitable? Certainly? Warm and fuzzy? OK, maybe that too.

Profitability has 2 components: Good Pricing, and Good Costing. Since a fixed price model is about letting the price determine the cost, project managers AND the sales team who made the value proposition are responsible for profitability together. Since in our business the pricing is not set by the project manager alone, but by a committee, there is a standardization of sorts for pricing in our organization. Therefore, what you will notice is that overall defects in profitability should be the responsibility of the pricing committee and project manager specific profitability problems can be taken into consideration in the total compensation scheme at year-end for each PM.

Here is my point: Project manager performance needs to be considered as a whole after multiple projects are completed because some projects will be winners and some may be losers. If you bonus a PM after a big winner and she bombs the next one, you did not reward performance you just rewarded luck at the expense of your year-end winner! Result: A wealth distribution system failure. If you know your business, I'll bet you can rank your top performers and your worse ones. Remember, the comp game is about wealth distribution. Take average salaries. Take your PMs. Rank your top PMs, Rank your Lowest PMs. (You will know who they are too). Take your pie and create a wealth distribution scale in excel that distributes the pie. . . more to the best, less to the worse. Simple, right? (if you have specific questions about profitability metrics, write me and email because it is the topic of a book rather than a blog)
2) How do you get to client profitability to incentivize lowest cost delivery?"
Great question. Notice the subtle distinction between client profitability and least-cost-delivery? What drives your business is client profitability. Ironically, PM's need to learn least-cost-delivery first and certainly need to know that least-cost delivery is NOT least-time-delivery! Why? Because PMs are often likely to think they should do something themselves instead of delegating because:
1) They are control freaks
2) They think they can do it better than you so they don't delegate, or
3) They just do it because they can get it done faster

Each one of these are TERRIBLE for profitability in your business. Control freaks simply don't think about profitability because they are so concerned with controlling everything that they care more about themselves than they do the business! "I can do it better than you" people have a problem because they think the game is about doing low-value (low challenge) work better than you and not about delegating so that they can improve on the high-value work the client really cares about. Time sensitive PMs who do things because they can do it faster than you are also missing the boat. I just want to look at the PM's in category 2 and 3 and just say "no shit! If I did something 10,000 times I would be able to do it better and faster than you too. Is that what you want to do with your life? Is that what kind of life our people should have? Because you can't learn how to delegate your work to someone who values a challenge you have essentially sentenced our younger work force to becoming expert document-reviewers!!!!!!! If they were to send you a hand-written card, what would it say? I'm almost certain it would read "HELP, I'm mired in discovery hell and have been down here for months. How about using some of my Harvard education and delegating some challenging work!?!?" Least-time delivery? Certainly not, but I am smart enough to know that you retain smart people by offering them as much challenge and responsibility as they can handle. . . . and that doing so is a big key to profitability in our organization.

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