Case study – How much is your “efficiency” costing you?

Accountants have a bad name don’t we?

Or a few bad names maybe.

“The men in the grey suits”.

“Beancounters”.

Worst of all, accountants can be accused of knowing the cost of everything and the value of nothing.

Sometimes, the critics might have a point. But only sometimes.

Sometimes, the good old Beancounters can see the value and it’s the client who is too focused on cost.

This was the case with ACX ltd.

ACX was efficient. Everyone worked hard.

But profits weren’t great as a percentage of turnover. Whenever this is the case, there are only four reasons:

1. Turnover isn’t high enough
2. Margins aren’t good enough
3. Pricing isn’t at optimal levels
4. Overheads are too high

Turnover was ok. And overheads were cut to a minimum.

We asked a few questions about pricing which tended to be driven by the market to a significant degree. Projects were costed out in a lot of detail by a couple of experienced estimators and pricing was usually on a cost plus basis. The company was getting about 35% of the jobs it priced which was a good indicator that their prices weren’t too high or too low.

Then we did some calculations on the margins which were nowhere near what they would have been if their performance matched the way that they were pricing their work. For example, if you add 35% to your direct costs to cover overheads and profit, then your Gross Profit margin should be 25.9% (35 divided by 135).

Most businesses have margins which are slightly lower than the figure their pricing should command. Things go wrong, extra costs arise.

A few businesses actually do better than their prices would suggest. These tend to be incredibly well run with quite close management of the jobs and the onsite team. There is no room for slacking.

But those businesses tend to be quite “management-heavy”. And they also usually have excellent costing systems which give them up to the minute cost analysis and identification of profits and losses as soon as jobs end. They are “all over problems” using an expression another client once said to me.

In ACX’s case, they were management heavy, but had terrible margins which were a long way off what would be expected from their pricing.

Something was going wrong.

Or maybe lots of little things.

As we started to ask more searching questions, various anecdotes started to emerge.

Anecdotes are useful but must also be treated with caution. Anecdotes can be used by the teller to justify a particular prejudice against a particular colleague or divert blame away from themselves.

But in this case, the anecdotes painted a picture.

Four guys sitting around in a van for three hours waiting for the caretaker of the property they were working on to turn up with the keys.

Subcontractors unable to start work because the equipment they needed wasn’t on site before they started.

Expense claims from staff for materials purchased from the local DIY store instead of the trade supplier they had an account with because the materials had not been pre-ordered. With no trade discount of course!

It all sounded a bit chaotic.

And then of course, decisions were being made to do things in different orders in order to keep people busy.

All of the above led to unhappy customers, things going wrong and time spent pacifying customers.

It also made it much harder to charge for variations.

Charging for variations is critical to good margins. Pricing can be competitive. Customers are likely to go for the cheapest price. You can find yourself negotiated down in a Dutch auction.

But the work required rarely matches the exact criteria in the tender document. Customers change their mind. Unforeseen problems arise.

And then mission creep sets in. If you’re not careful you’re doing extra work, incurring extra costs. But if you keep track of such changes and get change orders signed, the profit you make on all those variations will be considerable over the course of a year.

It’s all about the admin!

We worked through some numbers and calculated the impact of a more organised and pro-active office. Good office staff had previously been hard to find in that location, so we found someone offshore in Durban, South Africa. A highly experienced office manager whose salary in Durban was about half of what it would have been in the UK.

A list of problems converted into a list of responsibilities. Ordering stock, contacting key holders, chasing timesheets, ordering plant. All the things it is easier to do in an office with a landline, a computer and not sitting in a van with a dodgy signal whilst looking at three subcontractors chatting away whilst they await instructions on what to do next. The role was given the job title: Operations Assistant soon shortened to Ops Assistant.

It wasn’t perfect on day one but there was an instant improvement which grew over the next 6 months as everyone got used to trusting their new offshore colleague to sort their admin. The guys on site were better organised, there were less complaints and the margins in the quarterly accounts improved month on month.

Occasionally the Ops Assistant didn’t have enough work to do but the central document storage got tidied up and they even dabbled in a bit of marketing, posting pictures of completed jobs on Instagram.

Eventually, everyone forgot how they ever coped without an Ops Assistant and the cost became an essential element of the business’s daily operations. Sometimes costs aren’t costs, they’re investments.