AEC Managing Partner Newsletter August 2006
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Welcome to the August 2006 Edition of the AEC Managing Partner Newsletter. Yes, the summer is slipping away quickly but it is still August. I will try to get out the September Newsletter a bit earlier in the month will a full report on the Build Business Conference in Hollywood.
In this Months Newsletter:
1. Nine Signs of Highly Ineffective Recruiting - an article by Herb Cannon
2. The Business Cost and Impact of Employee Turnover - A guest article by Bill Bliss of Bliss and Associates
4. Houston ASHRAE Workshop September 26th
5. Axium Users Conference on October 20th
6. Valuations and Ownership Transition Seminar November 17th
7. SMPS Southern Region Conference January 26-27, 2007
Nine Signs of Highly Ineffective Recruiting
1. Being Too Anxious to Hire
Yes, your company is bursting at the seams with a record setting backlog and everyone is working far too many hours. But please avoid the almost irresistible temptation to hire a person whose only qualification is a body temperature of 98.6 degrees. It may make you feel better in the short term to see someone sitting at the computer screen cranking away - but it inevitably turns out to be costly mistake
2. Relying on One Recruiting Strategy
It always pays to advertise in more than one print publication, use more than one website to post jobs, use more than one outside recruiting agency and so on.
3. Having a Prolonged and Drawn Out Interview Process
There is intense competition for talented (or at least qualified) professionals. Too many companies act as though they and their prospective employees have all the time in the world to meet for 3 or 4 unfocused interviews over the course on 2 or more months.
4. Forgetting that Potential Employees are Also Interviewing the Company
The marketplace is extremely competitive for qualified architects and engineers. It is imperative that you do everything possible to present your company in the best possible light. Don't postpone the interview, clean your offices and be prepared to present the candidate with a package that includes a history of the firm, sample project sheets, benefits and so on.
5. Not Paying an In-House Referral Fee
If you can afford to pay a 20%+ of the first year salary to a recruiter, maybe you can afford to pay $1 - $2,000 bonus or more to your current employees for recruiting a qualified professional to your firm.
6. Monopolizing the Interview
Inexperienced interviewers have a bad habit of monopolizing the interview. Every interviewer should be prepared with a written list of probing questions. The goal of the interview is to find out as much as possible about the candidate. Most interview questions should be open ended and encourage candidates to fully explain their qualifications and experience.
7. Being Too Slow to Close the Deal
When you find the right candidate try to close the deal right then. I have seen too many candidates slip away because it took a week or more to send a formal offer letter. Whenever possible work out an agreement in principle right on the spot and send out the formal offer letter as an e-mail attachment within 24 hours.
8. Not Checking References
Make sure that any offer of employment is contingent upon the checking of references, verification of education and professional licenses. You may be unpleasantly surprised by what you find.
9. Interviewing Too Late
What would happen if you waited until you ran out of work to start marketing? Recruiting works the same way. Don't make the critical mistake of waiting until you absolutely need someone to start recruiting and interviewing. Make it a habit of advertising at least once a month and interviewing all qualified candidates. When a need arises you will have network of qualified candidates to speak with.
The Business Cost and Impact of Employee Turnover
One of the most critical components of success for the business owner, regardless of size, is the ability to keep the cost of doing business at a minimum. Obviously, every owner wants to ensure the best possible profit margin for the sustained growth and success of a business. What many businesspeople fail to realize is that employee turnover can represent a very substantial cost and lead to erosion of the bottom line.
Would it surprise you to learn that it will cost at least 150% of a persons base salary to replace him or her? Actually, the more you pay a person, the higher that percentage will be -- because the more you pay this person, obviously, the more you value their contribution to the growth and success of your business. Most businesses will probably pay their top salesperson triple (or more) what they pay a bookkeeper. The business values the contributions of the salesperson at a higher level, at least in strictly monetary terms, over those of the bookkeeper, although both perform valuable roles.
Lets say you have an employee with an annual salary of $50,000 who leaves a company. (The reasons for leaving are not important in this case: if the plan is to replace them, the costs will be the same.) It will cost a company a minimum of $75,000 to replace that person. This cost includes the savings realized because the person has left! And, all of that cost is taken away from the bottom line. We have developed a Turnover Cost Projection Model that identifies and calculates all the costs incurred.
The model indicates that the business costs and impact of employee turnover can be grouped into four major categories: 1) Costs due to a person leaving; 2) hiring costs; 3) training costs; and 4) lost productivity costs. For purposes of illustration, I'm going to use an example of a Financial Analyst in a mid-sized company. This person is paid an annual base salary of $52,000, which works out to an hourly rate of $25, assuming a 40-hour work week.
Costs due to a person leaving
When this Financial Analyst announces that s/he is leaving, (to avoid awkwardness, allow me to use the preposition he from now on) he has immediately begun to transition out of the company. Even though he has given you two or three weeks notice, his mind and full attention are not on this business anymore; this is simply human nature.
At this point, costs include the following: employees who must fill in for the person who leaves before a replacement is found; the lost productivity of the employee while he is still in his position but not fully concentrating on his job; the cost of a manager or other executive having an exit interview with the employee to determine what work remains, how to do the work, why he is leaving, etc.; the cost of training the company has provided this departing employee; the cost of lost knowledge, skills and contacts of the departing employee; the increased cost of unemployment insurance; and the possible cost of lost customers the departing employee is taking with him (or that leave because service is negatively impacted). The sum total of these costs can be as much as 85% of this positions base salary or $45,000.00.
Hiring costs
Unless there is someone to promote or the perfect person just happens to come along at the right time, there will be some costs associated with identifying and hiring a replacement for the Financial Analyst position. These costs will include items like advertising, an employment agency, employee referral award, internet posting and other forms of announcing the availability of the position. More money may well have to be offered to attract the right candidates. At the next stage, interviews conducted by management and/or hiring department staff will cost money in terms of the time they spend arranging for interviews, conducting the interviews, calling references, having discussions about the people they met, and time spent notifying candidates who did not get the job.
The time spent on these activities will also cost money in terms of lost productivity, because, with rare exceptions, these people are not employed to be full-time interviewers. Also included here are any skills, personality or assessment testing your company may utilize. Finally, there is the cost of conducting pre-employment checks such as past employment histories, drug screening, educational verifications and (possibly) criminal background checks. And dont forget, these assessments and reference checks may be conducted on more than one candidate for this opening. The sum total of these costs will be from 15% of this positions base salary or approximately $8,000.00. This will increase to about 38% of the positions base salary or $20,000.00 if an employment agency is used.
Training costs
Now that the person is hired for the Financial Analyst position, they cant be expected to know absolutely everything on the first day, can they? Costs to factor in for training include any new employee orientation that explains benefits, basic policies, company history, etc.; specific training for the person to do his job, such as computer training, product knowledge, industry knowledge, and the day-to-day duties to get the job done. Even though this may be informal or on-the-job training, the time it takes for various people to impart this knowledge is costing money -- especially since people who are knowledgeable enough to train others are probably also highly valuable to the company. Set the sum total of these costs at approximately 13% of the position's base salary or $7,000.00.
Lost productivity costs
Because the newly hired employee does not come fully trained, it will take some time before he is fully productive in his new position. This is true even if someone has been promoted from within the company. The following formula can be used: the employee is only 25% productive for the first four weeks; 50% productive for weeks 5 - 8; 75% productive for weeks 9 - 12; and will finally reach full productivity after week twelve. Since this person is being paid at the full rate of pay during this period, there are still more lost productivity costs. Naturally, for more senior-level positions, or those requiring longer periods of time to develop full productivity, the costs will be higher.
During this time of lost productivity, the persons supervisor is also spending more time instructing, reviewing work and possibly correcting mistakes. (There will be some mistakes that are not caught right away and will cost money to correct down the line such as with a customer who receives an incorrect price, invoice or actual shipment due to the new persons error.) Put the sum total of these costs at approximately 32% of the positions base salary or $17,000.00.
Adding the subtotals of each major category discussed above gives a total of $77,000.00 if an employment agency is not used and $89,000.00 if one is used. The first figure is just about 150% of the original $52,000.00 base salary we used in this example. (And remember the additional costs of employee benefits and company-paid taxes on top of that, which can range from 20 to 30 percent of the base salary.)
If we were looking at a sales position, the costs would be significantly higher due to the value of lost sales or customers. To calculate this cost, take the costs listed above and add the average revenue per sales representative divided by the number of weeks the position is vacant. This total will be well above 200% of the salesperson's annual compensation.
The employee as resource, rather than expenditure
For a company with $5 million in revenue and $250,000.00 in net income, they have just spent between $75,000.00 and $90,000.00 of that profit to replace someone! You may say that these are just the costs of doing business and to a certain extent, thats true. However, would you rather spend $75,000.00 on purchasing a new piece of equipment that can increase your manufacturing or service capacity, or use it just to maintain the status quo?
Many managers have focused only on the cash cost of employee turnover. They do not realize the entire cost and impact of turnover. The point is that the cost of time and lost productivity are no less important or real than the costs associated with paying cash to vendors for services such as advertising. This is something often overlooked or underestimated by employers; yet in today's tight job market, with companies competing for skilled workers, these costs are becoming more and more significant.
This is not to say that all employee turnover can or should be eliminated. But given the high costs involved and the impact on productivity and customer service, a well thought-out program designed to retain employees can easily pay for itself in a very short period of time. Unless you are prepared to beat all of your competition on wages all of the time, it is a good idea to start taking a hard look at your benefits, your policies and the intangibles that make your company a desirable place to work.
For More Information Contact:
Bill Bliss
Bliss & Associates Inc.
http://www.blissassociates.com
E-mail wbliss@blissassociates.com
Houston ASHRAE Workshop September 26th
Herb Cannon wil be conducting a workshop session titled "Productive Project Management - A Profit Perspective", plus a luncheon presentation titled "The Seven Habits of Highly Ineffective Engineering Firms"
Contact the Houston Chapter of ASHRAE for more information
http://www.ashrae-houston.org/
Axium Users Conference on October 20th
Herb Cannon will be conducting a session on Incentive Compensation
Please visit the Axium Website for More Information
http://www.axiumae.com/events/userconference/
Valuations and Ownership Transition Seminar November 17th
Herb Cannon will be presenting a valuation and ownership transition seminar in on November 17th. More details to follow in the September Newsletter. Please contact Adrienne Goldberg at 201-837-1100 to register.
SMPS Southern Region Conference January 26-27, 2007
Herb Cannon will be presenting at the SMPS Southern Region Conference in San Antonio, TX. Details to follow in the September Newsletter
Visit the AEC Management Solutions Website
http://www.aecmanagementsolutions.com
Want to Reprint an Article from AEC Managing Partner?
As a publisher of a print or web-based publication, you are hereby granted the right to reprint any article contained in this newsletter with the following provisions
1) The words "By Herbert M. Cannon" must be included immediately following the article title.
2) The following "resource box" is included following or preceding each article.
Herbert M. Cannon, President of AEC Management Solutions, Inc. and Publisher of AEC Managing Partner Newsletter, is a management consultant, seminar provider and speaker exclusive to the A/E Industry. He is available to speak at company meetings and conferences.
For more information contact Herb via e-mail hcannon@aecmanagementsolutions.com
Or visit his website at www.aecmanagementsolutions.com
3) You send us a hard copy of any printed publication in which one Herb's articles appear. Printed issues may be sent to 183 Higgins Road Matawan, NJ 07747
Thank you for taking the time to read my monthly newsletter. As always, I look forward to your feedback.
Regards,
Herb Cannon