Predictable profitability – part 1

For the first six years and three months of Mihaly Slocombe’s existence, we relied on a lean methodology and Microsoft Excel to manage our business. But my growing constellation of Excel spreadsheets eventually began creating as many problems as they were solving. The increasing trouble I was having with them triggered a broader realisation that Mihaly Slocombe had outgrown our lean startup strategies.

This is the third article in a series examining how we are transitioning our architecture studio from a lean startup to a more mature business methodology.

Our philosophy in this transition is to make decisions for our business as we want it to be, rather than our business as it is. We want to prepare ourselves for growth, to set up systems that will help us monitor and improve the health of our business, and scale up as we do. We put this philosophy into action at the start of last financial year, and embarked on a three year, three step renovation of our business management systems:

Step 1: Accountable accounting
Step 2: Predictable pofitability
Step 3: Clear communication

Clock; Time; Infographic; Business

Step 2 – 2017

As I promised at the end of the previous article, I’d like to share the results of my research into a couple of dozen different resource scheduling tools, and the software solution we’ve decided to pursue. At a minimum, these tools typically comprise timesheet and scheduling functions and will help us track the time we’ve used and the time we plan on using. But before I delve into my research, I think it’s worthwhile taking a brief step back to ask:

Why bother with timesheets and schedules at all?

This is a good question. Indeed, I recently heard about an exceptionally talented, medium-sized Melbourne architecture studio that has never bothered with timesheets. Despite years in practice and more then a dozen staff, they’ve never counted their hours. Perhaps one conclusion to draw is that timesheets are in fact unnecessary: just do good work and the rest will take care of itself.

But a business by nature doesn’t take care of itself, it requires constant love and attention.[1] Among the many tasks competing for that attention is the fundamental need to count everything the business buys and everything it sells. And an architect is in the business of selling time. Timesheets tell her how long projects take to complete, how to use her time most effectively, how to track her progress, how to make sure she’s profitable. Just as a baker must count the bags of flour she buys and loaves of bread she sells, an architect must count the hours she has and the hours she sells.

For Mihaly Slocombe’s team of six, accurate timesheets are in fact the most basic building block of our business administration. When examined in the right way, and correlated with other  business data like our fee proposals and invoices, they tell us everything we need to know about our past performance. Here are some of the ways we look at the data contained in our timesheets:

Time; Fees; Project; Accounting; Business; Architecture; Mihaly Slocombe

This is a comparison of our standard fee distribution against the average time taken across six recently completed projects. It’s gratifying to observe that the shapes of the two graphs are very similar. They prove that we’ve sculpted our fees to reflect the time we spend on each project phase, with minor eccentricity built in to capture more income during the early phases where our intellectual property matters most. We periodically review our timesheet summaries, to test both our fees and fee distribution against the actual time we spend on our projects.

Time; Fees; Project; Accounting; Business; Architecture; Mihaly Slocombe

This is a time comparison of the same six recently completed projects against all of our projects, including those we’re still working on and those that were cancelled at some point prior to construction. It reveals that while any completed project closely matches the distribution of our fees, our project time as a whole is heavily skewed towards the earlier project phases. This makes sense, as by definition we haven’t yet worked / don’t ever work on the late phases of either current or cancelled projects. What’s surprising is the extreme asymmetry of the two graphs. Being aware of this asymmetry allows us to identify key pinch points in a project, and even quantify the probability that any current project will continue past those points.

Time; Fees; Project; Accounting; Business; Architecture; Mihaly Slocombe

And finally, this is a comparison of the way one of our graduates, Eliza, spent her time in the September 2017 quarter against the way I spent my time. It reveals that Eliza works almost exclusively on projects (90% of her time) and very little on the business (10% of her time), while I work more evenly across projects (40% of my time) and the business (60% of my time). Quantifying these differences allows us to understand how much of our time is billable and how much is an administrative cost. This in turn allows us to calculate our charge-out rates and set crucial time budgets for all of our projects.

There are many, many more insights our timesheets afford us. They teach us about our fees, fee distribution, profitability, efficiency and billable hours. They help us:

  • Anticipate how much time we’ll need for our next sketch design proposal or documentation package
  • Balance the demands of the twenty or so projects currently underway in our studio
  • Determine how we can become more profitable
  • Detect project blowouts before they happen
  • Give everyone working in our studio responsibility for their time budgets
  • Know who has the time to take on this or that extra little task
  • Ensure that the studio as a whole thrives

In essence, if we want to know where we’re going, we have to know where we’ve been. Our timesheets give us the information we need about the past to prepare our monthly schedules, the future. Our schedules forecast which project milestones we need to reach each month, and who has to work on what to get there. This is a goals oriented planning philosophy that ensures we earn enough money each month to keep the lights on, salaries paid and some profit left over at the end.

As I’ve discussed previously (here and here), adopting this philosophy almost four years ago had a huge impact on the health of our business. The year before making the change, our monthly fees ranged between +127% to -100% of the annual average. The year after, they ranged between +48% to -53%. This reduced invoicing bandwidth has continued to improve, with our monthly fees for the 2017 financial year ranging between +33% to -23%.

This ongoing narrowing of our monthly fees is part of our core business strategy, and executing the strategy is entirely reliant on the coupling of our timesheets and schedules. Improving the way we produce and track both data sets is step two of our three year plan to renovate our business systems.

Stay tuned for the next article, where I will as promised share the results of my research into a couple of dozen different resource scheduling tools, and the software solution we’ve decided to pursue.


Footnote:

  1. An architect who spends all her time working in her business and not on it is an architect who won’t be working for herself for very long. Research in the United States shows that 80% of small businesses survive their first year, 66% their second year, 50% their fifth year and just 30% their tenth year. Georgia McIntyre; What percentage of small businesses fail?; Fundera Ledger; August 2017.

Image sources:

  1. Twenty four hours of clocks, author’s own image.
  2. Time and fees comparison, author’s own image.
  3. Projects comparison, author’s own image.
  4. Timesheets comparison, author’s own image.

2 thoughts on “Predictable profitability – part 1

Add yours

  1. Another insightful and thoughtful article Warwick. Excellent!

    I’m gunna curate this one to my database providing you have no objection!

    Have a f-a-n-t-a-s-t-i-c day… Winno

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