This article reveals why a hyper-economic and results-based focus hamstrings engineering firms with high turnover and low productivity, and what you can do to increase engagement, improve retention, and significantly increase operational profits.
You know the mantra; higher profitability is the result of reducing expenses and increasing efficiency!
Let’s break down this hyper-economic and results-based focus and look at how little it involves the people within your organization.
- Overhead Rate, the ratio of a firm’s total overhead expenses divided by total direct labor costs, is typically a Key Performance Indicator (KPI) used to measure a firm’s profitability. Since professional development or training costs are typically viewed as overhead, a company can increase profits by reducing the amount spent on training, right?
- The definition of efficiency is outputs divided by inputs, period. Most engineering firms not only use “chargeability” or “utilization” (billable hours divided by total hours) as a major KPI for a firm’s profitability, but it’s also typically used as a key metric for employee reviews. Engineers understand math, and they also understand when upper management distills their overall performance into a single “efficiency” number it’s not very engaging.
It leads to reason, then, if an organization reduces the amount spent on training and development, then more billable time will be racked up by employees. Reduce expenses and increase efficiency, what could be better?
When I was an engineering manager, each of my team members was expected to seek out the training they desired, provide a proposal, and then I would get it approved. Successful completion of the training in addition to providing a brief write-up of how the training benefitted their practice was a Key Behavioral Indicator (KBI) alongside the KPI’s used in their performance reviews. This improved moral, helped shape the future direction of their careers, improved engagement, reduced turnover, and was one of the reasons why my teams were consistently the highest producers and the most profitable.
One engineering organization I worked for, an ESOP, their stock price was reduced because the ratio of profitability to labor costs was too high. In other words, their overhead was too high, and efficiency was too low. You guessed it, the first thing to get axed was the company’s overall training budget. Suffice it to say, this company continually struggled with high turnover and low profitability.
Many engineering companies utilize a hyper-economic and results-based focus for their business model, and wonder why, no matter how much they reduce overhead and scream about efficiency, they constantly struggle with low to average profitability. This approach is also based upon the assumption the best way to retain an employee is to increase their pay, which simply isn’t the case. Bottom line, a hyper-economic and results-based focus sucks all the oxygen out of the conversation and doesn’t leave any room for employees to express what they really want out of their job.
Our experience and studies have shown the biggest challenges faced by engineering firms today are the recruitment and retention of talent.
According to the article by Timothy Judge, et al., The relationship between pay and job satisfaction: A meta-analysis of the literature, there is only a 2% overlap between pay and job satisfaction levels. Reporting on this study, the article by Catherine Adenle, 20 Things Employees Value, the top four things employees value most at work are:
- Professional Development
Note compensation places seventh on the list, right behind autonomy and connection.
Furthermore, the Architecture & Engineering Industry Study, 38th Annual Comprehensive Report – 2017, by Deltek, states the most expensive business process is talent acquisition, average employee turnover increased from 8.7% in 2016 to 11.0% in 2017, and the top three challenges to managing talent were:
- Employee morale & work/life balance
- Workforce capacity and planning
- Retaining employees
Josh Bersin, in his article, Employee Retention Now a Big Issue: Why the Tide has Turned, states “Many studies show that the total cost of losing an employee can range from tens of thousands of dollars to 1.5-2X annual salary.” What’s worse, many companies don’t include the high impacts of high turnover on their overhead rate; keep in mind high turnover equals low profits.
One of the best ways for engineering firms to increase their operational profits is to break the fixed mindset of hyper-economic and results-based focus and adopt a growth mindset that emphasizes the development of the people within their organization (see our article Why A Fixed Mindset Delivers Average Performance). By conducting an ongoing inquiry with your employees about where they want to take their career, and then consistently providing them with ample training opportunities to achieve their goals, your employees will experience the following benefits.
- They will feel appreciated by the organization’s ongoing interest and investment in their professional development.
- When individuals are continually growing and learning along with everyone else, their feedback, contributions, and work are given the same focus, and they feel included in something bigger – “Part Of.”
- An ongoing training and professional development program, that continues in good times and bad, demonstrates a consistent commitment to an individual’s wellbeing; in other words, consistency of action over time builds trust, and trusting employees stick around.
- Providing professional development and training on an individual’s career path helps them create their success and manifest their own destiny, resulting in higher engagement and commitment to the organization.
By adopting a growth mindset and focusing on your people by investing in professional development and training, your organization will become a place where people want to work and stay. Through shifting to a people focus, your organization will realize the following improvements.
- Higher morale, better work life balance for your employees, and higher productivity.
- Significantly higher workforce engagement and commitment that lowers turnover, boosts retention, and dramatically lowers the high overhead costs due to employee departures.
- Ongoing training and professional development will increase the capacity of your workforce and provide the skills for better work planning, resulting in higher utilization, efficiency, and profitability.
- And finally, according to the article by Bruce J. Avolio, et al., Estimating Return on Leadership Development Investment (RODI), that analyzed 133 available studies and reaches a 95% confidence level in their conclusions, ongoing professional development and training can produce net average RODI’s in the range of 150% to 200%, and, from a strictly business proposition, the investment has a potential for very robust returns.
In conclusion, engineers are great with numbers and scientific approaches to solving problems, however, boiling your employees down to a number and running your business with a results-based scientific approach will not improve your profitability. It’s simply not intuitive for engineers to adopt a humanistic and non-scientific approach, that focuses upon the professional development of your workforce, to improve profitability – but it works. So, if you want to significantly improve the profitability of your engineering firm, focus on your people!
Are you frustrated because you’ve tried everything, and still can’t grow and improve the profitability of your engineering firm? Are you tired of disengaged workers and high turnover? The Engineering Leadership Institute works with engineering and firms that work with engineers to custom design trainings and leverage e-learning to break the employee retention and profitability barriers. CLICK HERE to contact Randy P. Wall, PE, MPA for a free consultation on how to improve engagement, retention, and the profitability of your organization.