Unlocking Engagement, Equity, and Value in Small Engineering Firms

Over the next three months, Tradewinds Group Inc. is bringing you a series of insights specifically tailored for owners or leaders in professional service businesses. Their focus is on small firms, typically with 5-50 employees, where the principles of engagement, equity, and value creation are critical for growth and sustainability. 

Is a Lack of Structure Undermining Your Success? 

In small firms that employ highly talented knowledge workers, roles can be flexible, which has its benefits, but it may create a belief that formal structure, leadership, and management are not (and even should not be) required. 

In these cases, as the company grows there is a resulting gap that grows alongside it. A gap in leadership, strategy, accountability, and development. 

The fallout from this is often evidenced by comments like “We have so much confusion in projects and priorities” or “I have to do a lot of re-work for more junior people because it’s just faster/easier that way”.   

Other symptoms show up in the form of backed-up accounts receivable, or worse backed-up proposals and invoicing. 

Owners often believe the problem is their team but hiring more people or “better people” isn’t the solution.  

The solution is creating structure and implementing tools that engage your employees and support them to achieve at their highest level. 

The Lever of Organizational Design 

Engineering leaders can leverage tools from management science to achieve these next-level results, starting with Organizational Design (OD). Think of OD as a strategic fulcrum that leverages your firm’s success. 

OD involves creating a formal structure—typically hierarchical or a matrix—that clearly defines roles, streamlines communication, promotes accountability, supports growth, and aligns employees with their strengths to achieve organizational goals.  

It empowers key employees to work on the business rather than just in it, building the management layers needed to achieve targets and goals 

The Value of Employee Engagement 

Develop your employees and your business develops too.  

The three most important requirements in employee engagement are:  

• “I know what is expected of me.”  

• “I have the resources I need to do my job.”  

•  “I get to do my best work every day.”  

Engaged employees find purpose and meaning in their work. The elements that create engagement for them also result in positive results for your firm, including: 

• greater productivity 

• higher wellbeing 

• better retention 

• lower absenteeism 

• increased safety 

Each of these benefits leads to greater profit through reduced re-work and re-scheduling, higher quality results, lower recruitment and training costs, and less use of senior staff on lower-level tasks. 

Engagement Pays Dividends 

When contemplating placing people in management positions, there is often a fear of reducing billable hours – the fear that managers are eating revenue instead of producing it. 

That concern is missing two key points: 

1. Management practices directly impact employee engagement and that leads to increased profits due to increased productivity and efficiency. 

1. All employees add value. For small professional services businesses, there is a business formula that each employee, client-serving or not, is equal to ~ $200,000 in revenue to your firm.  

Here is how that return plays out: When managers build engagement, it builds both productivity (more billable hours) as well as efficiency (more profitable hours).  Utilization rate by employee is relatively easy to measure. The ratio to measure for efficiency is Gross Margin (GM).  GM = Revenue – Cost of Goods Sold (the majority of which is billable hours).
And of course, profit is the source for dividends.  

While everyone recognizes that each owner employed in their business should earn a salary commensurate with the role that they fill, what gets missed is that in addition, every owner should earn an appropriate return on investment reflecting the risk they undertake in starting, operating and growing their business.  

The impact of intentional OD on profitability cannot be overstated. It is the core mechanism that generates margin, builds the value of the business, and rewards ownership.  

To Learn More: 

• Stay tuned for the next blog post 

• Visit the Tradewinds booth on October 29 at The Engineering Conference 2024 –where they’ll walk through a practical ROI and Valuation tool with you one-on-one. 

• Join the Thought Leadership Thursday webinar. On November 7th. Tradewinds CFO, Jim Pelot is discussing “Value Sharing: Attracting, Incenting, Rewarding, and Retaining Employees.”