A New Business Model: Core Employees
The service industry is unique. Its product is ideas and its assets are people.
A previous employer of mine once quipped “At 5:30 each evening our company assets walk out our door and I pray each morning they return!”
The capital projects business i.e. the design and construction of major facilities, interacts with two of the larger service businesses: Engineering and Construction. Although these businesses are often marketed to distinguish themselves from one another, they are, for the most part, simply the sum of the individuals working for them – They are pure service companies.
There is little doubt that for ANY given company, the team of people employed to execute a project will have an impact on the results. In fact, the results of a project are impacted by any ONE of the people assigned to a project. The final project is a direct result of every, and any, single individual assigned to it.
This is a very important concept. This premise is stating that the final product is irrevocably linked to every individual that has worked the project.
Admittedly, the difference in the product may be insignificant. For instance, if a document distribution clerk fails to mail the final drawings to the field on the day it is ready, will the project success truly be affected? Eight times out of ten, the answer is “no”. But it could have an impact. It could be as significant as delaying the completion of the project by a day, or costing the project overtime charges in order to complete the tasks.
It could be more subtly. The Project Manager has promised the Owner and Constructor that the drawings went out and, over time, the Owner and Constructor lose confidence that the Engineer is capable of meeting his commitments.
The point of this example is to simply emphasize that, in a service company, the quality and commitment of the people is a key attribute of a successful company. The quality of the people is directly related to the quality of the Company and the quality of the projects they deliver.
A Brief History of Service Companies (Engineering and Construction)
Once one accepts the concept that the people make the company, the Business model for the company must take this into account.
The writer has been involved with the Engineering and Construction business for almost four decades. As with any business, the methods of managing and controlling these businesses have changed significantly over this period of time.
Four decades ago, the capital project business worked at a relatively slow pace. Projects were built in three to five years from conception to completion. Typically the engineer was employed to design a facility and the engineering product was completed before the construction ever begun.
Engineers were contracted with typically on a multiplier basis and these multipliers were significantly higher than today’s rates.
The inflation rates of the 70’s changed the capital project business forever. The traditional time frame for designing and then constructing a project were imposing huge financial burdens on the cost of a project. With double digit inflation, the cost of completing a project could double during the execution of the project.
The solution was to shorten the overall duration. The result was overlapping engineering and construction durations which spurred the concept of EPC contracting.
Over the decades, as competition in the service industries increased, the pressure on both engineering and construction was to reduce the “multipliers” that were traditionally common in the industry.
The industry responded by reducing the multipliers but changing the contract structure as well. Support personnel such as managers, secretaries, document clerks, IT personnel and similar, who had previously been handled as overhead and “included in the multiplier”, were now billable to account for the reduction in multiplier rates. Overhead groups were carefully scrutinized and reduced or eliminated.
As pressure on “rates” continued, service companies changed some of the contract terms and conditions to allow for further “reductions” in rates. Liabilities and warranties were monitored to reduce the “risk” in order to reduce the “rates”.
In the past, the higher multipliers allowed service companies to “save for a rainy day”. The higher profits allowed these companies to “coast” through temporary downtimes and carry valued employees from one project to the next. Over the decades, the numbers of companies that receive the higher rates and the ability to carry valued personnel have diminished significantly.
The service companies now monitor “billable hours” religiously and the threshold for non-billable hours continues to shrink.
The New Services Business Financial Model
This new business model has resulted in service businesses that must hire and fire personnel on a weekly basis based on present workload.
This management technique, however, has some highly undesirable consequences.
The market continues to drive the rates for service companies lower. Many companies have even established offices in a multiplicity of foreign countries where salary rates are significantly lower allowing the company to reap higher profits while delivering lower rates to their client base.
The employees of these service companies have come to accept the inevitable – if there is no billable work, they no longer have employment. The natural reaction to this policy is two-fold: (1) the project is not “finished” until there is another project that will employ the people, and (2) the employee has learned to “look out for himself” i.e. when a project is ending without another obvious project to follow, he finds another employer.
The final product of the service company has suffered from these practices:
- Project overruns during “slow times” are predictable.
- The loss of key project team members as a project nears completion during slow times is predictable.
- The biggest loss from this practice is the loss of highly valued employees.
The Inevitable Business Downturn
The new services business model is focused on minimizing overhead and non-billable hours. The employees have become aware of the practice and have learned to proactively protect themselves.
Company loyalty, a trait that was common in the service industry three decades ago, has almost disappeared.
Once a downturn is evident, the managers of a service company must address the morale of their workforce.
If they do not convince the employees of their long term security, the employees will begin to leave. They will leave on their own terms and their own schedule – and these terms and schedules will work to the detriment of ongoing projects.
If management fails to address the downturn, the FIRST employees that they will lose are the most VALUABLE employees. Why? These employees are the most marketable.
If management fails to address the downturn, the employees that will be left in the company are, in fact, the LEAST valuable employees. The cream of the organization will have plenty of opportunity to find a more secure position somewhere else.
The Core Employee
Over the years, I have had the misfortune of experiencing a number of these downturns. As a manager I was typically well prepared. Biannually, I would ask my supervisors to rank every employee in my office or department. I would ask them to provide this ranking both by title i.e. all the engineers AND simply by person.
Typically I would have three to six direct report supervisors so I would have six to twelve lists that I could review. Clearly there was a bias – those people that worked directly for the supervisor were always ranked slightly higher than those that were not. However, when these lists were combined, one attribute ALWAYS remained the same: The top twenty percent of the people and the bottom twenty percent of the people were ALWAYS the same.
The supervisors all agreed that there were unquestionably a small percentage of the workforce that was the most valued people in the organization.
In most cases, not unsurprisingly, these were also the highest paid people in their respective salary range.
As a manager, I would make it a practice throughout the downturn to call these top twenty percent of the employees into my office, individually and as a group, and emphasize to them how valuable they were to the company. I would promise that I would leave the company before they were laid off.
They were MY CORE EMPLOYEES. They were the KEY PERSONNEL that made the Company as successful as they were. They were the asset that distinguished my service company from others.
A Better Business Model
The purpose of this diatribe is to suggest that a Core Employee concept would be a unique basis for a service company business model. A formalization of this policy MAY be enough to reignite the COMPANY LOYALTY principle that has recently become extinct.
The concept is simple. Every year, at annual review time, one identifies a minimum of twenty percent and a maximum of thirty percent of the present workforce as CORE EMPLOYEES.
One would execute a contract with these employees, signed by a Corporate Officer, that simply states:
- The employee has been designated as a CORE employee.
- The company will do everything within its power to protect their employment within the company.
- If the company determines that it is necessary to terminate the employee’s full time employment they will:
- Maintain, at the company’s full expense, all benefits i.e. medical insurance, life insurance, disability, etc. for a designated period.
- Provide a salary of 70 percent of their base salary for a designated period.
- At the first opportunity realized by the company, the CORE employee will be reinstated to full time employment.
The duration and percentage of base salary are variables; each company should determine these based on their previous business experience. My recommendation is a minimum of 70% of salary and nine months to a year duration.
The objective of this Core Employee policy is obvious – it should provide sufficient insurance to make your most valuable employees comfortable that their jobs are secure and, if unforeseen events occur, they will have income and time to find alternative employment.
There are some management criteria that can be exercised around “core employees”.
First, it should be clear that becoming a core employee is dependent on the quality of work performed and it takes time to establish this metric. Hence, one must be an employee of the company for a period of time before one becomes eligible. My suggestion would be about three years.
Second, the value of core employees will probably differ between “departments”. The Company would need to make this distinction. For instance, the Project Management staff may be more “valuable” to the company than the staff in the shipping department. Hence, the overall company management would identify appropriate percentages of the staff by department.
Additionally, there should be a range of core employees. For instance, this example has suggested an overall low of twenty percent and an overall high of thirty percent. Once again, this would be dictated by overall company management.
Lastly, and most importantly, the designation of Core Employee must be renewed regularly. This is not intended to be a “tenure” policy. One doesn’t achieve Core Employee status and get to lay back and rest. As a Company grows and shrinks, keeping the Core Employees within a range of total workforce population dictates changes to the designated Core.
The assessment of Core Employee designation would be concurrent with an annual review.
Conclusion
The concept of Core Employees is not alien; I used it as a management tool over the years to try to reassure my most valued employees of their importance.
The implementation of a Core Employee Policy, however, may serve to revitalize a business sector that has become complacent and disheartened by years of abuse. This policy could help distinguish those service companies that truly believe that THEIR people are the differentiator between themselves and the competition.
