Yesterday I had a conversation with a coaching client of mine about how he can find efficiencies on a new, large account he just landed. His company is around $1 million in revenue and this new client will nearly double the size of his business. And even better, it is a five year contract. However, the margins are a little tighter than he’d like and he wants to improve those year over year. We discussed equipment efficiencies, labor reduction strategies, etc. However, there is one strategy that stands head and shoulders above the rest – one move you can make to promote long-term expense reduction. And the answer is……profit sharing with your project manager.
Most project managers have one primary objective, making sure the customer is happy. Second in line is the budget. As long as they are within budget and the customer is happy, all is well. However, with nothing but a base salary, there is little incentive to reduce job expenses. In fact, what would motivate a manager to accomplish the same job with less people if that could make it more difficult to keep the customer happy?
The answer lies in profit sharing. Imagine a $30k/month job that is operating on a 20% profit margin ($6k/month). Instead of fighting with the manager to convince him/her to reduce hours, what if you offered 1/3 of ever dollar you made above goal in the form of a bonus? If you beat the profit goal by $600, they would get a $200 bonus. If you beat it by $1,200, they would get a $400 bonus. This keeps the owner from being the budget nazi, always harassing the manager to cut expenses, and uses positive reinforcement to get the results you want. In addition to reducing tension, this helps cultivate an ownership mentality among your management team, a true WIN-WIN.
My only recommendation is to tie the bonus to customer satisfaction so that the manager doesn’t jeopardize the account in pursuit of a bonus. For instance, customer satisfaction must be at least a 7/10 for the manager to be eligible for profit sharing.
For those of you that are hesitant to share profits, you must be willing to let go. When people are treated like owners, they will act like owners, and everyone wins. Give it a try! I promise it will work if done correctly.