Welcome to the second installment in Navigate’s guest blog series from Joel Harris, Understanding Variable Costs is Wildly Important for Your Integration Business.
In Part 1, Joel shared his experience of using a variable cost structure to transform an acquisition from losses into profit. Since then, he has applied this principle in many different situations.
Here are a few examples of how a variable cost structure can add profitability to your integration business:
- Address seasonality (build fixed costs to lowest expected revenue), then use variable costs for peak demand.
- Address growth, which is typically chunky and not linear. Until it becomes steady state, don’t add fixed costs which are actually variable costs simply because they are labeled “direct costs.”
- Take on “big” projects that are unlikely to repeat themselves annually, giving yourself the capability to flex growth opportunistically.
- Take on projects that are “out of footprint” but enable you to service a customer whose geographic reach exceeds your own.
- Limit risk on your fixed contracts – get fixed bid from qualified subcontractors so you reduce demand on your internal resources while also locking in the project profit.
- Address hiring needs that cannot be filled to your standard in terms of cultural fit and capability in a current market environment.
When I first introduce this principle in a company, the hiring manager always asks,
“Why would I pay a subcontractor double or triple what I would have to pay a full-time employee?”
The answer is typically three-fold (although I often hear plenty of additional excuses to justify only hiring full time):
- You have grossly underestimated your true burden rate. At best, your internal rate when fully utilized is no more than a twenty percent discount to a subcontractor cost (and often less).
- You do not understand the cumulative profit loss for periods where that resource is not fully utilized.
- You find it “easier” to manage people you can threaten to fire, than holding a temp or subcontractor to your standard of performance.
If you stop and think about this question for even a couple of minutes, you can add to this list with relevant examples from your own company where you are leaking profits by not considering the option of adding truly variable costs to address your company needs.
As a caveat, if you are staffed below your fully utilized work available (for at least the foreseeable year), then adding full time qualified staff will be more profitable than hiring temps or subcontractors.
“I have frequently increased profit by “in-sourcing” talent, but not as often as “out-sourcing” direct costs that are not truly variable.” Joel Harris
Stay tuned for Part 3 in this series, when we do a deeper dive into the hidden profit of building truly variable costs.
Keep Watching: The Navigator Podcast with guest, Joel Harris
Understanding Variable Costs Is Wildly Important for Your Integration Business
Keep Reading: Part 1 of this blog series – Profits Hiding In Plain Sight
https://navigatemc.com/understanding-variable-costs/
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