Some people have advocated a single value, the “efficiency index”, as a simple and reliable method for gauging firm performance. This metric is the net fees divided by total payroll.

This method is supposed to replace the traditional net direct labor multiplier and labor chargeability measurements…thus, simplifying two management measures into one.

Does labor efficiency make management any more efficient by simplification? I don’t think so.

All that low labor efficiency can tell you is that you have a problem with either your net fee multiplier or your labor utilization. But, it won’t tell you which one. To understand the message that you should get from the efficiency index, you need to review the net fee multiplier and labor utilization. So, you end up right back at reviewing two separate measures.

If I haven’t made my point yet, I leave you with this. How much time is really saved by focusing on one financial measure instead of two?

If you are currently in the government market, now is the time to get aggressive about marketing and hiring. If you are not in the government market, don’t try to get in it now. Trying to get in now will be expensive and yield little return. Instead, focus on your best clients and trim your staff size to sustain the firm if the worst-case forecasts do come true.

About the Author: With thirty-five plus years of design industry experience as a manager, consultant, and writer, William Fanning has helped numerous firms throughout the country improve profitability and firm management as well as transition firm ownership. Formerly Bill was the Director of Research for the Professional Services Management Journal (PSMJ), the largest newsletter devoted to the management of design firms.