Do you know how many people you should have in your overhead for ideal growth?
Last week I was in Detroit leading one of my high-impact peer group meetings.
In the peer group meeting, I was asked, “Do I have too many or too few people in overhead?”
I know the answer to this because a client once told me that he heard the industry standard was 2:1 (2 field employees for every 1 overhead position).
“Hmmm. Where did you hear that?” I asked him. He couldn’t remember. This is how myths and misinformation get started. Bad generalizations are passed from one person to another.
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As the benchmarking guru, this is one metric that I track and follow.
Before I answer the question, let me add that benchmarking is very difficult. There are many key differences between companies, like:
- Mix of services
- Degree of diversification
- Number of months in the year you do mowing or landscaping
- Company’s speed of growth and how bulked up you are for growth
- And so on…
Having said that, it is still possible to analyze benchmarks and draw conclusions.
In this particular peer group, the field-to-overhead ratio ranged from 2.4:1 up to 7.3:1.
And based on each company’s mix of services, etc, I could tell them where they needed to be.
One member company that is heavy on installs had a fairly lean ratio of 5.8:1. My conclusion for him is that he needed to “bulk up” and add two more key (expensive) overhead positions to accelerate growth and free him up from day-to-day.
I told him, “Overspend on quality if you have to, use a recruiter if need be, but get these two positions filled – and your profitability and revenue will jump.”
Another company (mix of maintenance, irrigation, install, snow) was at 2.9:1. While I found that a bit heavy, the owner is on a fast growth track and the ratio is fine, as long as he is filled with A players, so that his “bulking” is muscle and not fat.
A third company at 13M+ and very diversified, had a ratio of 2.5:1. This company makes excellent (industry-leading) gross profit margins, but then spends quite a bit on overhead, and ends up with a good (not great) net profit. The firm is on a steady growth track, building out its middle management team, and the key is to grow their people’s skills so they can expand management’s span of control.
Another member, a young entrepreneur with a 7.3:1 ratio was running far too lean to be able to scale his business.
Here are 3 conclusions I draw:
- 2:1 is not the benchmark ratio
- You need to match your goals to your benchmarks, in order to interpret them.
- Being able to discuss the differences between each company in the benchmark study is where the true value lies.
Your Challenge: Pay attention to your organizational chart as you scale.
While the P&L tells you how profitable you are, and even how efficient you are (when you set it up with the proper chart of accounts), you must also manage and assess your performance by constantly looking at your organizational chart, both your current one and your 3-year outlook.
Being proactive in figuring how to staff makes all the difference.