One of the more persistent sentiments I’ve personally seen more openly laid out over the past few years of this recession is one which claims ‘there’s too much overhead at my firm’. Most often, this statement is being made by someone who is presumably not part of that ‘overhead’ and expresses a frustration that a disproportionate level of senior staff are in a firm, relative to everyone else. The effects of this can lead to lower salaries, less chance for advancement etc. It’s a perfectly understandable sentiment.

What’s struck me about that sentiment, though, is how the term ‘overhead’ can be misunderstood and misapplied. “Overhead” for the purposes of a services firm, are all of the expenses that it takes to run the business apart from direct salaries and the associated taxes/benefits. It’s the fixed costs that aren’t directly tied to your employee costs. So, in practice, it’s your rent, utilities, supplies, office lunches and coffee. It includes all your insurances (1). Overhead can absolutely be expensive – if you’ve leased 20k sf of office space, for a 200 person firm, and lose 100 people, you could very well still be paying for and holding all 20ksf. Your liability insurance can never be decreased, so even if your output slows, you’ll still be paying quite dearly to hold that coverage. Software licenses, advertising, etc. – all of it could be reduced, but perhaps not quickly and without some serious downstream consequences.

How much your overhead is, as a percentage of overall revenue, can vary. Widely and wildly. Put that Porsche lease on the office account? Very different than if you’re working out of a spare bedroom. Generally, it’ll fall between 12-20% of your gross revenue. And, like any government, a significant portion of that cost is relatively fixed or very difficult to dramatically lower. In fact, marketing expenses may be one of the few areas that could literally be cut to zero overnight, but it’s not a real option (2). Conversely, then, salaries account for the remaining 80-88% of your expenses. Which is a lot. A whole lot.

And that last fact brings us back to our original sentiment: what I believe most people mean is the comment made above – that there’s a seemingly high level of senior staff, who can be quite expensive to maintain. The unspoken sentiment is that all of those people are making it impossible to hire and/or maintain more junior staff. You know what? That’s exactly correct but it may not be the full picture.

In reality, there are many, complex reasons why there's 'excessive' overhead in some firms. This can range from ownership obligations (3) to a sense of sheer self preservation among the top leaders. One of the most obvious reasons, for me, is that clients almost always hire people and not firms. So, if the senior staff which have led your work are all shown to the door, it can be more difficult for the firm to maintain continuity with a client, etc. This can be acute at institutions where a firm has done multiple projects. I’ve literally heard potential clients bemoan working with firm X, simply because the PM they’ve worked with (and trust) is no longer there. In another vein, there is almost certainly a feeling, among some firm leaders, that employees below a certain level are merely interchangeable and replaceable in a way that senior staff simply aren’t (4).

At the root of this comment is this sentiment: how can we keep our overall expenses in balance, so that the rest of us can enjoy a more secure and/or profitable existence? There’s no general answer for this question. I’m open to suggestions. What this probably means is that the firms who will survive or even thrive are going to have to radically re-think how they define their services, how they think about income streams and sources and ultimately how to move beyond simply being 'architects'.

1(with the caveat that health insurance is usually directly tied to the employee cost and isn’t true overhead
2(no marketing, probably no work. Not the right kind of virtuous circle).
3(if you have an ownership stake – stock or shares – in a firm, the rest of the partnership may not be able to buy you out, even if revenues are down).
4(Sadly, there’s some raw logic in this statement. Though this won’t protect some senior employees, as the waves of colleagues at larger firms who have been laid off over the past few years will attest to.)