The 70 Percent Profit

This post is the result of a discussion I had with a new graduate at my company. His issue was that he couldn’t understand why a less than optimal solution was provided to a client, even though he was thoroughly capable of providing a better one. By now you’ve probably figured out that I have many theories on things, so obviously I was interested to discuss my thoughts.

As I work for an engineering company, I’m generally going to be using engineering references to discuss my points. However, I think that this discussion should be able to be used as an allegory for anyone who is about to transition or is transitioning between leaving university and entering the work force. Hopefully you will agree.

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Let me start with some background knowledge. Typically, the sciences (more so than the humanitarians) are set up in the pursuit of ultimate optimisation. In theoretical terms this means that a solution has no ‘dollar value.’ As such there is no such thing as profit and loss; only progress as far as research is concerned. This means that as we progress through school and university, one theory always remains constant. Work hard enough, for long enough and you will get 100%.

School is the biggest culprit of projecting this idea. However, despite the universities not having compulsory attendance and a few other instances which project independence and freedom, they still do not teach profit and loss in a practical sense.

Now before you jump down my throat, let’s acknowledge that accounting degrees teach you how to check the balance sheet and that financial degrees teach how to identify arbitrage stock and forex opportunities (i.e. pure profit and loss).

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However, this is still not practical profit and loss; or as I like to call it ‘The 70% Profit.’

To explain what I mean by the 70% profit, I’m going to highlight a key misconception of the world that many university students have. This is the idea that you should give people the best solution you can. However, this is not how the world works. If you insist on giving 100% (i.e. the optimal solution), you will not make profit. Instead you will make a loss or at worst not have a job. This is because of a nasty little word called liability – the state of being legally responsible for something.

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Note the position of the bullet hole on the second reflection

In a world of no liabilities, no one would pay someone to do their due diligence (i.e. take on their liabilities). This cynical scenario means that a government would not pay any engineers to design their roads if there was no chance of being sued should the road fail. Similarly, a principal contractor would not engage a ground engineering specialist if there was no chance of being sued should a bridge collapse due to the ground conditions. One further step down the line, sees the ground engineering firm only hiring certified engineers because there is chance they could be sued if they give bad recommendations. This continues on and on down the food chain.

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So now you understand the cynical view where the majority of people only have jobs because somebody doesn’t want to be sued. Let’s now link this to profit.

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Obviously, if you are taking on somebody’s liabilities you want to be aptly compensated for it. Seems easy enough. Take on liability. Charge a fee. Make sure you charge more than it costs you to take on the liability. Make profit. Congratulate yourself. Blow money on strippers and cocaine. Repeat.

When times are good, clients will be happy to pay you whatever you want. However, when times are tough (as the global market is currently experiencing), clients become more money conscious. This is where the 70% comes in. Please note I’ve picked 70 as an arbitrary number. It is most probably not the true number but its close enough for me to make my point.

Now finally, let’s define 70%. 70% is the percentage of liabilities that the client wants to be absolved of. In profit terms this means the client only wants and will only pay for a 70% solution. As such, if you offer a 100% solution like you have been taught at school, you will not win the work – let alone make a profit. To make matters worse, this openly contradicts everything we have ever been taught. So why on earth would we strive to achieve 100% if the client will only pay 70%?

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The truth of the matter is that you never would. What you would do (this is something schools and universities do teach you), is to optimise and optimise your 70% solution such that you maximise your potential for profit. I can’t tell you what this number is but if you can get it right, you will be a rich person. Hopefully this will mean that the next time we speak, you will be calling me from your gold plated ferrari.

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#Hanbaobao

PS: Note I use a lot of pictures from buzzfeed. Here is one such link (29 Photos That Prove “Breaking Bad” Had The Greatest Cinematography)

 

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