Pyramid Engineering, P.C. was created as a professional corporation chartered in Pennsylvania. The company is privately owned by the four founding partners.
The company is project oriented, where each project involves:
We offer innovative and economical design services, maintaining state-of-art design technology. We meet client needs on projects of all sizes.
Services include defining client needs, preparing bid documents, tendering bid analysis, construction review, payment certification, contract administration, warranty inspections. Projects include new facilities, renovations, repairs, and remodeling.
We have developed a brochure system which covers a broad spectrum of target market segments. This system is modular in nature and includes many ‘boiler plate’ sections which may be edited to suite specific needs. Brochure inserts are maintained as individual sheets to facilitate their assembly in any custom situation.
Our website includes a description of services, the areas which we plan to serve, contact information, a list of representative projects, and brief resumes. The website address is http:\\www.pyramidmep.com.
We will continue to develop a series of templates for project proposals. The format for all proposals will include:
Pyramid Engineering utilizes modern technology at all phases of a project. All work is carried out using CAD software, including preliminary design and presentation work. It is more cost effective, quicker and more accurate than traditional methods. We also use specialty design software as well as internet transfer of information between ourselves, other consultants and our clients.
Pyramid maintains comprehensive, Windows based analysis tools for design.
Pyramid maintains an Internet website complete with file transfer and e-mail capabilities.
Project Consulting: Proposed and billed on a per-project and per-milestone basis, project consulting offers a client company a way to harness our specific qualities and use our expertise to develop and / or implement plans, from conceptual planning to turnover. Proposal costs will be associated with each project.
Dispute Resolution: We will draw upon our broad range of construction and contract administration experience to provide dispute resolution services, including arbitration, mediation and expert reports for litigation.
Restoration Engineering: We would provide condition survey, design, and construction review services for repair of buildings.
Fabrication and Detailing Drawings: To serve the special needs of mechanical contractors, Pyramid will be offering these services to contractors in the future.
A very broad and extensive market base exists which, if properly pursed, can easily allow us to achieve our stated revenue / growth goals. Our targeted client base is taken from the following sectors:
Market Analysis | |||||||
2004 | 2005 | 2006 | 2007 | 2008 | |||
Potential Customers | Growth | CAGR | |||||
Educational | 3% | 200,000 | 250,000 | 300,000 | 262,656 | 269,222 | 7.71% |
Health Care / Senior Facilities | 0% | 75,000 | 75,000 | 75,000 | 50,000 | 50,000 | -9.64% |
Commercial | 0% | 30,000 | 30,000 | 30,000 | 30,000 | 30,000 | 0.00% |
Government | 0% | 30,000 | 30,000 | 30,000 | 30,000 | 30,000 | 0.00% |
Program Management | 0% | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 0.00% |
Contractor / Design Build | 0% | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 0.00% |
Sub Contracting | 0% | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 0.00% |
Total | 3.02% | 350,000 | 400,000 | 450,000 | 387,656 | 394,222 | 3.02% |
All of our target market segments have buildings or facility needs which require skilled engineering work to design and implement. They need engineers who understand their needs, their budget constraints, and the legal and code requirements for their facilities’ purposes and locations.
Our engineers are certified, with many years of experience in their fields, and ongoing relationships with government developers and planners, commercial developers, and local school districts throughout the Northeast. We will use these contacts to learn of new projects, develop competitive bids, and provide high-quality services to these market segments.
In addition, architectural and engineering firms often have need additional engineering consulting. Architects will always need skilled engineers to make their designs a reality, and large engineering firms sometimes have more work than they can handle.
In targeting work established architectural firms, our strategy is to offer them a viable resource from which to draw upon. We can undertake the entire mechanical, electrical, plumbing, and fire protection engineering process for their architectural projects.
The engineering, design and consulting business consists of many smaller consulting organizations and individual consultants for every one of the few dozen well-known architectural / engineering companies.
Consulting participants range from major international name-brand consultants to hundreds of individuals. One of Pyramid’s challenges will be establishing itself as a “real” engineering, design and consulting company, positioned as a relatively risk-free corporate purchase.
The key element in purchase decisions made at the Pyramid client level is trust in the professional reputation and reliability of the engineering firm.
Clients rarely compare consultants directly, looking for two, or more, possible providers for a proposed project or job. Usually, they follow word-of-mouth recommendations and past reputation, rather than selecting from a menu of possible providers.
The most important element of general competition, by far, is what it takes to keep clients for repeat business. It is worth making huge concessions in any single project to maintain a client relationship that brings the client back for the future projects.
Pyramid will utilize its existing contacts with architects, governmental agencies, commercial developers and local school districts to increase word-of-mouth about our business. We have a standard brochure on our expertise and specialties which will be sent to architectural firms recommended to us by our current contacts.
Our marketing to architects and developers focuses on our thorough engineering expertise across the full range of skills necessary for any project. Examples of previous work and recommendations from former employers are available for the asking. Our individual reputations as reliable, skilled, knowledgeable resources, combined with our range of expertise as a team, will appeal strongly to those looking for subcontractors.
Pyramid has focused on the western and central Pennsylvania area initially. We are licensed to practice in most states in the eastern United States, and will continue to expand into these areas.
Pyramid Engineering, P.C. has the following competitive edges:
For established engineering and architectural firms who require mechanical, electrical, plumbing, and fire protection engineering and consulting services, Pyramid offers a competitive and economical option. Projects may be delegated to Pyramid directly or arrangements can be made to supplement and assist their own in-house staff.
Most engineering work is billed on an hourly basis to predetermined levels dictated by project schedule milestones. We have assigned a rate of $75/hour for basic engineering/consulting services and $40/hour for drafting services. These are conservative values for the engineering market. We have used conservative unit rates to remain more competitive.
We will be using the internet and personal contacts in our sales promotion. These, together with a well targeted direct mail and e-mail campaign, will make all the major players in the marketplace aware of our presence.
We will focus our limited advertising budgets to promote community sponsored events. We will also offer technical services at discount rates to non-profit organizations.
Sales in our business is client service. It is repeat business. One doesn’t sell an engineering project, one develops a proposal that works for the client.
We must always be aware of the big-company consulting phenomenon of the split between selling the job and fulfilling the job, which leads to client dissatisfaction. The job should be developed, scoped, sold, and fulfilled by the same people. Our clients should never buy a job from one partner and have it delivered by anybody other than that same partner.
We need to avoid the temptation to drop fees to gain jobs. When a potential client questions the cost of a project, we explain the benefits. If the budget is for less money, then we must offer less service. Billing rates are not negotiated.
The following table and chart give a run-down on forecasted sales. In the last four months we have achieved sales of roughly $29,000 per month. We expect sales to remain at a relatively constant level for the next year.
Direct unit costs for the year consist solely of labor; these can be found in the Personnel Plan. Labor rates have been set at 70% of unit revenues, which yields a 30% gross margin. In the next year, we plan to increase gross margin to 35% as a result of providing a more efficient service to our clients.
Our unit rate for basic engineering/consulting service has been set at $75/hour. This is a conservative assumption based on published salary guideline levels for engineering professionals. Our unit rate for CAD services is $40/hour
Sales Forecast | |||
2004 | 2005 | 2006 | |
Sales | |||
Educational | $199,992 | $250,000 | $238,304 |
Health Care / Senior Facilities | $75,000 | $75,000 | $99,188 |
Commercial | $30,000 | $30,000 | $39,675 |
Government | $30,000 | $30,000 | $39,675 |
Program Management | $4,980 | $5,727 | $6,586 |
Contractor / design Build | $4,980 | $5,229 | $5,490 |
Consulting Income | $4,800 | $4,800 | $4,800 |
Total Sales | $349,752 | $400,756 | $433,718 |
Direct Cost of Sales | 2004 | 2005 | 2006 |
See Personnel Table | $0 | $0 | $0 |
Other | $0 | $0 | $0 |
Subtotal Direct Cost of Sales | $0 | $0 | $0 |
The accompanying table lists important milestones, with dates and managers in charge, and budgets for each. The milestone schedule indicates our emphasis on planning for implementation. Early milestones concern planning for the next three years, followed by further development of marketing and sales literature. We have also included ongoing meetings and reviews to confirm that our planned sales and expenses are matching our actual results.
Milestones | |||||
Milestone | Start Date | End Date | Budget | Manager | Department |
Business Plan | 10/15/2003 | 1/15/2004 | $0 | Lavoie | Administration |
Secure line of credit | 10/15/2003 | 1/15/2004 | $0 | Haugh | Administration |
Accounting Plan | 10/1/2003 | 2/1/2004 | $0 | Haugh/Lavoie | Administration |
Professional Licensing Plan | 1/1/2004 | 2/1/2004 | $0 | Solaeczyk | Engineering |
Press Release | 10/1/2003 | 2/1/2004 | $0 | Haugh | Marketing |
Networking Plan | 10/1/2003 | 2/1/2004 | $0 | All | Marketing |
Engineering proposal guides | 10/1/2003 | 3/1/2004 | $0 | Heasley | Marketing |
Client Presentations Plan | 10/1/2003 | 3/1/2004 | $0 | Solarczyk | Marketing |
Write / Update Mailer | 1/1/2004 | 3/15/2004 | $0 | Lavoie | Marketing |
Review / Revise Brochure | 10/1/2003 | 3/15/2004 | $0 | Lavoie | Marketing |
Client Contact Plan | 10/1/2003 | 3/15/2004 | $0 | Heasley | Marketing |
Advertising Campagn Plan | 10/1/2003 | 3/15/2004 | $0 | Heasley | Marketing |
Contract Guideline / Samples | 1/1/2004 | 3/15/2004 | $0 | Solarczyk | Department |
Initiate Direct Mailer Plan | 1/1/2004 | 3/31/2004 | $0 | Lavoie | Marketing |
Weekly Sales meetings | 1/1/2004 | 12/31/2004 | $0 | All | Marketing |
Internet up and running | 10/1/2003 | 12/31/2004 | $0 | Haugh | Marketing |
Regular check DGS & other sites | 1/1/2004 | 12/31/2004 | $0 | Solarczyk | Marketing |
Weekly check PitCon Listings | 1/1/2004 | 12/31/2004 | $0 | Haugh | Marketing |
Totals | $0 |
The website will be used as a marketing tool. It will offer a description of the services offered as well as listing of different clients served. Also included is a history of the firm, resumes of key members of the management team, and completed project descriptions and photographs.
The plan for marketing the site is fairly simple: we will submit it to search engines such as Google, and list the website on all the company’s correspondence and printed marketing/sales media.
Pyramid will develop and build the site. The initial website, www.pyramidmep.com, was up and running May 2003.
The company will be led by the four principals: John Lavoie, Tom Heasley, John Solarczyk and Eric Haugh.
John Lavoie has over 50 years of experience in electrical engineering, project management, and consulting management for both large consulting firms and industry.He has designed power distribution, lighting, communication, security and fire protection systems for both newly constructed and renovated industrial, commercial, and institutional buildings. He is equally familiar and experienced in primary power, distribution, variable speed drives systems, PLC, process control and instrumentation. His consulting firm management experience will provide the firm with direction and guidance needed in development of a new firm.
John Solarczyk has over 14 years experience in mechanical engineering and project management. His experience includes the design of chilled water, hot water steam and heat pump systems, performing energy efficient surveys, and utilizing measuring and testing equipment. He is also very familiar with the latest building control systems, in particular, direct digital control systems. John will be in charge of all HVAC and mechanical design.
Eric Haugh has over 11 years experience in mechanical engineering. His experience includes the design of sanitary, storm, domestic water, gas and medical gas systems. He is also NICET certified in sprinkler system layout, which includes the design of wet, dry, FM200 and standpipe fire protection systems. Eric will be in charge of all plumbing and fire protection designs.
All four principals have professional engineering licenses in multiple states.
The Personnel table summarizes payroll for the next three years. John Lavoie will work on a part-time basis, while the other three partners will work full-time. We have no plans to hire any other employees at this time.
Our labor costs represent the direct cost of sales, but payments are made monthly, regardless of hours billed to clients.
Personnel Plan | |||
2004 | 2005 | 2006 | |
John J. Solarczyk | $73,452 | $76,144 | $78,069 |
Thomas C. Heasley | $78,696 | $84,159 | $86,744 |
Eric C. Haugh | $73,452 | $76,144 | $78,069 |
John M. Lavoie | $22,728 | $22,843 | $24,722 |
Other | $0 | $0 | $0 |
Total People | 4 | 4 | 4 |
Total Payroll | $248,328 | $259,290 | $267,604 |
We want to finance growth mainly through cash flow and equity, but will need a second short-term loan, in the amount of $26,391, in the next year to cover our cash flow.
The most important factor in our case is collection days. We can’t push our clients hard on collection days, because they are larger companies and will normally have marketing authority, not financial authority. Therefore we need to develop a permanent systems of receivables financing, using one of the established accounting systems. In turn, we must intend to ensure that our investment is compatible with our growth plan, management style, and vision.
Compatibility in this regard means:
The financial plan which follows summarizes information regarding the following items:
The financial plan depends on important assumptions. From the beginning, we recognize that collection days are critical, but not a factor we can influence easily. Interest rates, tax rates, and personnel burden are based on conservative assumptions.
Some of the more important underlying assumptions are:
Others include 60-day average collection days, sales entirely on invoice basis, including a favorable deposit policy, expenses on a net 39-day basis, 30 days on the average for payment of invoices, and present-day interest rates.
General Assumptions | |||
2004 | 2005 | 2006 | |
Plan Month | 1 | 2 | 3 |
Current Interest Rate | 6.00% | 6.00% | 6.00% |
Long-term Interest Rate | 10.00% | 10.00% | 10.00% |
Tax Rate | 30.00% | 30.00% | 30.00% |
Other | 0 | 0 | 0 |
The gross margin for a service-based business is a reflection of the efficiency at which those services are offered. labor is our primary expense, and the only cost directly associated with sales. Given our sales rate over the last 6 months, we expect both to remain fairly constant. Gross margin, because we use no inventory, looks to be 100% for all year. After taking labor into account, a more realistic gross margin for Year 1 is 26%. We expect that our increased efficiency in Years 2 and 3 will produce a higher annual gross margin of 34% and 38%, respectively.
Net Profit /Sales will increase steadily through 2005.
Pro Forma Profit and Loss | |||
2004 | 2005 | 2006 | |
Sales | $349,752 | $400,756 | $433,718 |
Direct Cost of Sales | $0 | $0 | $0 |
Hidden Row | $0 | $0 | $0 |
Total Cost of Sales | $0 | $0 | $0 |
Gross Margin | $349,752 | $400,756 | $433,718 |
Gross Margin % | 100.00% | 100.00% | 100.00% |
Expenses | |||
Payroll | $248,328 | $259,290 | $267,604 |
Sales and Marketing and Other Expenses | $7,200 | $7,200 | $7,200 |
Depreciation | $612 | $612 | $612 |
Rent | $7,200 | $7,200 | $7,200 |
Utilities | $13,560 | $8,400 | $8,400 |
Insurance | $12,000 | $12,000 | $12,000 |
Payroll Taxes | $9,600 | $9,600 | $9,600 |
125 – Flexible Spending Account | $9,600 | $9,600 | $9,600 |
Automobile Expense | $5,400 | $3,600 | $3,600 |
Bank Service Charges | $600 | $600 | $600 |
Charity / Contributions | $600 | $600 | $600 |
Interest Expense | $1,800 | $360 | $360 |
Licenses and Permits | $1,800 | $720 | $720 |
Office Supplies | $6,000 | $6,000 | $6,000 |
Payroll taxes & Expenses | $9,600 | $9,600 | $9,600 |
Postage and Delivery | $840 | $850 | $860 |
Printing and Reproduction | $2,400 | $2,400 | $2,400 |
Professional Fees | $1,200 | $1,200 | $1,200 |
Professional Improvement (CEUs) | $600 | $600 | $600 |
Travel & Ent | $1,200 | $1,200 | $1,200 |
Other | $0 | $0 | $0 |
Total Operating Expenses | $340,140 | $341,632 | $349,956 |
Profit Before Interest and Taxes | $9,612 | $59,124 | $83,762 |
EBITDA | $10,224 | $59,736 | $84,374 |
Interest Expense | $2,243 | $2,137 | $1,338 |
Taxes Incurred | $2,211 | $17,096 | $24,727 |
Net Profit | $5,158 | $39,891 | $57,697 |
Net Profit/Sales | 1.47% | 9.95% | 13.30% |
The following chart and table summarize our break-even analysis. We are currently averaging sales above our break-even point. Any decrease in sales lasting longer than 3 months will generate decreases in payroll across the board to maintain net profits and capital.
Break-even Analysis | |
Monthly Revenue Break-even | $28,345 |
Assumptions: | |
Average Percent Variable Cost | 0% |
Estimated Monthly Fixed Cost | $28,345 |
Cash flow projections are critical to our success. The monthly cash flow is shown in the illustration, with one bar representing the cash flow per month, and the other the monthly balance. The first few months are critical. It may be necessary to inject additional capital in this time frame if the need arises. The annual cash flow figures are included here and more important detailed monthly numbers are included in the appendices.
Pro Forma Cash Flow | |||
2004 | 2005 | 2006 | |
Cash Received | |||
Cash from Operations | |||
Cash Sales | $0 | $0 | $0 |
Cash from Receivables | $359,562 | $392,397 | $428,316 |
Subtotal Cash from Operations | $359,562 | $392,397 | $428,316 |
Additional Cash Received | |||
Sales Tax, VAT, HST/GST Received | $0 | $0 | $0 |
New Current Borrowing | $26,000 | $0 | $0 |
New Other Liabilities (interest-free) | $0 | $0 | $0 |
New Long-term Liabilities | $0 | $0 | $0 |
Sales of Other Current Assets | $0 | $0 | $0 |
Sales of Long-term Assets | $0 | $0 | $0 |
New Investment Received | $0 | $0 | $0 |
Subtotal Cash Received | $385,562 | $392,397 | $428,316 |
Expenditures | 2004 | 2005 | 2006 |
Expenditures from Operations | |||
Cash Spending | $248,328 | $259,290 | $267,604 |
Bill Payments | $95,598 | $100,387 | $107,243 |
Subtotal Spent on Operations | $343,926 | $359,677 | $374,847 |
Additional Cash Spent | |||
Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
Principal Repayment of Current Borrowing | $13,326 | $13,325 | $13,325 |
Other Liabilities Principal Repayment | $0 | $0 | $0 |
Long-term Liabilities Principal Repayment | $0 | $0 | $0 |
Purchase Other Current Assets | $0 | $0 | $0 |
Purchase Long-term Assets | $0 | $0 | $0 |
Dividends | $0 | $0 | $0 |
Subtotal Cash Spent | $357,252 | $373,002 | $388,172 |
Net Cash Flow | $28,310 | $19,395 | $40,144 |
Cash Balance | $30,909 | $50,304 | $90,448 |
With the payment of our liabilities, relatively low payroll and operating expenses, and a conservative sales forecast, our Balance Sheet shows an increasing net worth in every month and year of our plan. As a consulting and design business, the majority of our “capital” is intangible – the skills, experience, and reputation of our team. However, the nature of our work also keeps our costs low, so careful debt management and billing will soon produce a good profit, and a valuable company.
Pro Forma Balance Sheet | |||
2004 | 2005 | 2006 | |
Assets | |||
Current Assets | |||
Cash | $30,909 | $50,304 | $90,448 |
Accounts Receivable | $57,320 | $65,679 | $71,082 |
Other Current Assets | $0 | $0 | $0 |
Total Current Assets | $88,229 | $115,983 | $161,529 |
Long-term Assets | |||
Long-term Assets | $9,628 | $9,628 | $9,628 |
Accumulated Depreciation | $5,957 | $6,569 | $7,181 |
Total Long-term Assets | $3,671 | $3,059 | $2,447 |
Total Assets | $91,900 | $119,042 | $163,976 |
Liabilities and Capital | 2004 | 2005 | 2006 |
Current Liabilities | |||
Accounts Payable | $7,722 | $8,298 | $8,861 |
Current Borrowing | $42,283 | $28,958 | $15,633 |
Other Current Liabilities | $0 | $0 | $0 |
Subtotal Current Liabilities | $50,005 | $37,256 | $24,494 |
Long-term Liabilities | $0 | $0 | $0 |
Total Liabilities | $50,005 | $37,256 | $24,494 |
Paid-in Capital | $0 | $0 | $0 |
Retained Earnings | $36,737 | $41,895 | $81,786 |
Earnings | $5,158 | $39,891 | $57,697 |
Total Capital | $41,895 | $81,786 | $139,483 |
Total Liabilities and Capital | $91,900 | $119,042 | $163,976 |
Net Worth | $41,895 | $81,786 | $139,483 |
Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 8712.01, Architectural Engineering, are shown for comparison.
Our business ratios look different from the industry standards in part because we are counting our only direct cost of sales, our engineering labor, as an operating expense. The company is structured so that employees receive a monthly salary regardless of hours billed, so our expenses are all, essentially, operating expenses.
Ratio Analysis | ||||
2004 | 2005 | 2006 | Industry Profile | |
Sales Growth | 54.82% | 14.58% | 8.22% | 6.40% |
Percent of Total Assets | ||||
Accounts Receivable | 62.37% | 55.17% | 43.35% | 33.49% |
Other Current Assets | 0.00% | 0.00% | 0.00% | 37.48% |
Total Current Assets | 96.01% | 97.43% | 98.51% | 75.03% |
Long-term Assets | 3.99% | 2.57% | 1.49% | 24.97% |
Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
Current Liabilities | 54.41% | 31.30% | 14.94% | 34.27% |
Long-term Liabilities | 0.00% | 0.00% | 0.00% | 13.64% |
Total Liabilities | 54.41% | 31.30% | 14.94% | 47.91% |
Net Worth | 45.59% | 68.70% | 85.06% | 52.09% |
Percent of Sales | ||||
Sales | 100.00% | 100.00% | 100.00% | 100.00% |
Gross Margin | 100.00% | 100.00% | 100.00% | 100.00% |
Selling, General & Administrative Expenses | 34.29% | 21.45% | 19.18% | 83.39% |
Advertising Expenses | 0.00% | 0.00% | 0.00% | 0.24% |
Profit Before Interest and Taxes | 2.75% | 14.75% | 19.31% | 2.49% |
Main Ratios | ||||
Current | 1.76 | 3.11 | 6.59 | 1.84 |
Quick | 1.76 | 3.11 | 6.59 | 1.49 |
Total Debt to Total Assets | 54.41% | 31.30% | 14.94% | 56.44% |
Pre-tax Return on Net Worth | 17.59% | 69.68% | 59.09% | 6.92% |
Pre-tax Return on Assets | 8.02% | 47.87% | 50.27% | 15.90% |
Additional Ratios | 2004 | 2005 | 2006 | |
Net Profit Margin | 1.47% | 9.95% | 13.30% | n.a |
Return on Equity | 12.31% | 48.77% | 41.36% | n.a |
Activity Ratios | ||||
Accounts Receivable Turnover | 6.10 | 6.10 | 6.10 | n.a |
Collection Days | 60 | 56 | 58 | n.a |
Accounts Payable Turnover | 12.39 | 12.17 | 12.17 | n.a |
Payment Days | 29 | 29 | 29 | n.a |
Total Asset Turnover | 3.81 | 3.37 | 2.65 | n.a |
Debt Ratios | ||||
Debt to Net Worth | 1.19 | 0.46 | 0.18 | n.a |
Current Liab. to Liab. | 1.00 | 1.00 | 1.00 | n.a |
Liquidity Ratios | ||||
Net Working Capital | $38,224 | $78,727 | $137,036 | n.a |
Interest Coverage | 4.28 | 27.66 | 62.61 | n.a |
Additional Ratios | ||||
Assets to Sales | 0.26 | 0.30 | 0.38 | n.a |
Current Debt/Total Assets | 54% | 31% | 15% | n.a |
Acid Test | 0.62 | 1.35 | 3.69 | n.a |
Sales/Net Worth | 8.35 | 4.90 | 3.11 | n.a |
Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |
Sales Forecast | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Sales | |||||||||||||
Educational | 0% | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 | $16,666 |
Health Care / Senior Facilities | 0% | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 | $6,250 |
Commercial | 0% | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 |
Government | 0% | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 | $2,500 |
Program Management | 0% | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 |
Contractor / design Build | 0% | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 | $415 |
Consulting Income | 0% | $400 | $400 | $400 | $400 | $400 | $400 | $400 | $400 | $400 | $400 | $400 | $400 |
Total Sales | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | |
Direct Cost of Sales | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
See Personnel Table | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Other | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Subtotal Direct Cost of Sales | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Personnel Plan | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
John J. Solarczyk | 0% | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 |
Thomas C. Heasley | 0% | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 | $6,558 |
Eric C. Haugh | 0% | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 | $6,121 |
John M. Lavoie | 0% | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 | $1,894 |
Other | 0% | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Total People | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
Total Payroll | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 |
General Assumptions | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Plan Month | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | |
Current Interest Rate | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | 6.00% | |
Long-term Interest Rate | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | |
Tax Rate | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% | |
Other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Pro Forma Profit and Loss | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Sales | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | |
Direct Cost of Sales | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Hidden Row | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Total Cost of Sales | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Gross Margin | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | |
Gross Margin % | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | |
Expenses | |||||||||||||
Payroll | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | |
Sales and Marketing and Other Expenses | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | |
Depreciation | 0% | $51 | $51 | $51 | $51 | $51 | $51 | $51 | $51 | $51 | $51 | $51 | $51 |
Rent | 0% | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 | $600 |
Utilities | 0% | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 | $1,130 |
Insurance | 0% | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
Payroll Taxes | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | |
125 – Flexible Spending Account | 0% | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 |
Automobile Expense | 0% | $450 | $450 | $450 | $450 | $450 | $450 | $450 | $450 | $450 | $450 | $450 | $450 |
Bank Service Charges | 0% | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 |
Charity / Contributions | 0% | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 |
Interest Expense | 0% | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 |
Licenses and Permits | 0% | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 | $150 |
Office Supplies | 0% | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 | $500 |
Payroll taxes & Expenses | 0% | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 | $800 |
Postage and Delivery | 0% | $70 | $70 | $70 | $70 | $70 | $70 | $70 | $70 | $70 | $70 | $70 | $70 |
Printing and Reproduction | 0% | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 |
Professional Fees | 0% | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 |
Professional Improvement (CEUs) | 0% | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 | $50 |
Travel & Ent | 0% | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 | $100 |
Other | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Total Operating Expenses | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | $28,345 | |
Profit Before Interest and Taxes | $801 | $801 | $801 | $801 | $801 | $801 | $801 | $801 | $801 | $801 | $801 | $801 | |
EBITDA | $852 | $852 | $852 | $852 | $852 | $852 | $852 | $852 | $852 | $852 | $852 | $852 | |
Interest Expense | $162 | $167 | $171 | $176 | $180 | $185 | $189 | $194 | $198 | $203 | $207 | $211 | |
Taxes Incurred | $192 | $190 | $189 | $188 | $186 | $185 | $184 | $182 | $181 | $180 | $178 | $177 | |
Net Profit | $447 | $444 | $441 | $438 | $435 | $431 | $428 | $425 | $422 | $419 | $416 | $413 | |
Net Profit/Sales | 1.53% | 1.52% | 1.51% | 1.50% | 1.49% | 1.48% | 1.47% | 1.46% | 1.45% | 1.44% | 1.43% | 1.42% |
Pro Forma Cash Flow | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Cash Received | |||||||||||||
Cash from Operations | |||||||||||||
Cash Sales | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Cash from Receivables | $33,565 | $34,537 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | |
Subtotal Cash from Operations | $33,565 | $34,537 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | $29,146 | |
Additional Cash Received | |||||||||||||
Sales Tax, VAT, HST/GST Received | 0.00% | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
New Current Borrowing | $4,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | $2,000 | |
New Other Liabilities (interest-free) | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
New Long-term Liabilities | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Sales of Other Current Assets | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Sales of Long-term Assets | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
New Investment Received | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Subtotal Cash Received | $37,565 | $36,537 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | $31,146 | |
Expenditures | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
Expenditures from Operations | |||||||||||||
Cash Spending | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | $20,694 | |
Bill Payments | $7,931 | $7,954 | $7,957 | $7,960 | $7,963 | $7,967 | $7,970 | $7,973 | $7,976 | $7,979 | $7,982 | $7,985 | |
Subtotal Spent on Operations | $28,625 | $28,648 | $28,651 | $28,654 | $28,657 | $28,661 | $28,664 | $28,667 | $28,670 | $28,673 | $28,676 | $28,679 | |
Additional Cash Spent | |||||||||||||
Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Principal Repayment of Current Borrowing | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | $1,111 | |
Other Liabilities Principal Repayment | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Long-term Liabilities Principal Repayment | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Purchase Other Current Assets | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Purchase Long-term Assets | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Dividends | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | |
Subtotal Cash Spent | $29,736 | $29,759 | $29,762 | $29,765 | $29,768 | $29,771 | $29,774 | $29,777 | $29,780 | $29,784 | $29,787 | $29,790 | |
Net Cash Flow | $7,829 | $6,778 | $1,384 | $1,381 | $1,378 | $1,375 | $1,372 | $1,369 | $1,366 | $1,362 | $1,359 | $1,356 | |
Cash Balance | $10,428 | $17,206 | $18,590 | $19,972 | $21,350 | $22,725 | $24,096 | $25,465 | $26,831 | $28,193 | $29,552 | $30,909 |
Pro Forma Balance Sheet | |||||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | ||
Assets | Starting Balances | ||||||||||||
Current Assets | |||||||||||||
Cash | $2,599 | $10,428 | $17,206 | $18,590 | $19,972 | $21,350 | $22,725 | $24,096 | $25,465 | $26,831 | $28,193 | $29,552 | $30,909 |
Accounts Receivable | $67,130 | $62,711 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 | $57,320 |
Other Current Assets | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Total Current Assets | $69,729 | $73,139 | $74,527 | $75,911 | $77,292 | $78,670 | $80,045 | $81,417 | $82,785 | $84,151 | $85,513 | $86,873 | $88,229 |
Long-term Assets | |||||||||||||
Long-term Assets | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 | $9,628 |
Accumulated Depreciation | $5,345 | $5,396 | $5,447 | $5,498 | $5,549 | $5,600 | $5,651 | $5,702 | $5,753 | $5,804 | $5,855 | $5,906 | $5,957 |
Total Long-term Assets | $4,283 | $4,232 | $4,181 | $4,130 | $4,079 | $4,028 | $3,977 | $3,926 | $3,875 | $3,824 | $3,773 | $3,722 | $3,671 |
Total Assets | $74,012 | $77,371 | $78,708 | $80,041 | $81,371 | $82,698 | $84,022 | $85,343 | $86,660 | $87,975 | $89,286 | $90,595 | $91,900 |
Liabilities and Capital | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
Current Liabilities | |||||||||||||
Accounts Payable | $7,666 | $7,689 | $7,692 | $7,695 | $7,698 | $7,701 | $7,704 | $7,707 | $7,710 | $7,713 | $7,716 | $7,719 | $7,722 |
Current Borrowing | $29,609 | $32,499 | $33,388 | $34,278 | $35,167 | $36,057 | $36,946 | $37,836 | $38,725 | $39,615 | $40,504 | $41,394 | $42,283 |
Other Current Liabilities | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Subtotal Current Liabilities | $37,275 | $40,187 | $41,080 | $41,972 | $42,865 | $43,757 | $44,650 | $45,542 | $46,435 | $47,327 | $48,220 | $49,113 | $50,005 |
Long-term Liabilities | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Total Liabilities | $37,275 | $40,187 | $41,080 | $41,972 | $42,865 | $43,757 | $44,650 | $45,542 | $46,435 | $47,327 | $48,220 | $49,113 | $50,005 |
Paid-in Capital | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
Retained Earnings | $55,858 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 | $36,737 |
Earnings | ($19,121) | $447 | $891 | $1,332 | $1,769 | $2,204 | $2,635 | $3,063 | $3,488 | $3,911 | $4,329 | $4,745 | $5,158 |
Total Capital | $36,737 | $37,184 | $37,628 | $38,069 | $38,506 | $38,941 | $39,372 | $39,800 | $40,225 | $40,648 | $41,066 | $41,482 | $41,895 |
Total Liabilities and Capital | $74,012 | $77,371 | $78,708 | $80,041 | $81,371 | $82,698 | $84,022 | $85,343 | $86,660 | $87,975 | $89,286 | $90,595 | $91,900 |
Net Worth | $36,737 | $37,184 | $37,628 | $38,069 | $38,506 | $38,941 | $39,372 | $39,800 | $40,225 | $40,648 | $41,066 | $41,482 | $41,895 |
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It’s time for a generative AI (gen AI) reset. The initial enthusiasm and flurry of activity in 2023 is giving way to second thoughts and recalibrations as companies realize that capturing gen AI’s enormous potential value is harder than expected .
With 2024 shaping up to be the year for gen AI to prove its value, companies should keep in mind the hard lessons learned with digital and AI transformations: competitive advantage comes from building organizational and technological capabilities to broadly innovate, deploy, and improve solutions at scale—in effect, rewiring the business for distributed digital and AI innovation.
QuantumBlack, McKinsey’s AI arm, helps companies transform using the power of technology, technical expertise, and industry experts. With thousands of practitioners at QuantumBlack (data engineers, data scientists, product managers, designers, and software engineers) and McKinsey (industry and domain experts), we are working to solve the world’s most important AI challenges. QuantumBlack Labs is our center of technology development and client innovation, which has been driving cutting-edge advancements and developments in AI through locations across the globe.
Companies looking to score early wins with gen AI should move quickly. But those hoping that gen AI offers a shortcut past the tough—and necessary—organizational surgery are likely to meet with disappointing results. Launching pilots is (relatively) easy; getting pilots to scale and create meaningful value is hard because they require a broad set of changes to the way work actually gets done.
Let’s briefly look at what this has meant for one Pacific region telecommunications company. The company hired a chief data and AI officer with a mandate to “enable the organization to create value with data and AI.” The chief data and AI officer worked with the business to develop the strategic vision and implement the road map for the use cases. After a scan of domains (that is, customer journeys or functions) and use case opportunities across the enterprise, leadership prioritized the home-servicing/maintenance domain to pilot and then scale as part of a larger sequencing of initiatives. They targeted, in particular, the development of a gen AI tool to help dispatchers and service operators better predict the types of calls and parts needed when servicing homes.
Leadership put in place cross-functional product teams with shared objectives and incentives to build the gen AI tool. As part of an effort to upskill the entire enterprise to better work with data and gen AI tools, they also set up a data and AI academy, which the dispatchers and service operators enrolled in as part of their training. To provide the technology and data underpinnings for gen AI, the chief data and AI officer also selected a large language model (LLM) and cloud provider that could meet the needs of the domain as well as serve other parts of the enterprise. The chief data and AI officer also oversaw the implementation of a data architecture so that the clean and reliable data (including service histories and inventory databases) needed to build the gen AI tool could be delivered quickly and responsibly.
Let’s deliver on the promise of technology from strategy to scale.
Our book Rewired: The McKinsey Guide to Outcompeting in the Age of Digital and AI (Wiley, June 2023) provides a detailed manual on the six capabilities needed to deliver the kind of broad change that harnesses digital and AI technology. In this article, we will explore how to extend each of those capabilities to implement a successful gen AI program at scale. While recognizing that these are still early days and that there is much more to learn, our experience has shown that breaking open the gen AI opportunity requires companies to rewire how they work in the following ways.
The broad excitement around gen AI and its relative ease of use has led to a burst of experimentation across organizations. Most of these initiatives, however, won’t generate a competitive advantage. One bank, for example, bought tens of thousands of GitHub Copilot licenses, but since it didn’t have a clear sense of how to work with the technology, progress was slow. Another unfocused effort we often see is when companies move to incorporate gen AI into their customer service capabilities. Customer service is a commodity capability, not part of the core business, for most companies. While gen AI might help with productivity in such cases, it won’t create a competitive advantage.
To create competitive advantage, companies should first understand the difference between being a “taker” (a user of available tools, often via APIs and subscription services), a “shaper” (an integrator of available models with proprietary data), and a “maker” (a builder of LLMs). For now, the maker approach is too expensive for most companies, so the sweet spot for businesses is implementing a taker model for productivity improvements while building shaper applications for competitive advantage.
Much of gen AI’s near-term value is closely tied to its ability to help people do their current jobs better. In this way, gen AI tools act as copilots that work side by side with an employee, creating an initial block of code that a developer can adapt, for example, or drafting a requisition order for a new part that a maintenance worker in the field can review and submit (see sidebar “Copilot examples across three generative AI archetypes”). This means companies should be focusing on where copilot technology can have the biggest impact on their priority programs.
Some industrial companies, for example, have identified maintenance as a critical domain for their business. Reviewing maintenance reports and spending time with workers on the front lines can help determine where a gen AI copilot could make a big difference, such as in identifying issues with equipment failures quickly and early on. A gen AI copilot can also help identify root causes of truck breakdowns and recommend resolutions much more quickly than usual, as well as act as an ongoing source for best practices or standard operating procedures.
The challenge with copilots is figuring out how to generate revenue from increased productivity. In the case of customer service centers, for example, companies can stop recruiting new agents and use attrition to potentially achieve real financial gains. Defining the plans for how to generate revenue from the increased productivity up front, therefore, is crucial to capturing the value.
Join our colleagues Jessica Lamb and Gayatri Shenai on April 8, as they discuss how companies can navigate the ever-changing world of gen AI.
By now, most companies have a decent understanding of the technical gen AI skills they need, such as model fine-tuning, vector database administration, prompt engineering, and context engineering. In many cases, these are skills that you can train your existing workforce to develop. Those with existing AI and machine learning (ML) capabilities have a strong head start. Data engineers, for example, can learn multimodal processing and vector database management, MLOps (ML operations) engineers can extend their skills to LLMOps (LLM operations), and data scientists can develop prompt engineering, bias detection, and fine-tuning skills.
The following are examples of new skills needed for the successful deployment of generative AI tools:
The learning process can take two to three months to get to a decent level of competence because of the complexities in learning what various LLMs can and can’t do and how best to use them. The coders need to gain experience building software, testing, and validating answers, for example. It took one financial-services company three months to train its best data scientists to a high level of competence. While courses and documentation are available—many LLM providers have boot camps for developers—we have found that the most effective way to build capabilities at scale is through apprenticeship, training people to then train others, and building communities of practitioners. Rotating experts through teams to train others, scheduling regular sessions for people to share learnings, and hosting biweekly documentation review sessions are practices that have proven successful in building communities of practitioners (see sidebar “A sample of new generative AI skills needed”).
It’s important to bear in mind that successful gen AI skills are about more than coding proficiency. Our experience in developing our own gen AI platform, Lilli , showed us that the best gen AI technical talent has design skills to uncover where to focus solutions, contextual understanding to ensure the most relevant and high-quality answers are generated, collaboration skills to work well with knowledge experts (to test and validate answers and develop an appropriate curation approach), strong forensic skills to figure out causes of breakdowns (is the issue the data, the interpretation of the user’s intent, the quality of metadata on embeddings, or something else?), and anticipation skills to conceive of and plan for possible outcomes and to put the right kind of tracking into their code. A pure coder who doesn’t intrinsically have these skills may not be as useful a team member.
While current upskilling is largely based on a “learn on the job” approach, we see a rapid market emerging for people who have learned these skills over the past year. That skill growth is moving quickly. GitHub reported that developers were working on gen AI projects “in big numbers,” and that 65,000 public gen AI projects were created on its platform in 2023—a jump of almost 250 percent over the previous year. If your company is just starting its gen AI journey, you could consider hiring two or three senior engineers who have built a gen AI shaper product for their companies. This could greatly accelerate your efforts.
To ensure that all parts of the business can scale gen AI capabilities, centralizing competencies is a natural first move. The critical focus for this central team will be to develop and put in place protocols and standards to support scale, ensuring that teams can access models while also minimizing risk and containing costs. The team’s work could include, for example, procuring models and prescribing ways to access them, developing standards for data readiness, setting up approved prompt libraries, and allocating resources.
While developing Lilli, our team had its mind on scale when it created an open plug-in architecture and setting standards for how APIs should function and be built. They developed standardized tooling and infrastructure where teams could securely experiment and access a GPT LLM , a gateway with preapproved APIs that teams could access, and a self-serve developer portal. Our goal is that this approach, over time, can help shift “Lilli as a product” (that a handful of teams use to build specific solutions) to “Lilli as a platform” (that teams across the enterprise can access to build other products).
For teams developing gen AI solutions, squad composition will be similar to AI teams but with data engineers and data scientists with gen AI experience and more contributors from risk management, compliance, and legal functions. The general idea of staffing squads with resources that are federated from the different expertise areas will not change, but the skill composition of a gen-AI-intensive squad will.
Building a gen AI model is often relatively straightforward, but making it fully operational at scale is a different matter entirely. We’ve seen engineers build a basic chatbot in a week, but releasing a stable, accurate, and compliant version that scales can take four months. That’s why, our experience shows, the actual model costs may be less than 10 to 15 percent of the total costs of the solution.
Building for scale doesn’t mean building a new technology architecture. But it does mean focusing on a few core decisions that simplify and speed up processes without breaking the bank. Three such decisions stand out:
The ability of a business to generate and scale value from gen AI models will depend on how well it takes advantage of its own data. As with technology, targeted upgrades to existing data architecture are needed to maximize the future strategic benefits of gen AI:
Because many people have concerns about gen AI, the bar on explaining how these tools work is much higher than for most solutions. People who use the tools want to know how they work, not just what they do. So it’s important to invest extra time and money to build trust by ensuring model accuracy and making it easy to check answers.
One insurance company, for example, created a gen AI tool to help manage claims. As part of the tool, it listed all the guardrails that had been put in place, and for each answer provided a link to the sentence or page of the relevant policy documents. The company also used an LLM to generate many variations of the same question to ensure answer consistency. These steps, among others, were critical to helping end users build trust in the tool.
Part of the training for maintenance teams using a gen AI tool should be to help them understand the limitations of models and how best to get the right answers. That includes teaching workers strategies to get to the best answer as fast as possible by starting with broad questions then narrowing them down. This provides the model with more context, and it also helps remove any bias of the people who might think they know the answer already. Having model interfaces that look and feel the same as existing tools also helps users feel less pressured to learn something new each time a new application is introduced.
Getting to scale means that businesses will need to stop building one-off solutions that are hard to use for other similar use cases. One global energy and materials company, for example, has established ease of reuse as a key requirement for all gen AI models, and has found in early iterations that 50 to 60 percent of its components can be reused. This means setting standards for developing gen AI assets (for example, prompts and context) that can be easily reused for other cases.
While many of the risk issues relating to gen AI are evolutions of discussions that were already brewing—for instance, data privacy, security, bias risk, job displacement, and intellectual property protection—gen AI has greatly expanded that risk landscape. Just 21 percent of companies reporting AI adoption say they have established policies governing employees’ use of gen AI technologies.
Similarly, a set of tests for AI/gen AI solutions should be established to demonstrate that data privacy, debiasing, and intellectual property protection are respected. Some organizations, in fact, are proposing to release models accompanied with documentation that details their performance characteristics. Documenting your decisions and rationales can be particularly helpful in conversations with regulators.
In some ways, this article is premature—so much is changing that we’ll likely have a profoundly different understanding of gen AI and its capabilities in a year’s time. But the core truths of finding value and driving change will still apply. How well companies have learned those lessons may largely determine how successful they’ll be in capturing that value.
The authors wish to thank Michael Chui, Juan Couto, Ben Ellencweig, Josh Gartner, Bryce Hall, Holger Harreis, Phil Hudelson, Suzana Iacob, Sid Kamath, Neerav Kingsland, Kitti Lakner, Robert Levin, Matej Macak, Lapo Mori, Alex Peluffo, Aldo Rosales, Erik Roth, Abdul Wahab Shaikh, and Stephen Xu for their contributions to this article.
This article was edited by Barr Seitz, an editorial director in the New York office.
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The ability of a business to generate and scale value from gen AI models will depend on how well it takes advantage of its own data. As with technology, targeted upgrades to existing data architecture are needed to maximize the future strategic benefits of gen AI: Be targeted in ramping up your data quality and data augmentation efforts.