Categories: Strategy and Leadership
When times are tough, every company looks to cut costs where they can. Yet how can this be accomplished without eliminating key projects and people? It is actually quite simple if you have the right data in hand. With the appropriate per-customer per-project profitability metrics, companies can easily shave off unprofitable work and learn how to focus their time, efforts and budget on the profitable work alone.
Cutting with Precision
Do all of the top managers at your company know which of your past projects were successful and which were failures? Do they know how many employees worked on these projects or how much time was invested in them? How about which of your clients were a drain and which ones were profitable? Without this information, you certainly cannot cut costs without risking the loss of projects and people that bring in the most revenue.
Implementing profitability metrics might sound complicated, but it is often easier than you might think. Here is a simple plan for attaining Per-Person, Per-Project Profitability (P5).
- Get employees to track their time by project and task
True, people don't like filling out timesheets, but the data that time tracking provides is far too important to ignore. It will help you learn, for example, which projects are consuming too much time as well as which clients are cheapest to service. Some managers might not realize that the noisiest customers are often the ones who pay the most. Though they are often labeled as "problem customers," they may account for much of the company's revenue. A simple basic level of employee project time utilization data can give you insight into the profitability of each customer, so you don't have to wonder anymore. When times are tough, you will be able to let your unprofitable customers go and work hard to keep the profitable ones happy.
- Add labor rates to your time data
One employee's time is more expensive than that of another employee, and those costs can add up on major projects, so adding labor rates to the time data is crucial. You must also track all expenses so that you can understand which projects and customers use up the most resources. Collecting this data on a per-project basis can help you understand true direct per-project cost, giving management better insight into how to cut costs when necessary.
- Allocate indirect costs
There are two types of indirect costs: general indirect costs, such as rent, that need to be allocated across every project, and semi-indirect costs, such as customer relationship management, which should be applied to all projects for the customer in question. In order to allocate general indirect costs, you will need to create a formula for each type (legal fees, electricity, marketing, etc.). For semi-indirect costs, there is a different process. If you have a large customer you do multiple projects for, there are usually some costs that apply to those projects as a group, but not against any particular one of them. Your best bet is to allocate these costs by revenue or direct cost over those projects.
- Integrate with other business systems
Do you use a CRM or accounting system? The right time project time tracking system will allow you to integrate with such tools, feeding crucial time data into payroll, billing and other important business functions for increased accuracy.
Per-Customer Per-Project Profitability
Cutting costs with precision is all about focus. If your company knows precisely what it is accomplishing and for which markets and customers, then everything that is not part of that mission can be cut if necessary. On the other hand, projects that have a tight charter are critical. Evaluate your current state of affairs: How many people are in overhead roles, not associated with satisfying particular markets or customers? How many projects are not really congruent with the core mission of your company?
Anyone can tell the manager of a large department to cut 10 percent right away, yet that manager can only do it intelligently if he or she is enabled with the right data. The solution might be as simple as canceling one large project, or it may take more finesse than that. Regardless of which course to take, time data is a necessary component to making the right decision.
Once you understand your company's profitability level on a per-customer and per-project basis, you will have an impressive advantage over your competitors. They don't know where their profits are coming from, but you do, so when you have to make cuts, you can be sure you are only cutting unprofitable work. In both good economic times and bad, knowing where you are profitable and where you are not is the only way to thrive in a competitive business environment.
About Curt Finch
Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employee time and expenses, and provides confidence that all resources are utilized correctly and completely. Curt earned a Bachelor of Science degree in Computer Science from Virginia Tech. As a software programmer fixing bugs for IBM in the early ‘90’s, Curt found that tracking the time it took to fix each bug revealed the per-bug profitability. Curt knew that this concept of using time-tracking data to determine project profitability was a winning idea and something that companies were not doing – yet… Curt created the world's first web-based timesheet application and the foundation for the current Journyx product offerings in 1997. Learn more about Curt at http://journyx.com/company/curtfinch.
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Tips & Tricks from Software CEO Curt Finch