Organizations that slash costs in response to a recession often have a hard time achieving top-line growth after it ends because their best employees are gone and their long-term projects have been cancelled. These drastic measures can, however, be avoided through the use of per-project profitability metrics. Here is a five-step process that will help you survive a recession the smart way.
Step 1 — Recognize that the Current State Is Chaos
Knowing how long a previous project took is necessary in order to determine the accuracy of the initial estimate, and information on your per-project costs is needed for validating future project estimates. Not only that, but even if a project was delivered on time, it may not have been delivered on cost — some businesses add resources to projects to ensure on-time delivery. If this is going on in your organization, you need to know, or you will likely fall prey to overcommitment and underpricing.
You also need to have all of this data if you want to repeat past successes. If you don’t know which projects came in on-time and on-budget, you don’t know which projects were successful, meaning you cannot accurately discern which of your processes are beneficial and which are counterproductive.
Overcommitment, underpricing, and an inability to repeat past successes leads to chaos, which is never a desirable state, least of all during a recession.
Step 2 — Track Project Labor Hours
Tracking employee time on a per-project basis lets you know early on if a project is in trouble, but that’s not all you will learn. For example, you might discover that certain projects are consuming more labor hours than you previously thought, or that your most demanding customers are the ones who pump the most money into your company (as is often the case). Having your employees track their time by project can help you discover the profitability of each customer, which, in turn, helps improve decision making.
In the face of an economic recession, smart companies will rid themselves of unprofitable customers and do their best to keep the profitable ones happy.
Step 3 — Include Labor Rates and Track Expenses
Did you know that travel expenses are often the second largest controllable corporate expense for most companies? Since certain projects, products, and customers use more travel expenses than others, this is a good area to examine in detail through per-project tracking.
Step 4 — Allocate Indirect Costs
Indirects costs such as rent, lighting, and marketing apply to different projects in different ways. There are two basic types: general indirect costs and semi-indirect costs. Rent, for example, would be a general indirect cost that must be allocated across every project. Customer relationship management, on the other hand, is a semi-indirect cost that should only be applied to projects pertaining to that specific customer.
Allocation of indirect costs varies by company. At Journyx, we allocate more marketing cost to software license sales than we do to professional services or software maintenance sales. We do this because, in our experience, marketing matters most during the customer acquisition phase and less in managing customer relationships.
It is also important to create a general indirect cost allocation formula for each type of indirect cost in your company.
Semi-indirect costs work this way: If you have, for example, a suite of related products that are grouped together, there are probably some costs (e.g., marketing of the suite) that only apply to those projects as a group. You might want to allocate these semi-indirect costs by direct cost or revenue over those projects.
Input from the managers involved is both valuable and essential. If you discover that your allocation formulas are perceived as inaccurate, unfair, or ineffectual, you will want to adjust them.
Step 5 — Achieve Per-Project Profitability
Letting your employees know which customers are making money for you and which aren’t is a surefire way to get them to alter their behavior accordingly, making your company much more profitable.
Sometimes a proxy might be necessary for understanding per-project revenue. For example, one of our customers, a major airline, uses Journyx Timesheet in their HR department. In this situation, one could track projects such as “Negotiate with pilot unions” or “Figure out new healthcare plan.” The project managers would then need to provide an estimate, in dollars, of the value such projects provide to the company overall. While this can be complex, it is well worth the effort.
If you manage a consultancy, bookings or billings data from your CRM system will work.
Once you know your level of per-project profitability, you will have a broad understanding of per-project, per-customer, per-product profitability, which gives you an advantage over your competitors. They may not know where their profits are coming from, but you do, so you can eliminate unprofitable work or at least perform it consciously.
Time and expense data will provide your company with knowledge that can help you survive the bad times and reach new levels of flexibility in good ones. When a recession comes and cuts are necessary, you will be able to cut intelligently, knowing that you're making the right decision.
About the Author:
Curt Finch is the CEO of Journyx (http://pr.journyx.com), a provider of web-based software located in Austin, Texas, that tracks time and project accounting solutions to guide customers to per-person, per-project profitability. Journyx has thousands of customers worldwide and is the first and only company to establish Per Person/Per Project Profitability (P5), a proprietary process that enables customers to gather and analyze information to discover profit opportunities. In 1997, Curt created the world’s first Internet-based timesheet application — the foundation for the current Journyx product offering. Curt is an avid speaker and author, and recently published All Your Money Won’t Another Minute Buy: Valuing Time as a Business Resource.