How to Achieve Per-Project Profitability
In a past article that I wrote for Executive Street, I spoke about how you can improve project estimates by using time tracking data with a very simple technique. In addition to improving estimation capability, time tracking data can make your company more nimble – and more profitable. How does it do this?
If you have real-time, accurate, per-project cost data available to your entire management team at all times, it provides a built-in alert system that tells you if your project is broken. What do I mean by broken?
Here’s an example: if you determined – using the equation I provided in the last article – that a particular project will take 1,000 person-hours to complete, and your staff has spent 500 of those hours so far, how far along should the project be? The project should be 50 percent done, right? But what if the time tracking data shows that you’re actually only 17 percent done? You have a problem.
The good news is that you’ve detected the problem much earlier than you otherwise would have, and you can take corrective action. You’ve discovered a hidden problem earlier than your competitors who are not tracking time could have.
But, are out-of-control projects really common problems in companies?
“Survey Says….” You Have Out of Control Projects
Many of you have probably heard the Standish Group statistic that 70 percent of IT projects are out of control, over budget or broken. Unfortunately, that number doesn’t sound unrealistic to me, even though it is a dismally bad number. Sometimes, when you find out a project is broken, you can do something about it – you can adjust the project course, put different resources on it or change the scope. When projects are able to be rescued, it’s usually because the company has accurate cost data which allows them to uncover the problem early.
What’s that worth? A lot. Accurate cost and time tracking data will keep your projects on track and increase your per-project profitability. Time tracking is a mirror that a company holds up to itself. It’s time your company looked in that mirror and understood its costs.
Following are the steps that you can take to achieve maximum per-project profitability:
1. Evaluate Your Current Situation
If you don’t know how long it took to complete previous projects, you can’t gauge the accuracy of your estimates. (Note: I am not exclusively referring to hours, because a project that was delivered on time may not have been delivered on budget, which is another problem.)
Without per-project cost data, repeating past successes is impossible. Understanding which projects were on-time and on-budget allows the success to be replicated. Additionally, recognition of project crisis can be a matter of feelings rather than science. True project data decreases the likelihood that good processes will be abandoned in times of crisis.
2. Track Project Hours and Expenses
Having employees track their time on a per-project basis will alert you to projects in trouble much earlier, providing the opportunity to intervene before it is too late. This data will likely surprise you in many ways. You will see which projects consume more labor hours than you thought, and which customers are cheap or expensive to service.
3. Add Labor Rates
Travel expenses make up the second largest controllable corporate expense for most companies, and some projects, products and customers use up more travel expense than others. Collecting this data on a per-project basis gives you the ability to know true direct per-project cost. This gives management better insight into how to cut costs intelligently.
4. Allocate Indirect Costs
There are two types of indirect costs: general indirect costs that need to be allocated across every project in the company, such as rent, and semi-indirect costs that should be applied to all projects for the customer in question, such as customer relationship management. For general indirect costs, create an allocation formula for each type: marketing, legal fees, office electricity, etc.
For semi-indirect costs, there is a different process: if you have a large customer that you do multiple projects for or a suite of related products that are treated as a group, there are usually some costs that apply to those projects as a group, but not against any particular one of those projects. In this case, you might allocate these semi-indirect costs by revenue or by direct cost over those projects.
Regardless of your process, input from all of the managers involved is necessary. They need to be perceived and understood as accurate and fair.
5. Per-Project Profitability
Imagine if your developers, support staff, marketing team and salespeople all knew which customers were making money for you and which were not. Don’t you think this would alter their behavior in ways that will make you more money? This gives you an enormous advantage over your competitors. You know where your profits come from and they don’t. You can eliminate the unprofitable work and calculate ROI on anything with ease. Your estimates will keep getting better and better.
Per-project profitability knowledge makes your company more solid in bad times and more flexible in good ones. Having good procedures in place to understand per-project profitability is the key to weathering any financial storm.