April 2008 Edition

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Feature Article:

How the Right Software Can Help You Survive a Recession



By Curt Finch, CEO, Journyx

Recession: it’s an ugly word that no one wants to hear.  Unfortunately, here in the U.S. we have been throwing the word around quite often recently.  The Dow Jones Industrial Average, which was at about 14,000 in October of last year, currently hovers at around 12,400, a drop of 11% in just four months that has many people worried.

When an economic recession occurs, savvy executives generally search for ways to cut costs before the demand for their products and services drops.  Though this is usually a sticky business, what if you could know exactly where your company is profitable and where it's not?  Wouldn’t that help you to figure out a way to do more of the profitable work?  In other words, what if you got rid of unprofitable customers instead of employees who have made the company what it is today?

Many businesses that slash costs in response to an economic recession find it difficult to achieve top-line growth afterwards because their best workers are gone and their long term projects were all cancelled.  Unnecessary cutting of employees and projects can, however, be avoided, or at the very least, they can be performed with more intelligent precision.  All you need to handle such problems in an effective way are per-customer per-project profitability metrics.

The first step towards understanding profitability is understanding your costs.  Most companies know their profitability in a general sense, but very few know it on a per-product or per-customer basis.  This is necessary in order to develop and implement the right growth strategy, so here is a five step process that will get you there.

Acknowledge “Chaos”

Without knowing your costs on a per-project basis, how can you validate future project estimates?  Without knowing how long your last project took to complete, how can you determine how accurate the initial estimate was?  You should also realize that even if a project was delivered on time, it may not have been delivered on cost.  Some businesses provide on-time delivery by inconspicuously adding resources to projects that are behind schedule.  You need to know if such things are going on in order to avoid overcommitment and underpricing.

This information is also necessary in order to repeat past successes.  If you don’t know which projects came in on-time and on-budget, you cannot know which projects were successful, and therefore, which processes to continue and which to discard or fix.

Overcommitment, underpricing, an inability to repeat past successes and abandoning proven processes in times of crisis leads to chaos, which is not the state you want your company to be in, especially during a recession.

Track labor hours by project

The simple act of tracking employee time on a per-project basis lets you know when projects are in trouble much earlier, when you can actually do something about it.  At the outset, 100% employee compliance with the system is not even necessary to gain significant insight into project progress, profitability, and accuracy of estimates.

The data you obtain from a time tracking software system will surprise you.  You might discover that certain projects are consuming more labor hours than you thought, or that a customer you considered expensive is actually cheap to service.

Many people don’t realize that the noisiest customers are often the ones who infuse the most money into your company.  In other words, your "problem customers" may account for much of your revenue and you don’t even know it.  Using a software solution to track employee project time can give you insight into the profitability of each customer, so you will no longer be in the dark.

When a recession looms, it is a good idea to relinquish unprofitable customers and make the profitable ones happy.

Add labor rates to time data and track all expenses

Travel expenses are the second largest controllable corporate expense for most companies, and some projects, products or customers use up more travel expense than others.  Collecting all this data on a per-project basis can help you understand true direct per-project cost, leading you to increased profitability.

Working towards nearly 100% employee compliance in time and expense data collection will now give management better insight into how to cut costs without a chainsaw.

Allocate indirect costs

Office lighting, marketing and HR, for example, represent indirect costs, and as such, they apply to different projects in different ways.  There are two basic types: general indirect costs and semi-indirect costs.  General indirect costs (e.g. rent) must be allocated across every project, while semi-indirect costs (e.g. customer relationship management) should be applied only to projects for the specific customer involved.

As every company is different, so allocation of indirect cost will differ by company.  Here 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 marketing expenses are directly related to obtaining new customers, more than they are to maintaining customer relationships over time.  In our experience, marketing matters most during the customer acquisition phase, which is when we sell most of our licenses.

You should also focus on creating a general indirect cost allocation formula for each type of indirect cost in your company.

Semi-indirect costs are handled a bit differently.  If you have a suite of related products that are treated as a group or a large customer you complete multiple projects for, there are probably some costs – such as marketing of the product suite or management of the customer relationship – that apply to those groups of projects, but not any particular one of them on its own.  Consequently, you may want to allocate these semi-indirect costs by revenue or by direct cost over those projects.

Also note that input from all of the managers involved is not only valuable, but essential.  You might need to alter your allocation formulas if you find that they are generally perceived as inaccurate, unfair, or ineffectual.

Once you have allocated indirect and semi-indirect costs across all projects, you will be fully aware of what your complete per-project costs are.  Whether or not you are facing a recession, you will have a very precise tool for making intelligent changes to company resource utilization and direction that are likely to lead to increased profits.

Share Per-Project Profitability Findings

If your engineers, developers, services team and salespeople knew which of your customers were making money for you and which were not, don’t you think they would alter their behavior in more profitable ways?

      Revenue - Cost = Profit

Seem simple?  Sometimes you might find it necessary to use a proxy for understanding per-project revenue.  For example, if you manage an internal IT shop for a large Fortune 500 firm, ask your customers for an estimate of the value their projects provide to the company, in dollars.  Allocating business value delivery can be complex, but it is well worth the effort.

If you manage a consultancy, you can use bookings or billings data right out of the CRM system.

Once you have an estimate of per-project profitability, you will understand per-project per-customer per-product profitability, which gives you an enormous advantage over your competitors.  After all, you know where your profits are coming from, and they don't.  This allows you to eliminate the unprofitable work (or perform it consciously if it has to be done for strategic reasons).  You can also easily calculate ROI on anything.

The right time tracking software solution will provide your company with knowledge of your per-project profitability, which in turn helps your company survive the bad times and reach new levels of flexibility in good ones.  When a recession comes and you need to cut, you will be able to cut intelligently, knowing that you're making the right long term decision. 



About 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".


Contact info:
Curt Finch
Journyx
Website: http://pr.journyx.com

 


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