Implementing Profitability
One you have defined your approach to measuring and managing Profitability, it is now time to put the building blocks into action. The following article will provide a step by step guide as you map your business to an easily managed and scaleable solution.
Service Costs - This is typically the most complex component as it involves a wide number of inputs and some level of coordination (and ongoing measurement) to ensure the correct values are set.
The recommended general approach is as follows:
Define Titles (not Roles) - Define set Titles, typically based on seniority (for consulting business) or potentially skill areas (for combined service/software). The general thinking here is that the more senior Title, the more costly the resource is; and these costs should be reflected in the project. All client-facing team members should be associated with a Title. In general, it’s difficult to manage an organization where resources perform different “Titles’ on a project, but you CAN have different “Roles” (as long as costs are consistent). Typical examples are:
Consulting - Senior Manager, Manager, Senior Consultant, Consultant, Associate
Strategy - Managing Director, Principal, Strategist/Consultant, Associate
Software: Senior Developer, Developer, Manager, Consultant, Associate
Determine # of Resources per Title - Estimate, for the calendar year, the approximately Number of resources per Title (this will be used later for allocation)
Establish a “Draft” Annual Cost per Resource - Establish the base annual costs for each resource on the team, focused primarily on compensation (bonus, salary). This is typically straightforward for team members with Annual Salaries with part-time work compensation or retainers. For those resources with hourly compensation, hold/retain this number for a future step.
Identify Additional Costs that vary by Title - Identify any costs that will vary per title. The most common example of this is Travel (as Senior Titles may travel more frequently than junior). This could also include Software or Membership costs for orgs, etc. Where possible, estimate annual costs for these Title-specific Costs. NOTE: If all travel is typically reimbursed by Customers, then this cost does not need to be “covered” in cost/bill rates.
Identify Costs that are “consistent” across Titles - Identify costs (benefits, facilities, hardware/network) that are typically consistent across all resources and develop a “per resource” cost.
Identify Management Overhead that Needs to Allocated to Resources - Identify the costs of Executives Management, Operations, Sales, HR, etc that should be applied to to costs to ensure all costs are “covered” by hourly Bill Rate. There are two models that can be considered for allocation:
Consistent Across All Titles (i.e. each resource must cover the same portion of the costs)
Allocated based on Base Compensation (i.e. Senior Titles carry more of the burden)
Note: For part time/retainer resources, approximations can be made on their compensation to “upscale” them to a full time employee.
Note: For hourly resources (assuming no benefits are paid by company), exclude them from the above calculations until the next step
Establish a Target Billable Utilization for Each Title - As a next step, determine the target Billable Utilization for each Title. In some cases, Time Tracking technologies may already be in place, which would inform this number. For other companies, an initial estimate may be the best estimate (assuming that tracking will be put in place (see below). In general, less experience Titles are expected to bill more hours.
This step involves balancing the culture of the company, expectations around level of non-billable work and projected revenue goals, so there is some internal discussion that’s required for this calculation
Infrastructure Components - The following infrastructure components will need to be established to measure and report on P&L.
Time Tracking - Ideally, ALL worked hours (even if non-client facing hours) would be tracked in a centralized system. In addition to informing Invoicing systems, the system must be able to produce a monthly (and quarterly) export that can be easily imported into a simple reporting system (i.e. Excel, Google Sheets),
For an SaaS Product business, the following components should be tracked:
Resource Name (with assumption that Resource Name can be matched to a Title offline)
Date/TimeStamp of Work Delivered
Duration of Work Delivered
Customer
Project
Product (or Product Line) Supported (for Product P&L)
Revenue Tracking - Additionally, it is critical to be able to track revenue on a monthly basis related to the work delivered by the service team. Most revenue tracking systems (QuickBooks, etc.) can support this work (assuming they are being actively managed by a Finance resource). In many cases, revenue will be a simple function of Hours billed multiplied by Bill Rate of resource, but in more complicated Contracts, there may be aspects of Milestone Deliver, Customer Acceptance, etc. that could skew these numbers which introduces some non-linear recognition.
Revenue should be reportable based on the following criteria
Delivered and Recognizable - All services have been delivered satisfactorily and approved (if required by the client). Invoicing in advance for non-fulfilled services typically does not merit “revenue” in this model.
Revenue Type - Typically, the type of revenue (T&M, Milestone, etc. is not critical to this model). In some cases, it may be useful to track reimbursed costs (such as travel) . . . but provided both the costs and revenue are associated with the project, this should not materially impact the P&L model.
3rd Party Services/Fees - Similar to travel, while these costs may appear as both revenue/profit, in situations where there is built in margin associated with these services/deliverables, these should be included in the project.
