Employee Wise Profitability: One key metric you might be missing

"You can't manage what you can't measure" is a well-known principle attributed to Drucker. (Some sources attribute it to Deming, another famous management guru.)

That's why companies measure and track profitability at various levels. All companies measure enterprise profitability. Many companies also measure BU-wise (Business Unit) profitability to let BUs have operational flexibility while holding them accountable for their performance. Some companies track customer-wise profitability. Project companies track project-wise profitability.

But do you measure each employee's profitability??

If you deploy hundreds or thousands of knowledge workers to deliver projects, calculating person-wise profitability needs person-wise revenue and cost data. Doing this manually every month, quarter, or year is tedious and time-consuming.

The complexity of your calculations goes up manifold if people work on multiple projects with different profitability levels. For example, if a person works on three projects with profitability of 35%, 20%, and 0%, you may end up with an average profitability of 23%, but the averaged data hides more than it reveals.?

Even if you calculate person-wise profitability, it is not actionable. It is just a report.?

Let's return to the abovementioned principle: You can't manage what you can't measure.?

You miss several things if you don't know per-person profitability.?

When the profitability of an ongoing project drops in one month, you can't easily and quickly find why. For example, you might have allocated employees with higher-than-necessary skills.?

Usually, the availability and matching skill sets of employees drive your resource allocation. It isn't easy to detect if your resource allocation is suboptimal because you aren't measuring person-wise productivity.

There are two scenarios in which skill levels and billing rates don't match. In the first scenario, you allocate people with lower skills to projects that require higher skill levels and have high billing rates. Their performance may be below par and will lead to customer dissatisfaction.?

The second scenario can be that you allocate a high-skilled resource to a low-billing rate project. The person may feel underutilized. When talented people are underutilized, they are more likely to look for better opportunities. Recurring underutilization of people causes employee attrition.

Person-wise profitability is the key financial metric you are missing. Here is a solution.?

You have software like CRM to manage your leads and prospects. You have project management, HRMs, and ERP software, and your managers use spreadsheets to manage other parts of your operations. You need a good PSA software that automatically presents you with person-wise profitability as one of its standard features.?

A capable PSA software integrates all your existing software and shows you person-wise revenue, cost, and profitability across multiple projects in real time. PSA eliminates the need to use spreadsheets to combine data from the above software.

Let me go in more detail. Let's consider person-wise productivity in T&M and Fixed-price projects.

PSA uses a person's billing rate and hours worked to calculate revenue, cost, and profitability. I have explained in previous editions of PSA Insights that even the T&M project metrics are not that simple. E.g., one must consider contractual policies concerning leave and holidays. PSA software takes into account all such conditions automatically.

Read more: The Pitfalls Of T&M Project Billing

For Fixed-price projects, your PSA software gives you an ability to use an algorithm to allocate revenue to individuals in proportion to their costs. PSA software should let you change the algorithm at the time of project set up.?

A capable PSA software provides insights into the person-wise profitability metric and makes it actionable.

Insights Into Resource allocation

PSA can short-list resources based on a combination of factors like skills, profitability, and availability. A truly enterprise-class PSA provides an 'ideal matching profile' - you can set up priorities and thresholds to decide the ranking. E.g. you can set up PSA to first allocate resources with highest profitability while ensuring that they have the right skills. Your managers can allocate resources rationally using validated real-time data and your criteria.?

Actionable Insights For management reviews

PSA software shows trends in person-wise profitability and isolates areas that need intervention. For example, a person's profitability has fallen from 15% to 10%. You can drill down to find if the cause is misallocation or an annual cost increase. In the latter case, you may want to consider increasing bill rates.

Another example: Using a capable PSA software, you can group employees according to their profitability bands, such as 0% and less, 0-25%, 25-40%, and >40%. You can then drill down into the areas of concern, like those in lower profitability bands, to find the causes and actions needed. Depending on what you find, you can decide on actions in the areas of resource allocation, skill development, or pricing strategies.

Kytes has all the above capabilities that arms you with automatic, real time person-wise profitability. Kytes helps you allocate resources optimally and formulate training and pricing strategies.

To know more and to arrange a Kytes demo, contact us at [email protected]