Keeping an Eye on Projects

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Whether you’re a lawyer, an IT consultant, an engineer, or working in PR, architecture, or for an advertising agency, or indeed any other kind of professional service organisation, it is your time that is probably the chief determinant of project cost, and the fees that your firm will charge to your customers. Sometimes it’s a matter of adding up all the time you’ve reported in your timesheet and multiplying it by a fee rate; sometimes your firm will have estimated how much time is needed for a project and calculated a fixed price for a well-scoped piece of work. In both cases, it’s never quite as simple as you would wish it to be. Sometimes there’s time you can’t charge, and very often a fixed-price project takes more time (and very occasionally less time) than planned.

If you’re working for a professional services company and you’re in a position of responsibility you’ll be familiar with these month-end questions:

‘How much of your Work in Progress (the time you haven’t yet billed) will you be able to bill? How much is it really worth?’

‘How is your fixed price project going? Do you expect it to take more time or less time than planned? ‘

You’re asked these questions especially sternly by your firm’s Finance Director, since he or she is responsible for calculating revenue for the month that’s closing, and revenue depends on the value of the project time that you’ve reported for the month. This is not just a matter of multiplying time by fee rate.

At year-end it’s even more important, since it’s your annual P&L that statutory and corporate auditors will analyse, and if you’re not too careful your managers will defer serious consideration of the value of Work in Progress and the progress of Fixed Price Projects until then. That can mean unpleasant surprises in the last month of the year.

At LLP Group we use systems@work’s time@work to keep an eye on what’s going on. Adjustments to Work in Progress value and the value of time in Fixed Price Projects are tracked as discounts or uplifts to the values that are calculated from timesheets. We can track how these values are discounted or uplifted when billed or written off, and we can track when this is done.

It’s never pleasant to discount work, but it’s some consolation when it’s done steadily throughout the year, rather than all in the last month. Take this report, for example:

project virtue

This, from one division of the company, shows the month in which work was executed down the left y-axis and the month in which the  value of time was increased or decreased along the top x-axis. What we see is that the value of time is written up or written down in the month in which it is recorded, or a month or two later. This is virtuous. This division doesn’t execute many fixed price projects and doesn’t hold Work in Progress for long.

lessvirtuousThe matrix, above, shows data for another division, one which executes more fixed price projects. It’s clear that decisions about the write down or write up of time are made sometimes many months after time is recorded, and as year-end approaches large values are written off. This is less virtuous.

If you’re running a professional services organisation this is the kind of tool you need if you want to avert unwelcome surprises.

When it comes to Fixed Price Projects you might also track the estimates that your project managers give you and track time recorded on the project (green), planned time (blue), and evolving estimated time (orange).

In this case, below, the project manager has seriously underestimated the number of days’ consulting that the project requires. As the project progresses he or she estimates more and more work. The result is that the achieved project rate is nearly 40% lower than the planned rate of 500. It’s probably loss making.

FPP

In the more complex case, below, the project has been ‘sold’ on the basis of ‘planned’ time, and as the project progresses the client adds additional scope and additional planned time (though not at the same fee rate). Time estimated by the project manager for the whole project gradually exceeds planned time. The Rates graph shows how the planned daily rate for the project is reduced as the scope of the project increases, and the actual achieved daily rate also declines.

FPP changing project

Whatever kind of service you’re selling, it’s essential that you keep track of the value of Work in Progress and the progress of Fixed Price Projects every month of the year.

Taking the Temperature of Risk

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Just as in The Hitchhiker’s Guide to the Galaxy a single number, 42, represents the Answer to the Ultimate Questions of Life, the Universe and Everything, so I like to reduce the health of a business (in my case a professional services organisation) to a single number. Or, not so much health itself, as the fluctuating risk to health.

Answer_to_Life

I take the good things, the bad things and an ugly thing and express them numerically:

The Good

Revenue Growth is good. I calculate the growth in revenue over the last 12 months compared to the previous 12 months.

Profit Growth is good. I calculate the growth in profit over the last 12 months compared to the previous 12 months.

The Bad

Customer always owe money, but growth in debt as a proportion of revenue is bad.

Work in Progress (the value of consulting that we have not yet billed) is never zero, but growth in WIP as a proportion of revenue is bad.

The Ugly

Bad Debts are very bad.

I then give the following weight to these values before adding them together:

Revenue Growth – I multiply the absolute value of Revenue Growth by 0.4

Profit Growth – I multiply the absolute value of Profit Growth by 2.

(This expresses the view that if revenue grows by 100, profit should grow by 20, and gives equal weight to both on that assumption. The assumption that 20% of revenue is profit is something you may want to adjust.)

Debtors – I take the absolute value of debts.

Work in Progress – I multiply the absolute value of WIP by 2.

Bad Debts – I multiply the absolute value of Bad Debts by 3.

(This expresses the view that a rise in Work in Progress is twice as bad as a rise in Debt, and Bad Debts are three times as bad as Debts.)

Then I calculate, on the good side of the balance, decreasing risk:

(Revenue Growth * 0.4) + (Profit Growth * 2)

And on the bad side of the balance, increasing risk:

Debtors + (WIP *2) + (Bad Debts * 3)

I then calculate the Bad Side minus the Good Side and divide the whole by the absolute value of the last 12 months’ revenue:

(Debtors + (WIP *2) + (Bad Debts * 3) – (Revenue Growth * 0.4) + (Profit Growth * 2)) / !2 Months’ Revenue

The result is what I call the Risk Index. A rise in this number from one month to the next is bad, and a fall is good.

For example:

  • Revenue 1000
  • Debtors 150
  • WIP 100
  • Bad Debts 10
  • Revenue Growth 200
  • Profit Growth 40

This means:

  • Revenue Growth of 20%
  • Profit Growth of 20%
  • Debtors of 15% of revenue
  • WIP of 10% of revenue
  • Bad Debts of 1% of revenue

This delivers a Risk Index of 0.22.

The index does not itself, reflect growth. If everything grows in proportion from one year to the next then the index stays the same. Risks are under control.

If revenue grows by 200, but profit doesn’t grow then the index increases to 0.3.

If both revenue and profit are static then the index increases to 0.33.

If revenue grows by 200 but profit grows by 60 then the index drops to 0.18,

If revenue grows by 200 and profit by 40 but bad debts to 30 then the index increases to 0.28.

The risk index reflects my own view as to what’s good and what’s bad, and alerts me to deteriorating or improving health, and its absolute value is of no consequence. Our company is made up of a number of subsidiaries and these are managed in groups. It’s useful to be able to track the trends in each from month to month.

You will note that I don’t include cash in the equation nor liabilities to suppliers. Given the kind of company we are (software reseller, software author and provider of consulting services (this being the largest part by far)) I believe everything else follows on from these five key values. If the risk index is static I assume I don’t have to worry about cash.

Please note that this measure is relevant to a professional services organisation, and would need extension to reflect the health of any other type of organisation. You might include inventory value, etc.

And note that on this scale 42 would be a very unhealthy number indeed!