A common item on many business leaders’ wish lists is Client Profitability reporting. The ability to determine which clients are delivering the most (and least) margin, measure the operations teams’ efficiency in delivery, and compare actual results back to the original deal model forecast is certainly a dream worth having.
Too often though, these leaders assume it’s a goal beyond their reach. They assume the effort of modifying procedures and systems is too costly, or the task of assigning every expense dollar to a client is too onerous to implement. They’re partially right.
There is a short term cost to aligning a business around Client Profitability data capture, but it is more than repaid with the improved accountability and enhanced business management capability that will last through the long term. Funding decisions are backed with hard data, not anecdotal evidence. Performance measurement is enhanced with quantitative results, not just qualitative observations. Renewal discussions are influenced with the knowledge of ‘cost to deliver.’ This tradeoff is summed up by one inspirational writer.
“What you do today can improve all your tomorrows.”
The roadmap to Client Profitability reporting will vary by industry and by business, but here is one roadmap outline that can work for service-based businesses and product-based businesses alike. It addresses Systems, People, Processes, and Allocations.
Systems
A project system is vital in assigning costs to a particular client or project. Project systems are available for purchase as independent supplements to a General Ledger and as modules for larger ERP systems. A good project system can assign an individual Project number to each client contract, enable Project Managers to create a Project budget, roll up Projects by client, and even break down each Project by Product (which would also facilitate Product profitability reporting).
Many companies have a Project system in place but they are not fully utilizing its capabilities, either because their processes aren’t aligned around it or because support staff is too overburdened to implement a more impactful procedure. In these cases, the value of the data from the Project system is diminished because it lacks completeness, precision and thus credibility.
Credible, complete and accurate cost and revenue data from a project system is a vital piece of the roadmap to Client Profitability reporting. Achieving this has as much to do with systems as it does with people and processes.
People
Asking business managers to alter their teams’ processes can be challenging, especially in companies where staffing is tight and employees are already feeling taxed. Patience and a little bit of sales finesse is required to help lead these managers along the path to improvement. In addition, the plan for improved cost assignment to Projects should not be needlessly onerous. It should focus on the 80/20 rule and should strive to achieve more results with less effort where possible.
I once worked on a project where it took nearly a year to convince a key business manager to adjust their team’s processes. We negotiated details, conducted beta testing and provided evidence to prove that the additional time it would take the team to capture the additional data would be valuable to that manager. In addition, we worked with that manager’s bosses to demonstrate the return on the effort and achieve buy-in. It was a cooperative effort, and in the end the manger was a vocal supporter.
Processes
In order to capture client-level cost details, numerous teams must be aligned from project start to finish. From delivery teams and project management to accounting and finance, projects must be set up correctly and costs must be assigned comprehensively.
Administration is vital to the process. Not only does the data capture plan need to address proper Project set-up but it also needs to address subsequent contract modifications. Deadlines must be established for Project Managers to update expectations (budgets) that align with reporting needs. Accountability loops must be in place to ensure compliance. Monthly testing must occur to confirm that costs are being properly assigned.
Continuous education and support is a valuable part of the data capture plan. New staff get hired, new scenarios arise, people forget, etc. The team needs someone they can contact with questions and a policy document they can reference. One company chose to send out a monthly Tips & Tricks newsletter to keep everyone on the same page. These proactive efforts pay dividends by preventing mistakes and oversights.
Allocations
It would be fabulous if, through our efforts with Systems, People and Processes, we were able to assign 100% of the business’ costs to individual client projects. The goal is to assign the maximum possible portion of total expenses directly to a project, but the reality is that a certain amount of expense remains unassigned at the end of each month. This “overhead” must be assigned to the projects through some method of allocation to ensure that fixed costs are factored in to the decision making process.
The value of effort lies in assigning costs directly to Projects. The effort to allocate overhead costs to projects is less valuable because it is based on assumptions rather than direct expense assignment, and is thus less precise. My recommendation would be to select a method (based on percentage of total revenue, headcount, direct costs, or other) that is agreeable to key constituents and can be efficiently maintained and reported. The least amount of time should be spent here.
Client Profitability reporting that is credible, complete and accurate can transform a business and enable business leaders to make data-driven investment decisions. The road to implementing a plan for cost assignment to Projects requires effort, both up front and on a regular basis, but the return is well worth the investment.
To find out more about developing and implementing a Client Profitability cost assignment plan, contact us.
Melanie Manning is the founder and Managing Director of Empower Business Optimization Consulting in Atlanta, Georgia. After a 20-year career in corporate finance and operations, Melanie recognized the value of business resources who could see the big picture and were also capable of implementing solutions. To address this need, she founded Empower with the mission of supporting growth through analytics.