This question was originally posted on Friday, June 12, 2009 10:47:57 AM by mzaret20000 on http://www.howtomeasureanything.com/forums/.
“Hi Douglas,
I have been asked to provide the gross margin for client engagements. My company is a recruiting firm that operates like an internal recruiting team (meaning that we charge fixed rates as we are doing the work regardless of outcome rather than billing a percentage of compensation hired). Most of our engagements are small so they aren’t not profitable in the absence of other engagements. I’m wondering what your strategy would be to make this type of measurement.”
Thanks for your post. At first glance, your problem seems like it could just be a matter of accounting procedures (e.g. revenue minus expenses and divided by revenue with consideration for issues like how you allocate marketing costs across projects, etc.) but let me presume you might mean something that is more complex. It might not be what I strictly call a “measurement” since it sounds like you probably have the accounting data you need already and you probably do not actually need to make additional observations to calculate it. This is more of a calculation based on given data and the issue is more about what it is you really want to compute.
Since you mentioned that your projects are small and not profitable n the absence of other engagements, perhaps what you really want to compute is some kind of break-even point based on fixed costs and marginal costs of doing business. But even that’s a guess on my part.
Perhaps you could describe why you need to know this. This is a typical question I ask. What decision could be different given this information? What actions of what parties would this information guide? Once you define that I find that the measurement problem is generally much clearer.
What I’m trying to decide on the proper staffing allocation given the volume of work we have. My thinking is that each client engagement is profitable when broken down into the hours spent working on them. I guess the real challenge may be to estimate how many man-hours are spent on each job search. I think I can take a sample to estimate this.
What I’m really trying to do is a bit more complex than a simple gross margin calc because I’m trying to flush out the surplus (or deficit) of man-hours we have employed. At the same time, I keep wondering if this will provide any new information that couldn’t have been inferred from the simple gross margin.
Perhaps there are two different issues, here. In one case, you are trying to ascertain how time is currently spent. This is not always obvious because managers cannot directly observe the activitities minute-to-minute for every person. As your sampling idea suggests, you could reduce your uncertainty about current time allocations with a survey. We start with the same approach you always use First, state specifically why you care about measuring this by identifying specific thresolds for action. If they spend more than X time on activity Y, what would you do differently? This can give you an idea about whether you really need to measure something further depending on whether this threshhold is somewhere within your range or so far out of your range that additional uncertainty reduction would tell you nothing. Second, state your current uncertainty about it. Give ranges for how much time they are currently spending on different activities, clients, or projects. Then, if you like, work out how much this uncertainty reduction is worth using the information value calculations I discuss in the book. This will give you an idea of how big and complete the survey really needs to be. (Keep in mind that if you have a lot of uncertainty, you don’t need many data points to reduce it). Then design and execute the survey. Avoid asking questions like “How much time to you spend on X?”. Mention specific and short time periods like “How much time did you spend on X today?”. Repeat this over a random sample of days for a random sample of people.
The second part of your challenge is really a forecasting problem, not an accounting calculation. Whether you have a surplus or deficit in labor given the current or anticipated project load is the real question. Again, you should state what you know now with ranges for demand and what you would do differently depending on better forecasts (fire people, hire people, reallocate people, etc.). Of course, you can’t forecast precistly but that misses the point of the book. You can reduce your uncertainty about these wide ranges by a number of methods. You could simply look at history and see how much things change and how quickly. You could also try to build correlations between various business factors and demand. You might try the Lens method I describe in the book if you don’t feel you have enough data for a good historical analysis. Perhaps you could think of 6 to 10 factors that probably correlate with upcoming demand and try to compute the correlation.
This question opens up a wide range of possible issues, since forecasting can be complicated. But remember, to count as a measurement all we need to do is develop a method that reduces uncertainty on your previous methods (which were probably based on intuition).
Let’s take this conversation to another round. Tell me what you think is feasible or not from the items I mention above and tell me specific answers to as many of the questions above as you can.