How to Shave Costs With Precision

The global financial marketplace has recently become quite volatile, as fears of an American recession affect economies all over the world. Such fears can be especially dangerous for businesses. In times like these, many top managers panic and make unwise decisions such as firing quality employees and slashing important programs.

This might seem like a wise decision at the time from a fiscal standpoint, but what many do not realize is that it actually ensures that there will be little to no top-line growth when the economy picks up later on.

Fortunately, there is a better way for companies to cut costs. All that is required are the right per-customer per-project profitability metrics.

Using a Scalpel, Not a Chainsaw

In a discouraging economic climate, how can you know where you should cut and where you shouldn’t? The right data makes such decisions simple, though you probably don’t have that data today.

For example, do all of the decision-makers at your company know which of your past projects were successful and which were not? Do they even know how many employees worked on them or how much time was invested? How about which of your clients were a drain and which ones were profitable? Without this information, you certainly cannot cut costs without risking the loss of projects and people who bring in the most revenue.

How to Start

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1. Have employees track their time on a per-project basis Yes, people don’t like filling out timesheets, but they are far too important to ignore. The data you collect through time tracking will help you learn which projects are consuming too much time as well as which clients are cheapest to service. Some managers might not realize that the noisiest customers are often the ones who pay you the most. Though they are often labeled as “problem customers,” they may account for much of your revenue. A simple basic level of employee project time utilization data can give you insight into the profitability of each customer, so you don’t have to wonder anymore. When the economy is down, you will be able to let your unprofitable customers go and work hard to keep the profitable ones happy.
2. Add labor rates to your time data One employee’s time is more expensive than that of another employee, and those costs can add up on major projects, so adding labor rates to the time data is crucial. You must also track all expenses, so you can understand which projects and customers use up the most resources. Collecting this data on a per-project basis can help you understand true direct per-project cost, giving management better insight into how to cut costs.
3. Allocate indirect costs. There are two types of indirect costs: general indirect costs, such as rent, that need to be allocated across every project, and semi-indirect costs, such as customer relationship management, which should be applied to all projects for the customer in question. In order to allocate general indirect costs, you will need to create a formula for each type (legal fees, electricity, marketing, etc.). For semi-indirect costs, there is a different process. If you have a large customer you do multiple projects for, there are usually some costs that apply to those projects as a group, but not against any particular one of them. Your best bet is to allocate these costs by revenue or direct cost over those projects.

Per-Customer Per-Project Profitability

Cutting costs with precision is all about focus. If your company knows precisely what it is accomplishing and for which markets and customers, then everything that is not part of that mission can likely be cut in hard times. Conversely, projects that have a tight charter are critical, as well as making sure that a high percentage of the people in your company are working on such projects. Evaluate your current state of affairs: How many people are in overhead roles, not associated with satisfying particular markets or customers? How many projects are not really congruent with the core mission of your company?

Anyone can tell the manager of a large department to cut 10 percent right away, yet that manager can only do it intelligently if he or she is enabled with the right data. The solution might be as simple as canceling one large project, or it may take more finesse than that. Regardless of which course to take, time data is a necessary component to making the right decision.

Once you understand your company’s profitability level on a per-customer and per-project basis, you will have an impressive advantage over your competitors, especially when the economy is down. They don’t know where their profits are coming from, but you do, so when you have to make cuts, you can be sure you are only cutting unprofitable work. In both good economic times and bad, knowing where you are profitable and where you are not is the only way to thrive in a competitive business environment.