Welcome to the last blog of the blog series where we first discussed three critical challenges
Faced to monitor Efficiency in Service Sector, and then the first challenge related to the
Input Cost Measurement and then the second challenge about Measurement of Output and Fixing it’s price.
In this concluding part, we will discuss the most challenging part – the third challenge of Comprehensive Quantitative Control with an example.
We have by now identified what is required to be controlled, which is available time of each direct employee. We have also realized that the time is invisible and most perishable and cannot be stored (like fish in cold storage). However it can be captured and recorded to keep tabs on how it is utilized.
Thus for proper quantitative control, a system should exist in every enterprise rendering service , to capture relevant information about available time for each direct employee ( every minute of it) that is purchased, and utilized on different projects resulting into revenue as well as non -project activities which will not result into any revenue. The system should capture the data on ongoing basis to ensure that the information is available for control in real time and not later for post Morten exercise.
We need to translate this information of captured time into money terms whereby we can find out direct cost for each of the project as well as direct cost on non-project activity ( for further analysis into it’s causes and control) . Simultaneously by applying billing rates we should be able decide the price or revenue that should be charged / realized for each of the project.
Thus by proper system keeping quantitative control on time and it’s utilization one is able to achieve an efficient control on costs , revenue and of course desired profit objective.
Perishability of time spent also brings out one more aspect – the timelines or deadlines which need to be adhered, to make the time spent worth it’s while. A project may loose its value or significance if it is delivered after the deadline agreed in advance. This may result into serious consequences for the customer as well as to the service provider. Hence the system should also provide for control on timelines to ensure preservation of value of the project.
We have seen that in some cases the price to be paid for an assignment /project is decided in advance or is with reference to % of the customers project costs etc. under such circumstances you will have to specify for such projects, the number of days (hours) that can be spent by different people in advance by using the billing rates of those persons to ensure that profit is maintained at project level in line with enterprise level profit objective. Thus system should provide control of profit by way of budgetary control.(please see example)
ABC Consultants
Situation A:
Need for Budgeting and the Process
Assumptions 1
- CTC and Billing Rate
| Employee | CTC Per Day | Billing Rate |
|---|---|---|
| Ajit (SR Manager) | 12,000 | 21,600 |
| Mary (JR Manager) | 4,000 | 7,200 |
| Vijay (JR Manager) | 1,500 | 2,700 |
2. Price of Assignment ” X ” accepted by ABC Consultants is Rs 60,000
Budgeting Process
Assignment ” X ” Assignment of people based on past experience
| Assigned Person | Estimated Days | CTC Per day | Billing Rate Per day | Estimated Total Cost | Estimated Total Billing | Budgeted Profit | Budgeted Profit (%) |
|---|---|---|---|---|---|---|---|
| Ajit (SR Manager) | 2 | 12,000 | 21,600 | 24,000 | 43,200 | ||
| Mary (JR Manager) | 4 | 4,000 | 7,200 | 16,000 | 28,800 | ||
| Vijay (JR Manager) | 12 | 1,500 | 2,700 | 18,000 | 32,400 | ||
| 18 | Total | 58,000 | 104,400 | 46,400 | 44% |
Observation:
- The estimated bill value is Rs 1,04,400 against agreed price Rs 60,000.
- Thus, Actual Profit as per assignment of people as above will be (Rs 60,000 – Rs 58,000 = Rs 2,000)
- This low profit not being acceptable. budgeting control is exercised to achive profit objective of say 44%
| Assigned Person | Estimated Days | CTC Per day | Billing Rate Per day | Estimated Total Cost | Estimated Total Billing | Budgeted Profit | Budgeted Profit (%) |
|---|---|---|---|---|---|---|---|
| Ajit (SR Manager) | 1.5 | 12,000 | 21,600 | 18,000 | 32,400 | ||
| Mary (JR Manager) | 3 | 4,000 | 7,200 | 12,000 | 21,600 | ||
| Vijay (JR Manager) | 10 | 1,500 | 2,700 | 15,000 | 27,000 | ||
| 14.5 | 45,000 | 81,000 | 36,000 | 44% |
Assignment ” X ” Action taken – Review of time requirement and reduction wherever possible
(Revision 1)
Observation:
- Actual Profit as per assignment of people as above will be (Rs 60,000 – Rs 45,000 = Rs 15,000)
- This low profit not being acceptable. budgeting control is exercised to achive profit objective of say 44%
Assignment ” X ” Action taken – Partial Substitution of Junior/ less expensive people in place of expensive people Review of time requirement and reduction wherever possible (Revision2)
| Assigned Person | Estimated Days (Revised) | CTC Per day | Billing Rate Per day | Estimated Total Cost | Estimated Total Billing | Budgeted Profit | Budgeted Profit (%) |
|---|---|---|---|---|---|---|---|
| Ajit (SR Manager) | 0.75 | 12,000 | 21,600 | 9,000 | 16,200 | ||
| Mary (JR Manager) | 1.50 | 4,000 | 7,200 | 6,000 | 10,800 | ||
| Vijay (JR Manager) | 12.25 | 1,500 | 2,700 | 18,375 | 33,075 | ||
| 14.5 | 33,375 | 60,075 | 26,700 | 44% |
Observation:
- Actual Profit as per assignment of people as above will be (Rs 60,000 – Rs 33,375 = Rs 26,625)
Conclusion:
- As Profit as per the revised assignment is matching with budgeted profit, this budget will be used monitoring control
- Effective Monitoring will ensure desired profit at the project level.
- If all the projects are handled in this manner, Profit objective of the organization will also be achieved easily
Note:
- It may not be feasible to have such a fine control on profit for each project in real world. But keeping such focus will only ensure success.
Thus the system should contain mechanism to create budgets for monitoring the time, cost and revenue for each if the project.
It is needless to say the system should not only provide for quantitative controls but also qualitative controls and take into account the human factor which is the most critical factor for success of any enterprise.
We strongly recommend that all the blogs should be read together as well as individually.
Our Eff Factor software helps to systematically counter each of these challenges.
Eff Factor software has been conceptualized by a team with wealth of experience in the service
Sector.
It captures all the processes and good practices which are needed to manage profitable operations of a service sector enterprise.
