1. If Cutting Costs Is A Must, Here’s How You Do It
Painlessly
When times are tough, every company looks to cut costs where they can. Yet how can
this be accomplished without eliminating key projects and people? It is actually quite
simple if you have the right data in hand. With the appropriate per-customer per-project
profitability metrics, companies can easily shave off unprofitable work and learn how to
focus their time, efforts and budget on the profitable work alone.
Cutting with Precision
Do all of the top managers at your company know which of your past projects were
successful and which were failures? Do they know how many employees worked on
these projects or how much time was invested in them? 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 that bring in the most
revenue.
Implementing profitability metrics might sound complicated, but it is often easier than
you might think. Here is a simple plan for attaining Per-Person, Per-Project Profitability
(P5).
1. Get employees to track their time by project and task
True, people don't like filling out timesheets, but the data that time tracking provides is
far too important to ignore. It will help you learn, for example, 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 the
most. Though they are often labeled as "problem customers," they may account for
much of the company's 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 times are tough, 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 that 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
when necessary.

2. 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.
4. Integrate with other business systems
Do you use a CRM or accounting system? The right time project time tracking system
will allow you to integrate with such tools, feeding crucial time data into payroll, billing
and other important business functions for increased accuracy.
5. 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 be cut if necessary. On the other hand, projects that have a tight
charter are critical. 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. 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.
Reference Link: http://www.hr.com/en/app/blog/2012/01/if-cutting-costs-is-a-must-
here%E2%80%99s-how-you-do-it-pa_gy213wpt.html