How can I improve per employee revenue?
We are a 50 people software company specializing in enterprise wide ecommerce solutions. We have
a solid industry reputation as experts, we have minimal overhead and always excess work in hand.
In spite of all these, our per employee revenue generation is low. About 50% lower than industry standards.
We did our initial analysis to find what is going wrong including our billing rate assessment, which seems to be OK. We tried to reduce engineers but that is affecting work. So have reached a dead end.
Any help on how to further analyze this problem will be of great help.
I would have to say look at the production mediums being used to further evaluate the situation and if there actually is indeed an issue because like Ali said, it;s foolish to compare yourself to someone who creates word press sites if you custom code everything from scratch. So far from what you're saying it seems like you pay your employees comfortably and make a decent profit, so it sounds like things are working pretty well for you.
For example, while with other methods of coding you may have to create a code to tell the browser to display input content in an output window, DoneJS natively goes "ok this is an input.... and that's an output.... duh" and just knows to display it there. It just has an intelligence to it that makes it easier to build with. The industry is becoming more JS dominant anyways so it would be good to get deeper into it and kind of drift from things like Ruby or Python.... which a lot of people expect to phase out in the years to come.
The only way I currently sense you can increase revenue is to charge more and maybe come up with some deals where you get residual income from these companies through instant tech help services or something of that nature. Maybe even come up with a deal that charges less overall for production but requires a percentage of annual profit in return for free fixes and updates to keep their site running smoothly as well as on demand tech support.
You don't want to try pushing people too hard to work faster because it'll make them feel like you're disconnected from the reality of how things work which will create a stressful atmosphere.... so you can only find ways to charge them more in an appealing way that shows them the value of the extra costs.
Hi Prashant, good question! Having worked for many years in the IT Benchmarking sector there are only 2 ways to improve your PER...either increase your revenue/profit or reduce your costs.
I am sure you have looked at this but the first place I would check is around my sales team. Are they selling at the right price or are they just getting the sale at any price? If your order book is full then I would investigate the latter. If. I was in Mumbai I would love to help you!
On the cost front, as you will be aware, outsourcing hardly ever decreases your costs - just gets it off your balance sheet. Also, it's not the best way deal to outsource a problem
However, if you can break out your main areas and f cost (people, product, process) and then even further into categories (software, hardware, licenses, maintenance etc) you should be able to see where your revenue is going.
Benchmarking taught me that every element of cost has to be evaluated to get an accurate picture. Typically, benchmarking works better at the high end as it does really need bit numbers to get true comparisons. I don't think you would get much out of such an exercise as it might be too general.
However, happy to help remotely if you get stuck
As you mentioned that you have solid industry reputation , I think you need to have a solid sales team , I mean any one can make sales bt not anyone can reach the targets or even more than targets , either you train your team or change the whole team .
My experiences with the software development industry show that as the organization matures, revenue from new sales (higher margin) often slackens off as revenue from support/maintenance increases. This will significantly reduce your revenue per employee ratio. Take a look at your source ratio and see if this applies. If so, it might help to provide some staff training in the area of" inside sales", which is the realm where your employees should excel. Financial incentives could also provide some improvement.
Put all employees in the same room, or an online meeting. Tell them what you wrote here. Tell them this low production will eventually lead to the company's decline, layoffs, dooms day. Something may be wrong. BUT, have each one make a list of ways to improve over the next 10 days. Then, break them into small groups to brainstorm to reduce the list to each group's best - 2 or 5 ideas. Let all group leaders or all employees meet and list/present - meet a few more times to narrow it down. Every employee gets to vote. Put each of the top 2 or 3, no more than 5 ideas into practice, like 1 a week or 1 a month. Measure results. If not better, go back to the former way - and try another idea. It is up to your employees to improve your business w/o hating their jobs and w/o losing their jobs.
Improve team value by improving individual value through out the organization. Focus on how to apply the tools of influence tracking what links value to pride within the individual. While it initially seems this will greatly vary it is interesting to find quiet the opposite even among highly diverse groups of people. Do not use any tools from your power of persuasion tool set; at this point stick with the tools of influence. Review the solutions already explored for how they fared in three categories: exceed, meet or failed expectations. Regardless of the initiative the common denominator is people. People sustain the changes of continuous improvement when influenced.
I suggest you try to decide on a mission & vision statement with your employees & customers and start to really think "outside in"......The concern you addressed indicates to me a need for more sales, by generating more volume vs. pricing & margins. Decide which area to focus most upon, I suggest you revisit your business plan as well, and think about you unique selling proposition (USP). A great book that helped me is titled Positioning by Reis & Trout...."what part of the cutomets mind do you wish to own?
Hi Prashant ,
Though this will be difficult to answer within the details you have provided but let me try.
First of all you need to have a detailed identification of variable and fixed elements of the costs. Which means that what costs are going to be incurred regardless you have the orders in hand or not.These are termed as fixed costs unless you work on a system where there will be no employee expense if you don't have any order. The costs associated with the orders only are variable costs.
So the point is that per employee revenue is meaningless if your per employee cost is also 50% lower than the industry standards because you are making the same money as others but you are charging less than the industry standards because you have lower costs.This could be your biggest strength in surviving in this competitive industry.
The other positive aspect here is that you still have margin to increase your profit margin in prices as per the norms in the industry.
The other aspect is that the work on hand is more of a repair and maintenance of past projects which is consuming most of the time of engineers and not producing any major revenues per employee.
Another aspect is the scope of projects which is creating a problem and the pricing ends up being distorted due to wayward scope identification and incorrect estimation of work hours. The maintenance of work hours within the internal control system could be another issue if you are not identifying true input hours by employees.
My strong suggestion is to build a job order costing system with correct identification of job related costs and non job related allocatable costs.Strongly identify redundant hours within the system and try to keep them in the profit margin buffer when billing the customers.
Also keep strict controls and provisions of billing to customers for out of pocket and other unexpected expenses.
It will also be good from a control perspective to bifurcate work according to specialization of labor and create sort of divisions within the company to be accountable for their revenue generation and related costs . This is called responsibility accounting.
We can have further analysis if more details are available.
Having said all that just keep an eye on one thing which is your cash flow availability . If you do not have a loan and you are accumulating cash with the passage of time you do not have to worry anyways.
Best Of Luck,
North York, Canada
First off, I agree with the advice of others. (a) there are no universal benchmarks and anyone trying to hold you to one is a fool. (b) you are a service business. Build productivity by clarifying scope, increasing velocity, and managing non-billable time.
One additional area to look at is your contractual obligations. Make sure your master services contract is clear about when you will accept the cost overrun of scope creep and when it's on the client to accept it. Always ask for your billables, and let your clients bargain from there. Giving them billable hours without getting a concession puts you in a very bad spot for future negotiations.
For professional firms billing rate should be minimum 2 1/2 times salary, e.g., salary of $100,000 annually should bill at $125 per hour minimum. Why you may ask? Because staff will have dead time, e.g., vacation, holiday, sick, administrative, selling, sales support,etc. So you need to account for that wil your billing rates. Too many people think they want to earn $100,000 therefore they should bill at $50 per hour. They close fast.