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.
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.
There is no objective and universal measure for Revenue per Head. You need to be a little sceptical of “Industry Average”. I have yet to come across any industry that can be so simply measured as much as Wall Street and City of London would love to do it.
Software industry is a wide ranging business from web development to IoT to heavily customised and specialist software for Military or Nuclear industry. This means comparing a WordPress web development company Revenue per Head with a company developing software for the Eurofighter or Bank of America is simply folly.
Benchmarking is a great way of measuring your efficiency and performance but you need to be careful and make sure you are comparing Apples with Apples (no pun intended) and not Pears.
Not fully understanding what you do except your brief description of your profile I would suggest you look at the following:
1. Requirements Capture
Many software companies rely on the client's to provide their requirements. Clients are notoriously poor at defining their requirements as they make assumptions that only an insider would ever make, their tendency to “Feature Creep” and finally cost or time overrun. So my recommendation is first look at your Requirements Capture process and how tightly that is reflected in your contractual obligations.
2. Life Cycle Management
Amazing as it may sound many companies do not have a documented and formal PLC, so make sure you do not become victims of their poor or non-existent PLC. Ask to participate in their PLC meetings with a permanent member of your team attending the meetings and demand in your contract that your team must sign off “Change Requests”.
3. Outsourcing Management
Many companies see Outsourcing as means of cost saving which can be true only if they manage the outsourcing effectively. Just getting a contractor to do the work instead of a person on your payroll is not the way to make savings. We use a lot of contractors for our business as there is no way on this earth we could employ every single skill needed to deliver solutions for our clients. However, we tightly manage the Input and Output of our contractors. Inputs being our Requirements Capture, PLC, and Project Management, and Output being what the contractor delivers against these. If these functions are managed on the basis of a few Coffee or Tea meetings or Skype calls, then it is not only a recipe for disaster but is also a sure way of missing the deadlines and customer's needs.
I hope this helps to put your questions in an appropriate frame and context, and perhaps help you view your challenge in a different light than the measures designed for financial games of Stock Markets vs the real economy and those of us with proper jobs and businesses :-)
P.S. You might have guessed I have no time for the Stock Market lemmings and their benchmarks. This is due to my painful experience of working for over 20 years for multinationals that were quoted on the London and New York stock markets who knew the cost of everything and the value of nothing. If my company ever gets large enough for an IPO, it will float over my dead body.
I don't know if this is possible in your operation but a few decades ago we were having trouble with productivity. For example one machine where I kept track of the time for us to build it came in at 123 hours. I put a bonus system in place based on output and it solved our problem. We currently build the same machine with 14 hours of labor. My thoughts when I started this came from watching one story on the bonus programs at Lincoln Electric and remembering when my wife worked at a Westinghouse factory when we were first married and the other workers would keep after her to work faster since they were on a bonus. Our guys are now always working and always efficient.
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.
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.
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
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.
Assuming there is really a problem here ;-)
Suggest you first take a hard look at client interaction.
For example, have the CEO attend client meetings, conduct customer surveys, etc.
The other action to consider is tracking, & classifying, non-billable time: spec "clarification" and where in life-cycle; bug remediation, idle (no work, etc.)
Lastly, there have been extensive studies into "programmer productivity" - time and time again the highest leverage activities were: requirements walk-through, followed by a (functional) design walk-through.
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
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.
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.
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?
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 .