Archive For October 26, 2016

Process and The Unrealistic Budget

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You all have been there. A project comes along. It has a familiar scope of work. You accept the terms, complete the work, deliver it, and then realize that…wow…you made no profit. If fact, you lost money.

What went wrong?

The easy answer is to blame staff for incompetence, for not using their time efficiently, for failing to understand the scope of work. But what if your staff isn’t the source of your net loss on that project? Is that possible?

You’ll have to dig more deeply and analyze. The results of that analysis may be discomfiting and expose glaring errors in your decision making, but positive changes based on those results and codified into a process that guides work on similar projects can prevent future errors.

Before you negotiate a fee for a project, you must understand the work necessary to deliver that project. That requires more than merely looking at current materials pricing and what the customer is offering to pay.

The very act of performing this analysis involves a process by which one begins at the delivery end of the project and works backward. To deliver, we have to do this, which require completion of that, which then requires doing the other task(s). Each task involved will have to be assigned to a staff member or outsourced. Don’t assume how long something will take: ask the employee or vendor for an estimate. Be as specific as possible to obtain as accurate an estimate as possible.

I always find it helpful to pad the overall schedule for delivery with a little extra time to cover the inevitable glitches that arise, which may include a technical failure, a severe weather, or a key employee calling in sick with a nasty case of the ’flu.

Analysis of the work involved, who will do it, and how much time it will take may surprise you. The analysis should also include determination of when approvals are necessary to move the project forward. Who approves the work so it can proceed to the next step? Is it always necessary to have top management or the client approve every step? How much time should you allot for approvals? Be certain, your staff will not appreciate necessary approvals coming through at the last second, thereby enforcing them to work feverishly in order to meet deadlines.

When analyzing the steps and work required to deliver a project on time and within budget, be sure to consider your team’s existing workload. If a project task will require six hours of someone’s time, then make sure that employee will have six hours to spare. If that employee misses his child’s school play because you dumped an assignment on his already full workload, then you’ll do nothing more than build his resentment toward you and the client. In addition, hastily completed work often suffers from errors, which reflects poorly upon your business and merits your customer’s dissatisfaction.

Once the process is determined feasible and is in place, it will serve as a reliable guideline for other projects with similar requirements. Periodically review the process to adjust for changes in labor, materials costs, and other variables that affect performance and delivery.

But the customer is prepared to pay only “this much,” you complain.

Be critical of the customer’s budget; you’re working from opposite angles. The customer wants to get the best work or product for the least amount of money and delivered in the fastest time possible. Your business seeks to at least cover labor, material, equipment, and overhead costs and, preferably, to make a profit. If a customer’s budget for a project won’t even cover your costs, then make a counteroffer based on a justifiable estimate of the work or decline the project.

No process in the world will reconcile a completely unrealistic budget with justified costs, unless the company is prepared to burden its staff, take a loss, and be prepared to grow a reputation as the low-cost provider.

Process. There’s no escaping it. The trick is to develop and use processes that work with you and your staff to produce predictable excellence within realistic deadlines. The Heggen Group provides the objective analysis and process development that will help your business determine feasibility and sustain profitability.

 


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Creating Custom Processes

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One problem I am called upon to fix is when a company regularly suffers from project delivery costs that are three times the estimated price quoted. First, I have to figure out what happened. Common scenarios are:

  • Project costs are underestimated and resources are over-utilized.
  • Project changes are not tracked and cost overruns are identified during the billing cycle.
  • The project is over-managed.
  • The project is quoted based on an informal conversation rather than a codified description of the scope of work.
  • Project requirements are not finalized before the work starts, requiring multiple re-starts.
  • The project owner is not established, resulting in unnecessary round of review and approval.

In this post, I’ll address the first scenario.

The client has a small project budget of $3,000 for the type of work the company does regularly. Such routine work often leads to companies agreeing to projects without properly assessing the use of resources. Therefore, the company unintentionally over-promises its resources, which can easily range from 10% to 40% in unbudgeted utilization. In short, the company accepted a project based upon other work without first confirming whether all components necessary to deliver the project–within budget–are in place.

In this scenario, the actual cost of delivering this small project ends up being $7,000. When it comes time to invoice the client, the company must make a choice: 1) write off the resource utilization and declare a loss on the project, or 2) ask the client for additional funds to cover the overage not anticipated by the original estimate.

Since this is the company’s error, the company decides to take a loss on the project so as not to alienate the client. However, the client now perceives the company as a low-cost provider: lots of work for a small price. (We’re not even going to address the problems that perception yields for the company.) Over time, the company improves at managing project resources, bringing delivery costs in line with project budgets, but at what cost to the company’s bottom line?

Based on the scenario as described, here’s how the numbers could play out. Following are key assumptions:

  • The client requests three more similar projects are priced at $3,000.
  • The blended hourly resource rate is $200.
  • The standard resource hours for the small project is 15.

 

Now, let’s run the numbers.

Multiply these simple numbers by the number of projects the company manages in that same way. Then think how this scenario would scale when applied to larger, more complex projects.

Questions arise: How often are projects underestimated and resources over-utilized? What organic revenue-generating opportunities are missed when scenarios like this happen? What new business opportunities suffer from inadequate resources because those resources have been over-committed to other projects?

The simple scenario above indicates that the company needs an assessment of process breakdowns to determine how to realign processes and systems to eliminate it from happening again. A realigned process put in place with system tracking and monitoring justify the specific tools a business needs to use to avoid unintentional project errors and provide the reporting necessary for informed senior management decision making.

Oftentimes, an outside consultant is needed to assess the problem and analyze the information, if only because the consultant comes to the problem with an open mind and without preconceived ideas. The consultant’s evaluation will be fair and the recommendations unbiased, without assigning blame. The new processes will consider the true command of resources for a routine project and then establish a feasible and efficient workflow to deliver the service or product. The company can then adjust its prices in accordance with the new process and use that new process as a guideline for estimating future project costs and fees.

I’m Jayne Heggen and this is what I do.

 


 

 

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No Process, No Business

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Process. The very word makes people’s eyes glaze over in boredom. Micromanagers salivate and staff members cringe when they hear it. Most people misunderstand it.

The mundane nature of process is what makes it critical to business, integral to behind-the-scenes operation. Without process, business cannot have efficiency, employees forsake guidance, and clients are left to wonder why their projects aren’t being delivered.

Process ensures consistency. That’s great if consistence means “consistently good.” Consistently poor performance broken by spurts of brilliance won’t carry a business. Just ask Mark Sanborn.

The Tingley Advantage states that process “is a set of defined tasks needed to complete a given business activity, including who is responsible for completing each step, and how they do so.” The processes your business uses should serve as a guide for how to get things done. Well-designed processes imbue the following characteristics:

  • They make a business competitive. If you know who does what and when, then you have benchmarks for measuring performance. You can identify the bottlenecks and the places where confusion may reign, which will indicate that something here needs to be eased and something there tightened. The goal is to regulate activity so that it flows smoothly along the chain of activity toward predictable and inevitable completion.
  • They make growth possible. Without measuring past performance, you can’t determine what’s needed to grow and improve. Without knowing what’s needed to grow and improve, you can’t determine whether your business is growing or improving. The well-designed process offers employees a blueprint for their work, yet allows them to learn additional skills should a coworker leave the business, fall ill, or simply head off on a well-deserved vacation.
  • They drive profit. Let’s face it, your business must make a profit in order to remain in business. Processes identify opportunities to improve efficiency without sacrificing quality and consistency. A good process allows for steady, predictable progression without officious duplication of effort that slows everyone down and demoralizes good workers. The increase in efficiency leads naturally to saving time which then leads to higher profit.

There’s no ‘I’ in ‘TEAM’

But there’s a “U” in “SUCK,” or so the saying goes. A well-designed process mitigates the SUCK. It can’t be all fun and games–that’s why we call it work–but there’s no reason to make work as miserable as possible. A good process assigns appropriate tasks to the correct positions, spreading the misery thin enough that a difficult project may actually be anticipated as a stimulating challenge rather than the next episode of Mission: Impossible.

Process involves participation from the entire team. Peter S. G. Carter in “Why Are Business Processes Important?” offers the following example from the automotive industry: “If the final sub-process is to move a car into the paint shop and the paint shop can only handle 5 cars per day, there is little point in having 10 cars per day ready to be painted.” The gist of that example is to show that a good process will take into account the capacity of each benchmark point and regulate the speed of manufacture to maintain consistent performance. Or it can spur the manufacturer to decide to expand the paint shop by adding extra paint booths and personnel to accommodate the higher capacity the rest of the factory is capable of producing. Whatever the decision–regulate or expand–the result is a business that operates on all cylinders, not with one cylinder clogged.

Process works best when everyone works together and no one feels overburdened.

Segue into business process management

Larger companies will have the luxury of appointing a position specific to managing processes. Such an expert–a business process manager–analyzes the underlying activities needed to produce a particular result. This is performed through studying the type of work and tasks performed as well as interviewing those people performing said tasks to learn what works and what doesn’t.

We all know that if something works flawlessly on paper, it won’t work that way in real life. Paper-based processes don’t account for real life glitches, bad attitudes, or individual competencies (or incompetencies). According to iGrafx when the process works, it aligns the “customer needs, and helps executives determine how to deploy, monitor and measure company resources. Regardless of whether the process is governed or managed by software, it must be responsive to changes in technology, industry standards, and employee capability in order to remain relevant and effective.

 


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