Time and attendance tracking is necessary for obvious reasons, yet many business owners do not realize that this data can deliver enormous benefits to the organization, aside from payroll. In fact, having employees track their time against tasks and projects
allows managers to develop key performance indicators to measure progress against strategic goals such as increased billability, adherence to project estimates and project profitability optimization.
Key Performance Indicators
A 'key performance indicator' or KPI measures an organization's progress towards a strategic goal. When leveraged correctly, KPIs can make a huge impact.
First, you must determine what the most important business goals are. It might be increased profitability, reduced number of defective parts per thousand, maintaining a certain percentage of customer satisfaction, or perhaps revenue per store location. Once this is established, you can create a KPI to help you measure your progress.
Next, you must ensure that your KPI is measurable. "Make customers more successful" is not an effective KPI without some way to measure the success of your customers. "Be the most convenient drugstore" won't work either if there is no way to measure convenience. In addition, it is essential that your KPI definition remain stable from year to year. For example, "increase utilization rates” needs to be more specific and address such things as whether to measure by hours or by dollars.
Keep in mind that a KPI is part of a SMART goal—one that is Specific, Measurable, Achievable, Relevant, and Time-based. For example, consider the goal, "Increase average revenue per sale to $10,000 by January." In this case, “average revenue per sale” is the KPI. This goal wouldn’t be SMART if it wasn’t achievable, if the word “January” was left out, or if it was not relevant (e.g. if this was a portion of the organization that had nothing to do with sales or marketing, such as human resources).
Simple and Useful KPIs
There are three basic KPIs that you should be able to calculate from any time and data labor source.
This is often termed the utilization rate. It is the percentage of time in a given period during which employees are working in a revenue-producing capacity. You must configure your timesheet system to track whether or not work is considered billable to the customer. Once you have this information, utilization for any period, group or person is found by the formula “B divided by T”, where:
B = Billable hours for the employee/group in the period
T = All hours worked for the employee/group in the period
Most organizations try to keep their utilization rate above 70%. A higher rate is better, until you’ve reached a point where administrative tasks that are necessary to the business—like tracking time—are not being accomplished. Then you know you’ve pushed it too far.
• Adherence to Estimate
Many contractors or consultants do a poor job with bidding appropriately. In order to avoid underbidding or overbidding, you can use the formula [(E-A)/E] where:
E = Estimated hours to complete project
A = Actual hours used to complete project
Improving this number can be difficult for some companies until they understand a simple truth: similar projects often have a strikingly similar ratio of early phase cost to overall project cost. The early phases of a project are usually referred to as the “requirements,” “design,” or “specification” phases. If after carefully tracking time on a batch of similar projects, you find that the first two phases usually take about 10% of the total project time, you can then use that data to predict the length of future projects.
The following diagram shows how tracking the time it takes to complete a project helps in planning future projects. By tracking time and subsequently learning that the first two phases of Projects 1 and 2 took approximately 10% of all project time to complete, the projected length of Project 3 becomes easy to determine. If the first two phases of Project 3 take 1.8 months to complete, you can estimate that the entire project will be completed in 18 months. This project estimation technique has proven itself to be extremely accurate for similar projects in a variety of companies.
• Percentage of Projects Profitable
“Percentage of projects profitable” is a KPI that can really affect your business in a positive way. As an analogy, consider British Petroleum (BP) and its experiences in drilling for oil. BP created a strategic vision for the company called “no dry holes.” Drilling for oil and not finding it is expensive. Rather than try to make up for all the dry holes by finding an occasional gusher, BP decided to try to never have a dry hole in the first place. Changing the attitude that dry holes were an inevitable cost of doing business fundamentally changed its culture in very positive ways.
If you set a strategic goal for your company of “no unprofitable projects,” it will change the nature of discussions in your business. For example, it empowers frontline employees to legitimately push back when a project is being taken on for political reasons. Conversely, having the attitude that the winners will make up for the losers doesn’t do this.
Measuring this KPI is easy because you can obtain direct per-project cost data from your timesheet system. Correctly applying indirect data (such as sales or accounting time) to the direct costs is a bit more complicated. Connecting all of this to revenue data gives you per-project profitability. Once you have that data, you can work on your KPI of percentage of profitable projects to try to maximize it. The formula for this KPI for a given time period (usually a quarter or a year) is:
# of profitable projects/# of projects
Other KPIs that could be useful are:
▪ Calendar time to complete a job (because overhead costs increase substantially due to delays)
▪ Percentage of customers satisfied
▪ Time to complete initial free estimate
Unfortunately, many businesses that track time and attendance for payroll and billing overlook the other benefits such data can provide. Real-time access to relevant KPIs, however, can give early warnings of project problems and lead your company to faster growth and more profitability.
About Curt Finch
Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employee time and expenses, and provides confidence that all resources are utilized correctly and completely. Curt earned a Bachelor of Science degree in Computer Science from Virginia Tech. As a software programmer fixing bugs for IBM in the early ‘90’s, Curt found that tracking the time it took to fix each bug revealed the per-bug profitability. Curt knew that this concept of using time-tracking data to determine project profitability was a winning idea and something that companies were not doing – yet… Curt created the world's first web-based timesheet application and the foundation for the current Journyx product offerings in 1997. Learn more about Curt at http://journyx.com/company/curtfinch.