Bikers’ Nation

Vietnam is a country of around 90 million people, and 25 million motorbikes. Perhaps as many as 10% of the population are conceived on or near a motorbike, 2% are born on or near a motorbike, and a number are buried with them, just as Norse warriors were buried with their horses.

The average number of passengers on a motorbike nears two (sampled over a five minute period in the town of Hoi An), but you will often see four and occasionally five on one machine, not to mention construction materials, kitchens, washing machines and small trees.

Family outing:

    bike family 4

Five at once

Five

Mobile kitchen:

bike conical hat

Lounging:

   bike with lounger 

Shopping and an elegant side-saddle posture

 bike side saddle

Texting

 bike office

Motorbike metamorphosis

 bike with garden

Anxiety

 bike angst

High fashion

 bike with pink lady

Satire

 bike on wall

Eight Measures for Professional Services Organisations – No. 3 – Activity Variance

So far we’ve looked at two measures: utilisation, and standard fee variance.

Measuring Standard Fee Variance (see Standard Fee Variance) is all very well, but if a low standard fee variance is your only goal then you’re in danger of not missing the bigger picture. A low variance on a value that’s lower than planned may be more dangerous than a higher variance on a value that’s much higher than planned.

actvity variance

If a low standard fee variance is your paramount goal then you can simply reject work when your fees are challenged by prospective clients, fire your superfluous staff as expeditiously as the law allows, and maintain a smugly high level of utilisation. Never mind that your gross margin will fall and that it won’t even cover your overheads.

The important point is that your forecast isn’t just based on standard rates. It’s also based on target volumes.

Activity Variance can be defined as follows:

Activity Variance is the excess or shortfall on activity when compared with forecast activity. It is best measured as a monetary value.

Why ‘monetary value’?

Well, in practice we might compare actual fees at standard rates against forecast fees at standard rates. The difference in value reflects a difference in the number of days of professional work that have been delivered. So, why not compare actual days with forecast days?

It’s true that thinking in terms of days is often helpful, and it is well worth making sure that you are able to report variance in days as well as value, but it is value that matters more, and value that is the true measure of deviance from forecast. This is because you might execute the same number of days as your forecast predicts, and yet, because proportionately more days are worked by staff at lower grades at lower standard fee rates, an activity value variance might still emerge. In the end, it is value that has the stronger relationship to profit and to cash.

Management Nonsense

My brother works for a large bank in their IT department. Last week he received a disturbing note from his boss:

Our main objective next week will be to enter our objectives in the performance objectives document.

Apart from being couched in the worst kind of ‘Human Resources’ jargon it raises two very troubling questions:

a) Given that this is itself an ‘objective’, should it be listed along with all other ‘objectives’ in the ‘objectives document’?

b) If the answer is ‘Yes’, then should it first be entered and then erased, since, once all objectives are listed, this particular objective has been achieved and it ceases to be an ‘objective’.

Escher

This puts me in mind of Bertrand Russell’s struggle with the notion of a ‘set’, a concept he needed in order to derive mathematics from logic, an enterprise he embarked on with Alfred North Whitehead and published between 1910 and 1913 as Principia Mathematica.

A set is defined in terms of a property possessed by its members. Assuming that a set can contain sets it seems legitimate to ask if a set can be a member of itself (for example the set of all sets contains itself).

Some sets are members of themselves and some are not. It seems legitimate, therefore, to ask if there is a set of all sets that are not members of themselves. But then you run into a paradox: if the set is a member of itself then it cannot be, and if it is not a member of itself, it must be. Russell had to invent a somewhat arbitrary Theory of Types (a hierarchy of sets) to rescue the enterprise, but it was not convincing.

Troubled in a similar kind of way, my brother wrote back to his boss:

Would the objective to enter objectives also be one of the objectives to be entered in the objectives document? I think we need to know.

His boss replied rather enigmatically:

It is actually part of the ‘Performance calendar topic’ which we all need to achieve as BAU.

I do not understand what this means (but BAU is apparently an acronym for Business As Usual).

It is not often that the world of work is troubled by deep logical issues, such as even the masters of world thought have struggled with. But when it is, we need direction from our managers.

Thank you, Vietnam Telecom

Thank you, Vietnam Telecom, for reminding us of the complexity that lies at the heart of all telephonic communication. We forget that this is the logical form of the system, even when we’re using mobile phones.

viet wires 2

Vietnam’s fixed-line subscribers number between 15 and 17 million and they are served by a spider’s web of cables bundled together and hung on hugely over-burdened street-side pylons. The weight of them must amount to thousands of tons. When a line is broken, it is easier to lay a new one than to find the broken one.

There are more than 120 million mobile subscribers, nearly ten times as many as landline subscribers, supported by a virtually invisible network that weighs nothing at all.

What’s the point of landlines?

Eight Measures for Professional Services Organisations – No. 2 – Standard Fee Variance

In this series of articles I am looking at how to measure the performance of a professional services organisation (PSO). I assume, perhaps ambitiously, that all PSOs engage in some kind of planning, forecasting or budgeting process, so that a certain level of profit can be anticipated.

  • Actual results may differ from the plan due to:
  • Lower or higher than planned utilisation of staff
  • Lower or higher fee rates than planned
  • Lower or higher realisation (conversion rate of fee value to revenue through invoicing)
  • Lower or higher overall activity than planned
  • Lower or higher staff costs than planned
  • Lower or higher overheads than planned

It is important to understand which of these factors are at play in your actual results. This article deals with ‘standard fee variance’.

std fees

The idea of ‘standard fees’ may be an alien one. What I don’t mean by ‘standard fees’ is a price list that you might optimistically publish to your clients. What I mean is the fee rates on which your financial plans are based, and which, if you exceed them, could mean more profit (all other things being equal), and which, if you fail to meet them, could mean lower profit or even losses. They are central to budgeting, financial planning, and revenue planning in a professional services organisation.

One of the reasons for reticence about standard fees is that budgeting costs is a much easier task than forecasting revenue, especially if you’re assuming that your professional service team is fixed in number. But your finance director and your shareholders aren’t likely to be satisfied with a cost budget without a revenue forecast.

How can you approach forecasting?

The first thing is to understand the constraints:

  • You cannot achieve what is physically impossible. By this I mean that you cannot earn more revenue than your staff are capable of earning. Their working days are limited and utilisation has an upper limit.
  • You cannot charge fees that the market will not support.
  • You must make a profit.The first constraint sets an upper limit on the number of days your staff can work, and therefore the number of fee-days that can be charged.

Standard Fees can be defined in this way:

Standard Fees, usually associated with grades, roles, and business streams, are target fee rates on which revenue forecasts have been built.

They should take no account of any effects of realisation (of failure to realise, as revenue, the full value of time). Realisation is a separate measure.

There are two approaches to the determination of standard fees:

  •  You can start with cost and multiply it (assuming a target gross margin %) to arrive at fee rates, or
  • You can start by considering what the market will bear.In reality, whichever method you start with, you will have to look at the numbers from both points of view.

Starting with costs and an assumed utilisation rate you may arrive at a rate that the market will not sustain. Starting with what the market can bear you may discover that your gross margin (after realisation has increased or decreased your revenue) is insufficient.

In these cases there are only two alternatives:

  •  Reduce costs
  • Increase revenuesHow?CostsAssuming that overhead costs are under control, the only costs we can be seriously concerned with are the costs of professional staff. How can these be reduced?
  • By increasing utilisation. If this can be done then more fee days can be achieved to offset costs, but this is only possible if the market allows it, and if realisation is unaffected.
  • By increasing realisation. If this can be done then more revenue will be achieved from the same fee days.
  • By employing staff at lower salaries. This takes some time to achieve, and can only be a long-term goal. It may also threaten the quality of the work you do and, in turn, the realisation you achieve.
  • By changing the balance of fixed salary and bonus so that employment costs reach budgeted level only if utilisation and revenue increase.Revenues
  • By using more sophisticated fee rate structures. Fee rates are usually associated with employee grades, and are even published, on occasion, to clients. They are like hotel ‘rack rates’ in that they represent the highest rate the PSO charges. They should usually be pitched higher than the average fee rates that you’ve assumed in your forecasting, since most clients see them as the starting point for downward negotiation.But you can set your rates more cleverly if you break the fixed link between an employee’s grade and the rates you charge. It is often better to charge on the basis of role since an employee may be capable of more roles than one, and you may thus be able to increase the average fees you charge.

Whatever techniques you adopt in anticipation of challenging margins, or in search of increased profit, you will forecast on the basis of an average or target or standard fee rates that you believe can be achieved. This fee rate will probably be associated with an employee, or more typically, with a group of employees, by grade or default role.

In complex PSOs that work across international boundaries, and which may contain more than one business stream, you will probably associate standard fees with combinations of grade, business stream and company (or country), especially if markets are substantially different in each of these. But you may choose any other meaningful combination of criteria against which to hold your standard fee rates, as long as comparison with actual rates remains possible. As with all systems, however, it is sensible to keep complexity at bay if possible. This is no exact science. Think always in terms of what you will do with the information that you hope to obtain.

As long as you can achieve actual fee rates that are close to your standard fees then your PSO should meet its planned profits (as long as all other measures are as planned).

If your rates are higher or lower than planned then a variance will emerge between the value of your fees if they were calculated at standard fee rates, and your actual fees.

Standard FeeVariancecan be defined as follows:

  • Standard Fee Variance measures the difference between actual fees charged to clients and the standard fees that would be charged for the same work, these also being the rates on which revenue forecasts have been built. They may usefully be analysed by Grade, Role, Business Stream, Department, Company and any other useful segmentation.
  • Actual Rates on fixed price

This definition of standard fee variance depends on the concept of actual fee rates. So let’s look in a little more detail at this concept. Actual rate is a simple enough concept in the case of time and materials projects, when every second of professional work is potentially chargeable. But how do we handle fixed price projects when there is typically a lump sum for a project or subdivision of a project?

You might think that it is meaningless to associate standard rates with fixed price projects. After all, revenue doesn’t depend in any way on how much time you spend on the project. Nor does it depend on who executes the work.

But this is a fallacy. If you are not imagining notional rates associated with the staff you plan to deploy on the project then you’re entertaining a very risky proposition, because you have arrived at a price without any calculation at all. True, you could claim, on the other hand, that you are fully aware of costs. And in this case, that’s fine, since you’re relating potential revenue to potential costs, and effectively defining rates as marked up costs. This is a slightly different method, but the result is the same.

You can think of it in two different ways:

You can determine a discounted or uplifted rate proportional to standard fee rates and apply this to estimated days.

Alternatively, you can uplift costs in proportion:

It doesn’t much matter which method you choose. Both deliver a notional fee rate that can be compared with standard fee rates to determine standard fee variance.

And once you can monitor standard fee variance you can act on it. Because, all other things remaining constant, if your actual fees are lower than standard fees then your profits are under threat. If they are higher, then you’re doing well.

Standard Fee Variance is a useful leading indicator of how well you’ve judged the market. If you have overestimated your rates then you must use all the tools at your disposal, as listed earlier, to claw back profitability:

  • By increasing utilisation
  • By increasing realisation
  • By reducing staff costs
  • By reducing overhead costs
  • By negotiating fees more aggressively and cleverly

Category Errors – Forcing Niceness on Things

Given Poland’s history of pioneering mathematical logic, it came as something of a surprise to come across a serious category error during my brief brush with the country when I flew last week from Sofia to Prague, via Warsaw.

A ‘category error’ is a philosopher’s way of identifying a particular type of nonsense, the ascription of an attribute to something to which it cannot in fact belong. ‘Readable grass,’ might be an example, or ‘friendly eggs.’

As Wikipedia puts it: ‘A category mistake, or category error, is a semantic or ontological error in which things belonging to a particular category are presented as if they belong to a different category,[1] or, alternatively, a property is ascribed to a thing that could not possibly have that property. An example is the metaphor “time crawled”, which if taken literally is not just false but a category mistake. To show that a category mistake has been committed one must typically show that once the phenomenon in question is properly understood, it becomes clear that the claim being made about it could not possibly be true.’

A contradiction is another kind of nonsense, I suppose, but I like this illustration anyway and I can’t find an image that aptly illustrates a category error.

Contradiction

It was a miserable late afternoon in Warsaw. The cloud base was a mere ten metres above the tarmac. It was a relief to get down safely.

‘Welcome to Frederic Chopin International Airport, Warsaw’ the pilot said.

And that was it, in case you missed it. That was the category error.

I think of the Nocturnes – wistful, romantic, delicate, nostalgic – and then I look at the grey slabs of concrete, the ugly terminal buildings, the machines, the dirty snow. Naming the airport after Chopin will never make it nice. Listen and look.

Nocturne Opus 20 in C Sharp Minor

chopin

What can you do about low utilisation in a PSO?

It’s one thing to measure utilisation (see Utilisation). It’s quite another to understand what it means and to influence it.

Even though the most serious threat to utilisation is always not having enough work to do (about which I give no particular advice here), it is nevertheless important to manage the work that you have, and the manpower that you have, optimally. You should be considering how to maximise utilisation both in good times and slow times.

inactivity

These are some of the issues you might think about:

  • Cancellations and Postponements

Clients rarely understand the lost time and value that results from cancellations and postponements. Whilst the interests of good relations must always prevail, it is important to make it clear that cancellations and postponements hurt you.

Can you persuade your clients to be reasonable about cancellations that result in lost time for  your PSO?

Can you charge penalty fees if there is no good reason for cancellation or postponement?

  • Poor Planning

Planning must take account of availability, skills, preferences, and experience, so you must make sure you have access to all of this information when you are planning the deployment of your staff.

Can your schedulers optimise the deployment of your team?

  • Poor Time Management

Good personal time management can make a difference, especially if a member of your staff is working in multiple places on multiple projects and tasks.

Are your staff planning their time efficiently?

  • Failure to Share

Many PSOs are structured by departments, and it is vital that spare capacity be communicated (together will skills, experience and availability) between teams. It’s important to make sure that it is in the interests of the ‘selling’ department and the ‘buying’ department to use each others’ staff.

Can you sell your consultants to other teams or departments in your organisation?

  • Short Days (over-ready acceptance of a client’s timetable)

It is reasonable to expect to work full days for clients (or, by arrangement, other portions of days) and it should be made clear to clients that the fee rates that are charged assume that efficiency.

Are your staff working full days or charging full days, or are they adapting too much to the convenience of your clients?

  • Unsophisticated Contracts

Make sure that your contract stipulates very clearly the rules by which you work, or ensure that a separate ‘consulting charter’ establishes between you and your client your and their understanding of how you work together.

Are your contracts clear about how you charge your time? Minimum hours? Travel time?

  • Multiple Short Assignments

You must balance your wish to provide an immediate and excellent service with your need to avoid switching too frequently from one task to another (and one place to another).

Are your staff rushing from one client to another in order to provide the best possible service, but wasting time whilst doing it? 

  • Inaccurate Time Recording

Make sure that it is in the interest of your staff as well as your organisation that staff should report all the hours they work for a client. Reporting time and charging time are different issues. Professional staff must record the truth.

Are your staff telling the truth about time?

  • Overstaffing and Insufficient use of External Staff

It is always better to have too much work than too little. When there’s too much to do, you can plan carefully to optimise deployment of staff. But always plan carefully and don’t sell false promises to clients in terms of delivery.

Try to have access to freelance staff who can be brought in to cover periods of too much demand.

Whilst we are all reluctant to fire experienced staff, don’t be too easily persuaded that ‘things will soon pick up.’

Do you have too many staff? You should be careful never to have quite enough. 

  • Inconvenient Project Dependencies

Scrutinise your consolidated project plans to avoid the risk of wasted time if tasks overrun and dependencies put you at risk. Keep thinking, What if…..?

Do your project plans take account of each other?

  • Distant Deadlines

Do today whatever can be done today. As well as leaving space for different (more) work in the future, it also brings revenue forward, which is rarely a bad thing.

Do distant deadlines breed complacency?

  • Inaccurate Estimates

Get better at estimating the time required for tasks. Getting this wrong can upset the entire team’s schedule.

Are your plans wrong?

  • Unimaginative Approaches to Last Minute Deals

Whilst PSOs are not airlines and are not hotels, you still need to use some ‘revenue management’ techniques to sell empty time if you can. Bring work forward using various commercial techniques.

Are you being commercially astute in selling unallocated time?