Professional Services Organisations borrow staff from one team to use on another’s project. How should that be managed?

Efficient deployment of professional staff in a diverse PSO often means one company, business stream, department, or team borrowing from another if utilisation is to be kept high, and if clients are to be satisfied. Each team will inevitably staff a project from its own resources by preference, but if skills are in short supply, they must look elsewhere. This is one reason why visibility of availability, skills and experience across the entire organisation is important.

Conversely, a team with time on its hands will want to promote its professional staff and ‘sell’ them to others.

However, these issues create challenges in terms of revenue sharing, costing, and motivation. These need analysis.

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A perennial issue in the management of PSOs is that of responsibility. There is the ‘line management’ responsibility of team leaders which includes:

  • Responsibility for the day-to-day deployment of a team of professional staff
  • Responsibility for the personal career development of the team
  • Responsibility for the profitability of the team

And there is ‘project’ responsibility:

  • Responsibility for the staffing of a project
  • Responsibility for the profitability of a project
  • Responsibility for all commercial decisions (invoicing, etc.) associated with a project

In most organisations, these responsibilities overlap, but they can also be in conflict unless there are clear rules for the resolution of issues with respect to inter-team charging. As PSOs become more commercially driven and team leaders and managers are rewarded according to the profitability of their team these conflicts can become serious.

Let’s look at an example:

Let’s suppose there are two teams, led by A and B. Each team leader employs a number of staff as follows:

  • A employs AA, AB and AC
  • B employs BA, BB and BC

In a simple world, each team executes and invoices projects using its own staff. Budgeting and forecasting are relatively simple, and there are no cross charges.

But what if B sells a project that requires the skills of AC?

In this case, he or she must borrow AC from A.

But how is this to work in terms of gross margin (on which the bonuses of A and B may partially depend)?

  • Should some of the revenue that belongs to B be passed back to A?
  • Alternatively, should some of the cost that belongs to A be passed on to B?

There are no entirely right answers here, but my own preference is for the second option, for several reasons:

  • In a commercial organisation it is the obtaining of revenue (or rather gross margin) that should be rewarded most clearly
  • In a commercial organisation it is the incurring of loss that should be penalised most clearly
  • People should not generally be rewarded or penalised for circumstances that lie outside their control

Let’s consider what would happen if our cross charging rule were that A should receive 85% of the revenue earned in respect of AC’s work on the project.

When B comes to A to tell him about the project, which hasn’t yet started, he’s optimistic:

‘You’re going to get good money for AC. I’ve negotiated a rate that’s higher than the usual. So you’ll probably end up getting more than you would if you’d sold him yourself. Sadly, I’ll only see a small part of that revenue myself, but, sadly, those are the rules.’

Of course, as in all cautionary tales, things don’t work out well. What B didn’t really tell A was that this is a fixed price project, and B has made some dodgy assumptions about the number of days the project will require. When it comes down to it, the revenue is spread more thinly than planned across the days that AC has given. When A receives his share of the revenue, it doesn’t even cover AC’s standard project cost.

‘I could have sold AC on some other projects and made more money,’ he complains.

However, this is just one of the problems. When A complains to B that he was expecting more revenue, he points out that the project has gone wrong through poor project management, and poor estimating. Why should he be penalised for that, since it was B’s team who were responsible?

B has to admit that some of this may be true, but he counters with a complaint that AC wasn’t actually as experienced and suitable as A had suggested, and so some of the problems were AC’s fault, not his team’s.

And so on.

Not all of these problems are resolved by looking at it another way, but some are. If A charged a fixed price for AC’s work, regardless of the revenue associated with the project, then at least the first kind of problem is averted. But what should that price be?

Full fee rate (B’s notional or actual fee rate for his project) would seem too high, since it would remove any incentive for B.On the other hand, standard project cost would seem too low (let’s suppose that AC has a standard project cost of 450), since it doesn’t provide much of an incentive for A, and provides him with no reward for the ‘risk’ of employing staff (and incurring overheads to do so).

In fact, assuming that appropriately skilled staff can generally be found in one team or another, a clever team leader wouldn’t bother to employ anyone at all. He would simply buy the time of his colleagues at standard project cost.

Of course, there are reasons why this would be a foolish policy. If you ‘own’ your own staff you may make your own decisions about how to deploy them, how to reward them, and you have a much greater chance of running successful projects if you have at least some influence over, and have earned the loyalty of the staff you deploy.Risk must bring rewards, and so the risk of running a team must be reflected in a margin to be charged to other teams when they need to borrow your staff. You should be rewarded for having recruited them, trained them and obtained their loyalty and for the risk that you face that they may be idle and unprofitable.

In the next post, I’ll address the question that arises from this: how should cross charges be calculated?

Form and Function

The modernist maxim that form should follow function is fine if you can agree as to function. What, for example, is the Sydney Opera House?

As an opera house it is not well served by its fabulously soaring shells. The auditorium is like a shoebox stuffed into a narrow but high arched vault. But you might plausibly propose that its function isn’t operatic at all, that it was always intended, not as an arena for Dame Joan Sutherland and her like, but rather to serve as a symbol of Sydney, of Australia, of difference, and as a celebration of the notion that in the New World anything is possible. The building welcomes you to Sydney just as the Statue of Liberty welcomes you to New York. In this sense its form follows its function well. It is sculpture, or beacon, not building.

Of course, it has also, at Ascot, been a hat.

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Construction of the Opera House was a sorry story. Danish architect, Jorn Utzon, submitted sketches to the selection panel in 1957 and the immense problems of actual construction were only resolved much later through close collaboration with Ove Arup, using, for the first time, computers to calculate stress. The final form comprises surface sections of a sphere.

The project ran 14 times over budget, and Jorn Utzon’s interior spaces, initially only sketchily conceived, were completed by another architect after Utzon’s resignation, which was provoked by the philistine bureaucrats who controlled the money (how dangerous would it be if they were not philistine?).

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It is one of the great architectural wonders of the world and one of few modern buildings to become a UNESCO World Heritage Site (2007).

Motivating Professional Staff – 3. Business Unit and Company Managers

In previous posts I’ve written about how you might reward Team Members (see Team Members),, Team Leaders and Project Managers (see Team Leaders and Project Managers) in a Professional Services Organisation (PSO).

Recognising, first, that everyone is motivated in different ways and that motivation is rarely a matter only of material reward, these are my recommendations:

  • Motivate team members 40% by utilisation (not chargeable utilisation), 40% by team gross margin variance from plan, and 20% on qualitative measures
  • Motivate team leaders 40% by utilisation (not chargeable utilisatiion), 40% by team gross margin variance from plan, and 20% on qualitative measures
  • Motivate project managers 40% by project realisation, 40% by project gross margin and 20% on qualitative measures. Ensure that project managers and more senior staff are involved in estimating, scoping, and agreeing between themselves a reasonable project plan irrespective of the commercial decisions made by commercial and sales staff

In this last post, I’m concerned with the bigger bosses: Business Unit Managers and Company Managers:

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Bonuses for Business Unit Managers

We can assume that Business Unit Managers have many of the same responsibilities as Team Leaders but with the added responsibility of commercial negotiation, employment terms and conditions, WIP management and debt collection. However, we can also assume that they do not have control over company overhead costs, though in their particular business unit we can expect that they will have control over sales and marketing costs associated with their unit.

So, since Business Unit Managers control all conditions for utilisation, realisation, standard fee variance, standard cost variance, WIP Days and Debtor Days, they should be judged and rewarded based on gross margin, with sales and marketing costs included too, if they control these, and WIP Days and Debtor Days. Qualitative measures should play a smaller part in the overall calculation.

Bonuses for Company Managers

In the case of Company Managers, we can assume that they control everything, ultimately, except demand in the market. But since they are responsible for the company’s response to that demand, as well as quality, project execution, sales, marketing, salary levels, fee levels and all other overheads, their bonus should be based almost entirely on profit in relation to profit targets, unless other goals such a growth, are of balancing importance.

It’s just not worth it sometimes!

I don’t want to encourage criminality, but sometimes it’s worth breaking the law, or, certainly, convention. I don’t mean laws that protect us from seriously harming each other or ourselves. Rather, I mean the little laws, such as those about when you can cross the road, or, in this (admittedly slightly dull) case, how you do your debits and credits. Where no harm is done it’s always worth asking, does the penalty exceed the cost of compliance?

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I’m not thinking of anything particularly alarming, unless you think that the way you present debits and credits is an issue of morality.

Don’t read on if you’re not remotely interested in accounting.

In a number of Eastern European countries accounting rules require that you make a distinction between a credit and a negative debit, and a debit and a negative credit. This would sound weird to most of the world’s accountants. In most of the world, the opposite of a credit is a debit and the opposite of a debit is a credit and that is the end of the matter. There are debits and credits and no other kind of transaction.

Not so in parts of Eastern Europe. If you make a mistake in your accounting system, you do not ‘correct’ a debit with a credit but with a ‘negative debit’. This enables the reporting of both credit and debit ‘turnover’ on an account, ‘turnover’ consisting of debits and their correcting negative debits, and credits and their correcting negative credits. ‘Turnover’ is something that the tax inspectors look at with quite remarkable enthusiasm, but I am not sure why.

Most Western accounting software packages don’t handle this well. They are built to handle just debits and credits, but convention, if not law, requires that when the tax inspector comes knocking on your door in Budapest, or Sofia, or Bucharest, or when they bash your door down in Moscow, you must serve up reports that show ‘turnover’.  Never mind that your business obtains no benefit at all from this.

But what happens if you can’t?

I remember doing some consulting in Bucharest, many years ago. During a system design workshop (we were putting in SunSystems) the chief accountant went on at length about negative debits and credits.

‘We have to have them,’ she said.

Her boss, the British Finance Director began to look concerned, so I tried to demonstrate some workarounds. But the chief accountant was adamant. I suggested some more expensive workarounds, maybe five days of work. Finally it occurred to me to ask:

‘What happens if you can’t show these negative and debits when the tax inspector comes?’ I asked.

‘Well, you may be fined.’

‘How much?’

‘About 50 dollars.’

Not much. Indeed, immensely less that the cost of working around the constraints of the software to make the right reports possible.

The Finance Director looked relieved and we quickly moved on.

The moral of this story is this always work out if it’s really worth doing something that brings you no benefit, even if it seems wrong.

Someone may tell you you’ve got to do it, but always ask, ‘What happens if I don’t?’

Motivating Professional Staff – 2. Team Leaders and Project Managers

Following on from my post on how team members might be rewarded (see Team Members), how should a professional services organisation reward:

  • Team Leaders
  • Project Managers

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Bonuses for Team Leaders

‘Team Leader’ may mean any number of things in a PSO, but here we assume that:

    • A Team Leader is responsible for deploying his or her staff and for maximising their utilisation at fee rates that maximise profitability
    • A Team Leader is responsible for hiring and firing members of his or her team
    • A Team Leader is responsible for ‘selling’ his or her staff internally to increase utilisation
    • A Team Leader is responsible for the career development and ‘pastoral care’ of his or her staff
    • A Team Leader is usually responsible for authorising the timesheets of his or her team members

But,

    • A Team Leader may not be directly responsible for setting salary costs, since these may be determined organisation-wide.
    • A Team Leader may not necessarily be responsible for projects and their profitability if some or all projects are managed by members of other teams.

A ‘Project Manager’ has a narrower field of interest. He or she wants to maximise the profitability of a project, regardless of the utilisation of the staff who work on his or her project. Clearly a project manager has an obligation (under the terms of his or her employment of staff from the team he belongs to or from other teams) to deploy staff with some regard for optimising the use of their time but that is not a primary concern

In summary, a team leader works at a management level where there is limited control over absolute profit and loss or gross margin, but considerable control over utilisation (even chargeable utilisation). Bonuses should therefore be formed around utilisation or related to variance from forecast gross margin. A successful team leader is one who keeps his team busy at external or internal rates.

Bonuses for Project Managers

  • A Project Manager is responsible for estimating the number of days required for a project, the skills needed and the timing of the project, assuming access to the staff he or she needs.
  • A Project Manager will advise on when and how a project can be invoiced.
  • A Project Manager is responsible for the realisation of a project (assuming he or she is also involved in project estimates and scoping at the time of sale and agreement with the customer)
  • A Project Manager is responsible for invoicing, or, at the very least, taking action to minimise Work in Progress
  • A Project Manager, together with an Account Manager, is usually involved in commercial negotiations as to what can be invoiced and when
  • A Project Manager will be involved , together with an Account Manager, in resolving issues of overdue debt

But,

  • A Project Manager may not be responsible for setting the fee rates or the costs of the staff he or she deploys

Bonuses for Project Managers should be based on variances, on realisation and gross margin, from the realisation and gross margin implied by the project forecasts he or she agrees to be reasonable. He or she should be protected from the consequences of a sales decision to sell a project at a dangerously low value.

A Project Manager should be involved in estimating a Project and a Project should not be sold to a customer until sales staff, account managers and senior managers have reviewed the estimates that an experienced Project Manager has put forward. Whilst sales and commercial staff should be measured against the contracts they make with customers (and rewarded on the project’s actual gross margin), Project Managers should be measured against the contracts they make with their own ‘company’, against the plan and the implied gross margin they believe is real.

What connects the philospher Ludwig Wittgenstein to the Sydney Harbour Bridge?

His mother (nominally).

I’m grateful to my colleague and business partner Jiri, who saw my reference to the philosopher Ludwig Wittgenstein last week in a post on Science and the Mind. Ludwig, at various times an engineer, philosopher, clarinettist, soldier, architect, and, during the Second World War, medical orderly, was the son of one of the richest steel magnates of Central and Eastern Europe.

Karl Wittgenstein’s  Vienna-based empire extended even to Kladno, just outside Prague, where, in 1889, he set up a world-famous steel mill, naming it the Poldi Works after his wife, Leopoldine.

It was at this mill that crucial components were manufactured in the late 1920s for the Sydney Harbour Bridge (which I can see from where I am writing this).

Ludwig inherited billions, but gave all of it away to his sister Margaret (who was painted by Klimt) and to his brother Paul (who lost a hand in the First World War and for whom Ravel wrote a piano concerto just for one hand), preferring a solitary, thoughtful, existence in a cottage in Ireland and a hut in Norway. He was famously difficult company.

Never mind, he was the greatest philosopher of them all.

Sydney Harbour Bridge

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The Poldi Steelworks in Kladno, near Prague.

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Poldi Steelworks logo

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Ludwig Wittgenstein

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Singapore: City of Admonitions

Everything is permitted in the fictional city of Mahagonny, at least during the last Act of Bertolt Brecht and Kurt Weill’s opera, Rise and Fall of the City of Mahagonny., which I saw in London last week. The lesson, and it certainly feels like one, is that moral and spiritual emptiness are the consequences of greed and unfettered materialism. It’s a Marxist anti-opera (or nearly, for Brecht was moving towards Marxism and the ‘epic’ didactic style when he wrote the libretto) but, sadly, it doesn’t offer any clue as to how a better kind of city might be built.

Even so, we can be pretty sure that he wouldn’t have recommended Singapore. He might have approved of its communal consciousness, but the underlying materialist engine would have appalled him.

In Mahagonny, everything is permitted. In Singapore, very little is permitted. Whether it is law, morality or merely etiquette, guidance on what you may or not do assails you wherever you may be. The images below I gathered in just five minutes on the metro. I love ‘Bag Down for a Better Ride.’ It could be set to music.

In Singapore, no one wants to stand out by infringing these or any other rules, even if the sanctions are mild (no caning, as far as I know, for not putting your bag down). Suitably cowed, it’s the only country I’ve visited recently where I wait for the green man to shine before I cross the road.

Often sanctions are severe. Two Australians recently got five years in jail and three swipes of the cane for spray-painting graffiti onto a tree. The law caught up with them in Kuala Lumpur, and they were extradited back to Singapore. Carry a gun or trade in drugs, and you hang.

It seems churlish to find fault with Singapore on the day that Lee Kuan Yew, its founding father, has died. Singapore celebrates 50 years of independence from Britain this year. It’s a rare case of a stable post-colonial nation, astonishingly successful in economic terms, its GDP per capita higher than that of its former colonial power. Ethnic and religious tension are absent, despite a mixed population. Its citizens are equal under the law and it is amongst the least corrupt of nations.

It’s also a comfortable, orderly stopover on the way to Sydney, and the prospect of tree-lined, litter-free, gum-free, graffiti-free streets is appealing, but nothing could persuade me to make this city my home. Litter, graffiti, even chewing-gum are a price worth paying for a little mischief, and freedom from convention.

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