Do you know who your most or least profitable employees are?
All businesses monitor key financial and operational metrics. Revenue. Profit. Costs. The high-level facts and figures that make their way to board meetings and investor presentations. Successful organizations build their goals around these metrics - and hold leadership accountable for delivering results.
But what about the individual employees that make up these critical data points. How do you know which team members have the biggest impact on the business?
This isn’t about which employees are the most productive or who spends the most time in the office. It’s about identifying high and low performers that truly move the needle for your organization.
For employees with billable hours, it’s actually quite simple to determine individual profitability:
(Hours Billed x Billing Rate) - Employee Cost*
Understanding who is the most or least profitable employee not only enables you to more effectively manage and reward your team, but it also gives you data that allows you to analyze your business on a much more granular level.
Uncovering hidden insights
Employee profitability itself doesn’t tell the complete story. But it provides a framework to ask other key operational questions about your business:
- Which types of jobs are the most profitable?
- Which clients are the most profitable
- What type of project is more or less likely goes over budget?
There numerous time tracking and resource management solutions that allow you to tie employee costs, hours, and billings to specific tasks and clients. These types of analyses offer powerful insights into operational efficiency, and allow you to make smarter management, product, and even partnership decisions.
Are your employees profitable enough?
Just because an employee is profitable, that doesn’t mean he or she is performing at an optimal level given his or her role, and compared to norms in your industry. That’s why it’s important to assess not only profitability, but also employee utilization - how many hours an employee is billing compared to how many hours they are working. Some employees may be spending too much time on non-billable work. Or a relentless drive towards profit may have them over-utilized and neglecting essential administrative duties, training, or assisting their peers.
Tracking utilization, especially utilization over time, can establish a pattern of improvement in an employee relative to his or her peers. It’s also critical to understand an employee’s predicted utilization when planning their time in the future. How many hours will they have available, and how many of those can be expected to be billable, and at what rates?
That’s why it so important for management to have effective budget-setting tools, as well as real-time visibility into project budgets as work is performed. Identifying and assessing over servicing - before it becomes problematic - ensures that your team is working on the right projects and the right time, and helps to solidify long-term profitability.
Data-driven performance reviews
The modern workplace is dominated by overly-qualitative employee performance reviews. All too frequently, decisions of compensation, promotion, and incentives are influenced by managers’ inherent biases towards social, likeable, or outspoken employees. A culture of fairness is easier to maintain when reviews contain key metrics - directly tied to profitability - that support manager decisions around performance reviews.
There is also excessive emphasis placed on goals or metrics that may dominate a firm’s culture or the chief executive’s thinking, but may not truly impact profitability. By incorporating individual employee performance in terms of profit created, you’ll be able to ensure you are rewarding the right team members for their work, and creating a culture that strives for continual operational excellence. And when matters of compensation are more closely linked to the individual's’ potential for creating profit, it aligns employee incentives with company imperatives.
*There are many methods of correctly computing Employee Cost. The obvious ingredients are wages, benefits, bonuses, and overhead. For the purposes of this discussion we’ll assume you’re using a reasonable method to distribute overhead expenses equitably across your team.
David Klein is the Director of Marketing for ClickTime
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