Accurate Effort Estimation is critical for Profitability

By Khiv Singh No Comments
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Traditional manufacturing industries track input costs related to their business very accurately. They have production targets, and precise information on total material used, person-hours of effort and actual output. This is important to ensure profitability for their business. Large companies use ERP (Enterprise Resource Planning) software to automate this tracking.

Time/Effort is a critical business asset

Traditional manufacturing industries track input costs related to their business very accurately. They have production targets, and precise information on total material used, person-hours of effort and actual output. This is important to ensure profitability for their business. Large companies use ERP (Enterprise Resource Planning) software to automate this tracking.

This is difficult to do at companies whose employees spend time on computers to deliver their products and services. They include software product or services firms, KPO/BPOs, engineering services, and IT and back office teams at organizations in various sectors.

Effort is the sum total of work time spent by all team members towards achieving end objectives. Effort results in Output which in turn is billable and leads to revenue. Though Effort influences the financial outcome, it is not measured in any meaningful way.  Unlike rigorous accounting of cash (which is the outcome of Effort), there is no equivalent process to keep track of Effort.

New business trends require Effort to be tracked accurately

In outsourced IT Services, Time & Material (T&M) has been the standard business model for a long time. With T&M, vendors did not have to worry about measuring Effort, because they got paid for each person-month of work. Clients who jumped on to the outsourcing model relatively early, initially did not care because person-hour rates in India were much lower than in the US or Europe.

Once outsourcing became an established practice, the competitive edge to early outsourcers vanished. With more players (companies and countries) in outsourcing space, clients are now demanding predictable costs. Depending on the services being provided, this meant “fixed fee for unit of service rendered” or “fixed cost for this entire project”. In both models, vendors now have to optimize their costs to be able to offer competitive rates and yet stay profitable. Optimizing cost means knowing the Effort that goes into producing the unit of work or completing he entire project.

The percentage of T&M work has been declining steadily from almost 100% to probably 50-60% at present. It is no surprise that accurate measurement of Effort has surfaced as a major requirement.

Current effort estimation techniques are inaccurate

Today, Effort is estimated from approximate headcount and calendar time that they spent on a given project or product release. This method often leads to incorrect conclusions.

Firstly, there can be a wide gap between time in office and time on work. Employees in the knowledge have very little idea about exactly how much time they spent on actual work. Industry surveys show that more than 2 hours are spent on non-work related internet surfing, chat, and absences for phone calls, coffee breaks, and other distractions in the office.  There is significant variance between employees – some deliver much more work time than others.

Besides time misuse, often unknowingly, there can be individuals who do not have sufficient work assigned, and others that are excessively loaded.

Flexi hours, distributed locations, contractors and outsourcing of work, are making it even more challenging to assess time on actual work by employees accurately.

Now, let’s see how Effort on a project or task is estimated. It is usually simply the number of people times the calendar time. This leads to seriously flawed estimates. For example, assume that four people spent 3 months on a given project, leading to an estimate of 12 person-months. Take three scenarios:

  1. Team had tight deadlines and spent 60 hours average per person each week. Actual effort was 1.5 times the calendar estimate of 12 person-months.
  2. Team we not managed effectively, or did not get inputs on time, and averaged only 30-35 hours per person-week. Here, the real effort was 75% of the estimate.
  3. Team was working 40 hours per week, but half of the team also had other assigned work that was not visible to senior managers calculating the effort estimate. Here too, the real effort was less than estimated.

Such a divergence between reality and estimates can mean the difference between operating profitably or at a loss. Worse, future bids for similar work will be incorrect since past estimates of effort are seriously flawed. So what’s the solution?  As the famous US management expert, W. Edwards Demming, put it, ‘You get what you inspect, not what you expect’. The way forward is an automated solution that provides accurate Work Visibility. It must be able to show the following accurately:

  1. Time on actual work for each employee
  2. Work time breakup by project and activity
  3. Aggregation of individual work time utilization data at team and project level
  4. Analytics on Effort: total, average per employee per day, breakup by projects (if the team was assigned to multiple projects), % of time on various activities (so that the activity mix can be improved in future)

Summary

Rising competition and new business models require accurate computation of Effort to ensure that companies negotiate correctly for fixed price or outcome based business deals. Automated Work Visibility is the key to measure Effort accurately, and even optimize it for increased profitability.

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