Metrics: Determining Costs and Profits, Part 2

Chances are, if you were in Business School before 1990, the analysis
tools for forecasting and scheduling were on the order of Cost Analysis,
Break-Even Point, Return on Investment (in terms of capital and sales),
and Production Scheduling. Along came a mighty software company, and all
of the information derived from those analyses was put into an
Excel-type spreadsheet. Little attention was given to communicating and
sharing this information with other related departments, despite well
established concepts such as profit centers and teams, or to allocating
human capital relating to project deployment and cost of deliverables.

In 1992 though, Robert Kaplan and David Norton introduced the Balanced
Scorecard as an integrated tool that pulls all of those concerns into
one dynamic system and provides powerful information. Nine years later,
analysis of the information system in Europe, Asia, and America revealed
an average acceptance of roughly 55% in small to large companies.

The Balanced Scorecard provides managers with forecasting dynamics when
considering whether to take on a project or not and what parameters are
needed for execution and profitable delivery. As the project progresses,
the tool provides drill-downs showing where costs may divert the project
from the targeted profit margin and even down to identifying where
personnel involved in that portion of the project as the source of the
issue. From that feedback, an assessment can be made indicating whether
the personnel require more training, talent should be reallocated, or
the goals of the team and the project must be better communicated.

Herein lies the beauty of the tool. In order to produce the best
results, communication with and understanding of your personnel is
critical for them to buy into their work. One feature of the Balanced
Scorecard is the initial information provided to your team, which gains
their consensus on the targeted project.

The Balanced Scorecard may not be the right tool for every organization.
If you're managing a very small office with only a dozen or so people in
the entire business, then an Excel model may still be the right tool for
you. The point is, a model that can provide the right information for
your organization's needs does exist. And even though Break-Even
Analysis is traditionally used for analyzing product sales, programs are
available that will aid in analyzing human capital deployment as a
substituted input for one of the other variables.

When it comes to deciding which program is right for you, other options
exist to spending hours calling or exchanging numerous emails with a
potential vendor. Free demonstration models are available that allow
potential customer to determine whether that product is the right fit.
You may want to use a checklist to assist in your selection process.
Inphase Performance Products offers just such a printable checklist at
http://www.inphase.com/RFI.htm.

No matter what you choose to use, a tool that helps monitor costs and
human capital allocation in relation to the project and profits is a
good idea. Then when the project is completed, you'll definitely know
that it's time to order out for the celebratory pizza and Thai food.

» posted by ITworld staff

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