Beyond Traditional P&L—Are You Measuring What You Manage?

Introduction

Jack Welch, former CEO of GE, once remarked, "A profit and loss statement tells you where you’ve been; insights and advanced metrics tell you where you’re going." Similarly, Carly Fiorina, former CEO of HP, emphasized the importance of transforming data into actionable insights. Peter Drucker's assertion that "what gets measured gets managed" underscores the necessity of precise metrics. Indra Nooyi, former CEO of PepsiCo, highlighted that a company's ability to adapt and make informed decisions is crucial for distinguishing itself in the market.

In the current dynamic business environment, especially for IT companies, traditional P&L statements and balance sheets are insufficient. Success hinges on converting data into actionable insights and swiftly adapting to operational changes. Beyond the inherent appeal of their products or services, companies must delve deeper into their data to identify growth opportunities and optimize resources.

Traditional P&L statements often fail to answer pivotal questions: Which customers or projects are driving growth? Which metrics are declining? Are resources being utilized optimally? Addressing these queries requires granular data that provides actionable insights. By defining and measuring factors that influence growth and efficiency, organizations can better manage their operations and elevate their status in the industry.

Expanding Beyond Traditional P&L

While the P&L focuses on gross margin and SG&A expenses managed by departmental heads, a deeper analysis is essential:

• Gross Margin: Examine profitability at the customer and project levels, integrating both financial and operational metrics.

• SG&A: Monitor expenses across functions to ensure alignment with revenue trends and optimize as necessary, correlating costs with revenue and personnel metrics.

This discussion will concentrate on measuring customer and project profitability through detailed data collection, analysis, and management. Our next newsletter will address SG&A tracking, development of responsibility P&Ls, target setting, and measurement.

Key Metrics to Measure

When establishing or restructuring company operations, it's vital to design a management information system (MIS) that captures the following data. Ideally, these data points should be integrated into ERP/financial reporting systems and project management tools.

1. Employee Master

Capture the following details:

• Employee ID

• Name

• Location & Country (also classified as Offshore/Onsite/Nearshore)

• Cost to Company (CTC) and Loaded CTC (CTC plus additional non-CTC salary costs)

• Gender and Nationality

• Date of Joining and Exit

• Status (Active/Inactive)

• Designation, Role, Band (Major band and Sub-band)

• Department Group (e.g., Technical, Sales, Support, Leadership)

• Department specifics (e.g., Delivery by horizontal , Sales by Vertical, Finance, HR)

• Employment Type (Permanent or Contract)

• Hiring Source (Campus or Lateral)

Maintain this master in real-time. The Employee ID should link to all associated attributes, facilitating comprehensive analysis for value enhancement or cost optimization.

2. Customer Master

Include the following information:

• Customer ID and Name

• Company Group - Parent/Holding

• Vertical and Sub-Vertical (aligned with internal classifications)

• Customer Headquarters (for sales regional reporting)

• Billing Locations (multiple entities if applicable – create separately)

• Assigned Vertical Head, Sales Director, and Account Manager

• Status (Existing or New Customer for the current year)

• Revenue Size of the Customer

• Classification (e.g., Fortune 500, Global 2000)

• Addition and Exit Dates

This master aids in assessing customer concentration risks and revenue growth profiles, offering insights beyond traditional P&L statements.

3. Vertical Master

Document:

• Vertical and Sub-Vertical Classifications

• Understanding revenue segmentation by verticals (e.g., BFSI, Manufacturing, Telecom) helps evaluate sales effectiveness and alignment with global IT spending trends.

4. Horizontal Master (Service Line or Offering)

Record:

• Horizontal and Sub-Horizontal Classifications

• Assigned Horizontal and Sub-Horizontal Heads

Mapping projects to horizontals (e.g., Applications, Cloud Infrastructure) enables analysis of deployed resource utilization and alignment with business growth, ensuring optimal hiring and skill development.

5. Project Master

Capture:

• Project ID and Name

• Type (Customer, Internal, Shared)

• Engagement Type (e.g., Time & Material, Fixed Price)

• Revenue Type (e.g., Existing Customer Existing Business)

• Associated Customer, Group, Vertical, and Horizontal

This master facilitates tracking of revenue-generating and internal projects, ensuring accurate cost allocation and profitability analysis.

Revenue-generating projects are categorized as Customer Projects and are mapped to external customers. Internal and Shared projects, mapped to the company, focus on tracking metrics and costs as cost centres.

• Internal Projects: Employees are initially assigned to Horizontal Resource Pool, Support, or Sales Projects based on their roles. When a Customer Project begins, they are reassigned accordingly. Employees not allocated to Customer or Internal Projects remain as bench resources. Typical internal projects include training, COE, value creation, support department and  Sales related projects.

• Shared Projects: Resources work across multiple customer projects, with costs and efforts allocated proportionally at month-end. These types of projects are common in Infrastructure or AMC services, ensures accurate revenue and cost matching.

• Support department or Sales Projects: Functions like Finance, HR, IT, and Sales have dedicated projects to track their department resources, costs and time, such as Sales, Pre-Sales, or Solution Projects.

• Timesheet Recording

Employees assigned to projects must log time as Billable, Non-Billable, or Leave. Approved timesheets enable  billing, revenue recognition, and cost allocation, providing data for metrics calculation and cost optimization.

Calculating Customer and Project Profitability

The process involves:

1. Creating customer and project records upon deal closure.

2. Assigning employees to projects.

3. Recording and approving timesheets.

4. Recognizing revenue and accounting for costs.

This sequence enables calculation of:

• Revenue: With all associated parameters.

• Direct Costs: Including resource costs and project expenses with associated metrics

• Project Margin: Revenue minus Direct Costs.

• Delivery Overheads: Such as leadership, bench, and support costs.

• Gross Margin: Project Margin minus Delivery Overheads.

Analysing profitability at the customer and project levels, alongside key performance indicators like bill rates , cost rates and utilization percentages, provides actionable insights for performance improvement.

Project margin at the Customer and Project levels is calculated as revenue minus direct costs, as both are directly aligned to the project. To determine Gross Margin at these levels, delivery overheads must be allocated using a defined rule. Some companies treat delivery overheads as fixed costs, assessing Gross Margin only at the business segment level, where these overheads are more controllable, rather than at the Customer or Project level.

Summary

Traditional P&L statements offer a broad view of business performance. However, in the IT industry, measuring granular metrics is crucial for effective operations management. This newsletter has explored dissecting the P&L up to the Gross Margin level, analysing profitability from project to company-wide perspectives. By integrating financial data with personnel metrics, organizations can derive actionable insights to enhance performance.

Key Performance Indicators (KPI) metrics for projects, when measured using both financial and non-financial data, enable informed decision-making and drives performance improvements.