Responsibility P&L—Are You Measuring What You Are Managing and Controlling ?

Introduction

In our last article, we highlighted how traditional P&L statements often fail to address critical questions: Which customers or projects drive growth? What metrics are underperforming? Are resources being used optimally?

Granular data that offers actionable insights is essential to answer these questions. By defining and measuring factors influencing growth and efficiency, organizations can enhance their operations and competitive standing.

This continuation article builds on that discussion by exploring Responsibility P&L—a framework for precise ownership and accountability in financial performance. If you have not read the previous article on customer and project profitability, we recommend it as a precursor to this one.

Expanding Beyond Traditional P&L

While traditional P&L tracks Project Margin, Delivery overheads and SG&A expenses by department, Responsibility P&L takes a deeper dive:

• Project Margin: Evaluate profitability at the customer and project levels, combining financial and operational metrics.

• Delivery Overheads : Delivery overheads are spent by respective horizontal organization for their business line

• SG&A: Align expenses with revenue trends, optimize where necessary, and correlate costs with revenue and personnel metrics.

In this article, we focus on SG&A tracking, Responsibility P&L, target setting, and measurement.

Key Metrics to Measure

Project Margin and Delivery overheads : As previously discussed, Project Margin at the customer and project levels is calculated as revenue minus direct costs. Delivery overheads, categorized as direct fixed costs, are specific to the horizontal business segment they support.

When preparing vertical-wise P&L, delivery overheads are aggregated and allocated. This allocation is necessary because a vertical's revenue often comprises contributions from multiple horizontal businesses. To ensure fairness, it is essential to establish a well-defined allocation principle, distributing costs proportionately based on factors like revenue contribution, resource utilization, or other relevant metrics.

This approach ensures transparency and accuracy in measuring vertical performance, fostering accountability across horizontal and vertical business units.

SG&A Expenses (Selling & General Administrative): SG&A costs are often fixed nature but may have a linear correlation with revenue.

A breakdown of SG&A includes:

• Selling Expenses ( Sales Overhead): For IT organizations, these typically account for around 7% of revenue and an additional 2–3% for sales presence in multiple countries in Europe and APAC regions.

• Selling expenses primarily include the salaries of sales teams (Hunters, Farmers, Engagement Managers, Sales Leaders, Pre-Sales professionals, etc.), travel expenses, and other related costs. Salaries typically constitute 70–75% of this expenditure.

• When preparing the Vertical P&L, these costs are directly allocated to the respective vertical business line they support. However, total sales overheads are also aggregated and proportionally allocated to horizontal business lines, based on the verticals they serve.

• This dual allocation ensures clarity in cost attribution, fostering accountability across both vertical and horizontal business segments while providing a comprehensive view of performance.

• General & Administrative (G&A) Expenses: This cost tracking is being done in two ways:

1. By Functional Departments: Expenses categorized under Finance, Marketing, IT, HR, Leadership, etc. Each department’s costs are tracked by line items like salaries, travel, legal fees, and audit expenses in case if Finance function.

2. By Line Items: Examples include salaries, rent, travel , software licenses, recruitment, training, and CSR activities.

G&A overheads and depreciation are calculated at the company level and subsequently allocated to vertical and horizontal business segments. This allocation provides a comprehensive view of each segment’s P&L performance in the broader context of the company’s overall financial performance. By distributing these costs appropriately, organizations ensure greater transparency, enabling business leaders to assess their contributions holistically while aligning segment-level performance with enterprise-wide objectives.

To achieve “best-in-class” performance, companies should track and compare these expenses against external benchmarks and set clear goals for optimization.

Responsibility P&L: Driving Ownership

Having understood SG&A spending, let us explore Responsibility P&L and its integration with the company-level P&L.

Responsibility P&L fosters accountability by assigning business leaders ownership of the P&L for their respective areas. Business Leaders are held responsible for both controllable costs (directly attributable to their operations) and non-controllable costs (allocated overheads).

By measuring Responsibility P&L, organizations can ensure transparency, drive accountability, and align individual performance with overall business goals.

Responsibility P&L: An Illustrative Example

Below is a sample structure for a Responsibility P&L. Companies can customize it to align with their specific needs and operational requirements:

• Horizontal Business Heads: Accountable for Delivery LOB Margin (Project Margin minus direct delivery overheads). They manage costs and optimize Delivery LOB Margin within their business line. After factoring in allocated costs, they own the EBIT for their division and its contribution to the company’s overall P&L.

• Vertical Sales Heads: Responsible for Vertical Sales Margin (Project Margin minus direct sales overheads). They drive project margins for the business they secure, control sales overheads, and enhance Vertical Sales Margin. Post-allocation of additional costs, they own the EBIT for their business and its impact on the total company P&L.

• CEO’s Role: The CEO oversees total revenue and EBIT, relying on Responsibility P&L to measure each leader’s performance transparently. This enables better decision-making, promotes ownership, and ensures a reliable assessment of business segments.

Summary

Responsibility P&L empowers CEOs to evaluate business leaders based on their specific contributions, helping identify high-performing and underperforming segments. While this article focused on the IT industry, the principles can be adapted to non-IT organizations too.