The Paralysis of Analysis

Jim HustonA primary objective of a chief executive is to ensure everyone in the organization has clearly defined goals that are simple and measurable. Goals must be both quantifiable and timeable. Too often, field and office staff meander through their daily routines without an end-game strategy. This can be disastrous financially as shown by the following scenario.

The Scenario
Recently, an irrigation service contractor complained to me that her monthly revenue from her four full-time service technicians seemed low. Her company worked year-round. The most they had ever billed in one month was $44,000 (including parts). Maximum annual sales were about $450,000. She told me her hourly rate was $65 per man-hour, and technicians would normally make a minimum of four service calls per day. She added billing $700 to $800 per day was not uncommon. I knew immediately something was seriously out of balance.

In this company, the average technician is paid $19 per hour for a 40-hour week year-round. Total payroll hours per year, minus some holiday and vacation time, were roughly 2,000 man-hours. Adding a 10 percent risk factor, a 30-percent labor burden, general and administrative overhead at $14 per man-hour, a van at $8 per hour and a desired 20 percent net profit margin, this technician has to bill just less than $500 ($492) per day. Repair parts would be billed in addition to this amount. The portal-to-portal rate calculates to $61.46 per man-hour ($492 divided by 8 man-hours). For easy math, let’s round up the hourly rate to $65 and the daily billable amount to $500.

Analysis
This contractor’s hourly rate is fine (if it is presented to the customer properly). Technicians should bill $11,000 per month (22 days at $500 per day) for labor, plus roughly $150 per day (retail) for parts or approximately $3,300 per month. Total monthly revenue per technician should be a little more than $14,000. This equates to $168,000 per year. Four full-time technicians should bill about $672,000 per year. Somehow, this contractor is missing an extra $200,000-plus in annual billings. That’s a lot of money.

Recommendations
First, I’d recommend this contractor keep the $65 per man-hour rate. However, she should charge a minimum trip charge of $65, which will cover up to the first 30 minutes on site. Time past the first 30 minutes should be billed in 15-minute increments (or part thereof) at $16.25. This methodology should generate a minimum of eight billable hours per day or $520 ($65 times 8 hours).  

Second, this contractor should monitor her daily revenue generated from each technician because she is under-billing between $100 to $200 per day per technician. It is quite possible technicians are doing side-jobs on her time.

Conclusion
Pushed by the pressures of running a business in today’s economy, too many contractors can get wrapped up in minutia. They monitor the wrong things and/or suffer from paralysis of analysis. Worse yet, they monitor nothing at all. To save yourself stress and time, keep things simple, measurable and timable.

Setting daily goals for everyone in your organization is critical if you are going to keep your organization focused. However, remember you must be focused on the right things. Doing so can make your life much simpler and your bottom line much healthier. Both are critical in these perilous economic times.