For a lot of IT services companies, a large part of their work portfolio is fixed cost projects. That means that they go after and bid for projects in a particular domain. When they reach certain milestones (e.g. project completion), they get paid a certain amount. i.e. compensation is tied to delivery of scope, not necessarily the amount of work their people have put in. Employees (except perhaps contractors) get paid by the hour. They want a fixed salary every month and they want you to worry about the rest.
On the sales side there are usually many things going on simultaneously at any given time. So your revenue ($ or man hours of work) plotted over time looks something like this
Sometimes there is lots of work, sometimes not so much. The company management needs to make a decision on how many employees to hire to fulfill demand. The redline represents this level (# of man hours available for delivery)
If the line is drawn somewhere in the middle as is shown in the diagram, everything on top of the line is business that the company cannot deliver. If the line is drawn all the way on the top, the company will be able to deliver all the business the sales pipeline can generate but the portions in red will be idle hours for its team. The more time your team is sitting idle, the less efficient your company’s delivery engine is. The amount of inefficiency usually directly relates to the average employee salary.
The problem is relatively common in the business world (even outside the services industry) and its one of matching supply with demand.
So what can you do about it:
- Try to sell FTE contracts (where the customer is given a resource and is billed a fixed hours a month) instead of fixed cost projects. This pushes the cost of inefficiency to the customer and often gives them an incentive to use resources efficiently.
Try to make your sales pipeline less erratic.
- Steady partnerships help.
- Lots of independent sales channels tend to level off the overall erratic-ness in your revenue line.
Try to predict the pipeline
- Watch your revenue line closely and try to look for patterns. Business will be good when the general economic conditions are good. You will likely see spikes a few months after June and August when companies approve budgets. Keep a close eye on the conditions of your company’s general health and published plans for the future.
- On the capacity planning side (particularly in Pakistan), young graduates are largely available in June/July. If you try to hire in August, you might have missed the best of them already.
- Try to develop a strong contractor network. In our figure above, if you drew the line all the way at the bottom, your company would be 100% efficient. If you were able to execute everything else via external contractors, this would work out nicely. This ofcourse the general idea… its very hard to manage contractors and developing a network large enough for you to find availability whenever you need it is a challenge in itself. That’s the general idea though. The higher up your line, the fewer contractors you need and (most likely) the less efficient you are. The lower your line, the more efficient you are but the stronger your network needs to be.
If you have other ideas or thoughts, please leave me notes in the comments section.