Making Money vs. Making Forecast

LinkedIn Article by Tim Williams
June 26, 2018

The constant forecasting and recasting of revenue is a colossal waste of time in most professional service organizations. No doubt every firm needs a periodic estimate of expected income and expenses, and the closer the estimate is to the actuals, the better. But the time devoted by senior professionals to the relentless forecasting process in most firms doesn't yield the expected incremental value. As the Scottish proverb goes, “You don’t make sheep fatter by weighing them more often.” 

A more precise forecast doesn’t produce more money for the firm. And when an assignment has been completed, a more precise analysis of estimates vs. actuals doesn’t produce more profit. Even when a project is still in mid-stream, it’s quite impossible to improve the actual profitability of the assignment by monitoring the hours spent vs. the hours estimated. 

In place of analyzing financial data that appears in the rearview mirror, the most profitable firms do their costing accounting in advance. They do a good job of estimating the value (not just the cost) of their work, quote a price based on that value, allocate the resources to effectively get the job done, then execute the project while paying close attention to scope management. 

These firms define “scope” properly, meaning the actual work product, not hours spent. It’s entirely possible for an assignment to have used 90% of its estimated hours but stand at only 10% actual completion. 

A ship that has already sailed

An initial estimate of hours only serves the purpose of helping to forecast your expected costs on a project. Once the project is underway, no amount of analysis will help get the project done faster or more profitably. A profitable project is the result of good scoping, good pricing, and good scope management (keeping in mind scope does not equal hours).

Once the actual work on a project is underway, aside from the quality standards upheld by the firm, the only things that matter are:

  • Is the project meeting its milestones (are deadlines adhered to and are phases of work completed on time)?
  • Is the project staying in scope (no client-driven changes beyond what was outlined in the original scope of work)?
  • Is the project staying in budget (defined by outside supplier charges and other hard costs, not hours worked)?

If your team does an effective job up front of identifying how long a particular deliverable should take to complete, then it’s up to the team to manage its own time to meet the deadline. It doesn’t help them to have a project manager constantly looking at timesheets, telling team members how many hours they have left on a particular assignment. The responsible parties will have to do what it takes to deliver the output regardless of “hours remaining.” 

Utilization or accountability?

In a profit-optimized organization, the culture is one of accountability, not utilization. The goal is to get your teams centered on the idea they’re in the business of delivering outputs and outcomes, not inputs. Inputs (hours, efforts, activities, individual tasks) are only a means, not an end. We should not be interested in micro-managing an individual’s hours or tasks; rather, we should be focused on whether or not they are delivering the intended output or outcome, on time and in a quality way. 

Consider all the time, energy, and methodologies your firm uses to forecast, track and analyze inputs (hours). Now contrast that with how your firm tracks what really matters: work completed and results produced. Specifically, related to outputs:

  • Do you categorize produced work or completed services into broad classes for which you track and attribute revenue? What are these classes?
  • Do you know how many actual deliverables were produced during the past year in each of the classes? What was the average cost of these outputs? What was the average price? 
  • Instead of hours or percent of staff time, do you have other means of matching workload to resources? Have you developed a unit of measurement for outputs to help establish, gauge and manage actual workload?

Equally important is your firm’s commitment to and process for tracking outcomes -- the business results you produce for your clients. Specifically:

  1. Does your firm have a framework for identifying and categorizing metrics of client success? 
  2. For which clients are outcomes clearly defined so that some type of measurement is possible?
  3. What are the formal ways in which you discuss and identify outcomes with your clients?

The way to make your numbers isn’t to step up your financial forecasting process. (Chances are, you’re already investing the necessary time to assess expected income and expenses.) Instead of analyzing the effect, turn your energies to gauging the cause. 

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