Should You Manage Employee Performance Based on Profitability or Productivity?

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With a sophisticated ERP solution like Microsoft Dynamics GP, you have easy access to metrics, KPIs, and ROIs that are tailored to track your organization’s goals. Recently, we are seeing a trend in the Professional Service industry of companies now wanting to now include per person profitability to their metrics. In order to do this, you must be able to break down, isolate, and calculate the different activities that are being entered by each individual within the organization. The best way to do this is with a project accounting module since you will need to link an employee’s detailed activity to a particular project, phase, or company.

If you are strictly looking at per person profitability in a professional service firm, your first step  is to figure out how many hours you can bill. To get an accurate calculation, you need to do more than just subtract the employee’s salary from their revenue; you also need to factor in benefits and overhead costs. Every organization is different, but you need to figure out what is the cost of your organization’s overhead per employee workable hour in order to calculate this multiplier to add your employee’s hourly wage to more accurately calculate your organization’s real profitability.

The debate begins when you start looking at an employee’s profitability; should you actually start by reviewing an employee’s productivity? There are activities that probably occur within your organization that may be considered productive, but not profitable in the short term.

When you want to calculate an employee’s productivity, you need to start by looking at how many hours in a year are considered workable versus non-workable hours. An employer knows that you cannot be profitable or billable at all times since employees are entitled to benefits.  The calculation must take into account the hours that a salaried employee will be paid for but will not be productive since this should not be taken into account when you are looking at someone’s personal productivity rate. You should  calculate the actual number of potential productive hours after benefits, and the calculation would look something like this:

  • Number of available hours to work in one year for a salaried employee:  40 hours per week and 52 weeks per year: 2080 workable hours 
  • Number of paid but non-working hours in a year for a salaried employee:
    • 3 weeks of vacation= 120 hours
    • 10 civic holidays= 80hours
    • 5 sick days= 40
    • 240 of non-working hours
  • Total number of productive hours in a year: 1840 hours 

Once you have calculated the maximum number of potential hours of productivity that are available in a year, the next question should be: can all resources be profitable? Within an organization, it is expected that there are some tasks that are productive, but by definition will never been seen as “profitable”. For example, should employees who are doing Business Development activities or completing RFPs be penalized on their performance reviews because they were working on something that isn’t immediately profitable but may be profitable one day?  This is why it is important when you are setting up your solution that you can create various levels within your project in order to distinguish, but not penalize, those who are productive yet not technically profitable in a financial sense.

So what is the danger of you strictly manage by profitability? If you assign goals which are solely linked to profitability, you are creating an environment that is solely focused on short-term profits.  If you do this, your organization may begin to lag in other areas since this evaluation process does not encourage them to do business development and nurture future sales, places less importance on training and can cause you to fall behind to the competitions with regards to knowledge on the latest innovations, and finally, you may well miss out on solidifying customer loyalty since there is less importance placed on basic customer support.

A good project accounting solution would have an integrated time sheet module that would enable employees to enter their various activities and would push the results directly into your ERP solution. The time sheet must be able to allow for different phases and levels in order to extract the breakdown of an employee’s profitable versus productive hours in general and within a particular project. This will help you set a wider variety of objectives since both are needed to maintain a successful business.

By JOVACO Solution, a Quebec-based Dynamics GP Partner

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