"As I said earlier," Dan said, "I asked Jim Stewart, our CFO, to sit in with us today and share any insights he might have about the business implications of the current time and billing system. He's been taking some notes as we talked, and I'm sure he would like to share them with us." He turned to the CFO. "Jim, you've been here longer than I have, which is one reason I wanted you to be here today. We'll need your insights into what matters from a business standpoint as we begin finding solutions to these issues. More than anything, we want to plan a product that makes good business sense. Take as long as you need and tell us what you see as the business implications of the issues we have listed." Dan sat down, and all eyes turned to Jim.
When Dan had invited him to attend the meeting, Jim hadn't been sure what to think. Early on, he had resented the fact that Dan wasn't reporting to him but was instead part of the senior management team. He had worried that the new CIO would spend money wildly and not really care about what made Ferguson and Bardell the successful business it was. Over the past six months, however, he had come to realize that Dan was interested in far more than just computers, and was primarily concerned with the same things he was: how to use his area and his skills to make Ferguson and Bardell the best it could be for its customers, its employees, and its stockholders.
Being invited to share his opinions in what was primarily a technology meeting was a new experience for him. It seemed, though, that Dan and the others really wanted to hear what he had to say. Taking a moment to gather his thoughts, he began.
"I appreciate the opportunity to join you today," he said, looking at Dan and then the others. "It has been good for me to hear your analyses and to see the issues list you have developed." He looked at Jane, with whom he had worked for the past four years. "I especially appreciated your section, Jane, and the self-control you showed. I have heard you describe our time and billing system in the past in somewhat more, shall we say, graphic terms."
Jane blushed and smiled, and everyone else laughed knowingly. The tension broke, and everyone, including Jim, relaxed noticeably.
Jim continued, "I made some notes as you all spoke, and I'd like to share with you what I see to be the primary business issues caused by the current system. I was going to follow Dan's agenda, but now that I think about it, I'd like to simply list the business issues, because they actually cross more than one area. Is that acceptable to everyone?" When the group nodded, Jim moved to the whiteboard.
"Basically," he said, "you can affect the profit picture of a company in only two places: the top line or the bottom line. In other words, you can increase profits either by increasing revenues or by cutting costs. There are an infinite number of means to either of those ends. I'm being fairly simplistic, but this is a good way to begin considering business implications of a problem. Does it affect either the top line or the bottom line?
"It seems to me that four basic business issues relate to the current time and billing system. Two are top-line issues, and two are bottom-line issues.
"The first issue is inefficient use of resources. The example Marta gave is perfect: We have a resource that has a certain skill set, but we are not aware of that skill set. Or we might have one person who is marginally competent at a given task and another person who is exceptionally competent at the same task, and we send the marginal person because we don't know that the exceptional person is, in fact, free at that time.
"Ultimately, of course, an inefficient use of resources leads to loss of revenue. Customers want a resource adequate to the job at hand, but only adequate. The point is to send the appropriate resource to the customer. If we send a $200 resource to do a $50 task, either we bill the customer $50, in which case we lose money, or we bill them $200, in which case we lose a customer.
"Of course, there is also the other situation Marta mentioned: where we lost a job entirely because we believed we didn't have the resource to cover it, when in fact we did and didn't know it. This sort of situation sends salespeople and management absolutely over the edge. In fact, I happen to know that we lost a salesperson over that particular incident. She had spent six months trying to get into that company, and when she finally got us a shot at some work for them, we didn't have our internal systems together well enough to deliver, even though we could have.
"Those are the two top-line issues I see. Now, what about bottom-line issues? Again, I see two. The first is the cost of the time associated with filling out, entering, and reviewing timesheets, and then generating, reviewing, and mailing invoices. Although spending a certain amount of time is inevitable, we should still look for ways to reduce it. If we can cut 15 minutes a week from the time spent filling out timesheets, that adds up to over ten hours of time saved a year. Multiply that by 800 resources and you have saved over 8000 employee-hours a year.
"The biggest area of improvement I see, though, is in data entry. Jane mentioned that if the process were even partially automated, she could possibly cut one or even two positions in her department. Considering the loaded cost of even one of those positions, that alone could be enough to justify the cost of writing a new piece of software.
"But let's say we don't cut the two positions but instead assign the people to other, more productive work. What that means is that as we grow, we don't have to hire two new people but can instead use people who already know Ferguson and Bardell and who already understand the work and what we do here. We get productivity from the beginning."
Jim paused to let his comments sink in. Looking around the room, he could see that some of these concepts were new to most of the members of the team. Dan seemed unfazed by the discussion, and Jane had heard some of this before, but the others clearly weren't used to working through the business implications of technical issues. He continued.
"There's another business implication that is a little more esoteric. But it's one that I deal with every day, and in some cases it can have a major impact on the bottom line. That is the cost of money."
"Here is the problem," Jim explained. "Like all companies, Ferguson and Bardell works with a certain cash flow. We have money flowing in from invoices, and money flowing out to payroll and other expenses. If more comes in than goes out in a given time period, we have a positive cash flow, and if more goes out than comes in, we have a negative cash flow.
"If we expect to be profitable, over time, we should always have a positive cash flow. But much of our work is on large projects for other large companies, and a lot of our invoices are milestone-based. So at any given moment we may have only a very small positive cash flow or even a negative cash flow.
"A contributing factor is our current invoice cycle. Jane, how often do we send out invoices?"
"Twice a month," replied Jane, wondering where this was headed.
"What are our invoice terms?" Jim asked.
"We do net-30 for almost all of our clients, but most of them actually pay around net-45."
"And what do we typically do to cover payroll, if we are having a tight month while we wait for large invoices to come in?"
"We move money out of the line of credit and into the payroll account."
"Exactly!" Jim exclaimed. "We hit the credit line while we wait for our cash flow to catch up. That's the cost-of-money issue."
Jim seemed pleased that he had managed to explain something as complex as the cost of money to a group of techies. But, realizing that many members of the team hadn't quite grasped the connection, Dan decided to act as if he didn't understand. "Jim, I understand that we have to take money out of our line of credit to cover bills whenever our receipts are slow coming in. But why do you call that the cost of money, and what is the relationship to our time and billing system?"
The group looked relieved that Dan had been the one to show his ignorance. Catching on, Jim smiled slightly. "Alright, here is the point. When we hit the line, it costs us interest. The rate isn't that high, but over time it can certainly add up. That interest cost is the 'cost of money' I've been referring to.
"Here's how it relates to time and billing. We currently do invoices twice a month because it takes us two weeks to walk the entire time and billing cycle. If we could shave enough time off the process to do invoices every week, then the money would come in one week sooner, we would use the money from the line one week less, and we'd pay one week's less interest. Over the course of a year, that can really add up."
"How much?" the group demanded, almost in unison. Jim looked startled by the response, so Dan repeated calmly, "How much money do you think we might save in a year, Jim, if we were able to go to once-a-week invoicing?"
Jim thought a minute, seeming to debate with himself about what to say. Finally, he did some calculations on his pad. "If I've figured this correctly, moving to weekly billing would save Ferguson and Bardell approximately $500,000 a year."
Dan whistled, and Tim muttered "Holy moly!" Jim was quick to interject, "Now, those are just preliminary figures, based entirely on our current line of credit and what we've had to do over the past year. It could be less, if our work cycles evened out so we wouldn't have to hit the line as often."
"But, it could be more if the Fed raises interest rates, right?" Jane asked. Jim nodded in agreement.