Like any valuation exercise, attaching an estimate of value from a resource management plan or a portfolio management system can be challenging. There are so many techniques and so many variables; oftentimes, the credibility of those variables and their underlying assumptions can quickly be challenged. Other techniques involve non-quantifiable assumptions around relative value. Again, these techniques are prone to simplifying assumption bias. In my opinion, we need a quantitative approach to do this right and – as famed consultant Peter Drucker once said – “If you can’t measure it, you can’t manage it.”
So, before selecting a method and running the numbers, let’s look at why people seek out resource management plan software. In general, we see a demand for:
- Visibility: this entails the ability to catalog what’s being worked on and what will be worked on in the future – a basic and fundamental need. Obviously this can result in value creation, however it’s hard to associate a concrete valuation based purely on visibility.
- Measure: being able to gauge resource allocation. Again, it is very important (and challenging) to draw out a clear path to a valuation.
- Improving utilization: being able to conduct scenario analysis and ‘what-if’ modeling to improve utilization. OK! Now we’re on to something. From here, I can think of two options for showing a valuation. The first is optionality. With scenario analysis and what-if modeling capabilities, I have endless capabilities – as a user – to generate option value for my organization. While this is massively important and creates huge value, the techniques to generate a quantifiable relationship as part of a valuation exercise are hard to do in a blog post (and rarely do these techniques transfer to the real world). Real options analysis is available; Black-Scholes is around, but diving into the mechanics of Ito’s Lemma, rocket science and Brownian motion is not really my idea of fun. Furthermore, calculating real-option valuation is unique to each customer in such a way as to complicate this discussion beyond reason.
- The second option for valuation is utilization itself. This is a topic everyone understands, translating cleanly into every organization. In general, the idea is that “if I can improve my aggregate utilization, I can reduce waste and get more accomplished”. This is one of the main drivers for customer interest in our product – Tempus Resource.
We commonly associate savings from the perspective of over-utilization, but often the real value is found in extending and maximizing the value of under-utilized resources. We frequently hear from our customers that they…
- Need to get more done. Even if that includes – generically – lower priority projects
- Share little interest for certain over-allocated resources because they are outsourced or contractors.
- Need to improve non-critical resource utilization. Certain skills or roles take up the majority of critical demand – leaving a potentially large number of non-critical resources idle or at least underutilized. Maybe these resources represent sunk cost, but that doesn’t mean they can’t enable more value for your organization. Winning at the margin separates good performers from great performers!
Total resource pool size:
375 full-time employees
IT or R&D
Development, networking, database and support
Let’s look at the resources grouped by key function, average hourly cost per employee and total spend:
Before we continue with our analysis, we can already glean some important statistics: first, our fictitious company spends about $75 million per year for this resource pool. We can assume 2,000 hours of base carrying capacity per resource per year and an hourly cost of approximately $100 per hour, which includes salaries, benefits, overheads, etc. We can also infer that for each 1% of under-utilization, this company is wasting $750,000 per year. This is a crucial measure for our analysis.
In this same case, let’s assume the demand and utilization look like this:
Given this allocation profile, we can tell that our aggregate effective utilization is approximately 95.3%, which means we have 4.7% under-utilization. When paired with our overall annual cost, this under-utilization translates into over $3,500,000 of wasted spending per year.
Our wasted capacity is spelled out in the following table:
With the mix of projects, resources and business demands changing year-to-year, the potential benefit of improving utilization is not a one-time event, which means we can realistically expect to see the same problem year-in, year-out. Therefore, the assumption that Tempus Resource can provide a 5-year or even 10-year stream of future benefit is a realistic one. In our case, we are going to assume a 5-year benefit. And, as part of our valuation exercise, we’ll remain conservative and assume Tempus Resource can improve the global utilization of our fictitious company by 1% annually. With these assumptions in place, we arrive at a minimum 5-year benefit stream outlined in the following table.
The next step in our valuation exercise is to discount these benefits back into today’s dollars using a discount rate. In this case, we’re dealing with a fictional company, so we can take some liberty. We could just assume the CFO will tell us the rate to use (which is how most companies run their DCF analyses) or we could go through some long drawn out CAPM exercise. In this case, let’s just assume the fictional company has an S&P credit score of BBB. Which, at the time of this writing, would imply a 5-year borrowing rate of 4.35%. For the sake of conservatism, let’s throw in another 100+ basis points – due to untold riskiness – which gets us to around 5.5%.
So, let’s plug in the numbers and see what we get:
In the end, given our assumptions, the value of improving utilization by ONLY 1% each year, over a five-year period, yields over $3.2 million dollars in value. Any solution that costs less than $3.2 million would result in a positive return on investment. Of course, you can imagine how attractive the payback period measure will appear.
While every valuation exercise is beholden to its assumptions, our approach in this blog post was excessively conservative. The opportunities for value enhancement are indeed great, and we consistently see real-world practitioners generate massive value for their organizations through Tempus Resource – the leading Resource Portfolio Management solution. With over $3.5 million dollars in wasted capacity at our fictional company, Tempus Resource can provide the capabilities to close this gap and eliminate this waste.
So how does it do this? In this case, there are two methods: the first option is simply to reduce headcount. Tempus Resource includes tools to identify those resources, types, skills, etc. that are not part of your long-term resource management plans and may represent excess headcount that can be eliminated.
Second, Tempus Resource includes an array of tools to improve utilization via ‘what-if’ modeling and scenario analysis capabilities. One such feature is the Opportunity Map, which instantly identifies opportunities for project execution. It allows you to ask the question “when can I do this project?” and find the answer by intelligently scanning your portfolio for the optimal positions for execution – taking into account your existing commitments and simulated options.
Another feature is the Coolmap. Designed to highlight density of under-allocation, the Coolmap uses blue-scale visual indicators to highlight areas of under-allocation by any resource attribute and/or named or generic resource.
Going back to the Peter Drucker quote above, Tempus Resource does give you the tools to measure your resources and understand how they’re being used. As a result, you can manage them in a much more powerful and effective way.