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Why We are All So Bad at Project Accounting (Hint: It’s not your fault) Created by

Curt Finch

Content

What project accounting is and why it's important

 

Project accounting is a critical concept for today's business world, yet most businesspeople do not know their project accounting data. This includes firms that outsource the accounting of others and it results in cost ignorance. Most modern firms have very little understanding of which customers are profitable for them, and which ones are huge losers. R&D projects which should have been cancelled long ago linger on. IT departments languish amid derisive commentary from their peers.

 

Proper project accounting is one of the many things in life that sounds really easy but, for various reasons - psychological, sociological, political - can often be really hard.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Globalization is just getting started - and it's set to accelerate</h3>

 

The scariest thing about this - for Americans - is that today, there are 1 billion knowledge workers on the internet. Many of them are from countries full of smart, well-educated people who are really tired of poverty. Poor people in the U.S. are obese. Poor people in China and India have a different set of problems - and that difference is very motivating to them.

 

There are 7 billion people on planet Earth. Today, there are 1 billion knowledge workers. Soon there will be billions more. They'll all be very motivated to figure out what you're up to and how they can do it better, faster and cheaper.

 

How exactly do you think you're going to stay in business when you don't even understand your costs on a per-project basis? How about your customers? Will they be around and survive the coming tidal wave? In the immortal words of Neil Peart, "Constant change is here to stay. Globalization is accelerating.

 

It's time to get ready.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">We're all bad at project accounting</h3>

 

In my position as CEO of a company that helps people solve these problems, I've seen every kind of company all over the world with various levels of ability trying to attack and fix this issue. Small companies, large ones, consultancies, manufacturers, from South Africa to Sweden to Jordan to New Zealand - nobody understands their costs. Their ability to fix it is not related to the industry they're in or the size of the company. The key differentiator here is the ability to effectively communicate the benefits of the collection of this data to the front line knowledge worker.

 

Why are we all so bad at project accounting? I've thought about this a great deal and the answer comes down to "future shock - a term coined in a book of the same name by the sociologist/futurologist Alvin Toffler in 1970. Future shock is a perception of "too much change in too short a period of time"

 

Our sociological ability to implement effective accounting systems hasn't really caught up with change in the last 50 years.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">From Neanderthals to Farmers</h3>

 

About 30,000 years ago, the Neanderthals died off (or were killed off) leaving Homo Sapiens (that's you) as the only hominid species remaining on the planet. That's 1,500 generations ago. For the first 1000 of those generations, we were all hunter-gatherers.

 

Hunter-gatherers, like animals, have always understood their costs of production at an intuitive level. 

 

Project accounting for the hunter-gatherer is easy. Hunter- gatherer projects include activities like "kill mastodon or "catch fish (say that with a grunt). The return on investment (ROI) is easy to calculate and it's intuitive. And if the ROI isn't good enough, a harsh environment will make sure that our example caveman won't make that mistake very long because he'll be dead. When we say that Native Americans were more "in tune with nature, this is accurate. The ones that got out of tune died quickly.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Along came the farmer</h3>

 

About 500 generations ago, Babylonian farmers invented accounting - eventually double-entry bookkeeping. This is the basis for civilization because it enabled the measurement of and accumulation of capital - without which no progress is possible. Be sure to tell your kids that at dinner. Accounting is not boring - in fact, it is the reason they have an iPod. Without accounting, there would not be a civilization to produce an iPod. 

 

Farmers know their costs of production. Until about 100 years ago, almost everyone was a farmer. And farmers know if a crop is making money or not. We've had this math nailed for 10,000 years. Your great grandfather was a farmer, right? With the exception of Gutenberg, Socrates and Jesus, just about everybody was.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Henry ford arrives</h3>

 

A few generations ago, manufacturing became the most important driver of the world economy. From a project accounting perspective, manufacturing and farming are not that different. A farm is just a food factory, really.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Enter the knowledge worker</h3>

 

Knowledge worker, a term coined by Peter Drucker in 1959, is one who works primarily with information or one who develops and uses knowledge in the workplace.

 

Today, most of us work with knowledge and information instead of with physical things. Accounting for knowledge work is different. Accountants are knowledge workers. So are environmental consultants, software engineers, web designers, lawyers and journalists.

 

I live in Texas. In 2003, 48 percent of workers in Texas were classified as knowledge workers. Being paid more than their counterparts in other professions, they're a much larger percentage of the economy. These numbers are growing and, in our lifetime, will encompass the majority of workers globally.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Knowledge worker organizations don't know their costs</h3>

 

Most knowledge worker organizations haven't the faintest idea of their per-project costs. Unlike our hunter-gatherer ancestors, who implicitly knew the costs of doing business, or our farmer or manufacturing ancestors, who invented materials and financial accounting, we don't know our costs at all. What we're doing is too new. We've only been at it really for 50 years - 2 generations out of 1500!

 

Materials-oriented businesses, like manufacturing and farming, have had effective accounting systems for thousands of years. Companies like Wal-Mart, Dell, and ADM exemplify how well the problem of materials management is already solved. 

 

Knowledge, process and project management, however, are still relatively nascent fields. Project accounting is how we understand production costs in a knowledge economy. The knowledge worker-dependent businesses of today, though, are relatively new and, for the first time since Babylonian farmers invented accounting thousands of years ago, nobody knows their costs. If you don't know your costs, you don't know where you're profitable. And if you don't know where you're profitable, you can't steer your company to success. In the knowledge economy, understanding production costs requires a new approach. 

 

How is accounting for knowledge work different? For a hunter, he can count how many fish he caught. For a farmer, how much corn he produced. For a manufacturer, how many cars came off the line. But for a knowledge worker, the production is much less clear. 

 

Time spent is one of the metrics you can use. It's not perfect but it is universal. It is one proxy for production and it's a very relevant one.

 

People businesses, like software companies and architecture firms, don't track employee time to minimize break times, if they track time at all. They do it to understand costs and automate billing, and to a lesser extent, to track salary, paid time-off, or to pay hourly knowledge workers correctly. These areas are rife with potential Sarbanes-Oxley Act (SOX) compliance issues. The rise of the people business is challenging news for accounting executives - and it makes their function more critical than ever. 

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">T&A products are from your father's life</h3>

 

Typical time and attendance oriented products aimed at a manufacturing or at an hourly workforce (like those from aditime.com or legiant.com) have several problems for knowledge worker companies. First of all, knowledge workers are often offended by the concept of being forced to swipe a badge through a reader in order to open a door and get to work (although that is a very effective method for solving adoption problems). Furthermore these systems do a poor job of capturing time worked from home or at a customer's site. Lastly, they typically do not have the correct functionality to capture per-project time if the number of projects or employees is large.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">The road to p5 - per-person per-project profitability</h3>

 

There is a process to achieve per-person per-project profitability. It's not trivial but it is achievable in most companies. And even if you stop halfway down the path you'll be in a better place than you are today. Once you have achieved this state of nirvana, you will know which departments are profitable, which customers are, and which strategic vectors that your company is following are profitable. Just because some person or some project is not profitable doesn't mean you should fire him or kill the project - investment is how you grow. But trying to calculate ROI in the absence of the 'I' is a fool's errand.

 

Project accounting gives you your 'I'.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">The five step process from chaos to order - knowing the path</h3>

 

The five-step process from chaos to order looks like this:

1. Chaos - where you probably are today

Over commitment is common. Processes abandoned in crisis. Successes are difficult to repeat consistently.

2. Transition - 

Track project labor hours on all projects by most employees giving an approximation of direct costs on a per-project basis visible to management.

3. Structure - 

Track time with rates and expenses on all projects by all personnel. Complete direct costs known.

4. System - 

Allocate indirect and partially indirect costs giving very relevant and tightly defined per-project and per-person cost visibility.

5. Order - 

Integrate the project accounting system with CRM or accounting systems or some other system that provides a proxy for the positive benefit received in order to provide per-project per-person profitability.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">When should you start this process?</h3>

 

If you have more than about five people in your organization and they are working on many projects or within many processes, it is time to start thinking about implementing time tracking - the most difficult prerequisite for project accounting success. If you have 100 people in an R+D group and you're not tracking time, then you're wasting the lives and work of a significant percentage of your employees. 

 

You have them working on projects that the market will not reward you for, which are over budget or otherwise in the ditch, and you don't know that today. 

 

Steve Covey argues persuasively in his book "The 7 Habits of Highly Effective People that you should track your time even if it's just for yourself. If you do, you will certainly be surprised by the data. However, we have found that the business value really starts to get delivered in terms of understanding profitability for organizations of at least five people. Guiding your company forward to a tracking environment requires changes to culture. Start by explaining the benefits that time tracking provides for the company. If you understand your costs, you can run your business profitably. Otherwise you're flying blind.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">Don't feel bad</h3>

 

The future is about innovation. It's all about finding new ideas. The past was about counting your chickens, or your catch for the day.

 

Most companies on planet Earth have a broken or non-existent project accounting process. You probably do, too. The good news is that if you fix it before your competitors, they'll be forced to follow or fail.

 

<h3 style=" page-break-after: avoid; margin-right: 0in; margin-bottom: .0001pt; margin-top: 0in; font-size: 12.0pt; margin-left: 0in; font-family: 'Times New Roman'; text-align: justify;">How one company created a p5 practice </h3>

 

AimSourcing, Inc. is a business support company specializing in Accounting Information Management Outsourcing services. AimSourcing provides business consulting, accounting system optimization and outsourced administrative services to companies in the consulting and technology industries. Among their practice specialties is a "black-belt" capability in QuickBooks setup, configuration, and administration.

 

Since so many of their customers were selling services to other businesses, project accounting with a web-based timesheet application, was fast becoming a requirement. In providing outsourced accounting services to its clients, AimSourcing uses QuickBooks as the foundation accounting and payroll application, and Journyx for project- and activity-based time tracking. They have successfully integrated the two applications to provide a completely automated business system. This allows them to take their customers to a per-person per-project profitability level of project accounting excellence. In exchange they get a software-as-a-service (SaaS) revenue stream associated with the time tracking software and more consulting revenue from their customers. The biggest benefit, of course, is that AimSourcing's customers are less likely to get destroyed by the Chinese/Indian outsourcing onslaught and, in fact, may figure out faster how to use this trend to their advantage.

 

For evidence that this is working, one of AimSourcing's customers provides a clue: Rick Silva, the owner of Living Assets Management - an executive coaching firm in Austin - says, "AimSourcing handles all of our day-to-day accounting, as well as payroll and tax filings. Journyx, integrated with QuickBooks, allows us to collect and verify information from our staff located throughout the country, and invoice clients every month. I have been able to reduce my accounting time to zero and focus on using the information we collect to manage and grow our team and clientele." Journyx searches constantly for other partners like AimSourcing.

 

These companies exemplify how to move forward into the accelerating future shock of current trends toward globalization. They've figured out how to help people turn globalization fear into globalization power.

 

And that's globalization we can all live with. Time will tell how many of us make the leap.

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