Why Should You Track Inter-Departmental Profitability?

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As activities are becoming increasingly complex, it is becoming more important to not just  follow and evaluate the results  of the organization’s profitability, but to go deeper into each individual department's profitability as well.

The trend is lending itself to the idea that organizations are becoming more specialized and therefore the results of these individualized departments are being tracked more closely to better understand their portion of what they bring to the organization. For example, with Professional Service firms, departments are normally grouped by discipline and specialization, such as in the case of most Engineering or Accounting firms. Then we also see departments that are divided by type of business function like in the case of IT firms where Research & Development, Consulting, Support, and Sales & Marketing are separate cost centers.

By separating and setting up departments as their own cost centers, you can easily have a snapshot of the profitability by department and by having this detail at a more granular level, it is then easier to quickly roll it up into a global view of your entire organization.

The next challenge is to encourage Department Managers to work together and lend employees from one department to the other when one department is over-capacity in order to better manage employee workload across the organization.  This is usually the quickest solution when there is a cross-functional employee who could be available to assist on another team to fill the gaps before going through the lengthy process of hiring a new employee or  to avoid the issues that are linked to a project falling behind.

To encourage this partnership, an organization needs to create the notion of inter-departmental billing, a concept where a department is compensated for lending its employees. This is due to the fact that since it is the employee’s original department which incurs the expenses for their salary, benefits, training, and especially for their down-time, why should the department which is “borrowing” an employee receive all the profit? By offering this compensation to the department which is “lending” the employee, both can benefit since it is alleviating non-productive time of an employee and at the same time keeping the organization as a whole more pro-active and profitable.

If you look at a situation where Department A has an employee who is “sitting on the bench” and you have Department B who requires an additional resource:

This is advantageous to both departments since for Department A this means that their department is now working at capacity and Department B can now meet their immediate demand without rushing into any new hires. At this point, the second department should also consider their upcoming workload and consider hiring a new employee since if they were working directly for this department  their hourly revenue would increase from $10/hour to $16/hour.

Why do Department Managers agree to this concept? Because this is where the subtle differences with regards to a department’s profitability could be the most affected; if Department B “borrowed” an employee from Department A without compensating them, the profitability by department will be skewed since Department B would be seen as more profitable since there is no cost to them with regards to non-productivity or overhead and Department A would be assuming all the cost. Therefore leaving us with the question: what would be Department A’s motivation to lend their employees to another department in the first place?

By utilizing a project accounting solution, it is easy to track and automatically distribute these inter-departmental charges when an employee enters their timesheet as you will be able to create rules and charge-back rates depending on the project. By having Managers accountable for their Department’s profitability, you will be able to keep managers aware of under/over-staffing, have a better view of trends or departmental changes as well as making it easy to see how each department influences your organization as a whole.

To better understand how your organization can benefit from calculating departmental profitability, contact us at 1-888-988-3535.

By JOVACO Solutions, a Microsoft Dynamics GP Reseller in Quebec

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