For a services firm, revenue planning is far from a simple, straightforward affair of arriving at a figure that “appears” to be just right. While the absolute figure might not reflect the complex planning that goes into it, understanding the finer points of the factors that are taken into consideration while planning for revenue items will demonstrate not only the advantage that a CPM tool brings to the table, but also how Adaptive Planning makes the entire exercise a cinch.
A person of sound logic, at this juncture, will no doubt raise the query about what makes planning of revenue a complex affair for a services firm. The answer lies in the very nature of the business. How does a services organisation turn in a tidy profit? Let us first consider the various avenues that a services firm can meander down to generate income.
These, then, would define what services the firm actually offers. These could include:
- Project based services (product based, specified deliverables, software development)
- Support services (IT maintenance)
- Outsourced business processes(contact centres, voice processes, transactions, FP&A processes)
- Outsourced research processes (legal, bio-medical, finance)
However, this classification falls short of the depth of the services offered, which could vary from one serviced vertical to another. And thus rise the many factors which complicate the revenue planning process. What approach does the firm take to determine profitability at an engagement level? Does it forecast a gross revenue figure and then work backwards to arrive at the operating costs and thus the margin? Or does it understand the scope of the work it seeks, then the desired profitability and thus arrive at the mark-up, which along with the operational cost yields the revenue?
The answer to that rests with what business drivers the firm considers, the metrics that it can track and have a degree of control over. If we consider the relatively simple approach of planning for headcount based on the revenue forecasted, then the first method serves our purpose. But what if the revenue projection is driven bottom up, based on operational constraints? Well, in such a scenario, the firm will consider the mark-up approach to arrive at the revenue figure.
Add to these aspects of revenue planning other attributes which, amongst others, might include:
- Project type (different charges for different services provided)
- Delivery centre location (impacts cost and thus margin and final revenue)
- Rate charged per employee (the basis on which the head count is arrived at, as well as the operational cost)
- Multiple projects, interdependent for one client (software development and subsequent support)
- Rate charged per transaction (in the case of outsourced processes)
The exercise now gets even more convoluted as multiple sets of variables are brought in to calculate the final revenue figure, the expected staffing requirements (which might include a blend of skill sets), gross profitability and other factors such as currency exchange rates as well as the probability of realisation. With all of this swirling about, it is no surprise that even simple revisions to business drivers are shunned as they would require poring over the numbers for considerable periods of time before arriving at the revised revenue figures.
Adaptive Planning helps bring dollops of delicious method to this apparent madness. It allows revenue accounts to be tagged to attributes called dimensions, which help in the consolidation of the revenue across disparate parameters. It also helps define centrally defined and collated business drivers, which are then used through easily scripted business rules, to calculate the revenue. These centrally defined values can range from the rates applicable to employees, categorised as required, to exchange rates and desired profitability across service categories. In short, the revenue planning can be modelled around the business drivers used by the firm. This not just allows the FP&A organisation to quickly build out revenue projections, but also carry out complex revisions to the planned figures as and when the need arises. Simple, is it not?