Welcome to the December 2012 issue of Precision Matters – the Precision Design Technology (PDT) Newsletter.
Precision and Profit !
Precision Design Technology Ltd. (PDT) has developed a new technology for software development. This technology delivers commercial database systems directly from the specification and eliminates design, coding, and most of the testing. This newsletter shows how improved precision (in specification) leads to improved profitability using this technology.
We assert that this technology can deliver bespoke systems “better, quicker, cheaper – and right!” I have explained the reasoning behind this separately. By “quicker”, my estimate is that you will halve your time to deliver; by “cheaper”, my estimate is that you will halve the number of staff involved in a project.
Halve the time:
If you halve your time to deliver, and we assume all projects are about the same size, then the number of projects that a project team can take on will double. The new technology has made your team more efficient and more effective. I assume that you intend your projects to be profitable and build an appropriate margin into each project (perhaps 10%). If you change nothing else, but double the number of projects your company could undertake, you would double your turnover (Example_1 below) for no increase in cost. Your overall gross profit would improve substantially. Quicker delivery, and of the right system, is in itself a valuable competitive advantage.
Halve the staff:
If you halve the number of staff involved in a project, and we continue to assume all projects are about the same size, then the staff cost of each project will fall to about one half of its original value. The new technology has made your team even more efficient and even more effective. Halving the number of staff will not, of itself, increase project throughput or fee income but it will reduce your internal costs (Example_2 below). Although overhead costs may remain largely unaltered, halving staff costs will still improve your overall profit.
Overhead: If we assume 250% overhead rate (100% staff cost, 150% fixed cost) then technical staff being paid £40,000 pa need to earn £100,000 pa in project work.
Base Position: We could assume a technical staff member to bill £100,000 pa for the company to meet £40,000 pa salary (above). If the “average” project was 24 man-months, say 4 staff for 6 months, then the project cost is £200,000. If its profit is 10% (£20,000) then the client will pay £220,000 for the project. This team can undertake 2 such projects in a year and so the team turnover will be £440,000. Project costs are £400,000 and the team shows £40,000 pre-tax profit (10%).
Example_1: The situation changes if we use the new technology to halve the project time. The “average” project now requires 4 staff for 3 months; the team can do 4 projects a year and each project costs £100,000. The client will expect to pay the standard rate (£220,000). Annual costs are unchanged at £400,000 but the fee income is now £880,000. The team now shows £480,000 pre-tax profit (an increase of 12 times).
Example_2: The situation changes again if we use the new technology to halve the number of staff involved in a project. The “average” project now requires 2 staff for three months; this team will still do 4 projects a year but each project now costs £50,000. The client will still expect to pay the standard rate (£220,000). Annual costs are now only £200,000 and the fee income is unchanged (£880,000). The team now shows £680,000 pre-tax profit (an increase of 17 times).
The above estimates concern working staff: half your staff members are now seriously more productive. The remaining technical staff (the other half) should be intelligent enough to retrain in the new technology; once retrained, you have now doubled again the number of projects your company can undertake.
Example_3: The situation changes again if we retrain the remaining staff in the new technology. The “average” project still requires 2 staff for 3 months, so 2 teams can each do 4 projects a year and each project still costs £50,000. The client will still expect to pay the standard rate (£220,000). Annual (staff) costs are now doubled (£400,000) and the fee income doubles for 8 projects (£1,760,000). The two teams now show £1,360,000 pre-tax profit (an increase of 34 times).
Note that these advantages apply not only during the initial development of a new system but also to the maintenance of the system after delivery. It is usual to charge 10% - 20% of the initial system cost annually for maintenance; this covers error correction and minor business enhancement. Provable systems will have few if any errors, so error correction becomes negligible. You undertake minor enhancements in the same way as you developed the original system (in half the time and with half the staff) and re-proving the amended system is fully automatic.
Your problem now is to enhance your sales and marketing teams to bring in eight projects where they previously brought in two! In this situation, you have four advantages to offer:
1. Technically, your systems will be better (higher quality, fewer errors, provable).
2. Operationally, you will deliver quicker (in about half the time of your competitors).
3. Financially, you are now so much more profitable that you could afford to be cheaper by reducing your price by enough to win more projects while still remaining far more profitable than previously – and with a higher reputation!
4. Logically, your delivered systems will be right because your customer will have agreed the behaviour of the system at specification time.
It is probable that the example figures I have used do not match your own. If so, I urge you please to repeat the above calculation with your own figures and include some pessimistic assumptions. Even allowing for the technology transfer cost (training, licence fees, maintenance) and some disruption to your normal pattern of work during the transition, I assert that you should find the outcome pleasantly attractive:
Halving the time should double your income
Halving the staff should reduce your costs
Retraining unused staff should double your income (again)
Your operational costs should remain almost unchanged.
You could see a fourfold project & income increase without extra cost.
If you can increase your income fourfold (from £x to £4x) while your costs remain substantially unchanged, then three quarters of your new income becomes profit.
The Newsletter Archive
If you want to review any of the previous Newsletters, they are all available at the Newsletter Archive page
Want to reproduce this article?
Yes you can, so long as you accredit it to John Warren, Precision Design Technology Ltd. and attach the following biography to the article at the bottom:
Precision Design Technology, (PDT), the IT systems experts, provides world-class consultancy and solutions for IT information systems to help its customers develop affordable, high integrity software for business. Normally high-integrity software is prohibitively expensive - PDT provides a solution at a price business can afford.
John Warren, CEO & Chief Scientist at PDT, writes and blogs on behalf of the company. John also manages the rules and inference engine development for the SPECIFY4IT tool-set that bridges the gap between the client user and the system supplier.
The SPECIFY4IT tool-set is capable of delivering high-integrity business software faster and more cheaply than conventional development methods.
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