Enterprises rendering services as accountants, lawyers, architects, engineers, information technology firms, consultants in different fields face different challenges when it comes to efficient running of such enterprises. The people at the helm, with great talent, knowledge and experience in their own field are at times found to be struggling to achieve decent top line and bottom line. Most of the times the lack of good performance in such enterprises is not due to lack of domain expertise but is mainly due to inadequate attention to basic financial management principles and absence of proper system to deal with this aspect.
It is essential to understand some basic differences between them and the manufacturing or trading enterprises and accordingly decide the strategy for improvement in performance.
These differences and challenges arising from them are listed below.
Difficulty in measurement of input and it’s cost
Input for rendering services is employee s’ efforts. Generally, the employees are paid salaries on monthly basis, but incentives, bonus etc may be paid at different points in time, may be quarterly, annually etc. The measurement of cost of rendering a service thus becomes complex. Salaries are normally considered as a fixed cost like overhead or indirect cost. However, in service sector the employees cost may have to be treated like a direct cost of rendering service. These factors further increase the difficulty of identifying cost for rendering a service.
Difficultly in measurement of output of service and fixing the price
Service being rendered is invisible, intangible and difficult to measure. These difficulties are not faced by manufacturing or trading enterprises, as they deal with something that is tangible and measurable. Rendering of Services may involve different employees/ managers directors, ( or owners themselves ) with different skills and experience, and each assignment from customer may require varying proportions of different people and different durations. Therefore, there is a need to fix assignment (project) wise price to generate expected profit for the specific assignment and enterprise as a whole.
Difficulty in keeping quantitative control on input and output and balance (closing stock)
In case of manufacturing sector generally, the input of raw material for a given output is definable and measurable in the form of “bill of material” etc. The raw materials consumed, finished goods produced, sold and the unsold balance can all be tracked and verified physically. This benefit as we saw earlier is not available for service sector. Their input is time purchased from employees and output is also the same – time sold to customers. This time is supposed to deliver a service(project). The mathematics is complex, because fifty percent time spent does not mean fifty percent service delivered. So service delivered in elapsed time is invisible and therefore not amenable to normal quantitative- physical controls. Besides “time” is perishable, as the time bought from employees not sold at that point itself may become useless having no realizable value. Thus, there is no such thing like closing stock of unused time. Consequently, keeping virtual physical-control on input and output and wastage is a big challenge.
We strongly recommend Eff factor approach in dealing with these challenges that will help in improving the efficiency of service sector enterprises.
Efficiency is measured by following formula.
Revenue/ costs or simply Revenue- cost i.e. profit.
Eff factor approach is to ensure increase in the sales and control of the costs for better efficiency.
Read on to understand these challenges in depth covered in the blog series where we talk about the above-mentioned three challenges one-by-one.