In Good to Great, Jim Collins claims that one of the key determinants of operations greatness is the central idea that “each good-to-great company attained a deep understanding of the key drivers in its economic engine.” Easier said than done?

I previously written on the need to simplify your data and information by focusing on a core set of six metrics.  Collins goes even further by suggesting the operations of every business should attain a single “economic denominator”.  “If you could pick one and only one ratio – profit per ‘x’ – to systematically increase over time, what ‘x’ would have the greatest and most sustainable impact on your economic engine?”  Examples included profit per customer, profit per customer visit, profit per employee, profit per ton of finished steel, and more.

The economic denominator we use at iBusiness Solutions to monitor our operations is profit per hour, where hour includes every hour worked by every person in the company.  We use profit per hour because this ratio can be applied consistently over time, regardless of:

  • the number, type, or length of client projects,
  • the ratio of employed vs. subcontracted consultants,
  • the ratio of billable resources vs. back office staff, and
  • many other variables in our business.

Profit per hour has provided a level of stability and sanity to our operations in the midst of confusion, uncertainty, and even chaos so that we can:

  1. Communicate yesterday’s results™ – We have tracked profit per hour for every project, every consultant, and every week since March, 2003.  It’s amazing the story one number, tracked over time, can tell about your operations.  In early 2005, the story line became evident that our business model wasn’t working. As a result, we stopped reselling business intelligence software.  It was a scary decision to intentionally say goodbye to nearly 50% of our revenue but it was soon obvious that was absolutely the right decision.
  2. Influence today’s decisions™ – Early on, this ratio clearly pointed out that the software training services we were providing were not profitable, even though this work was billed at our highest hourly rate.  Shortly after realizing this, we stopped providing these training services which forced us to and freed us up to pursue longer-term projects, which in turned has opened up several new possibilities for us and our clients.
  3. Anticipate tomorrow’s opportunities™ – Even though profit per hour is a lagging indicator, it has helped us anticipate new opportunities because we track it timely and frequently enough.  As we move from exclusively consulting services to a software-as-a-service product, we are realizing already in our projections that the same profit per hour is not going to work for The iBLeague™ side of our operations.

In my last post, I wrote about confronting the brutal facts of your current reality by collecting, managing, and analyzing your data to create information that cannot be ignored.  While the use of a single metric must be done with caution, I can personally vouch that profit per ‘x’ is one metric that cannot and will not be ignored and it can lead to a much deeper understanding of the potential greatness of your company.

Question: If you had to pick one and only one ratio, what profit per ‘x’ would be best suited for your operations?