Before starting Barbershop Labs, I spent the majority of my career running engineering teams for early-stage companies in a wide variety of industries. Each company had its own unique DNA, with different products, technologies, people, organizational structure, funding, etc. However, one common theme was there always seemed to be a lack of analysis on the costs/rewards of everyday business activities.
There were sophisticated spreadsheets and software to calculate income, expenses, net revenue, contribution margins, blah, blah. The finance folks cranked out reports on customer acquisition costs, cash flow, funding, forecasts, churn rates, etc. However, when it came to how employees were spending their time, or how decisions were being made, or the net financial impact of small to medium decisions, these companies had no data.
A common scenario in the SMB “real world” is when the sales team is close to landing a new customer, but in order to close the deal, a new feature needs to be added to the product. This leads to a meeting with a bunch of department heads from Sales, Product, QA, Engineering, Customer Service, and the CEO. The sales team explains the new feature that’s required. The rest of the group nods their heads. They’ve been through this before. They explain how building that feature will impact their schedules, priorities, and department morale. Now the sales team nods their heads, and asks them to just investigate what it’d take to build the feature.
The various department heads go back to their respective teams and solicit feedback, draft estimates, schedules, specs/stories, etc. More meetings. Finally, the people from the original meeting regroup again with the CEO, and present their findings. The CEO nods her head, then says, “We need this customer, make it happen.”
The department heads accept this new direction, go back to their teams, redirect their resources, re-prioritize their plans, update their schedules, and ultimately, make it happen. When the dust settles, and (hopefully) the customer is landed, the return is clearly visible: the new customer will bring in X revenue. Let’s say that’s $100,000. But what about the investment that was required to get there? How do we calculate everything that it took to get that feature built? Unfortunately, this is where most SMBs fail. The CEO knows the cost of every employee (salary + benefits + taxes, etc), and has a sense of their performance, but nobody seems to think of that cost translated to an hourly rate.
Yet, calculating the cost of the example I provided is actually quite easy. First you have to throw out anything that’s unquantifiable. You can’t answer questions like ‘what if the work that was de-prioritized as a result of landing the customer would have led to 10x more revenue?’ Or ‘what if the new feature skews the vision of the product?’ Or ‘what if the new customer goes to your competitor a year later?’ Or, even something positive like ‘what if the new customer refers you to five new customers?’ Those are really important questions, but we don’t have concrete answers to them, so toss them aside.
Using my example, let’s assume that we tracked the hours of the entire effort, and we knew the hourly rate for all parties involved. Remember that first meeting with all of the department heads? There were six people in that meeting. Let’s say they each made $72/hr ($150k/year). That was a two hour meeting, so it cost $864. Then the team meetings each department head had with their respective teams, let’s say that ran a total of 250hrs at $45/hr: $11,250. The department heads then regrouped with the CEO – another $864. Planning work was done – another $5,000. Finally, the product design, visual design, development, testing, and deployment of the feature was completed. Let’s say that took eight weeks and required six full time employees, each averaging $45/hr: $86,400. Total it up: $104,378.
The return of the project was $100k, and the investment was $104k. A net loss.
Let’s look at a few more simple scenarios that happen every day. How about an hour long discussion between four people weighing the pros & cons of upgrading their hosting plan that will definitively improve service, but cost an additional $100/mo? Each of the four employees averages $125/hr, so that conversation cost $500, or FIVE months of the upgraded service. Make the damn decision in five minutes, and move on to more important things.
What about a weekly departmental meeting? What about the amount of hours spent fixing a bug? Or haggling over a contract? What are the costs? What are the returns? It doesn’t take a CFO to figure these things out, yet most companies operate blind to these metrics.
I’ve kept the business side of Barbershop Labs very simple. I want every dollar I spend to make me more than a dollar in return. I don’t spend money I don’t have, and any investment I make, I measure to determine whether it was successful. If I spend $1000 on Google Adwords, and it yields a contract worth $30,000, that’s a good investment! If I spend 5 hours automating a task that took me thirty minutes to complete every month, that’s a good investment. If I take on a project for $40k, and by the end, the development effort took $40,000, that’s a bad investment.
I measure everything by the hour, so when I sit down for a team meeting, I calculate the hourly rate for everyone in the meeting. If that meeting isn’t going to yield more than that sum, we’ve wasted our time. If I’m with a client and they spend 30 minutes asking why they should upgrade to a GitHub Organization account for $25/mo, I remind them how many months they would’ve paid for during the course of paying me for those thirty minutes.
I’m not adverse to spending money to make money, and not every investment is going to pan out, but if I don’t quantify my mistakes, then I can’t learn from them, and I’m bound to repeat them. That’s just not an option for me.