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Topic Financial Benefits for FTE-based Contract

Financial Benefits for FTE-based Contract

Home Forums General Forums Methodology Financial Benefits for FTE-based Contract

This topic contains 7 replies, has 5 voices, and was last updated by  Strayer 1 week ago.

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  • #705829 Reply

    My company provides Contract research. Some of the contracts are set up on an FTE basis. E.g. We provide 10 people for 1 year for 150K/year=1.5M. We have a GB project to improve efficiency by about 5% per person across 30 people by eliminating NVA. I am curious how others quantify this kind of benefit. The reality is we will give 5% more value to our customer and they get the financial benefit. We cannot reallocate the person to other work. We cannot reduce the amount of the FTE’s on the contract They are committed to the client through the life of the contract.

    I am curious how other’s would calculate the financial benefits here. Thanks

    #705833 Reply

    Disclaimer: I’m relatively new to this whole (Lean) Six Sigma thing and so I’m learning as I go.

    Who initiated the need for the project? Your company or your customers?

    If it was you, then it’s possible that the project is NVA to the customer and your increased efficiency is offset by your added time, effort, and energy spent in making the improvement.

    If your customers are demanding it, then you may have some savings. Mostly in the way of avoiding losing a contract. You would effectively be reducing your cost of poor quality. This only works if the project is in response to a customer’s need (value) or if it aligns with your company’s objectives or financial goals.

    I suppose the other way would be if your increased efficiency gives you a competitive edge in the market and wins you more contracts but I’m not sure how that works in the contract research industry.

    My rule of thumb is this: I don’t focus on efficiency or time-savings unless the extra capacity can be used to bring in more profit or avoid cost elsewhere. Make sure that there is something value-added that the saved time/efficiency would be better spent on.

    #705835 Reply

    @boadair Bo it has been a while since we have spoken. Hope things are going well.

    This is just my opinion but headcount reductions are a losing strategy. There aren’t many products these days, particularly in your part of the world, where material isn’t the major cost driver. I have had contracts as far back as 1997 where we wrote a clause in the contract that nobody would lose their job over a SS project.

    So if your person gets done early have them to another project. At the end of the day we are targeting a 5X ROI per year so if I charged someone $1.5M for a year that team owes the client $7.5M in benefits (not savings necessarily).

    You can take the amount of each type of product that was delivered the previous year. Multiply the labor and material times that number and add it up. Subtract if from what was spent and that is a pretty fair estimate of how much money is available in benefits.

    Just my opinion.

    #705838 Reply

    Mike,

    Good to hear from you. It has been a while. I completely agree about headcount reductions. That is not being discussed. We also cannot put the people to work on other projects. They are contractually dedicated full time to the client so the 2 hrs per week saved will be 2 hours freed up and only a financial benefit for the client. It is good business to provide better service to your clients but it is a tough sell to some in this industry to do continuous improvement projects with no financial benefits.

    #705839 Reply

    @boadair I guess I missed the point. When you discuss a FTE (Full Time Employee) you back yourself into the benefits capture position that says unless you can reduce the requirements for a full time person you have had no effect. I have always seen that as headcount reductions but I could be wrong.

    Your contract specifically says that the GB will work one a single project? If that is the case them your contract creates the problem. If the GB is just assigned to the company why can’t they work multiple projects (for the same company)?

    #705855 Reply

    My apologies if I am confusing everyone. The FTE equals the scientist performing research for a client project. My company assigns a person (Scientist) by name to work for the client. We charge an hourly rate and we get paid for 8 hrs/day. The Green Belt project is to improve the efficiency of the Scientist by simplifying and reducing NVA. If I reduce the NVA of the Scientist by 1 hr per day the benefits get passed on to the client as one more hour of VA work. My company cannot charge more and cannot reassign the Scientist to work on other projects. That 1 hour belongs to the client. So the question is how do you calculate the financial benefits for my company. The benefits for the client company are clear.

    #705859 Reply

    @boadair That sounds much different. I still may not be clear on this but your company revenue is a fixed amount of time. The project doesn’t change for you no matter what you do. Your rate is locked and your time is locked. I am starting to feel really stupid not understanding this better.

    #705864 Reply

    Okay, @boadair As I understand it, it’s a fixed-labor contract, as opposed to one that ends when a project is complete. In the latter case the contract might have incentives and penalties, and the benefits to your company would be clear. In your case, the financial benefit is soft since you’ll be paid the same. Is it a good thing to reduce NVA work for your client? Absolutely. But the benefit to your company will be additional business with this client or a selling point for other clients rather than any change in revenue for the current contract. That’s a lot harder to quantify but it can be done. It’s a job for your finance and marketing professionals. You can provide them with data about the improved ratio between VA/NVA.

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