The Headcount Plan - A Golden Ticket To Transforming Forecasting In A Professional Services Business.

Forecasting in many businesses continues to be a bit disjointed, and separated from reality. Using headcount as a driver to calculate your costs can transform that.

There are many businesses in many industries that have challenges and struggles with the forecasting process. The professional services industry is no exception. From disconnected spreadsheets around the business, to manual processes, to outdated data, and inconsistent assumptions - many of these headaches will be familiar to those involved in the forecasting process.

And there are different solutions out there to help make a change. In this article, I will focus on one simple and easy to apply in your forecasting process. It requires a simple switch to a 'driver-based forecasting' approach with one key tool at the centre - a Headcount Plan.

Headcount is central to so many things.

In a Professional Services business, your people are your most valuable asset. The time they invest has a direct relation to your ability to drive revenue. They also account for your single biggest cost, your salaries. When you factor in related costs like taxes and pensions, these costs typically account for up to 60% of revenue in many professional services businesses. So most of the money that comes is tied to paying people on a monthly basis.

But it goes way beyond that. Your people drive so many other costs in your business. The majority of your P&L is directly influenced by your people. Travel, training, equipment, software, entertainment. These are just a few costs that will typically fluctuate in line with headcount.

And when it comes to forecasting, understanding these relationships is critical for the quality and output of your numbers. So to do this effectively you need a well designed model. And at the centre of it all, sits the Headcount Plan.

So what is a Headcount Plan?

In simple terms, a Headcount Plan is an overview of how many people you have in the business, usually broken down by role, location, department etc (however you like to slice and dice your data). Your headcount plan will be built in majority by people already in the business, plus known hires, and also unknown hires. You will also include information like start and (if known) end dates, so you can build a profile of headcount over time. It will also of course include salary levels.

This profile of how many people you have in the business will form the foundation of many costs in the business. And dynamically managing this within a well designed model is a powerhouse approach to drive efficiency and quality in your numbers.

So does the headcount plan influence the rest of the P&L?

Below a few of the most significant costs that you can model from a headcount plan. With no extra time, you can calculate these on an individual basis (even if you don't need to look at employee levels) to really give you that accuracy in your forecasts.

Hear are some examples of costs driven by headcount: 

• Salaries - Self explanatory - calculated for each month the employee is in the company.
• Salary taxes = Salary x employment tax rate (based on the location of employment) 
• Pension costs = Salary x pension rate (per employee agreement) 
• Telephone costs = Agreed upon rate per person (maybe tied to group contracts with vendors, and could vary based on role) 
• Staff training costs = Budget per person per year. 
• IT equipment costs = amount paid on purchase per employee (for example when they join), and then depreciated and replaced in line with company policy. 
• IT software costs = Headcount x number of licenses per software (applied based on who needs different types of users - managing a table of IT licenses is extremely important now, with so many different types of software). 
• Staff entertainment costs = a budget per person per year. 
• Travel costs = budget per person per year (typically apply different amounts to different departments, based on the type of work).

When you look at these costs, you can see that they cover the vast majority of cost lines in a professional services business. So by modelling these costs from a central headcount plan, it can have a transformative impact on your forecasting process.

And it goes further. Headcount plans can also generate revenue insights - the 'Bottom-Up Revenue Plan'.

I have focused on costs so far. However, in this industry, one key tool is to understand the revenue capacity of your workforce. This is a key thing to look at when designing your revenue profile. You need to understand how 'right-sized' the business is to meet the revenue projections.

I won't dive too deeply here, but in this industry, your revenue is largely dependent on the billable hours or days of your staff (many operate in this way). By having a headcount plan, you can estimate how many billable hours or days each of your staff can deliver in a given period, based on their role, availability, utilization rate, and billing rate. These variables will help you project your revenue capacity. And tied to a dynamically managed central headcount plan, it is powerful stuff for decision making if you ask me.

There are real benefits from doing this process well

So what do you get by modelling your business from a central headcount plan?

1. A P&L that makes sense. Why are my telephone costs x? Why are software licenses changing by y? This forecasting approach helps you dive to the initial underlying drivers, rather than living with confusion of fixed numbers that are disconnected and shown in pure monetary terms. 
2. Huge time savings in reforecasting. You can make changes in central and controlled places and see the updates flow through automatically. When headcount numbers change, the rest of the calculations should flow through. You don't need to revisit each cost line by line to check it makes sense. If the model is designed well, it will take care of everything. And what if you work in a business that operates with drivers that vary by department (only certain departments have certain software) or country (varying tax rates between countries)? You can manage these things dynamically in one place to save not only time, but to model with much more transparency and control.
3. The ability to make decisions and see a clear outcome. Let's not forget a key reason for forecasting - to help make better decisions. You can review your costs in line with operational decisions to change the way you work with your numbers. For example, if you want to change the pension policy, you can update your numbers and see immediately how that impacts profitability. If you plan to add a new division with 25 people, you can quickly see how the numbers flow through to the P&L. If you want to upgrade a piece of software - see immediately the projected cost impact and identify ways to get a better deal. Armed with your numbers, you will make better decisions!

Takeaway - A central headcount plan is a critical piece to a high quality forecast. Especially in a Professional Services business. So make sure you use it in the right way!

In a world where so much is happening and changing all the time, try and find ways to maintain some control, especially when projecting your numbers. And a central headcount plan is one of those components that will transform your forecasting capabilities, when used well.

And remember, it is more than just having good quality numbers. It is about providing a tool that becomes a core component of decision making around the business! So use it wisely!