CAD Management Finances, Part 313 Jul, 2006 By: Robert Green
To convince management you're right, it's all in the numbers.
In the past two issues of CAD Manager’s Newsletter (click here for archives) I discussed how to approach the CAD management job from a financial angle. If you haven’t had a chance to read the first two installments of this series, please take the time to do so now because I’ll be building upon the concepts I presented in Parts 1 and 2.
In this installment I’ll focus on analyzing your cost-saving ideas from the perspective of presenting them to your management. Whether you like dealing with financial issues or not, the only way to get what your department needs is to make your management understand what you want and agree to fund it. It really is imperative that CAD managers take the time to understand these financial concepts. I can guarantee you that the most successful -- and well-paid -- CAD managers use these financial concepts every day.
Your Cost-Saving Ideas
In Part 2, I asked you to come up with some CAD management ideas that you thought could save money for your company. After getting your list of ideas together, you were asked to do four things:
- Figure out how much cost savings you think you could achieve with each idea.
- Sort the ideas so those that will save the most money are at the top of the list.
- Sort by ease of making changes so that the changes you could make the fastest and easiest are at the top of the list.
- Sort by user support so that the ideas that would benefit the most people and have the greatest impact are at the top of the list.
You should now be able to look at your prioritized lists and figure out which ideas will generate significant savings and be easiest to accomplish while serving the greatest number of people in your organization. When you find the items that meet these criteria, you now have an immediate action list.
Do a Rough Cost Estimate
With your newly generated immediate action list you must now perform a basic cost estimate for each item. Here are some guidelines for obtaining a good cost estimate for any idea you come up with.
Software costs. Will you have to buy software? If so, will the software have annual service contracts to consider?
Hardware costs. The same considerations as with software apply.
CAD management time. How many hours will you have to spend, and what is your hourly rate? If you don’t know your hourly rate, simply ask your management and then multiply the hours you’ll spend by your rate to get a dollar cost value.
User training time. Will users have to sit in training? If they do, then you have to count the hours they spend in training and multiply by their hourly rate to get the cost of training.
Training materials and support. Will you have to hire a trainer? Send users to outside training? If so, these costs add up.
Programming or customization time. Will you have to hire anyone to help you with programming or customization services?
Now total up your costs for each idea and compute how long the cost savings they can generate will take to pay for the costs of implementing the idea. The ideas that pay for themselves fastest represent the best ROI (return on investment) values and should now be the very first ideas you try to implement.
Write It Up and Submit It
Now take your cost-saving ideas and your cost estimates and write them up so that your management can see what you’ve done. These write-ups need not be complex. Here's an example:
Savings analysis. We’ve determined that we can save each of our staff of 40 CAD users 20 minutes per day by automating standard CAD tasks, such as insertion of title blocks, standard XREFs, layer lists, standard symbols and so forth, by using custom tool palettes that we can develop in-house at very low cost. Based on 40 CAD users, 20 minutes (0.33 hours) per day saved, 240 production days per year and an average $25-per-hour labor rate, the savings we can generate would be $80,000 per year.
Calculation: 0.33 hours per user per day x 40 users x 240 days per year x $25 per hour = $80,000 per year
Cost analysis. To make these changes I will require 30 hours of programming and installation time at my $60-per-hour CAD manager’s labor rate. I’ll also need 10 hours of CAD user testing time at an average $25-per-hour labor rate. I will further need four hours of my time to generate training materials for our users and teach a class for them and will also need all 40 users to attend a one-hour training session to get acquainted with the newly developed tool palettes. We’ll be able to make the change to custom palettes for a very low $3,290 because we won’t have to buy any new hardware, software or external services to make the changes required.
Calculation: 34 hours total CAD management time x $60 per hour = $2,040
50 hours total CAD user time x $25 per hour = $1,250
Grand total = $3,290
Payback analysis. This $80,000 savings idea will pay its $3,290 cost in about two weeks’ time, thus making it one of the highest ROI projects we can undertake. Worth noting is that our adherence to standards should go up considerably as users begin using a more standard work approach, thereby lowering our rework and error rates as well.
Now Get Approval
Admit it: Doesn’t the example scenario I outlined carry a whole lot more weight than saying, “Tool palettes are really cool” or complaining, “My management never lets me do anything new”? If you present your ideas to management in the way I’ve outlined, they’ll see the value of what you’re proposing and will appreciate the analytical approach you took to flesh out your ideas. When you work in the financial realm, you don’t think you have a better idea -- you know you have a better idea!
Now that management has seen your idea and understands its financial impact, it is time for you to ask for the funding approval to make it happen. It is critical that you actually ask the question, “Can you approve this so I can start saving us some money?”
Remember that if you don’t ask, you’ll never get what you want! And in this case what you want (the standardization power of palettes) dovetails perfectly with what management wants (cost savings) to make a perfect win-win scenario.
What I’d like for all you CAD managers to do now is work through your list of cost-saving ideas and perform the savings, cost and payback analysis steps I’ve outlined in the above example. As you perform this exercise for all your ideas, you’ll start to see which ones are the big cost savers, and therefore which ideas you should work on first. You may be surprised to find that some small ideas can save big!
In the next issue of CAD Manager’s Newsletter I’ll conclude this series by giving you some additional guidance on what sorts of projects you can undertake in different economic scenarios to get specific financial results. I’ll present more example scenarios to illustrate key points and give you more opportunities to practice. Until then.
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