The 2 Times Rule and how to it can make you more money -ITPN EP012

The Early Days
Back when my business partner and I started the company in 1995,  we were a couple of "snot nosed kids" as my mother used to call me when I was young.   We were really good at what we did which was installing and implementing ERP software for manufacturers.   We weren't however very good with finances.    We were fortunate in that the company started off with a bang.  We were traveling to some of the largest companies in the world and we were the Red Adair's of our eco-system.  Saving manufacturers for countless hours of downtime and really helping them get the most out of their software investment.

It wasn't long, about 15 days if I remember right when we needed to bring on our first team member.   and that's when our accountant introduced us to what is still called today in our company, the 2 Times (2x) rule.

In today'ss episode of the IT Provider Network, I am going to introduce you to the 2X rule and the concept of LER or Labor Efficiency Ratio as well as give you so actionable ways you can get more out of your days.

 
The 2 Times Rule
So the 2X rule was pretty simple,  our accountant told us for each employee we brought on we needed to have 2 times that amount in revenue. If we hired a 100k a year guy we needed to product 300k of revenue with that employee to stay solvent and make a profit.    That rule held fast for many years in our company, and it became a major part of our hiring decisions over the years.   We always did our what-if analysis on a spreadsheet that became known as the "Death of PICS" spreadsheet.     Back in the days of time and material billing a 100k resource that sat on the bench for a while could literally be the death of your company.

Fast forward to the last few years,  we have continued to grow and our business has continued to evolve.  Our managed service division is more than 50% recurring revenue and our enterprise software division is moving to SAAS and more recurring revenue too.

Because of the growth, we are no longer a flat organization, and our costs continue to go up.  We now have two buildings, double the amount of licenses and computers and of course, the whole world is moving to a recurring revenue model so our spend is becoming more of an operational expense (OPEX) than a capital expense (CAPEX)

Because we now have some managers that are not revenue producing so we needed to revisit the 2X rule and make some adjustments.

What we found is that the old 2X rule is really called LER or Labor Efficiency Ratio and LER was still a good measure of how efficient we are as a company, a division, for a customer or as an employee.

Direct LER = Gross Margin /  Direct Labor Costs

In simple terms, it's the 2x rule but now we shoot for a higher number closer to three. For 2017  The higher the number the more efficient you are being with your resource but there is a point where LER grows too high and you are really stressing out your staff.   You need to find out where that tipping point is for your team and anticipate the need to hire more staff before they start walking out on you.

If the LER is low then you may have uncovered some problems in your company,  either excess or poorly trained staff,  needy customers, wasteful practices, lack of procedures or problems in your procurement or service delivery.

Add LER or if you like the 2X rule to your arsenal of metrics for your company, but don't look at it in isolation.  It is only one metric that needs to be part of your planning and strategy.

Enough of that boring bean counter stuff , and my apologies to all you bean counters let's talk about some actionable ways you can get more done and increase your LER.
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