Often, it's too difficult to fully attribute the cost structure of a business. One heuristic we can employ is to separate business activities into "core" and "supporting" value-chains, but even then we get stuck if we try to manage the latter in detail.
Breaking down “supply” into a detailed tree of inputs is quite difficult, given that each individual staff consumes resource inputs from many different business functions, and returns output to many different business functions also.
A simplifying paradigm-shift may be applied here. For any period,
- We consider the total expenditure on staff ( maintenance@[compensation + administration] + amortised cost of programs booked as capital expenditures ), and call it human capital expenditure (HCE), then we divide net income (NI) by HCE, to obtain a ratio, which we can refer to as the earnings-to-human-capital ratio (EHR)
- Multiplying the cost of any individual or team (henceforth “team”) by the EHR, then gives us a fraction of NI which that team is responsible for, in an arm-wavvy way, which we can refer to as their implied-earnings-responsibility (IER).
- Whereas we haven’t PROVEN that a team is responsible for their IER, we can use IER as a nominally equitable heuristic that teams can use to anchor their financial KPIs.
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