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Last week I did a book review on Simple Numbers, Big Profits. In that review I passed on the discussion of labor productivity because it is such a big piece in and of itself. So this week I wanted to dive into this topic in a bigger way.
Discussions of labor productivity used to create a sense of panic in me. That was because I was on the employee end of the stick and employees were usually the ones getting the short end of the stick when companies tried to “enhance labor productivity”. It was usually code for layoffs. Simply having fewer people do the same amount of work. I think that the premise was that no one was working at peak productivity and they could simply cut and force people to be more productive. Even if that wasn’t the intent, that is how the employees perceived it. And with good reason, because there typically wasn’t a lot of guidance about how this productivity was going to be achieved. It was left up to the employee to figure it out. Sometimes they would try to lay out the thought process behind it but didn’t spend much time on getting buy-in. This started a downward counter productive spiral. Cut staff…..demoralize the remaining staff because it was perceived as more work for the same pay……..cut staff again……demoralize staff because they had no idea what the end game was or how many of these rounds were going to happen.
So I have plenty of examples where the desire to be more productive created less productivity. This is tricky business to be sure. The trickiest part is making the hard decisions that really need to go along with this strategy and then spending the time getting everyone else on the same page.
What the author suggested was looking at you labor budget as does the NFL. That analogy was a bit lost on me but I figured out what he was saying. One of the reasons that is given for the NFL cap is to keep the salaries from eating up all of the profits of a team trying to attract “stars”. That part made sense to me. When you look at your costs, if you let salaries get out of line, it will be easy to see how that can start to erode profits.
Salaries are probably a place where your dollars and how you spend your dollars has the greatest impact. I have worked in companies where two people in the same job description (and probably similar wages) could produce very different results. One person would burn the midnight oil but not get as much done as someone leaving on time everyday. Or they would work the same number of hours but the results achieved were very different.
Analyzing your team in terms of their productivity can be hard, but can potentially give you the greatest return. You will struggle trying to get the same impact by saving a few dollars on your office supplies.
So the first step in this process is to determine your salary cap. If you start with your sales number and determine your target gross profit, you will identify what your maximum total expenses can be. From this point, identify your fixed costs; office space, equipment, supplies, etc. The remainder will be your salary cap.
Example:
Gross Sales $1,000,000
Target Profit – 10% or $100,000
You then have $900,000 to spend on expenses. If your office rent, etc is $400,000 then your salary cap will be $500,000.
This is a simplification but you need to look at it like this to get your boundaries set.
If you are in a growth mode, you may give yourself a little leeway on this but I would do so cautously. Make sure that you aren’t using it as an excuse to not make the hard decisions about your staff.
Once you come up with your cap, you need to compare with where you are now. Then the hard questions come. Are we going to increase our revenue enough to justify where we have are salaries? Is someone not performing to the salary level we are paying them? Do we simply have too many people? Where is productivity leaking out? Are your team members in the best job to use their skills or do you need to rearrange who is doing what? You can probably answer these questions but acting on the answers can be difficult.
Having a target and looking at these numbers on a regular basis is the key to keeping these numbers from getting out of line and eating away at your profits.
What challenges do you have in managing labor productivity?
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