For most businesses, the costs associated with having employees are significant; in some cases, employee cost is the single biggest cost area for the company. It should be no big surprise, therefore, that employee costs must be controlled in order to optimize profitability. So how can the costs associated with having employees be measured, monitored, and controlled. There is an old, but very true, saying in business circles that states “if you do not measure it, you cannot control it“. If you do not measure employee productivity, you cannot control it; so how do you measure employee productivity?
First and foremost, the measurement should be a ratio. The ratio should be a measure of “value” produced divided by either a direct or indirect measure of the cost to the company for producing that amount of “value”. Using a ratio gives a relatively reliable metric that can be used to compare performance during busy business periods and slack business periods and ideally should remain constant (or improve) regardless of volume. Examples of potential productivity measurement ratios include:
- Number of widgets produced per hour for a production worker.
- Dollars of sales revenue booked per hour worked for an inside customer service representative.
- Dollars of sales revenue invoiced per hour for service technician.
- When monitoring employee productivity and making managerial decisions based on the information, it is advisable to:
- Look at a sufficiently long period of time; this reduces the chances of short-term aberrant data distorting the facts. Use a moving average of 4 to 12 weeks (use the shorter time frame for very stable data with minimal variability and the longer time frame when outside influences can cause greater week-to-week variability).
- Look for trends. Graphing the data is a good way to visualize the trends. If the moving average is declining, it is a warning sign that prompt corrective action is needed; if the moving average is stable, this is good; if the moving average is improving, this is very good and the employee(s) should be commended for their efforts.
- Monitor the data both for individuals and the average of the entire work group. This allows for comparison between the employee in question and the work group average.
- Share the data openly and frequently. Use the date in all performance discussions with individual employees, both during informal discussions and during formal performance evaluation reviews. Additionally, routine (weekly) posting of the productivity graphs without managerial comment can be a positive factor in stimulating improvement; nobody wants to be at the bottom of the productivity “pack”.
Although the above comments refer specifically to employee productivity, the same logic can be applied to monitoring the effective utilization of other company expenditures. For example, you could measure and monitor:
- Inventory carrying cost per dollar of sales revenue. This can provide information to assist management in deciding what to carry in inventory and what to consider as “special order” only.
- Advertising expenditures per dollar of sales revenue (particularly when the sales revenue produced can be matched with the advertising vehicle that generated that sales opportunity). This can provide information to assist management in deciding which advertising expenditures are producing sufficient sales revenue and which expenditures should be discontinued.
Generally speaking, the best managed companies track their performance using a set of carefully selected Key Performance Indicators (KPI’s) which are often nothing more than ratios that measure the productivity for specific performance areas.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: