As someone who takes great pride in how I care for myself physically, emotionally, and spiritually, it is comforting to see the resurgence in corporate dialogue surrounding employee wellness and well-being.Mindfulness and meditation are being more widely talked about as a way to become better employers, better employees, and better corporate citizens. Emotional intelligence is again in the spotlight. (Was it ever not?) The search for purpose and meaning brings a sense of community and fulfillment when the people that make up a company and its culture align. Happiness is a highly obtainable goal.
People are more often than not a company’s biggest asset, so it makes absolute sense that a business should take the utmost care of its employees. The truly enlightened Chief Financial Officer knows this. As the person that watches over the company’s assets with an eagle eye, a CFO’s goal is to make sure its greatest asset is performing at its best.
Unfortunately, the old saying, “Happy employees are productive employees,” doesn’t always hold true. Yes, unhappiness does have its costs. According to Gallop-Healthways estimates, it’s a $300 billion a year problem in the United States. That’s $300 billion a year in lost productivity! Think of your own productivity when you have gone through a period of unhappiness. Have you cared a little less? A lack of creativity? Commitment lags? Less friendly with your colleagues?
Unhappiness is a problem, without a doubt.
Yet, while companies struggle to ensure that they are creating healthy environments where their people can thrive and succeed, most do not spend nearly enough time analyzing whether their employees are productive. A happy employee doesn’t necessarily mean a productive employee. Or maybe it’s better to put it this way – a happy employee may still not be the right employee.
So how do you look at productivity?
One metric is to monitor your Labour Efficiency Ratio (or LER). In a nutshell, it quickly shows you how many dollars are being earned against each dollar spent on salaries.
In his book, Seeing Beyond The Numbers, Craig Crabtree outlines two LERs worth monitoring over time.
Direct Labour Efficiency Ratio
Gross Margin / direct labour costs
Gross margin is revenue less the cost of goods sold (non-labour costs) to produce what you do. In this analysis, it’s better to use gross margin, over revenue, as you can really only spend gross margin to cover labour and operating costs.
Direct labour, and the costs associated with it, is what is used to produce your product or service. In other words, it’s what you pay your staff to directly serve your customers. What it doesn’t include is labour used to run the business – like management and administration.
With an eye toward improving your Direct LER (or gross profit dollars per direct labor dollars), it gives you maximum flexibility to deal with price or volume as your tools.
Management Labour Efficiency Ratio
Contribution Margin / management and admin labour costs
Management LER is a measure that determines how productively your management team is running the business. Contribution margin is calculated by subtracting from your gross margin all direct labour costs, and is the output of your business engine before accounting for any operating costs.
This ration allows your management team to focus on the actions necessary to get more contribution margin dollars using the levers of revenue, cost of goods sold, or direct labour. As Crabtree notes, “Once again, you can accomplish your goal by either volume or pricing as long as your labour is productive.”
Time to slice and dice your data!
With your Direct and Management LERs in hand, along with your P&L statements, determine where changes are needed in the business to improve profitability. Using these ratios, look at specific products to see what is performing well, or the opposite. Looks at clients through the lens of your LERs to measure your good versus your bad customers. You can take the analysis to also look at divisions, locations, line of business, or even employees.
Note, there is no one answer as to the right value for each LER. A little further investigation is required to determine what LER is necessary to generate the desired profitability. That analysis will help determine where a management team needs to look for greater efficiency, or even to cut costs.
Turn your attention to your workforce, and build and adjust your teams based on your analysis. With your data in hand, and a few numbers plugged into a simple financial model, you’ll know how much you can really afford to pay people and if/when to hire new talent. You’ll also know if the current team is performing to the necessary level, and then take actions as appropriate.
Happy teams aren’t always the most productive teams. Productive teams aren’t always the happiest. But without a doubt, happy, productive teams are profitable teams.