Three Steps to Maximize Labor Productivity
Written by Greg Crabtree
Every entrepreneur that is struggling to be more profitable always tries to cut anything but labor. But I have a new thought for you: instead of thinking about cutting costs, increase productivity!
This may sound like a play on words, but in my experience you cannot cut kitchen supplies enough to get profitable. In every case where I have helped a business improve profits, it came through improving labor productivity. You are likely spending the right amount of money on labor; you just do not have the right people doing the right things.
Here are the three keys I focus on:
Key #1 - Measure Labor through a Labor Efficiency Ratio (LER)
I prefer to look at labor as a lever, not as a cost. To do this we separate labor into at least 2 categories, direct labor and administrative labor.
Direct Labor Efficiency Ratio - This is calculated as gross profit per direct labor dollar. My definition of gross profit is revenue minus all non-labor direct costs. Revenue is a vanity number and you can only spend gross profit to cover your labor and operating costs. By focusing on improving gross profit dollars per direct labor dollars, it gives you maximum flexibility to deal with price or volume as your tools.
Administrative Labor Efficiency Ratio – This is the next key to holding your management team accountable, and is measured by taking Gross Profit less Direct Labor to come up with a term I call “Contribution Margin.” As I studied profit and loss statement structures, I found that we needed this new item to create a line that represented the output of your business engine before any operating costs. Contribution Margin dollars per Administrative Labor dollars is our measurement for Administrative Labor efficiency ratio. By using Contribution Margin as the numerator, it allows your management team to focus on multiple options to get more contribution margin dollars by adjusting revenue, cost of goods sold or direct labor. Once again, you can accomplish your goal by either volume or pricing as long as your labor is productive.
Key #2 - Find Successful Patterns of LER by using the Data Cube
Even in struggling businesses, we find patterns of success that can be replicated. The “Data Cube” is a term I created to represent the various views of Contribution Margin you need to track to understand your business model. You should be able to track revenue, cost of goods sold and direct labor by customer, by product, by division, by location, by line of business or by employee whenever possible. Not all of these will apply to every business, but you should be able to make a good attempt at least by customer. Service businesses that track billable time can get down to LER by person.
For example, if you can calculate LER by customer, rank them by labor efficiency ration from top to bottom. If you are a typical business, 80% of your revenue will come from 20% of your customers. Find the most successful patterns in your top customers and evaluate why they are successful and others are not. This will lead you either to re-price the underperformers or to find your unproductive labor, one of the two. If it is a good customer, but bad labor, these are the employees you will need to either re-train or replace. If it is a bad customer, you need to free up your good labor by letting the customer go and not let your good labor go to waste. It is no more complex than that!
Key #3 – Hire and adjust pay based on LER targets
Once you have your LER for direct labor and administrative labor, you have the ability to hold your team accountable to a measurable outcome to base your pay adjustments and future hiring decisions. Like any productivity measure, you cannot keep your people at the highest level forever, but by tracking this over time, you will find a base level that gets exceeded and then you fall back to that amount after raises or staff additions. This also gives you the ability to calculate revenue targets for new management team hires by working backwards into the increase needed to maintain the current LER. One recent example was a client of mine who wanted to add a new sales person who would cost $100,000 per year. The client thought the target would be $300,000 but after we worked the math, it was really $700,000! That changed his thinking and he decided to add a less expensive person to help flush out leads and he would continue to handle closing.
In today’s competitive environment, all labor must be productive and you do not have any room to pay someone if they are not producing. You will also find that productive labor does not waste non-labor costs and you won’t be cutting kitchen supplies or resorting to single-ply toilet paper to make your profit target!
About the Author: Greg Crabtree has worked in the financial industry for more than 30 years. He founded Crabtree, Rowe & Berger, PC, a CPA firm dedicated to helping entrepreneurs build the economic engine of their business. Crabtree leads the business consulting team, helping clients align their financial goals with their profit model and their core business values. He is the author of Simple Numbers, Straight Talk, Big Profits! For more information, visit: http://www.seeingbeyondnumbers.com/.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.