Maximize Your Business Through Productivity RatiosAt some point in the growth of a business, every entrepreneur realizes that they need to shift their focus and work “on” their business instead of working “in” it. In fact, it has been written about so many times that many entrepreneurs actually believe that this is the one transition they need to plan for in the growth of their company.

In reality, the shift from working in your business to working on the business is only one of the shifts that an entrepreneur will need to adjust to (assuming that the business growth continues and they are successful). After this first shift, the next stage will be to work toward maximizing the business which requires a whole new set of skills and priorities.

It is a funny reward to entrepreneurs who are successful that their skills are rendered largely meaningless at each stage of success. Being an excellent carpenter is largely meaningless as you move towards leading a crew. Your experience leading a crew is largely meaningless as you shift focus to building the contracting business. In that same way the shift to working on the business by building systems and structures that support growth becomes less important when it becomes time to maximize the business – something that should be measured in productivity.

Productivity

Productivity is a simple concept and a great measurement to use when you are thinking about maximizing your business. The formula is simple:

Productivity = Total Output / Total Input

You can measure productivity in terms of investment dollars (how many dollars were generated in output per dollar of investment) or by some mixed ratio that is more relevant to your business. For example how many dollars of revenue were generated per billable labour hour. At the end of the day you need to pick the right input and output metrics for your business. Then your productivity ratio becomes the one measurement that you monitor daily/weekly/monthly/quarterly and which drives your leadership efforts.

Many people hear the term productivity and immediately think about cutting – cutting jobs, inputs, investment, etc. The way the term has been used in the corporate world has been as a “nice” way of talking about cutting jobs. When you hear about productivity in a corporation the next news is often layoffs or the sale of a division.

While cutting is, in fact, one way to increase your productivity ratio, it is mathematically only half of the equation. There are actually two main strategies to increase productivity:

  1. Decrease INPUT
  2. Increase OUTPUT

Let’s have a look at both of those options in a bit more detail:

Decrease INPUT

This is by far the most common way that people think about productivity. Unfortunately, the most common method of decreasing input has been to CUT – cut people, cut jobs, cut investment, cut cut cut cut…  So people are conditioned to cringe and look over their shoulder when they hear the word productivity.

Another way to think about decreasing input is to think about optimization of the work, the processes, and the inputs.

If you are in the distribution business you can drastically reduce your inputs by looking carefully at your logistics practices. How many trucks are shipping partially full? How many stops does a truck have to make to deliver a route? How heavy are your products and packaging? Are there ways to optimize shipments to common locations by utilizing a local intermediary?

If you are in the software development business you may want to consider other alternatives. How much of what we are building could we be buying or licensing? Are there common functions which are already available as libraries that I can buy or leverage open source? Are there approaches in development such as test driven or agile development that can help reduce my cycles? Am I effectively leveraging DevOps and environments to minimize down time and simplify deployment?

As a manufacturer options are more aligned to sourcing and process. Am I optimizing my raw material sourcing based on my forecast consumption? Are there ways that I can get additional raw material price breaks? Have I fully optimized my labour to support the work in the pipeline? Have I effectively implemented LEAN concepts and am I measuring the bottlenecks throughout my process?

Without cutting any investment, people, jobs, or other direct inputs I can find significant savings just by looking deeper into the core inputs. Often very small changes in process, structure, or approach yield significant savings. At the very least they create the ability to scale as you start to focus on increasing your OUTPUTS.

Increase OUTPUT

In many ways, the sales and marketing teams should be just as nervous about the word productivity. The second half of the productivity equation falls directly to revenue and output. Creating scalability in the consumption of inputs is ineffective if you don’t have a relative increase in your outputs to take advantage of those efficiencies.

On the output side, you need to focus your efforts on 3 key areas to maximize the productivity ratio. Not all revenue or output is the same:

  1. Market
  2. Customers
  3. Pricing

When you consider your market you need to carefully consider all aspects of the market. You may leverage tools such as Michael Porter’s 5 Forces or the Business Model Canvas to help you assess opportunities. There may be markets that border your existing industry that can leverage your products and services. Those bordering markets may have a pent up demand because nobody has identified the scale of the opportunity.

Looking at your customers you need to be vigilant to understand and seek out more of your most profitable customers. Knowing what makes a customer profitable, what they are looking for and what differentiates you to them, and where to find more of them is critical to maximizing your productivity. Adding more customers that are less profitable actually has the reverse effect on your productivity ratio. Cutting customers who are not profitable increases your productivity ratio so you need to regularly choose who you do business with.

Finally, pricing is critical to your outputs because you may be underpricing your products or services relative to the value that they deliver. If you are simply using a “cost-plus” type formula to determine your pricing you may be leaving money on the table. When you deliver a product or service that is unique and delivers significant value to your customers you may be able to increase prices without losing sales. Make sure you price for the value that your organization provides and don’t apologize for earning strong margins. You are building a profitable company after all!

Maximize Your Business

To maximize your business you need to maximize your organizational productivity. In three simple steps you can implement this by doing:

  1. Decide on your Productivity Ratio
    Every business and industry is slightly different and you need to decide what the appropriate measure for INPUT and OUTPUT are that you want to maximize. Ultimately this ratio will be extremely personal to your company and your goals. Measure what matters so you can chase it relentlessly.
  2. Understand the INPUTS and OUTPUTS
    Defining the metrics for the input and output of your productivity ratio is helpful but it isn’t enough. You need to go a level deeper and map and understand the defined inputs and outputs at a very granular level. What are the drivers and indirect sources of the inputs? What are the potential other related output sources? Dive deep and make sure you understand all of the relationships so you can work to maximize them.
  3. Execute, Measure, Learn, and Adapt
    Much like any continuous loop you need to drive change to your inputs and outputs, measure your progress, learn from the results, and adapt your approach to continuously drive to maximize your productivity. This is a never-ending process that will draw on your previous working “in” and “on” skills as you look for better ways to do the work, better processes and structures that create efficiency, and a better understanding of your customers and markets.

Most importantly… DO IT. Take the time to focus on what will really move the needle and maximize your business.

It’s time to become a CEO and not an Entrepreneur… congratulations… you succeeded! (Now you get to start again).

About Tim Empringham, MBA
Tim Empringham is a passionate advocate for Innovation in organizations of all sizes as a mechanism to drive growth, create uncontested market space, create new customer value, and drive efficiency into the internal organization. His focus is on disruption of thinking and markets through integrative thinking, structured Innovation frameworks, and leadership development of Innovation and Change leaders within the organization.

Leave a Reply

Your email address will not be published. Required fields are marked *