At 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 managing and leading your business by 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 and experiences are rendered meaningless at each stage of success. Being an excellent carpenter is largely meaningless as you move towards leading a crew, and 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 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, but 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. In fact the way the term has often been used in the corporate world has been as a “nice” way of talking about these cutting initiatives. Often when you hear about a productivity initiative in a big corporation the next news is about layoffs or selling off a division of the company.
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:
- Decrease INPUT
- Increase OUTPUT
Let’s have a look at both of those options in a bit more detail:
This is by far the most common way that people think about productivity but unfortunately the most common method of decreasing input has been to CUT – cut people, cut jobs, cut investment, cut cut cut cut… and so people are conditioned to cringe and look over their shoulder when they hear the word productivity.
Another way to think about decreasing input however 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: 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 or practices in development such as test driven development or agile development that can help reduce my cycles and testing efforts? Am I effectively leveraging DevOps and environments to minimize down time and simplify deployment?
If you are in the manufacturing business you may want to consider: Am I optimizing my raw material sourcing based on my forecast consumption or are there ways that I can get additional raw material price breaks? Have I fully optimized my labour and shifts 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 what my core inputs are and how I consume them. Often very small changes in process, structure, or approach can yield significant savings into inputs, or at the very least create the ability to scale efficiently as you start to focus on increasing your OUTPUTS.
In many ways I think the sales and marketing teams should be just as nervous about the word productivity floating around an organization because the second half of the equation falls directly to their feet. Creating scalability and efficiency in the consumption of inputs unfortunately 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:
When you consider your market you need to carefully consider all aspects of the market and you may leverage tools such as Michael Porter’s 5 Forces or the Business Model Canvas to help you assess opportunities. You may find that there are markets that border your existing primary industry that can also leverage your products or services and who may actually have a pent up demand because nobody has identified that 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 has the opposite effect of increasing your productivity ratio so you need to regularly consider who you should no longer be servicing.
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 but you actually deliver a product or service that is significantly unique and delivers significant value to your customers you may be leaving money on the table without even knowing it. 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!
So What Now?
To maximize your business you need to maximize your organizational productivity. In three simple steps you can implement this by doing:
- 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. For quickly scaling Internet companies that may be new users per marketing dollar invested or active subscriptions per free user, but ultimately it will be extremely personal to your company. Measure what matters so you can chase it relentlessly.
- Understand the INPUTS and OUTPUTS
Defining the metrics for the input and output of your productivity ratio is helpful but won’t give you enough to move the needle. 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.
- 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 better understanding of your customers and markets.
Most importantly… DO IT. Take the time to focus on what will really move the needle in your business and then maximize it.
It’s time to become a CEO and not an Entrepreneur… congratulations… you succeeded! (Now you get to start again).
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.