Labour costs are typically 50-70% of your operating costs so anything you can do to improve labour productivity is a good thing. The 80/20 Rule can be applied to the issues around staffing so that your business can operate as effectively as possible. Yellow Belt
The Vital Few
When dealing with staff, there will be comparatively few people in your business that are excellent and super productive at their job. Hopefully most of your senior management team lies in this area but in the words of the song “it ain’t necessarily so”.
The 80/20 Rule would say that about 20% of your people are extraordinary and the rest are in various shades of productive ‘grey’.
We also know this from the concept of a ‘normal’ or bell shaped distribution of events. For a parallel application when choosing a professional see How to Choose Professional Advisors. This says that about 66% of staff are average, 17% are extraordinary and 17% terrible.
This will apply to staff in general and in each skill type in particular. For example, there will probably only be a few excellent technical experts or specialists in their particular skill. Many of the others will be “holding the fort”.
Consider the impact the 15-20% of poor staff are having on your company’s productivity and staff morale. You should consider a management plan for this group. Maybe you should be firstly trying to show them how to lift their game and, failing that, letting them go. The remaining staff will thank you for getting rid of the deadwood and your average productivity will go up as the low producers improve or are moved on.
Conversely, the 15-20% who are the most productive clearly deserve some recognition – especially if you want to keep them. Money might help and the respect of management and their peers will certainly assist.
Possibly as a first pass in your organisation, you can give thought to whether you need entire sections of your operation.
Do you, for example, need an HR Department, do you need IT staff, do you need accounting staff. Many of these specialist skills can be outsourced and one advantage of outsourcing is that if they don’t perform well you can let the outsource company go. Another advantage is that you will be outsourcing to a specialist who will presumably do the job better in many ways than your own staff may be able to. They might be better equipped to scale as your business grows rather than taking on new staff – of whom 80 percent will be average at best.
It’s also true to say that you may not have sufficient skills within yourself or your business to adequately determine whether your existing staff in those roles are doing the best possible job. How do you know your single HR staff member is doing a good job unless you are an HR expert yourself? You are operating in the “don’t know what you don’t know” area when you employ experts in areas where you are not an expert.
When you outsource, you should be getting the best skills that you can afford and almost certainly will do better than keeping that skill in-house.
You will also be faced from time to time with a need to replace staff that leave and that necessary training and other activities are required to bring them up to speed. If you outsource, it is the job of the outsourcing company to bring people up to speed and provide you with a steady level of service irrespective of fluctuations in their own staffing.
Measure Labour Efficiency
You can measure the efficiency of your staffing operation by calculating a “Return on Labour Ratio“. This is calculated by dividing your revenue by the cost of your labour. It tells you how much revenue each dollar of wages is producing.
When calculating this ratio, include both your in-house salaries and any outsourced labour related costs so “hidden” labour costs are taken into account as well.
This ratio won’t have a great deal of information the first time you do it but if you continue to do it periodically – perhaps 6 monthly – you will see a trend. Either the return will go up or it will go down.
If the trend goes up then you are generating more return with less salary expense and this is a good thing. If, on the other hand the trend falls, then you are plugging in more labour and not getting a corresponding return in the revenues.
A falling ratio should be a wakeup call that you are becoming less productive per unit of labour. It might just be that your company is getting larger where this might be understandable. But it might mean you are getting less efficient and the Peter Principle is kicking in and you are hiding more and more “dead wood” in your employee pool.
Go to the article: Peter Principle: Promotion to Incompetency
When calculating this, include both your in-house salaries and any outsourced labour related costs. If you have a reasonably large organisation, you can do this on a departmental basis. This will indicate the departmental return on the money and other assets involved in operating it, A return on labour ratio will indicate the departments that are the most efficient users of labour. This is only practical when the department has direct revenue from sales of some sort. Trying to give e.g… the accounting department revenue by ‘charging’ other departments is the stuff of cost accounting nightmares and is a world we don’t want to enter because the work is hugely time consuming and the results are guesswork largely.
If you have a reasonably large organisation, you can do this on a departmental basis rather than the company as a whole.
This will indicate the departmental return on the money and other assets involved in operating it. It will also indicate the departments that are the most efficient users of labour giving you a benchmarking tool. This is only practical when the department has direct revenue from sales of some sort. Trying to give e.g.. the accounting department revenue by ‘charging’ other departments is the stuff of cost accounting and is a world we don’t want to enter because the work is hugely time consuming and the results are guesswork largely.
Elsewhere we have discussed the Boston Consulting Growth Share Matrix of revenue on one axis and growth on the other (see Boston Consulting Group article)
We wrote in that article of the great businesses to have (the “Stars”) and the terrible ones to have (the “Dogs”).
It might be possible to plot the Return on Labour Ratio in BCG Matrix format. This would indicate to you, those departments that are your “Stars” and “Dogs”.
A Word of Caution
We have been discussing the usefulness of applying 80/20 to your personnel.
It is important not to take this too far!
We may also have given the impression that you can drop 80% of your staff. This is not necessarily the case.
Consider a hamburger which may be 20% meat which is the part that is most attractive and most nutritious. But without the surrounding bread roll (the 80%), it is not a hamburger and may not be much of a meal.
Most likely you will require and should have these additional staff. The trick with the 80% component of your staff is to keep them focused as much as possible on productivity. Very often this means providing optimal systems for production and training them to follow these systems.
You personally are only going to have strengths in some areas. In a well-run business, you will hire others who complement your weaknesses in order to give a well-rounded business. Therefore businesses can and should be run as a team of talented individuals.
For more on the 80/20 Rule readings go to the Skills Module introduction: SM2.0 80/20 Sales Growth; Double Sales, Triple Profits.
Refer to other articles on staffing from the Human Resources Menu.