Managing Labor Productivity Like the NFL
The big obvious consequence of the Information Age are the tools and information resources that have put managers in charge of their working time as never before.
We all face nagging duties but multitasking has made us, more than ever, personal managers of our own labor productivity. The better we handle our tools, the more we might get done, depending on the constraints of the other people and partners we work with.
But how well do we do that and how do we know the right skills and tools are in place? Especially for us non-sales types, what's a measure of our productivity?
Editors cross this bridge daily, pounded by software startups on one hand pitching quick technology solutions, and by management gurus and celebrity authors on the other hand who tell us how to create influence and manage up and down to make more business.
I'd be an idiot not to watch strategy in an era of culture and change management. Any tech manager would be foolish to be ignorant of sales culture and how personal influence brings money in the door (even if it's true that tech experts and management gurus usually ignore one another completely.)
Amid all the go-go pitches I get from sales and management gurus, one wasn't just sales psychology. It was about labor productivity. Greg Crabtree is the entrepreneur, accountant and finance expert behind the book with the nonetheless spunky title, Simple Numbers, Straight Talk, Big Profits!
Greg's finance savvy met my productivity doubts in an era also demanding brand building, sharing and collaboration. It's the peer groups he studies (and the mountain of accounting data his firm holds) that led him to calculate the profitability of productivity, instead of the cost allocation businesses practice. Plus, he says, profit isn't overall productivity per hour, it needs to be separated into direct, management and sales inputs.
"Loading labor or allocating overhead are all noise level things," Crabtree told me. "Accountants deserve the criticism, we kind of move information around and count it two or three times. That doesn't create clarity."
Accountants wrestle with these ideas too. Crabtree's trail of cash flow data led him to advise that labor be divided into those direct, sales and management buckets and managed by profit per labor dollar. It's not a new idea and you need all three (he's a big fan of the business allegorical novel "The Goal," by Eli Goldratt) but a with apologies to growth investors, it's one measurable way to stay in business.
"At 5 percent pre-tax profit you're on life support, 10 percent makes you a good business, 15 percent you're a great business. Anything above that, take it while you can get it because the market forces will push you back."
Until pre-tax profit is at 10 to 15 percent, you treat all labor like a salary cap divided across the three categories. Businesses, Crabtree figures, could learn from the New England Patriots, the Pittsburgh Steelers and a couple of other NFL teams how to spread labor dollars around to get the optimal players on the field.
The skewing in small businesses Crabtree counsels comes from management compensation and the sales margins that swing wildly across the business. Once you correct for the top compensation and compensate sales in proportion to profit, the numbers normalize and profit KPIs can dictate when it 's not time to add employees in a busier environment, (where management contribution to profit can ramp faster than direct labor can).
It's not the last word, but it is a baseline and anchor to hold onto. "We think the data we have from clients is extremely valuable as an indicator of what works and what doesn't," Crabtree says.
Profitability by type of employee, by customer, by business line or by product is the wheelhouse business intelligence and performance management to begin with. "Every business has three or four sides to their cube you can track the data correctly pretty accurately or at least to a good indication," says Crabtree. But business has a lot of control over labor compared to other things. "In technology service businesses we've seen where they take a gain from something and get sloppy with what it adds and it becomes kind of a hiding place for unproductive labor to go hang out."
Dividing types of labor and allocating to protected margins lifts some of that elusive doubt on the value of non-sales workers for once, or as Crabtree says, "you tell me, Mr. business owner what you intend to do and I'll give you the absolute target of what you have to do to justify the decision you are making." For a $5 million company (or a departmental budget) he thinks the quantification of that is simpler than most of the consultants make it.