Maximizing Labor Efficiency for Your Growing Business

Sep 1, 2023 | Listen

Maximizing Labor Efficiency for Your Growing Business

Labor costs can be a significant challenge for any company, especially in service industries where people play a central role. 

To run a healthy and sustainable business, it’s essential to strike a balance between cost optimization and the well-being of your people.

This is where labor efficiency steps in – a strategy that involves leveraging your workforce’s skills, time, and resources to achieve maximum productivity and job satisfaction. 

But what is labor efficiency exactly? And why is it vital for your business? 

In today’s episode, Herb Cogliano and I explore the human-centric approach to labor efficiency and how it can uplift your business operations to new heights.



Timestamps for this week’s episode

03:30 What is labor efficiency and why is it important for any business?

05:01 Understanding labor efficiency as ROI on people and their impact on financial returns.

06:40 Explaining revenue-producing and back-office support labor in the labor efficiency equation

18:16 Defining A, B, and C players through talent assessment, rehiring, and core values.

29:45 Actionable and manageable next steps to improve labor efficiency and operating profits


What is labor efficiency and why is it important for any business?

Labor is one of the biggest investments any company will make, so it is important to control it better.  

To understand the labor efficiency ratio (LER), let’s draw a parallel between professional sports and their salary caps. Despite teams spending the same amount, the outcomes can vary significantly – some winning championships while others land at the bottom. The same principle applies to businesses: creating the best team possible with the labor investment at hand.

So as a business owner, the goal is to create the best team your money invested can buy or optimize your labor resources to achieve the desired level of profit.

Analyzing your LER will help identify areas for improvement, enhance productivity, reduce costs, and stay competitive in the market.

By aligning labor investments with profit objectives, you can build a winning team that propels your company’s growth and prosperity.

To help you understand the concept of labor efficiency ratio...it's about helping you create the best team that your money invested can buy.

Understanding labor efficiency as ROI on people and their impact on financial returns.

Understanding labor efficiency is recognizing people as a valuable investment directly impacting financial returns. 

It involves three key aspects:

  • Leveraging labor cost to generate profit
  • Helping managers identify unproductive labor and take corrective action
  • Holding middle management accountable for delivering results

To calculate the labor efficiency ratio, simply divide gross profit by direct labor cost, revealing the return on labor investment. 

For instance, in a service company like a CPA firm, a healthy ratio of 2 to 1 means every dollar invested in labor yields $2 of gross margin, showing the effectiveness in generating profits.

“You want to know when is the right time to add labor for profitable growth, not just for growth’s sake but based upon the desired levels that you think your industry and your business are worth.” – Herb Cogliano

Explaining revenue producing and back-office support labor in the labor efficiency equation

Labor efficiency involves distinguishing revenue-producing labor from back-office support labor. Revenue-producing labor includes client-facing roles like sales, operations, and customer service. Back-office support labor encompasses administrative roles such as bookkeeping and marketing.

When you're more disciplined about hiring at the right time for the right reason, that's how you get the best team can buy.

Understanding this distinction helps businesses make strategic labor investments. By optimizing revenue-producing roles, companies can boost productivity and profits. Simultaneously, efficient back-office support ensures smooth operations and cost optimization.

Maintaining a healthy operating profit of 15% or more is essential for sustainable success. It provides financial stability and enables reinvestment in growth, ensuring long-term profitability and resilience.

Knowing the difference between revenue-generating and back-office labor is key to business success. It will help you make strategic decisions about your labor investments, setting you up for business growth that is financially healthy and sustainable.

Defining A, B, and C players through talent assessment, rehiring, and core values

Identifying A, B, and C players through talent assessment is a two-step process that’s both simple and effective.

In the first phase, take a look at your org chart and ask yourself if you’d enthusiastically rehire each person for their current role. Those you’d readily rehire are your A players, while those you’d hire for a different role are B players. The ones you wouldn’t rehire at all fall into the C player category. This quick evaluation gives you a clear picture of the percentage of A players in your company.

In the second phase, dig deeper with a more sophisticated approach. Evaluate employees every quarter based on two key factors: how well they align with your core values and their productivity in their specific roles. A score of 8, 9, or 10 on both metrics designates an A player. Depending on their scores, employees can be categorized as A, B, or C players.

Your main objective should be to retain A players and help B players develop into A status through effective coaching and growth opportunities. While addressing any issues with C players is important, it’s equally crucial to enhance your hiring process to attract more A players and improve your talent development skills. By focusing on hiring the best talent upfront and nurturing their growth, you’ll build a high-performing team that drives success and continuous improvement in your organization.

“There are 5 simple traits of a high impact CEO – growth orientation, coachable learner, strategic thinker, accountable executor, and effective communicator.” – Herb Cogliano

Actionable step to improve labor efficiency and operating profits

Download the labor efficiency ratio worksheet provided from the website: www.aspiregrowthadvisors.com. 

Business owners can assess their team’s performance and receive complimentary assistance through a no-commitment call. 

There is also a high-impact CEO scorecard on the site that offers insights on transforming from a traditional business owner to a high-impact CEO by adopting simple traits and mindsets to focus on for growth and success.


Summary

  • Labor efficiency ratio (LER) helps create the best team your money invested can buy. By analyzing LER, you can identify areas for improvement, enhance productivity, reduce costs, and stay competitive in the market, ultimately driving growth and prosperity.
  • Labor efficiency recognizes people as an investment impacting financial returns. It involves leveraging labor cost, identifying unproductive labor, and calculating the ratio for profit generation.
  • The labor efficiency equation differentiates direct and indirect labor, aiding informed decisions for adding labor, and fostering healthy, sustainable growth, profitability, and success.
  • Identifying A, B, and C players involves assessing employees based on your enthusiasm to rehire them, their alignment with your core values, and productivity. The goal is to retain A players, develop B players, and improve hiring to build a high-performing team for sustained success.
  • As an actionable next step, check out the labor efficiency ratio worksheet from www.aspiregrowthadvisors.com to assess your current team’s performance.


Transcript

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About guest – Herb Cogliano

International Business Growth Advisor & Certified Scaling Up Coach

Aspire Growth Advisors

Herb leads his own advisory practice leveraging the Scaling Up Performance Platform, described in Verne Harnish’s award-winning book, Mastering the Rockefeller Habits-Scaling Up.

As an International Business Coach, experienced CEO Scaling Up Practitioner, and Professor of the Scaling Up Masters Business Course, he has learned firsthand what it takes to overcome many business challenges. 

Herb is pursuing his passion for working with leaders of growth companies to achieve more freedom by helping them create industry-leading strategies, a culture of accountability, flawless execution, and a healthy cash flow within their organizations.

Herb was formerly CEO of Sullivan and Cogliano Designers, a 53-year privately held family-owned Technology Staffing and Workforce Solutions firm and in 1993, he also founded the Sullivan and Cogliano education business.

Sullivan and Cogliano joined a select group of companies that have appeared on the Inc. 5000 Fastest Growing Company list multiple times. The Inc. 5000 is ranked according to percentage revenue growth over a four-year period. This achievement puts us in a unique position, especially considering that over 27 million businesses are registered in the USA.

His firm was a multi-year recipient of the Boston and South Florida Business Journal Best Places to Work Award. This honor recognizes Sullivan and Cogliano’s achievements in changing the business landscape and creating a positive work environment that attracts and retains employees through employee satisfaction, working conditions, and company culture.

Herb serves on the Carroll School of Management Board of Advisors at Boston College. He has served as a Board Director of the American Staffing Association. He is past president of the Massachusetts Association of Staffing Services and previously served on the boards of Employment Resources, Inc. and Junior Achievement.

He received his BSBA from Boston College in 1987 and his MBA from the University of Massachusetts (International Honor Society Beta Gamma Sigma) in 2016.

Website: https://www.aspiregrowthadvisors.com/

LinkedIn: https://www.linkedin.com/in/hcogliano

Email: herb@aspiregrowthadvisors.com


About host – Kathy Svetina

Kathy Svetina is a Fractional CFO for growing small businesses with $10M+ in annual revenue.

Clients hire her when they’re unsure about what’s going on in their finances, are stressed out by making financial decisions, or need to structure their finances to keep up with their growth.

She solves their nagging money mysteries and builds a financial structure with a tailored financial strategy. That way they can grow in a financially healthy and sustainable way.

Kathy is based in Chicago, IL and works with clients all over the US.

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