Question: Lowering labor cost as a percentage of revenue

Historically, our technology service business has trailed the industry standard of labor cost (as a % of revenue.)

Before we refocus on growth, we have identified improving this ratio as our key thrust this year-through a combination of reorganization, standardization and technology driven productivity. We have made a list of multiple initiatives, each with an owner.

We are looking for advice on how we can track the monthly progress & impact of our initiatives towards the overall goal, of reducing labor costs.

Your insights are appreciated.

4 Expert Insights

Some additional information about your business would be helpful.  If possible segment your business by customer group or product offering. Each segment may demand different levels of service to meet customer expectations.  Again, keep track of labor costs related to each segment. The metric may be labor to sales but that becomes unreliable if pricing varies within segment.  Please contact me if you want to explore this further.

This is not meant as criticism, just observation based on the limited information here: Point #1 is either your labor costs are too high (am indicator of relatively inefficient operations) or your sales are too low (an indicator of ineffective marketing, sales or service). Now that I have your attention:

Point #2 is you might save yourselves some time by choosing 1 or 2 of your main or most critical services. a) map the process, as it is performed today. Get all involved to comment on this until you have your 1 best "as-is" process; b) Then secure consensus on what everyone wants it "to-be"; c) create teams & action plans to get it from the "as-is" to the "to-be" state; d) standardize the processes; e) train everyone on these standard processes; f) define metrics that clearly, simply & objectively measure the progress.

Proceed with a Champion of the overall initiative, Process Owners of each (who facilitate their Teams) & Team members (who assist the Owner). The Teams, Owners & Champion need to work with the Finance department to define & agree upon the few metrics that truly measure what your progress is.

Both Gary and Dan are spot on.  Break down your services into market segments, and then choose the 1 or 2 areas that will provide you with the highest return on investment.  It is similar to the old "80-20" rule...You should find that most of your benefits will be derived from those areas that have the highest ROI.

And don't just measure everything in dollars and cents.  Utilization hours vs. realization, headcount and mobility should also be factors in measuring your success.

Lowering labor costs as a percentage of sales might be an arbitrary decision. It assumes there is no difference between your company and your competitors. However, this is rarely the case because businesses are built on a productive asset that varies from business to business. What you want to look at is what is this asset and what is your return on it in comparison to the competition.

Let's look at two car manufacturers: Rolls Royce and Ford. I don't know the financials of either but I bet you labor is higher cost component for Rolls Royce than for Ford. Consequently, if Rolls were to benchmark themselves against Ford their product would undoubtedly suffer. You might be doing the same thing. Now if we look at this example from the productive asset point of view and determine that Rolls's asset is the brand and Ford's is a manufacturing plant then we can see that the return on the brand is probably close to the return on the plant. Okay, so I am being a bit hypothetical but it is only to make a point.

All businesses exist because they own and/or control an asset that can be used in a product or service that provides customers with a competitive advantage. That is, the asset somehow makes the customer's life easier or less uncertain in some way. the busy part of the business involves putting in place processes that make that asset usable to the customer, and managing the risks inherent in the business. The business survives when all this done and an excess of value of produced, otherwise known as profit, allowing the company to pay for the cost of capital, return money to investors and reinvest in its future.

You have to look at the specifics of your business before making a decision which assumes you are like everyone else.