Solving the productivity puzzle: measuring it
By Jenny C. McCune • Bankrate.com

Doing more with less is how families get through hard times. It's also how a small business can navigate a recession. Sales generally fall during bad times, so boosting productivity can be the only way to break even or increase profits.

But before a company can increase productivity, it must first be able to measure it, says Mark Ellwood, president of Pace Productivity in Toronto. Ellwood paraphrases management guru Peter Drucker: "If you can't measure it, you can't manage it."

Such measurements are not always easy. Consultants and experts have different definitions of productivity, and even these definitions vary by the type of business. For example, how a service-oriented business, such as a public relations firm, measures productivity differs from how a small auto parts manufacturer would.

Service vs. product
"A service company increases productivity by maximizing 'billable hours' or their equivalent," says Doug Jobling, program manager for the Rhode Island Small Business Development Center at Bryant College, Smithfield, R.I.

"It measures the percentage of time its workers are working on a project for which a client can be billed. This requires focusing on efficiency in management, accounting and related business operations of the company and marketing the service to current and potential clients in an effective way."

It's generally easier to measure productivity if your company manufactures a product. "Simply put, if each worker produces X units of a product in one day, his productivity is measured by the number of units produced divided by the sum of the cost of his labor plus the cost of raw materials needed to produce that volume of product," Jobling says.

Ellwood has an even simpler definition that works for both service firms and manufacturing concerns: "Productivity is the allocation of scarce resources for maximum benefit."

Five measurement methods
Here are ways that experts cite as methods that any operation can use to measure productivity:

1. Find which inputs give the greatest output: Ellwood prefers this method, citing his own consulting business's efforts to find and recruit new customers. "I could put out a newsletter, make referral calls, place cold calls, go to trade shows, advertise and so on," Ellwood says. What he found was that some new customer recruitment efforts worked better than others. In his case, he measured the effectiveness of different marketing vehicles and found that for every dollar spent, he got more customer referrals through his Web site than any other type of marketing. Knowing that the Internet was the most productive marketing channel for his business, Ellwood concentrated his efforts there.

2. Evaluate variables: Niko Canner, cofounder and managing partner of Katzenbach Partners in New York City, says look at the variables that drive your business and how it performs. For a restaurant, that would be the number of tables, how many people could sit at each table, the number of times each table "changed hands" in a night. More seats could increase your company's business and its productivity, since it could serve more people simultaneously. That, of course, is only true if each seat at each table could be filled for a maximum number of times each night. Variables also include costs. So while the restaurateur would look at his eatery, he'd also look at variables such as the cost of purchasing raw materials (food) to turn into dinners, as well as wages spent for a cook, dishwasher and wait staff.

3. ROI rules: Return on investment can be a potent measurement tool of your company's productivity, Canner says. Figure out what you get in return for a capital expenditure, such as a new computer or a new addition to your retail shop. You spend $3,000 on a computer and its peripheral, but it allows you to do an extra $500 a month in business. That means your investment in technology will pay itself in six months.

4. Consider customers: Canner says determine which productivity measures matter to your customers. If you focus on producing more widgets at a lower cost and the quality declines, any productivity gains may be wiped out by lower sales. Buyers want non-defective products more than they want cheap products.

5. Ask your employees: As your company grows, you may lose sight of the production side of the business. You're focusing on administration and overseeing. To figure out what variables to use as productivity measures, Ellwood says ask your employees.

Don't sweat the details
One big mistake that small companies make when measuring productivity is to get too entrenched with details. Too "fine-grained" an analysis won't have any more a payback than a broader analysis, but will cost more and maybe more than your business can afford, Canner says.

Another challenge is that productivity can be a moving target, says Tony Dottino, president of Dottino Consulting, Hartsdale, N.Y., and co-author of The BrainSmart Leader. In the manufacturing sector, for example, products are constantly being "improved," which can boost production costs and lower "productivity." Even what you're measuring can change over time as the definition of productivity changes.

Dottino cites hotels that try to exceed customer expectations without figuring out what they need vs. what they want. A company might spend a lot of money on guest bathrobes, but if most hotel guests don't care about such an amenity and then are asked to pay for it, that can backfire.

Don't make a similar mistake. Productivity is a puzzle that any small company can solve. But before you start piecing it together, first make sure you measure it properly.

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: March 20, 2002