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- The Only KPI You Need to Increase $$$
Jay Z…The Forefather of KPIs
“Where the plans was to get funds and skate off the set/To achieve this goal quicker, sold all my weight wet” - (Where I’m From) by Jay Z
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As we our growing our latest Fairfield acquisition (August 2022), I have been reflecting on breaking down the business into it’s simplest form. What do we do? What do we sell? How do our customers buy from us? Etc. We are also creating metrics to track how the business is doing. I’ll admit I’m a data nerd and can pig out on it for hours but when looking at our dashboard one day I realized we were doing things all wrong. And it inspired this post. Enjoy.
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Having dozens of KPI’s is a waste a time. Too much data just leads to too much time spending analyzing what is going on in your business instead of running your business.
I can tell you how well your company is doing by just looking at 1 KPI.
Labor efficiency.
Labor efficiency is defined as “A measure of how efficiently a given workforce accomplishes a task, when compared to the standard in that industry or setting.”
In a manufacturing setting, this would be “How many labor dollars does it cost to produce your good?”
In a service setting (like we have at Fairfield), “How many labor hours does it take to complete your service?”
This is all that matters in business. Companies that have ruthless efficiency can produce goods and services at far lower costs than their competitors. This gives them autonomy to compete in several spaces. The company can compete on cost since their cost of goods sold is lower than their competitors. They could compete on talent and pay a little more for the best talent in the industry. They could also compete on service by dumping dollars into the experience the customers have when buying from the company.
**Being hyper efficient with labor is a flywheel that creates competitive advantages throughout your entire company.**
A beautiful example of labor efficiency is found in sports. Teams have to decide before the season how much to spend on labor. And all teams (mostly) have the same goal; win as many games as possible. The most efficiently run teams can get more out of their labor costs than the rest of their competitors.
Here’s a chart showing the labor efficiency (or lack thereof) in the NBA this season. The only KPI that matters here is Cost per Win. Which is essentially labor efficiency. The team that was most efficient? The Memphis Grizzlies. The lease efficient? The Golden State Warriors. If you were the CEO of an NBA team, this is the only chart you need to understand how efficiently you are managing your talent. (The 8 most efficient teams all made the playoffs and 2 of them are currently in the NBA Finals (Denver & Miami).
Denver and Miami will now generate more revenue through ticket sales, concessions, jersey sales, etc. Unsigned players will want to be a part of a winning team/culture and will consider that when choosing a new team. Some may even take a discount in pay to do so. This is the flywheel of labor efficiency. It can build on itself over and over but must continue to be monitored.
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4 Ways to Increase Labor Efficiency In a Business:
Leveraging Tools
We all learned about the 6 simple machines in middle school. My favorite is the lever. And we can use it to increase throughput (produce more goods/services) while minimally increasing costs. Automating tasks such as invoicing, customer follow up emails, and chat bots are all tasks that a human does not have to complete. (Zapier, Airtable, IFTTT, Intergrately are a few automation tools you can take advantage of.)
Reduce Employee Turnover + Cross Train
Hiring is expensive. So is training new employees. At our portfolio companies, we have a giant task map that allows anyone to jump in and get trained on specific tasks. It also allows new hires to get up to speed quickly. Saves us $ and ultimately makes us more efficient.
Lowering Labor Costs
This may seem obvious but lowering your labor costs while maintaining throughput is one way to increase efficiency. One of the quickest ways to do this is by using offshore resources. We have saved $$$ using this process and have found some AMAZING employees to join our team.
Pay for Responsibilities, Not Experience
One of the most silent ways to let margin degradation happen in your business is to pay for experience. If you are not increasing the output of the employee through more responsibility, then giving them a raise is costly. The amount of experience does not constitute a raise for an employee; only increased responsibility and more output should be compensated.
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Applying This to You
While you can apply this to your business, you can also apply this to your everyday life. Get ruthlessly efficient with the gym, your work, etc and it will create space for other endeavors.
“Where the plans was to get funds and skate off the set/To achieve this goal quicker, sold all my weight wet”
In these lyrics, Jay Z describes using leverage to achieve greater labor efficiency.
“Where the plans was to get funds and skate off the set” // Here he describes what we all want. Do our job. Create wealth. And get out the game. He wanted no different.
“To achieve this goal quicker, sold all my weight wet” // Jay Z was selling a product (it may rhyme with whack) that is sold by weight and needs to dry before it is sold. He sold his product while it was still wet so that he could use less inventory while still maintaining revenue. This was the lever he used to achieve his goals more quickly than his competitors. Less hours. More pay. And judging by his net worth, it seemed to work.
Jay Z. Labor efficiency extraordinaire.
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