Recent headlines on the economy read:
- Producer prices drop again; jobless claims jump
- 2008 foreclosure filings set record
- America’s lost manufacturing jobs
- Is Stimulus Pushing Recovery Further Away?
- More Retail Bankruptcies Likely
At the core of all these concerns and challenges is the issue of [tag]productivity[/tag]. Which gets to the question: Why is it important to focus on [tag]workforce productivity[/tag]?
According to the 2005 Economic Report of the President, productivity growth:
“helps keep inflation in check, makes it easier for American businesses and workers to compete, raises standards of living, and reduces the difficulty of meeting long-run demographic challenges by increasing the total amount of resources available.”
Flip the coin over then and look at what productivity decline might impact:
- growing inflation
- difficulty in business competition
- a falling standard of living
- decreases in the amount of resources available
This probably accurately reflects the challenges we are facing today.
Let’s drill down another level – why does productivity matter in your business? Why is it important to focus on workforce productivity?
One simple definition of productivity is:
“The amount of output per unit of input (labor, equipment, and capital). There are many different ways of measuring productivity. For example, in a factory productivity might be measured based on the number of hours it takes to produce a good, while in the service sector productivity might be measured based on the revenue generated by an employee divided by his/her salary.” (InvestorWords.com, emphasis added)
Considering your business, this becomes a matter of understanding whether your workforce productivity is less-than 1:1, equal to 1:1 or greater-than 1:1.
- Are you getting less output per unit of labor your workforce is putting in? Or less value per unit on each dollar invested? Result: 1:<1.
- Are you getting an equal value of output for the labor you are putting in? Or dollar return-for-dollar invested? Result: 1:1.
- Are you getting a greater amount of output for the labor you are putting in? Or more value per unit on each dollar invested? Result: 1:>1.
How do you know?
A number of studies on worker productivity have demonstrated the difference of value contributed between [tag]low-performers[/tag], [tag]average performers[/tag], and [tag]top performers[/tag]. Without getting into a discussion on the need to manage other factors like materials costs, inventory, etc. if you focus on understanding which people contribute and what those people contribute you can better understand your workforce productivity.
You can consider that an average performer will give you a 1:1 return on investment – in other words they are returning to the business the full value of the money you are paying them in wages/salary, benefits, training, and other employee-related costs. Assuming your business is structured so you are adding value to your product or service, you can come out ahead with this. But this is not growth.
Studies show that a low performer will give you 1:<.5-.8 return on investment (depending on the type of work). For every low performer you have in your business, you are losing $0.20 to $0.50 cents for every dollar you invest in them. In financial terms that is an HC ROI of (20%) to (50%).
Finally, these studies also show that a top performer will give you a 1:1.2-1.5+ return on investment (depending on the type of work). For each top performer you have in your workplace, you are gaining $0.20 to $0.50 for every $1.00 you invest in them. Again, in financial terms that is an [tag]HC ROI[/tag] of 20% to 50%.
Where else can you find that kind of return on investment today?
Why focus on Workforce Productivity? Because it can mean a 40%-100% swing in how your human capital investment performs.
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