For years, I’ve worked with Executive Leaders to create Business Cases related to Digital Business Transformations. Many times, an increase in productivity is one of the metrics driving the justification to move forward with a particular project or program. Unfortunately, this metric is frequently dismissed by Leadership and you end up trying to pull in other key strategic rationale that is qualitative in nature (e.g. “This is table stakes for our Industry”; “It will improve the Customer Experience”). While these other measures are valid and important, if Finance has a hand in the approvals and the dollars don’t add up, then you’ll likely get your project rejected.
Why doesn’t productivity count? Top business schools discuss Opportunity as an essential component to any Business Case (the “O” in SWOT) and productivity savings are certainly an Opportunity.
The brass tacks: we, as Project Leaders, have failed to show the value of productivity savings when it doesn’t involve removing headcount.
Realistically, there are 3 ways productivity cost savings can be realized and measured:
1. Reduce headcount
2. Upskill the team to do more or be redeployed into open positions
3. Prep for growth
I’m going to use Revtelligence’s previous post driving a 35% increase in operational productivity to help illustrate the interaction between these options.
Headcount reduction is an easy metric to tie to a project.
In the Revtelligence example, there were 12 employees working on Sales Orders. In theory, 35% productivity savings would create a 35% reduction in headcount – so, 4 people could be eliminated. For ease of math, let’s say fully loaded salary is $43,750. Remove 4 people and you save $175,000 per year in fully loaded salary. When the project is over, you let 4 personsgo and voilà! You realized savings of $175,000 per year and you see the effect on the bottom line.
Your new processes and systems might dictate that the some or all the team isn’t qualified or capable of handling the updated roles and responsibilities. If that’s true, then certainly, I’m an advocate for headcount reduction.
Another reason I’ve advocated for headcount reduction: we’ve removed activities and responsibilities that we never expect to return, plus we aren’t expecting sufficient growth in the next 6-12 months to require that headcount. It would be logical to reduce headcount at that point.
(Side note for all of you creating a business case that includes headcount reduction: remember to include the Exit Cost with your cost-benefit analysis and ensure that the jurisdiction allows for an exit. I’ve encountered times where this was forgotten and it turned into a $100,000+ mistake or a regulatory restriction made the reduction literally impossible).
In the time of the Great Resignation (or the Great Reshuffle), it’s critical to consider upskilling or redeployment to fill open positions or address the new skillset required by the project / program.
And 37% of professionals are using upskilling and reskilling as a way to address the labor shortage, according to a recent Korn Ferry study (article here). When you increase employee engagement through this methodology, you significantly reduce attrition and increase performance (study here).
Couple this with the fact that hiring outside your organization costs anywhere from 50% to 200+% of the resource’s annual salary (according to SBA and SMHR). Why wouldn’t you have a discussion with your employees on other opportunities, before you consider headcount reduction?
That’s when we get back to: how do you measure this and show the value?
Admittedly, of the 3 areas, this is the most difficult to measure. If you’re a smaller organization where one or two hires can swing the numbers, I’ve found the best ways include:
The other option is to simply focus on time-to-value. For example, if an external hire takes 6 months to onboard and is only partially utilized (e.g. 0% for the first 2 months; 50% for months 3-4; and 75% for months 5-6), then you can compare this to the redeployed individual(s). If they are selling or delivering, then you’ll want to associate this with increased New Business or Revenue Recognized earlier in the process. If they are general administrative costs (e.g. Accounting, IT, HR), then you will need to look at cost savings.
While the first method is more difficult to obtain, it is a bit more accurate a representation of actual cost savings realized. The second method is easier and can be used in conjunction with the first in order to show additional value.
Back to the Revtelligence example, we chose to take that 4 headcount capacity and upskill the entire team. Previously, the group was administrative in nature (e.g. copying and pasting proposals onto contract forms to send through eSignature; manually entering completed contracts into Sales Order forms in the ERP). What the team lacked was customer service skills. This lack of skills meant a terrible customer experience, creating massive churn and high goodwill expenses. So, Leadership sent them through a series of classes and worked with them to practice. KPIs were aligned to these courses and their everyday use. Customer Experience improved (and so did the morale of the team). Unfortunately, we didn’t get a chance to measure this increase in CSAT, decrease in churn and goodwill costs, due to the sale of the company.
Most companies looking to go through a Digital Transformation, also have major growth as a strategic goal. The more you grow, the more people you will need to support this growth.
For those of you who do headcount forecasting (side note: that should be all of you), this can be an easy metric to measure. If you plan to hire 5 people next quarter, then create a 4 headcount capacity on the team, you should only need to hire 1 person next quarter instead. It will show a future headcount reduction, which you can ideally append further opportunity cost savings due to not having to hire those additional 4 people (refer back to option 2 related to hiring costs and utilization costs).
Even if you don’t have headcount forecasting and you’re certain you will need these people because of expected expansion (refer back to option 1), you can measure this by comparing the before-and-after metrics related to New Business or Revenue. If these are sales people, you can measure New Business per Sales Employee. If these are delivery or administrative people, you can measure Revenue per Employee. Either of these metrics should show an increase in New Business or Sales, if you are truly realizing productivity cost savings related to growth.