Growing without hiring

Wednesday, June 12th, 2019

Background – the Employment Challenge

For most SMEs, getting and keeping the right people is the biggest constraint on growth. This problem rears its head particularly at the systemisation stage; that transition between total control by the founder and the emergence of a self-sustaining and scalable organisation run by a management team.

Unemployment levels at historically low levels make it a buyers’ market and business owners often struggle to paint a compelling picture of the benefits of working for their small business. They lack confidence in its attractions when compared with what they perceive as the glamour and rich rewards of a corporate career. This doubt may be justified in the case of young, well-qualified job seekers who have a similarly rosy view of corporate life however the myth of “millennials” being somehow different from previous generations of young employees and needing special handling does nothing to dispel the general gloom at the prospect of employing more people.

Too often, business owners see themselves on the wrong side of the employment power equation. As well as being frightened of losing staff, they perceive government regulation as being weighted on the side of the employee. Many compensate for this with anaemic management and the acceptance of low productivity. At the extreme, they become hostages of their own employees.

Many business owners start to see the time, cost and risk of hiring, and the subsequent effort required to retain, as an insurmountable barrier and decide to stay small rather than endure any more failed recruitment exercises. Others continue to batter their heads against the problem, often compensating for poor hires and high attrition by working longer hours themselves.

The resulting low productivity is a problem for employees (who earn less than they could), the business owner (whose health and wealth suffer), customers (who receive a less-good service from disgruntled staff) and the country (whose GDP and social investment grows more slowly than it otherwise might).

The irony is that most small businesses have significant scope for growth without hiring any more staff at all. They just need to get more from their existing staff by improving productivity.

Productivity-led Growth

An alternative to hiring more people is to get more from the people you already have.

This might mean investing in machinery, or systems, or training. On the other hand, it might just mean organising things better and showing a bit more leadership.

Whatever changes are envisioned, it needs to start with measurement.

Measuring Productivity

Economists generally measure national productivity as gross domestic product (GDP) per head or per hour worked. The most direct translation for this to the level of the firm is revenue per head. This has the attraction of being simple and accessible – most business owners will be able to work it out in their head. Revenue per hour paid is almost as simple and has the advantage of taking today’s varied work patterns into account.

However, when you consider that a misguided manager might get an improved revenue per head by doubling wages the limitations of the revenue per head model become obvious; this measure does not take the cost of employees into account.

Using gross profit per head or per hour suffers from the same shortcoming, although it is a useful indicator in sectors that have a high proportion of direct-cost staff, such as security. Even then, it fails to measure overall business productivity because overhead costs and efficiencies are omitted.

Net profit per head addresses this and is a good overall measure of productivity. Its main drawback is that, as the old joke goes, profit can be whatever your Finance Director or accountant wants it to be. It is certainly subject to one-off management and accounting decisions.

The measure I prefer is employee productivity (total revenue/total employment costs). Whilst not a great measure of overall productivity (for instance, it misinterprets the impact of outsourcing), in the context of this article (the problems of directly employing staff) it works pretty well.

Improving Productivity

If you do nothing else, start by measuring (and communicating) employee productivity on a regular basis. Like most things in management, just letting people know that you are measuring something will lead to improvement.

The rest of this section offers some other suggestions.

Note: This article does not concern itself with change management but a word of warning: Do not impose these changes on staff, and don’t pay someone in a suit from outside the business to decide what is required. Treat the change process as an exercise in communication and leadership, which means asking people what they think and listening to the answers.

Document Your Processes

Developing and documenting “the one best way” to do things means that you can deskill the process. By breaking complicated sequences down into simple steps and making these teachable you reduce reliance on the single person who knows how to do it.

You can define desired outcomes (how many, how quickly, to what standard?) and so apply measurement to the process and thus improve productivity. Deciding who owns the process and its results is an essential part of this.

You can deskill these processes, applying lower-cost resources to most of the tasks whilst focusing your difficult-to-hire big-hitters on the activities for which they are needed. Your aim should be to design every activity so it can be carried out by the lowest-cost resource.

Solid processes improve the quality and consistency of outcomes and so improve the experience for both your external and your internal customers.

Manage Your Quality

Poor quality reduces productivity. It causes rework, delay, waste and reputational damage. It demotivates your staff.

Quality should be owned by the doer. The person who runs the process must believe in the importance of what they do and take pride in doing things right. They should be involved in agreeing what good quality means for their output.

Quality should be documented, so that its achievement or otherwise is not subject to debate. Whether you write software or make furniture, answer the phone or run the company website, the required standards can and should be defined in writing (or in some cases, images).

Handoffs should be quality checkpoints, with the recipient empowered to reject things that do not meet the agreed quality standard. Learning to do it right first time increases productivity.

Implement Targets and Standards

No measurement equals no useful discussion, and so no understanding, and so no improvement.

Great teams improve continuously, while they are winning and while they are losing.

Agree targets for productivity from your newly-defined processes (quality, speed, cost, defects, wastage – whatever suits the process concerned) with the process owner. Implement regular, routine reviews to discuss performance against these targets. Focus these reviews on learning and improvement, not on blame or excuses.

Use Information Technology to Improve Processes

Relevant research is hard to find but my personal experience as a business consultant (and former IT professional) is that the application of IT in most small businesses is woeful. This situation is thrown into a starker light by the abundance of low-cost but enormously powerful cloud applications that could be driving real business advantage.

As ever, benefits from technology stem not from having a new system but from changing the business with it. Paying the monthly subscription is the easy bit.

Software Applications

Examine the capabilities of the software you already have to identify ways to exploit it to improve productivity:

  • Automate repetitive tasks such as marketing, invoicing, renewal reminders and statements.
  • Eliminate re-keying and errors by linking systems together and sharing a single copy of data.
  • Redesign processes that involve high levels of paperwork, delays or mistakes.
  • Speed up processes where this impacts customer service.

Identify the parts of your business that are not supported by technology and look for systems that could help.

Data

Large companies will enter data once then exploit it many times to understand and improve their processes and customer experience. Small companies by contrast often enter the same data repeatedly and never look at it again.

Use data to measure and improve efficiency by identifying quick wins and then focusing your (small number of) employees on these. For example:

  • Customers whose spend is dropping.
  • Customers whose contracts are renewing.
  • Customers who only buy one of your products and should be buying more.
  • Customers who consume a disproportionate amount of support time.
  • Differences in performance across branches, individuals, product lines, days of the week.
  • Defects and their causes

Use data to create new products (“sign up to our benchmarking service”) or differentiate existing ones (“includes remote diagnostics and alerts”).

Subcontracting

Subcontracting is a well-established way of reducing your payroll whilst making your business more responsive to changing demand. Letting work at fixed prices can deliver improved profit margins and reduced slippage. Subcontracting will increase our preferred employment productivity measure.

However, whilst reducing the employment problem, subcontracting presents a different set of management challenges:

  • You need to keep subcontractors sufficiently well-occupied to be there when you need them.
  • You need to develop a pool of subcontractors so that you don’t become over-reliant on them and can keep pricing under control.
  • You need to provide unambiguous specifications for them to price the work and for you to make sure you get what you wanted.
  • You need rigorous quality control.
  • You need a different set of supervisory skills.

Like many things in business, being half-hearted about sub-contracting will probably end in tears. It is perfectly possible to follow a strategy based on having few staff and becoming expert in managing subcontractors – most of the oil business, for instance, works this way. However, if you simply outsource the problem and don’t address the management framework in the above bullet points you will end up raising costs and lowering quality.

Strategy

As well as the above tactics to improve productivity you can step back and look at more strategic changes that will result in a business that needs fewer people, productive or otherwise.

Reposition Within Your Value Chain

A business carries out a sequence of activities to produce its service or product. Each business sits within a chain of other businesses (suppliers and their suppliers, and customers and their customers). This chain of activities is known as the value chain, as economically speaking, each link moves something closer to the final product (and takes a margin for doing so). You can picture this in terms of a mining company shipping a load of ore, the smelter shipping a load of aluminium rolls, the factory shipping a load of finished cars and the car salesman counting the used fivers as you drive off in your new Rolls Royce. Everyone down the line has ended up with a proportion of the money you paid for the finished product.

The point is that individual companies don’t have to stay in the same place in this value chain, and many don’t. Different stages offer a different return based on the different levels of risk and investment required (or, more prosaically, some stages are more hassle and pay a better margin).

If you are a manufacturer then you might develop designs, engage with certifying bodies, procure materials, manufacture the product, build the brand, manage field and channel sales, run installation projects and provide spares, service and support. The hassle/margin model could certainly be applied in this case. It is also difficult to see how any one small organisation can be good at all these different things. In the context of the employment and productivity challenge you might:

  • Compare the employment headache versus the margin retained in each activity. For instance, in the above example, divesting yourself of (or outsourcing) everything but design and certification might allow you to keep 80% of the margin for only 20% of the headcount.
  • Identify barrier assets; that is, which of these activities rely on things you own or things you know that prevent others entering the market and so protect your margins. If the above business relies on a unique manufacturing technique but can use any competent designer then it might make sense to focus on manufacturing only.
  • Consider the dangers of entryism. Would exiting part of the chain give the competition a route into the bits you’d like to retain?
  • Reflect that sometimes the employment headache is the barrier to others entering (take a fresh look at the subcontracting section above from this perspective).

What’s the New Competition?

Businesses that have been established for some years may well have adapted perfectly as their market and business environment evolved – but perhaps not. Often, they will have evolved into something baroque and inefficient simply by resolving each challenge as it came up.

This presents another approach to designing a low-employment business; ask yourself the question “Given a blank sheet of paper how would we design a business to serve our customers well with the fewest number of employees?”. If you need to prime the mental pump, start by asking “Who is out there today doing this better than us? How are they doing that?”

The answer probably won’t look like your current organisation. This gives you an opportunity to consider how you might move towards the new model.

Note: Sometimes, businesses find it easier to implement their new and repositioned business model by starting a separate business rather than trying to change what they already have.

You Can’t Avoid Leadership

We need to talk about the elephant in the room. Unless you have found a way to deliver service to customers with no employees at all (which was not the objective of this article) you will have to lead people.

If you want to increase productivity in the ways described above then you will have to lead people through a change that most of them won’t be too keen on. You can document all the processes and set all the targets you want to – if your employees want you to fail you will fail.

Whilst the recruitment and employment environment described in the opening section is real enough, the root of the employment challenge is often a leadership problem.

How Do You Make Your Employees Want To Change?

The short answer is “You can’t”.

They are comfortable – that’s why they are still with you. They will find it difficult to see what they get out of greater productivity except more work.

What you can do is start to paint a picture of a better place, make some simple but impactful changes that lend it some credibility and work to create the desire to get to this better place in at least some of your staff.

Create a Shared Purpose

Why do your staff bother coming to work? If the answer is “For a pay-check” (which it will be in most businesses) then you have some work to do.

The thing that draws people to an organisation and gets them to commit heart and soul is a sense of shared and worthwhile purpose. This doesn’t have to be “Cure cancer”; “Become known as the best plumbers in town” can be enough. The desire to achieve this is what drives change, improvement, co-operation – and productivity.

This means that for you as leader who wants to increase productivity a critical part of your role is to help everyone in the organisation imagine, articulate and start to believe in this shared purpose. This requires real, two-way, communication, sustained for as long as you run the business.

Communicate Continuously and Effectively

Effective communication is two-way communication. When I hear employees complain that communication from management is poor, they don’t mean that they don’t get told stuff. They mean that they are not listened to.

The most powerful words you can use as a leader are “What do you think?” To engage your people in your vision you must allow them to influence it so that it becomes their vision.

Effective communication uses stories. Humans understand, relate to and remember stories. In business, stories are about the big win, the terrible project, the customers who say they love us, what we are great at, what things will look like next year…and so on.  Each story reinforces some element of the values, strategy, vision or secret formula so that these things become woven into day-to-day activities; “the kind of people we are” and “the way we do things”.

Every interaction with an employee, formal or informal, is a chance to discuss and reinforce the shared purpose through stories. For you as a leader who wants to increase productivity a critical part of your role is communication.

Let Go of Stuff

Productivity improvement and the associated changes must be driven by the employees concerned. Trying to do it by controlling what people do is exhausting and futile. They must want to do it and they must be accountable for their own results.

Accountability starts with you demonstrating you are willing to let go and accept that you don’t have all the answers and are not the best at everything. As processes, outcomes and measurements are defined you are creating the framework for delegation.

Successful delegation is not abdication but a careful, planned process of coaching designed to help an employee learn, grow and succeed. The result is an employee who is empowered and more capable. Delegation is a critical skill for leaders.

More broadly, for you as a leader who wants to increase productivity a critical part of your role is developing employees to do and decide everything, and to have the aim of doing and deciding nothing yourself.

Share the Rewards

Humans are not motivated by money and only poor leaders attempt to control performance or attract and retain staff this way.

People do however want fairness and to have their efforts and abilities recognised. A wise leader understands this and will devise ways to share some of the gains from more accountable and productive staff. After all, you will have saved all that time and money you used to spend on recruiting people.

Summary

Most small businesses find their growth constrained not by the market for their product but by their inability to hire staff. Improving productivity allows businesses to grow without hiring by getting more out of their existing workforce. This results in a more profitable business that is more enjoyable to own.

Employee productivity (total revenue/total employment costs) is the most useful way to measure productivity in this context, and the act of measuring this and discussing it with staff will start the improvement.

There are some tactical changes that can be made to processes, quality standards and systems that will improve productivity. You can also take a more strategic view and reposition your business so that fewer employees are required.

Both these approaches involve change for your employees and successful change requires leadership. Leadership means:

  • Creating a shared and compelling vision with your employees.
  • Strengthening this vision through stories at every opportunity.
  • Delegating everything, and coaching employees to be accountable and successful.
  • Sharing the rewards of success.

One final thought. If you become this leader, and create a productive, fulfilled workforce…you won’t have any problems recruiting or retaining staff whatever the employment market is like.

If you’d like a chance to learn how to make your employees more productive, your business more profitable and your life less stressful then register for this event.

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