Organizations that aren’t committed to continuous improvement risk becoming static or being left behind. Waste and inefficiencies happen, of course, but organizations motivated to reduce or remove them will have a better chance of succeeding in a competitive marketplace. Implementing a successful operational efficiency plan can help your company reduce waste and increase productivity without sacrificing the quality of your product or service.
More efficient business operations can lead to greater productivity, better customer experiences, and happier employees, but only if you accurately measure your program’s success. Here, we preview some key metrics and tools organizations should use to assess operational efficiency, including productivity, cost, quality metrics, etc.
Understanding Operational Efficiency Metrics
To improve operational efficiency, you need data. Simply feeling that the company is working more efficiently isn’t going to cut it.
Selecting the Right Metrics
The right operational metrics for one company may not be suitable for another. It’s up to your organization’s leaders to determine what metrics are most important for determining efficiency. If you’re a manufacturer, you may want to track cost and customer satisfaction (CSAT) metrics. A sales-motivated tech company may worry more about employee engagement and productivity metrics.
Each organization has its own goals and priorities. When selecting the right operational metrics for your company, ask yourself which of the below is most important, and work from there:
- Productivity
- Operational costs
- Employee engagement
- Product quality
- Customer satisfaction
Leading vs. Lagging Indicators
Leading and lagging indicators are key metrics that give insight into your organization’s health. Leading indicators predict future outcomes, while lagging indicators measure past outcomes.
Each organization will have different metrics that serve as leading and lagging indicators. For instance, in the examples above, a manufacturer may use growing production output to indicate that it can raise production goals for next year.
However, last quarter’s decreased CSAT scores are a lagging indicator that quality may have dropped off. Despite looking in opposite chronological directions, both of these metrics inform the decisions your organization must make today.
Productivity Metrics
Productivity is a crucial component of any organization’s success. There are several key ways to measure productivity.
Employee Productivity
More efficient employees create more efficient business operations. When employees are at work, they should put time and effort into projects, of course, but they should also have the right tools and support to get projects done on time and under budget.
Employee productivity is about more than simply working hard, it’s an organization-wide calculus to remove workflow bottlenecks and obstacles, give employees the technology and support they need, and make them understand that their work is valuable and appreciated.
Some important metrics to track include:
- Tasks completed per employee
- Billable hours per employee
- Revenue per employee
User activity monitoring software can be very useful in tracking employees’ work patterns and productivity, including their most and least productive hours and most repetitive tasks. Identifying how employees work can help you improve revenue per employee and overall business operations.
Project Efficiency
Completed projects are a direct measure of productivity. Naturally, your company would always like to complete more projects in less time. Some of the best project efficiency metrics include:
- Project completion rate
- Average project duration
- Successful vs. missed deadline rate
- Project handoff rate
- Exceeded budget rate
Different projects will have different requirements and expectations, of course, which is why it’s essential to plan and manage project efficiency properly. The more you measure project efficiency, especially across different types of projects, the better you’ll be able to set realistic deadlines and resource utilization and keep projects moving efficiently.
Cost Metrics
Operational costs are always an organizational priority. The lower your costs, the higher your potential profit margin, so controlling costs is key to achieving operational excellence.
Labor Costs
The average company devotes 70% of its revenue to labor costs. For most companies, labor is by far the most expensive cost. (When giant companies issue mass layoffs, now you know why.) Labor is also the most important cost for most organizations, so it’s crucial to not simply slash worker hours or lay off staff — cost metrics can help you find a balance between human staff numbers and project efficiency.
Some useful metrics to track are:
- Labor costs as a percentage of revenue
- Average labor cost per employee
- Total cost of workforce (TCOW)
Optimizing labor costs can be tricky. Cutting staff is likely to have a negative impact on employee morale, which can hurt productivity more than the staff cuts already have. The best thing to do is not over-hire in the first place, taking careful account of your labor costs to hire only when you’re positive the new job role will suitably add to company revenue.
If you’re past that point, consider cutting contract employee hours or contract positions first to save on labor costs before laying off full-time employees.
Overhead Costs
Overhead costs are expenses that can’t be directly tied to producing your product or service. For instance, raw material and labor are operating expenses, but a lease on office space or laptops for employees are overhead costs. Some important metrics here include:
- Overhead ratio: Operating costs vs. revenue
- Operating expense ratio: Cost to operate a piece of property vs. income brought in by the property
Overhead costs, especially in the age of hybrid work, are more controllable than ever. Fully remote companies tend to have much lower overhead than ones paying for entire floors in skyscrapers. Monitoring and reducing overhead costs can be an effective way to improve operational efficiency and increase profit margins.
Quality Metrics
Sure, some companies specialize in making cheap goods. Most, however, rely on quality to create more loyal customers. A key component of improving operational efficiency is not sacrificing quality. Yes, even qualitative items can be measured with quantitative metrics.
Error Rates
Mistakes happen, but an efficient organization ensures that when they happen, steps are taken to avoid them in the future. Errors lead to backtracking, costing employee time and organizational resources. Some metrics you can use to track errors include:
- Error rate per task or project
- Percentage of work that requires rework
- Time lost due to errors
- Employee error rate
Instituting quality assurance processes can help reduce errors and improve efficiency. Manufacturers and producers must adhere to safety and compliance protocols, but it’s also valuable to use quality inspectors to ensure proper machine operation, assembly efficiency, and final quality checks. In non-producing companies, quality assurance may be as simple as training managers in new business processes to check work for quality before approval.
Customer Satisfaction
Loyal customers are vital for any business. The customer acquisition cost to convert a potential customer is five times that of retaining a current one. Even if your flagship product is built to last for 20 years, a satisfied customer will come back after those 20 years to purchase again. Gathering customer feedback and prioritizing customer service can help you determine how efficiency measures have impacted your customer.
Key metrics to track include:
- Customer satisfaction (CSAT) score
- Customer retention rate
- Customer lifetime value (LTV)
- Average customer issue resolution time
- Customer service clearance rate
Becoming more efficient at the expense of customer experience is wasteful. Producing more products at lower cost is of no import if your loyal customers are disappointed in the reduced quality of your products. Always invite customer feedback and measure customer satisfaction to ensure that you’re striking a good balance between efficiency and quality.
Employee Engagement Metrics
Research shows that companies with highly engaged employees are 21% more profitable than those with less engaged employees. Improving operational efficiency relies on productive, happy, motivated employees who are invested in company success.
Employee Satisfaction
Productivity is an essential element of operational efficiency, and employee productivity has a major impact on your overall organizational productivity. As we just mentioned, engaged employees are more productive, which is why it’s essential to measure employee satisfaction and take measures to keep your employees happy and excited about work.
Some good metrics to track include:
- Employee satisfaction score
- Employee Net Promoter Score (eNPS)
- Employer review site ratings
- Workload balance
Retention and Absenteeism
One of the best indicators of employee engagement is simply familiarity. In today’s workforce, the average person stays with the same employer for just four years. If your organization has many employees who have stayed with the company for longer than that, it’s a good indicator that people are happy working there.
On the other hand, if employees frequently stay for only short durations or miss work regularly, they’re probably disengaged. Critical metrics to track include:
- Employee retention rate
- Employee turnover rate
- Absenteeism rate
Naturally, absenteeism negatively impacts productivity because employees hired to do jobs just aren’t doing them. A high employee turnover rate, however, can be even more costly due to the cost in productive hours and money of hiring, employee training, and getting them up to the same productivity level as the previous employee. One estimate claims it costs 3x to 4x a departing employee’s salary to replace them.
Tools for Measuring Operational Efficiency
You know what to measure, but how do you track key operational efficiency metrics? There are several tools that can help.
Business Intelligence Platforms
Business Intelligence (BI) is the technology-driven process of analyzing data and delivering information to help leaders make informed decisions and improve business operations. Integrating BI into your organization can help collect, analyze, and visualize a wide range of efficiency metrics to give you a bird’s-eye view of operational performance.
All collected information is designed to be actionable, assisting executives and leaders in complex decision-making, from cutting costs to increasing investment in tools and technology.
Some of the top BI platforms on the market today include Microsoft Power BI, Tableau, and Looker Studio.
Productivity Tracking Software
Some software on the market is dedicated purely to productivity tracking. More comprehensive employee monitoring solutions like Teramind include productivity tracking features. Whatever your budget and level of interest in user activity monitoring and behavioral analytics, productivity tracking tools are highly useful in assessing employee productivity, discovering process bottlenecks, and developing strategies to improve productivity.
Good productivity tracking tools can gather myriad data points, including productive time, completed tasks, average task or project duration, idle time, and much more to create a vivid picture of employee work patterns. You can figure out when employees are at their most and least productive, what tasks they’re struggling to complete, what support they need to complete projects, and how to incentivize them to be more productive.
Moreover, they’ll help you recognize manual processes that can be improved by process automation and increase your operational efficiency rate.
Implementing a Continuous Improvement Process
Optimizing operational efficiency requires continuous improvement. The entire organization should be committed to innovation, experimentation, and the acceptance that everyone can always perform better.
Setting Goals and Tracking Progress
Continuous improvement means goals and objectives shouldn’t be static. Before you set out on an operational efficiency program, you should create a framework for setting efficiency goals based on the metrics and benchmarks that make most sense for your organization. Once you have the right goals in place, you must actively track progress over weeks, months, quarters, and years to get an accurate picture of improvement over time.
Regularly tracking progress against goals and analyzing your leading and lagging indicators will help you make proactive strategic decisions to reach business goals, or re-allocate resources to assist at-risk or new goals. Nobody can predict the future, but anyone can use past and present data to make informed decisions to help a company reach its goals.
Data-Driven Decision Making
To emphasize the point, all of your operational efficiency decisions should be driven by data. You will have taken the time to decide what metrics to track, and invested in the technology to help you do so effectively, so it’s vital to use that data to make better decisions.
Efficiency data will help you improve business processes, whether you’re aiming to lower production costs, increase customer satisfaction, or inspire a more empowered team. Regular data reporting and clear communication to employees of progress towards goals will help them feel more invested and committed to working towards a company culture of continuous improvement. When you do make decisions, make sure the entire organization understands what metrics drove that decision.
Conclusion
Becoming a more efficient operation requires careful tracking and utilization of key metrics. Productivity, cost, quality, and employee engagement metrics are all foundational in measuring overall operational efficiency in 2024.
Business Intelligence, productivity software, and employee monitoring solutions can all help organizations gather and analyze the right data. With a comprehensive, data-driven approach to efficiency measurement, your organization can make meaningful process improvements to lower costs, reduce waste, and improve productivity and profits. It starts today.
