HR Professional - Newsletter - hrp nl 1511

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Focus on productivity (2)

Measure and compare productivity, and link it to rewards…

Synopsis:

The algebraic formulations

In the first paper in this series on productivity we argued that the HR executive should be responsible for the oversight of productivity of the organization – in its external perspective, determining whether the organization will survive global competition. He is the one who should push for productivity drives, better training and development, better leadership, and so on.

 

The cold hard fact remains that one cannot control something unless one can measure it.

 

Some organizations leave this entirely to line managers. If those organizations are successful today, then this may well prove that they were right. But it seems to us that the safer strategy is to develop one or more market-orientated yardsticks.

 

The value added ratio is difficult to beat for this purpose. It works equally well in a manufacturing environment as in a service-providing organization.

 

The concept is that, if we employ someone at R100 per day, and he generates an extra profit for us of R25 per day, he has ‘added value’ of R125 per day. So, algebraically:

VA = SC + NP

(i.e.: Value added = Staff costs + Net profit)

 

The ratio of SC divided by VA is a productivity ratio because obviously it represents INPUTS divided by OUTPUTS, and the beauty of it is that the outputs are measured so as to include the financial determination of profits.

 

The ratio is widely used in the US as part of a typical ‘gainsharing’ scheme – and is known as the Rucker Plan.

 

(Note that when it comes to using the ratio for the purposes of an incentive scheme, it is important to understand that value added has to be the denominator and not the numerator - simply because value added is going to be what is shared.)

 

Let us explain here briefly how productivity is measured using this formula.

 

First, let us look at the external perspective:

The value added statements of selected peer comparator organizations are studied going back let us say ten years. Why one has to go back that far is that one is vitally concerned in trends – and in smoothing the volatility of profits.

 

The following graphic illustrates the concept:

 

 

One can learn a lot from this study, and for example endeavour to answer why the buffer is narrowing, and what the company can do to stave off the threat of competition in the future.

 

Turning to the internal perspective:

See the formulation below which is the breakdown of the staff costs for the whole organization (SCO) divided by the value added of the whole organization (VAO).

 

 

In the base scenario, the organization exemplified has let us say twenty-four departments, and is able to compute staff costs attributable to each department during a financial year (see line one). On the second line, the contribution which each department makes is shown. On the third line, the support service departments are treated as one.

 

How to drive productivity…

Where the employee or group of employees have to ‘produce to plan’ – that is, their output is confined to a particular quantity of finished product, then one can interpose ‘turnover’ as the denominator of staff costs and as the numerator of value added. What one achieves through this is that the first ratio gives one the target ratio in relation to throughput – the department head charged with optimizing the ratio based on the defined level of throughput to be achieved; the second ratio then being merely a scale factor, by which the ratio is tied to the main formula. The same can be done using the ‘gross contribution’ of the department.

 

So, to summarize, each department (even the support departments) has a set of productivity ratios by which the headcount of the department can be optimized and controlled.

 

How to divide up the pie…

The ratios can also be used as a basis for a team-based incentive. The ratios can be used as KPI’s on a departmental scorecard.

 

See also the worked example of the calculation of a gainsharing pool in the block below.

 

 

Gainsharing of this kind satisfies the classic economic principle that it is a win-win. The ‘value added pie’ gets bigger, but keeps the same shape.

  

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We consult in this field. Contact Deon Thomson or Don Wood on (011) 442-4334

 

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