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Three Critical Actions for Improving Productivity in Technical
Organizations
Gary C. Hinkle -
President, Auxilium, Inc.
February 2, 2009
It’s February 2009, and you are in some way
affected by perhaps the worst economic conditions since the Great Depression. Your
company is probably “hunkering down,” “weathering the storm,” or <insert
metaphor of choice here> until the financial crisis is over.
Given this situation, businesses can’t afford to waste money.
Actually, businesses can never really afford to waste money.
But they do. Lots of it. An inconceivable amount of money is wasted every
day in businesses around the globe because managers allow unproductive
activities to occur. Think of five ways your company wastes money in your
opinion. I bet you can do this in less than two minutes.
Why do businesses allow such waste? Because managers don’t know how to
measure and improve productivity from more than some narrow perspective
they learned along the way. Many don’t know how to do this at all.
Cutting costs is often necessary during tough economic times, but
cost-cutting usually has a significant detrimental effect – and cost
cutting doesn’t address productivity issues due to inefficient processes,
poor communication practices, mismanaged projects, and many other factors.
Before implementing cost-cutting measures that might have damaging
long-term effects, managers must be engaged in productivity initiatives
with measurable short-term and long-term outcomes.
You might be wondering, “What is a
productivity initiative?” A productivity initiative has the goal of
sustainable improvements that provide better results (profit, time to
market, quality, etc.) at roughly the same fixed costs, or even lower
fixed costs if possible. There will always be an initial non-recurring
cost to implement sustainable improvements, but the long-term ROI should
be significant enough to fund the initiative.
Sustainable improvements might involve eliminating non-value-adding
activity; improving communication; enhancing project management
methodology and tools; strengthening leadership; or improving
relationships with customers and stakeholders.
Here are three ways to assess and improve productivity in your
organization.
1) UNDERSTAND THE COST OF INEFFICIENT LABOR
Someone in your company probably knows what the burdened cost of labor is in your
department or across the entire company, division, etc. Burdened cost
includes benefits, office space, energy costs, etc. Everyone should have this
information.
The fully burdened
labor cost for an experienced technical professional is typically in the
neighborhood of $75 to $125/hour. Let’s use $100/hour
in an example to keep it simple. The burdened cost to employ a group of 20
engineers at $100/hour is approximately $347,000/month.
The typical workday is filled with distractions, interruptions, and
unproductive activities that are sometimes outside our control, but most
are candidates for reduction or elimination.
We plow through dozens or hundreds of email messages each day to determine
which ones are relevant and which ones require a response. Many of these
messages are unclear. Productivity is lost due to poor communication and
information overload.
We go to meetings – often meeting after meeting all day – some are very
productive but others seem like a waste of time. If they seem like a waste
of time, they probably are. Unproductive meetings are very expensive,
but unfortunately they occur frequently.
A simple task can take hours to complete because we get interrupted.
If we walk to a colleague's desk or work area to chat, the face-to-face
conversation might be the most productive way to communicate, but we risk
distractions and interruptions along the way.
Technology helps us stay connected
but at the same time provides additional channels for interruptions.
Cell phones are especially distracting for many people, and I wonder how
much more productive certain people would be without their cell phones?
There are too many examples of distractions and interruptions to list
here, but there is one phenomenon that needs our attention. One of
the biggest productivity killers is “project juggling.” When we
switch back and forth between multiple projects, every time we stop work
on one and start on another there is significant ramp-up time which is not
as productive compared to if we were able to focus on fewer projects. This
gets worse as we take on more projects that we must work on
simultaneously.
Product development methodology gurus Wheelwright and Clark did an
extensive study that determined the ideal number of simultaneous projects
for an engineer. With just one project, productivity was only about 70%,
and was limited due to dead time while waiting for input or actions that
enable work to continue. With two projects the average productivity
increased to about 80%. With three concurrent projects productivity
slipped to about 60%, and with four projects productivity dropped below
50%.
You can imagine what happens with five or more projects!
In their study, Wheelwright and Clark defined productivity as “the percent
of time spent on value-adding tasks.” This is a good definition to keep in
the forefront of your mind, though there are other good definitions as
well. Many people struggle with the meaning of “productivity” and a clear
definition such as this one can be helpful.
Other recent studies have found that productivity above 90% is nearly
impossible, 80% is excellent, 70% is very good, and 60% or below is
typical.
With the prevalence of layoffs and other cost-cutting measures, people are
expected to do more with less, which often leads to individuals taking on more work.
In doing so, productivity can decrease significantly, which means that the
output to cost ratio decreases. In other words, businesses get a lower
return on their investment when cost-cutting measures reduce productivity
– which is frequently the case.
Let’s revisit our example group of 20 engineers. The fixed burdened cost,
no matter how many hours they work is about $347,000/month. If the percent
of time spent on value-adding tasks is in the neighborhood of 60%, but
could be increased to 80% through a productivity initiative, what would
this productivity gain be worth?
To accurately estimate this, we would need to know the value of the
output, so let’s just look at it in terms of cost. If 20% of the labor
cost is wasted, that amounts to nearly $70,000/month in this example, or
roughly $800,000 in a year. A successful productivity initiative should
cost a small fraction of this, and even if the productivity gain requires
hiring one or two additional workers, the ROI is still favorable.
Again, this example doesn’t even address the value of the output, which
should be huge, so let’s look at this next.
2) FULLY ASSESS THE COSTS ASSOCIATED WITH PROJECT DELAYS
We’ll look at two real-world examples here very quickly. The first is a
product development example where the cost of time-to-market delay is
significant.
In this example, a team is working on a new product family that will
initially generate about $5M in revenue per month when released. The cost
of delay includes the cost to keep the team working on this project as
well as the cost of lost opportunities because new projects can’t be
started yet.
To simplify, let’s only consider revenue lost due to each month of delay,
which is ~$5M. In this case we’ll consider a productivity initiative
focused specifically on time-to-market with a goal to achieve a 10%
reduction in development cycle time. If a 20-month schedule could be
reduced to 18 months, the company benefits from ~$10M in additional
revenue upon release of the new product family.
A successful productivity initiative to achieve these results should cost
only a small fraction of the return. If the right resources are engaged,
the ROI could be well over 10x – maybe even 100x (with an investment under
$100K).
Here’s an example of a process improvement program. This company
estimates they are losing $6M annually due to inefficient processes and data
standardization issues, and they decide to invest in improving this
situation. The estimate to complete the program is roughly $7M over an
18-month period.
The cost of delay in this case is the cost to the company due to
inefficiencies until the project is complete ($115K/week) plus the
development cost ($90K/week). The total cost of delay is approximately
$205K/week. If the program is completed one month sooner through a
productivity initiative, the benefit to the company is over $800K. If an
investment of an additional $200K is necessary to reduce the development
time by one month, the overall benefit to the company is about $600K upon
completion of the program.
3) INVEST IN YOUR MANAGERS AND LEADERS
Very few managers know how to measure productivity from the broad
perspective necessary to zero in on the most beneficial improvements.
Those who do, don’t generally know how to implement the improvements to
solve “fuzzy” problems that impact productivity such as communication
issues, morale issues, or problems that seem outside of their control –
like lack of resources.
Managers don’t generally receive anywhere near the level of education and
training that is needed to significantly improve productivity in their
work areas. Companies that invest in their managers often fall way short
of providing them with the knowledge and tools they really need. Taking a
few management courses or going through a basic corporate training program
can be helpful, but much more is needed for managers to solve challenging
productivity issues.
I’m happy to see training expenses heavily scrutinized during this
recession. Over $50 billion is spent annually in the U.S. on training and
development and most training professionals would agree that much of this
money is wasted. This would not be the case if decision-makers understood
more about the proper educational activity to pursue given the goals and
circumstances.
If the goal is to simply increase knowledge for the benefit of the
business and the employee, then “education” is the appropriate solution.
Don’t expect any significant business results unless the educational
activity is focused and extensive.
When the goal is to bring a person or group to an agreed standard of
proficiency through practice and instruction, then “training” is the best
solution. Training is successful when learning objectives are well-defined
and met. The learning objectives may or may not have a significant
measurable business outcome. For example, when managers receive basic
training covering topics such as harassment, performance management,
company policies, etc., though this training is important, it will not
generally yield measurable outcomes that improve business results.
To improve business results, some sort of outcome-based approach is
needed. Outcome-based solutions first define measurable business outcomes,
and then a team is formed that is accountable for results. The team works
together until the measurable outcome is achieved. Education is often a
major aspect of achieving sustainable improvements, but is not the focus
of the activity. The outcomes are the focus. Getting managers involved in
outcome-based activities by definition has measurable business results.
Even better than outcome-based activities, are ROI-based activities. ROI-based
solutions first define outcomes that can be measured in terms of financial
gains. A team is formed that is accountable for results, and they work
together until the measurable ROI is achieved. Education might be a
necessary aspect for successful completion. Achieving measurable ROI is
more difficult than other outcome-based approaches, and usually requires
the support of top-management.
The reason I went through this explanation is because managers are not
enabled to make or influence significant and sustainable productivity
improvements without either extensive education and training, or an
organized outcome-based approach.
An outcome-based approach (or ROI-based) is by far the most expedient way
to benefit from measurable results. Success requires an expert facilitator
to help define the outcomes, pull the team together, facilitate learning,
and ensure the outcomes are achieved.
Click here to obtain a PDF copy of this article to
share with your colleagues.
Completing Projects Faster at a LOWER Cost (PDF)
You Can’t Afford NOT to Have Productivity
Initiatives (PDF)
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