65-Cost Standards Come to the Service Industry

Many service industries have adopted detailed measurements of worker productivity. Most of these measure productivity of front-line employees. We believe that each overhead cost group can produce its own productivity measures and then manage to them. The end of this blog describes such an approach.

Posted 12/11/08

For many years, managers in manufacturing industries have measured activities to a farthing using methods developed over a hundred years ago with the time and motion theories of Frederick Taylor. But throughout most of these last hundred years, the service industries have managed to elude this management approach. That may be changing.

The major consulting firm, Accenture Ltd., has a unit named Operations Workforce Optimization (OWO). This consulting group has created labor standards for several retail chains. These labor standards create the equivalent of standard costs for service employees, such as cashiers and stock people.

These new standard cost measurements, along with ubiquitous electronic technology, enable retailers to measure precisely the productivity of some service employees. A clock on the cash register starts as soon as a cashier rings out the previous customer. The clock continues to run until the current customer has paid and received a receipt. This measure of time compares to standards established by OWO and the company. The company then counsels low-performing cashiers to improve their times. OWO maintains that its methods can cut labor costs by 5 to 15%.

The question is, how do retailers best use this cost innovation? Certainly, they should be able to reduce costs by bringing poor performing employees up to a reasonable standard. At least some of the cost savings originate here. But they also should be able to improve customer service by reducing the time the customer must spend in the check-out line. Of course, reducing a customer’s time and reducing workforce at the same time can quickly work at cross purposes. This is where management must balance conflicting opportunities. In some cases, the cashiers, who are under the measurement system, have told customers they cannot talk to them, or do anything extra, because they are “on the clock.” In other cases, customers have found that they do, in fact, spend less time checking out. It will take an astute management team to make these trade-offs properly so that costs go down and customer service goes up at the same time. If the customer sees no benefit, the cost reduction can become self defeating. (See “Costs: The Last Consideration” in the Perspectives on StrategyStreet.com.)

These cost management innovations by OWO and its client retailers are examples of efforts companies make to reduce the units of input, in this case employees, not producing output, in this case, customer transactions. The simple measurement of employee productivity is one major approach to reducing lost or wasted input.

There are several other approaches producing the same effect. You can shift demand from high demand to low demand locations or times. You can improve the accuracy of the forecast in order to staff more appropriately. You may use short-term sources of help to shave the peak of demand with stretched capacity. And you can speed the process so employees spend less time waiting. (See the cost reduction ideas in the Improve/Costs/Reduce Units of Input Available but not Producing Output on StrategyStreet.com.)

Each of these approaches improves productivity if the company implements them right. If they are done poorly, however, they can actually reduce margins.

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Update 2022:

An important measure of cost management calls for measurements of Efficiency, the number of employees per Intermediate Cost Driver.  The Intermediate Cost Driver is a smaller end product produced in a cost center for a customer in the chain of value added to produce a customer transaction.  Examples of intermediate cost drivers might include the concept development in advertising, an order in a restaurant, flight attendants available per occupied seat in an airline.  Go HERE to see how to create countable measures of productivity to be used in the creation of economies of scale.

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Update 2/26

Some years ago, service industries may have lagged manufacturing industries in measuring labor productivity. Those days are passing as some of the best companies in today’s service industries measure labor productivity in some detail. Here are a few examples.

Professional Services (Consulting, Accounting, Legal, Engineering):

• Billable‑hours utilization / Time Utilization
• Revenue per employee
• Project margin per hour / Contribution margin per consultant
• Engagement profitability
• Client delivery cycle time

Airlines:

• Aircraft turnaround time per employee
• Passengers boarded per labor hour
• Available seat miles per employee
• On‑time departure ratio per ground‑crew hour

Retail & Food Service:

• Transactions per labor hour
• Revenue per labor hour
• Labor‑cost‑to‑sales ratio
• Inventory handling productivity

Hotels, Call Centers, Customer Support:

• Rooms cleaned per housekeeping hour
• Check‑ins per front‑desk hour
• Average handle time
• First‑contact resolution
• Customer satisfaction per labor hour

SaaS, Digital Agencies, Marketing Firms:

• Time utilization (billable vs. non‑billable)
• Project delivery cycle time
• Revenue per employee
• Client‑retention‑adjusted productivity

We believe that all these measures are valuable. They are proving their worth with the companies who employ them to control costs. We further believe that a company can control its costs in each overhead function by measuring employee productivity in achieving specific companywide measures of customer interactions. The people Productivity is a measure of Input divided by Output. The Outputs are the companywide measures of customer interactions or of an Intermediate Cost Driver (ICD) employed to produce those customer interactions. In turn, an employee’s productivity is the multiplication of Efficiency (people/ICD) times Effectiveness (ICD/customer transaction) in each overhead group. Conducting this analysis by level of employee also proves to be very helpful and insightful. See HERE, HERE and HERE for explanations of these analyses.

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