Operational efficiency reduces costs and increases profit margins. But it’s about more than just the money. Discover how to improve your operational efficiency for greater productivity, profitability, agility, sustainability, and satisfaction in your service-based business.
Improving operational efficiency is a positive, proactive, growth-focused way to bolster your organization’s finances.
As businesses navigate post-pandemic economic realities, they may be tempted to use cost-cutting measures to improve their profits. Indeed, in the last major global recession, McKinsey research found 79 percent of all companies cut costs.
But that strategy risks the future success and sustainability of your service-based business.
Cutting budgets and headcount has consequences for what your business can deliver. Perhaps that’s why only 53 percent of executives interviewed by McKinsey had faith that cost-cutting would help them weather the financial storm.
A better approach to improving your financial viability is to reduce costs by increasing efficiency. Improving operational efficiency aims to eliminate waste and optimize processes, so that your business delivers the same great products and services, but at a lower cost.
And, with operational efficiency, it isn’t just controlling costs that boosts your bottom line.
Improving the efficiency of your operations makes more time to create value in your business too - through higher productivity and employee engagement, greater innovation and agility, and improved customer satisfaction.
Operational efficiency is a measure of how efficiently your business converts inputs into outputs, and a strategy for improving profitability without undermining product quality.
Business success and sustainability rely on your ability to take inputs - like raw materials, human resources etc - and convert them into outputs - like products and services - that your customers want to buy.
To make a profit, your inputs need to cost less than the money you make from your outputs. And to be appealing to customers, your outputs need to satisfy their expectations.
If your business is looking to increase profitability, you might consider cost-cutting measures. But these risk reducing customer satisfaction and undermining your client base. Operational efficiency is a strategy to increase your profitability without reducing product quality or customer satisfaction.
It achieves this by reducing your spend on your inputs by using them more efficiently in the first place. Efficient operations aim to reduce waste and latency in your business, so that every penny you spend delivers a return on investment.
No. Operational efficiency focuses on optimizing your existing resources to deliver the same product or service at a lower cost to your business. With cost-cutting, there’s more on the table. For example, reducing resources or using cheaper raw materials. This risks reducing the quality of the products or services you offer.
As such, cost-cutting is a strategy to be undertaken with caution. PwC research found less than 30% of cost-cutting programs hit their targets, and less than a fifth of these demonstrated sustained benefits over three years.
Whereas operational efficiency poses no risk to your business. In fact, it’s packed with lots of other benefits beyond cost control too - see below - so it’s a strategy all businesses should understand and embrace.
Productivity and operational efficiency are not the same thing. Productivity is how much work gets done. Efficiency is how well it gets done. Your business can be productive without being efficient.
Two businesses can be equally productive. But if one works more efficiently, they are likely to be more profitable. They’re also more likely to meet quality and customer satisfaction goals, which can make them more successful and sustainable.
This is why measuring and improving operational efficiency is so important in business.
An IT firm develops apps for clients. The project manager predicts a project should take 4 weeks but - due to bottlenecks and double-booked developers - it takes 8 weeks and involves the use of higher-cost contractors.
This suggests the company isn’t predicting resource availability or capacity accurately - and that has consequences for project margins, schedule, and customer satisfaction.
The business is not operationally efficient in this example. Due to poor planning and management, they have incurred unnecessary resource costs, failed to maximize the ROI of the existing human resources, and undermined client satisfaction.
Read more about project profitability and how to measure it.
The benefits of operational efficiency go beyond just saving money. Operational efficiency can also improve customer satisfaction, help engage and retain staff, and improve your business agility.
Operational efficiency reduces costs by using resources better. For example, in a professional services business, people are your highest cost. If you can optimize their workload and processes - so that they’re delivering more work within the same working hours/wage cost - you're getting more output for the same input.
By reducing wastage in your operations, you can deliver the same products at a lower cost, which means more profit. Or you can increase your outputs at the same cost, meaning the potential for revenue growth. For example, if you can save 100 hours on existing Project A, you can reinvest that time in delivering new Project B.
Operational efficiency means working smarter and that often results in working faster. As a result, you can get new products to market quicker or deliver projects in a shorter timeframe. This has lots of benefits, from delighting customers with your speedy service, to stealing ahead of your competitors with a new product.
Operational efficiency can drive up product or service quality. Consider automation for example. Manual, repetitive tasks can sap your team’s time and creativity. If you automate those processes, the tasks still get completed (often to a higher standard with less human error). And your team gains back time for more value-adding activity. Like strategy or product development, instead of spreadsheets and data entry. This can drive up product quality, at no extra cost to your business.
When you operate efficiently, you’re more agile and able to exploit new opportunities. Building on the example above, imagine your business has the chance to quote on a new project. But your PMs are so tied up with manual tasks managing your existing projects, that you don’t have the time to work out capacity and resource availability for future projects. So the opportunity passes you by.
Inefficient processes are time-consuming and boring - which can leave your staff feeling frustrated, overworked and undervalued. Improving operational efficiency gives your team more time for stuff that engages, excites, challenges and develops them - which means they’re more likely to be working to optimal capacity and less likely to be looking for a new job! Think they’re not looking? Think again. Microsoft reports more than 40% of workers are considering leaving their employer in the next 12 months.
Truly efficient operations reduce wasted time and effort, increase transparency between teams, and improve data flow. This means your managers have more time and accessible information for better decision-making. Instead of feeling overstretched and constantly on the back foot, they have time to be proactive and strategic. This, in turn, can improve every element of your business.
You can measure operational efficiency through a range of quantitative and qualitative measures. Strictly speaking, operational efficiency is measured as a ratio known - unsurprisingly - as the operational efficiency ratio.
The operational efficiency ratio adds operational expenses to the cost of delivering your services or goods, then divides that number by your net sales. This results in a number, which can be expressed as a percentage, that shows how much of your net sales are absorbed by costs.
However, this ratio isn’t the only way to measure operational efficiency. Different businesses will use other measures to create a more holistic picture of business performance. For example, in a service-based business, you would want to also look at metrics relating to:
Of course, stats and figures only tell part of the story. You also need to consider qualitative measures of operational efficiency.
Do processes FEEL efficient? Are staff slowed down and feeling frustrated? Are they working long hours to meet deadlines and risking burnout? Are customers happy with your product or service? Or do they complain about lead times, processes, and deliverables?
If you spot any shop floor signs of operational inefficiency in your business, it might be time for an operational efficiency audit. This is a standalone initiative to:
In a service-based business, your people are your biggest asset - they do the work that delivers the results - but they’re also your biggest cost. So improving how you manage your human resources will make a significant difference to the operational efficiency of your organization.
Here are ten ways to improve and align your people, processes, technology, and data to improve operational efficiency - for lower costs, higher productivity, and happier clients and colleagues.
Resource optimization is the process of allocating and managing resources in the most efficient way possible. The purpose of resource optimization is to maximize productivity by reducing the direct costs of labor. Resource optimization techniques can also help you improve performance and meet customer requirements better.
Resource optimization includes a lot of different techniques.
Assigning the right people to the right projects at the right time
This ensures you have the skills you need to deliver a project on time and to customer satisfaction. But you avoid overspending on staff because you only use the exact people (at the exact level of skill and seniority) you need. And you make sure you’re using them to capacity rather than them sitting on the bench waiting for meaningful work.
Underutilization is when your resources aren’t being used in a way that maximizes your ROI. For example, using a senior software engineer when a more junior staff member would have sufficed. In this scenario, you may be paying $100 per hour instead of the $50 that the task required. Or having staff working on low-value admin instead of billable work that adds value to your business.
The flip side of underutilization is overutilization. This is when you are using staff too much. This can cause several problems for your project, processes and profit.
Firstly, overutilization leads to burnout, which leads to issues around health, performance, and attendance. The World Health Organization added burnout to its International Classification of Diseases in 2019, stating it is an ‘occupational phenomenon’. Burnout is also the leading cause of staff resignation, which leads to costly employee churn.
Secondly, when one individual is in high demand they can become a bottleneck to projects. This means whole project schedules can be delayed by their availability. Or force the use of the wrong resource for the task at hand, which impacts deliverables and/or costs.
As you can see, resource optimization is a key lever in operational efficiency - improving margins, project performance, budget and quality control, staff satisfaction and more. To optimize your resources, you need mechanisms to understand:
Business transformation is achieved through the golden triangle of people, processes, and technology - the PPT framework. People do the work, processes make that work repeatable, and technology makes those processes more efficient. So it’s essential that your processes are fit-for-purpose and operationally efficient.
Understand current processes
The first step is to audit your existing processes and understand every step. How does each action contribute to the overall goal? Is it the best action to achieve that goal? Is it optimized to achieve that goal efficiently? To do this, you need to ‘get into the mud’, as Ella Steinmetz-Simon, COO at 14Mind, explains:
‘Managers plan for near-perfect scenarios but they rarely happen. It’s important to get into the mud with your team and see what’s really going on. It gives managers a better insight into the technicalities of business processes - and the challenges your team face day-to-day. Any roadmap for operational efficiency that isn’t based on a granular understanding of current processes is based on rocky foundations.’
Realign and redesign processes
Your process audit may discover systematic inefficiencies in how you’re doing things. Or it may reveal that once fit-for-purpose processes no longer meet the evolving needs of your business.
For example, consider your processes for scenario planning - comparing different combinations of projects and working out which is best for your business. When your business was bijou, you could manage this process by assessing data from a simple spreadsheet. But now you’ve grown to an SME - congratulations 🥳 - that process no longer works. Extracting meaningful insights from Excel takes hours of a data analyst’s time, just to model a single scenario. It’s excessively time-consuming and the data is rarely fully up-to-date.
This process - that used to work - is now a risk to operational efficiency. Both by taking up unnecessary time to execute, and by denying managers the easy access to data they need for effective decision-making. This is a process that would benefit from automation (see next section).
You also need to make sure your processes are aligned to your current strategic objectives. If processes were initially established - say - during a period where you were focused on cost savings, they may no longer be suitable now you’re pursuing growth.
Once you’ve updated and optimized your processes, create Standard Operating Procedures (SOPs) for your team to refer to. SOPs are written instructions that describe routine processes step-by-step, so they can be completed in the same consistent, efficient way every time - regardless of who is performing them.
One of the major barriers to operational efficiency is unnecessary manual processes. In the new age of automation technology, there is no excuse for these time-consuming, labour-intensive activities.
Ajay Agrawal, professor of entrepreneurship at the University of Toronto, says digitization and automation will top the agenda for ambitious businesses this year. Speaking to McKinsey for their 2022 technology trend panel, he says ‘Traditional companies will continue their investments in digitization. Technologically advanced companies will invest in automation.’
Manual processes sap staff time and morale, sucking them into tedious tasks that don’t actually need human input to execute. As a result, you waste the time and talents of your team members, performing tasks over hours or days that a software program could complete in seconds.
Consider resource allocation as an example. You have all of your resources allocated to their relevant projects. The right people are in the right place at the right time. Life is in balance. But then a project schedule or scope changes, and you need to reallocate resources accordingly.
This is a process that - if performed manually by your program manager - could take hours to complete. But - using resource allocation software - would be the work of a few minutes. This means you can make changes confidently and quickly, and your PM can get back to tasks where their human ingenuity and input add value to the business - like strategic planning, innovation, and stakeholder management.
Automating processes improves operational efficiency by:
‘Every single company should be investing in automation and software that works for the company. Put the money into it - every single penny is worth it,’ says Ella Steinmetz-Simon, COO at 14Minds. ‘Remember that just because certain software was popular six months ago, doesn’t mean it’s right today. Always be on the lookout for new technology and new opportunities to automate.’
As your organization grows, it gets harder to collaborate and share information. Perhaps you started as a small team sharing information about operations, finance or recruitment by shouting across the office or starting a huddle in Slack. But now you’ve grown and there are actual teams for each of those business functions, and they each have their own systems and processes.
Your business depends on those teams working well together - sharing information in a timely way, working together for the greater good - but that doesn’t always happen. This can undermine operational efficiency in lots of ways.
‘A common problem with business planning is that operational systems are vertical and siloed. There’s no visibility into connected and contingent factors that affect your ability to deliver,’ says Tim Copeland, CEO at Runn. ‘Sales colleagues might commit to a project without fully understanding the impact on the delivery team. Or a project manager might plan around an individual’s capacity without knowing they’re coming to the end of their contract. This can lead to operational inefficiency - and risk the cardinal sin of overpromising and under-delivering to clients.’
To improve cross-team collaboration - and therefore operational efficiency - you should think about ways to:
Access to accurate data is essential for informed and timely decision-making, so siloed data is a big barrier to operational efficiency. Standardizing and centralizing data in a single source of truth ensures all departments are working with the same information - and managers have 360-degree insight into overall organizational performance.
Take resource utilization as an example. In project-based businesses, managers need to be able to track and monitor resource utilization if they want to avoid over- or under-utilization. This needs information about every project and resource to be stored centrally - and updated and displayed in real-time - so they can make the right decisions for both people and projects.
Another example is monitoring projected-vs-actual budget. If managers can see data about discrepancies in project projections across all teams, they can identify best practices and share that with poorer performers. The data can also help refine planning processes, so future projections are more accurate.
When looking to improve your data availability, consider the following:
It isn’t just decision-making the benefits from better data availability. McKinsey research found that improving data management, architecture, and governance can reduce waste and manual effort, cutting annual data spend by 5 to 15%. That’s time and money worth saving.
In a service-based business, time is literally money, so it is important to track how time is being spent. Research shows that workers spend 2.8 hours a day on productive tasks and only 27% of their time working on tasks directly related to their skills.
Time tracking is one way to monitor and improve time management - and make sure your resources are being used efficiently. This doesn’t mean forcing your staff into 100% productivity or billable hours. That isn’t realistic. It simply means focusing your staff on work where they and their skills add the most value to your business.
For example, imagine you run a graphic design agency. You discover your lead designer is actually spending 3 hours a day dealing with emails about the approval process - emailing PDF proofs back and forth between different clients. This points to a solution to improve your operational efficiency - either by delegating that task to an administrator or introducing approval automation software. That way, your designer gets back to using the skills you actually hired them - and pay them - for.
Read more about time tracking - and how to automate it - so it doesn’t become a time sink in itself.
No project ever goes to plan - even with expert PMs at the helm. It’s important to track and evaluate how a project is progressing, so you can make changes if necessary. Project controls let you manage risks that emerge from the unexpected - like a team member needing to take sick leave or being moved to another project - to manage costs and customer outcomes.
Project controls include - but aren’t limited to:
By providing a framework for measuring, monitoring, and correcting project performance, project controls can significantly improve operational efficiency - by preventing projects from going off course and costing you additional time and money.
To improve operational efficiency long-term, you obviously need to think ahead. ‘You should be thinking about 3-, 5- and 10-year goals and how to get there. That means aligning your investments and innovation to your longer-term strategic objectives,’ advises Ella Steinmetz-Simon, COO at 14Minds. ‘If it isn’t going to work a year from now, it isn’t right for your business.’
There are a number of activities you can undertake now, to improve efficiency in the future.
Capacity planning is about looking to the future to ensure you have the right resources in place to deliver your goals efficiently. For example, do you have the right number and type of staff - for example, senior developers - to deliver the sort of projects you plan to take on? If you plan to grow your business, do you have enough equipment and space to scale up? If you don’t have capacity in place when you need it, you’re likely to hit roadblocks and bottlenecks that lead to inefficiencies - at least in the short term.
Capability building is concerned with increasing your organization’s ability to achieve its future goals. It involves looking at where you want your business to be, auditing your current capabilities to get there, and filling any gaps that will hold you back. Capabilities are competencies - anything from leadership skills to how to manage meetings effectively. Building capabilities can significantly improve operational efficiency over time.
Automation and innovation
Automation frees up resources from time-consuming manual processes, which improves operational efficiency. This is a given. But implementing technology isn’t a one-and-done activity. Technology evolves to solve new problems and can render existing solutions - and whole processes - obsolete overnight. To ensure your business is using technology to its full potential, you should always be horizon scanning for new solutions.
We’ve already established that - in a service-based business - your people are your biggest asset and cost. So helping them work efficiently will drive up operational efficiency overall.
According to Ella, setting goals and empowering employees to achieve them is key. Employees need goals and Key Performance Indicators to:
Ella recommends managers:
If there was ever a time to try new things, it’s now. More and more organizations are experimenting with new working models, and ways to engage remote and hybrid teams. For example, Runn has moved to the async approach.
'Async working starts from the assumption that happier people are more productive, and organizations that prioritize their peoples’ needs will benefit as a business. At Runn we have teammates in different time zones all over the world. They all work their preferred hours to suit their personal needs. And - thanks to our async approach - they’re all empowered to contribute equally and collaborate effectively,' says Felipe Skroski, cofounder at Runn.
Ella is a fellow advocate for evolving how you work too. For example, something as simple as meeting management can have an impact on operational efficiency.
‘We’re cutting down on meetings,’ she explains. ‘If I need to share information with people I can record a Loom video or send a voice note. If we do have meetings, we make sure there are specific goals we want to achieve and this is the only way to achieve them. We put a time limit on the meeting and we schedule other times for socializing, so we can stay focused on the tasks at hand.’
Resource management software is one way that service- and project-based businesses can improve operational efficiency. It allows organizations to plan, resource and manage projects in the most operationally efficient way possible.
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