While it's always tempting to focus on increasing revenue, during a recession, businesses face numerous challenges, including reduced spending resulting in a decline in demand for products and services. In the long run, an organization’s ability to minimize expenses, thus maximizing the bottom line, will allow them to weather the economic storm and flourish after it passes.
In this article, we will see how a little bit of impro-
vement in operational efficiency can result in dramatic improvements in profitability. Imagine if you will, that you work for a consulting company based in the USA. This company has 675 employees whose average annual salary is $152,000. Considering the cost of PTO, Insurance, and other employment expenses, their fully burdened annual cost per employee is $228,000. Oh, employee turnover at the company is 30% (the consulting industry is 30-50%).
OK, do you have that all in mind? Let’s take the next step.
The number one cost center in most companies, especially consulting companies, is employee salaries. Wherever we can find ways to reduce this overall number or increase the overall throughput of those employees, we see improvements to the bottom line profitability.
We are going to address three areas of productivity improvement;
Interruptions
Waiting
Onboarding
Interruptions are the normal day-to-da, someone texts, drops by your desk or sends you an email that you stop your current task and take a minute to address. Waiting is the time that we spend looking for and waiting on others to get some information; waiting delays the progress of the work at hand. Finally, onboarding is a period when a new employee needs to come up to speed and be productive.
A day in the life…
Jamie comes to work on time and leaves on time every day, except when they are sick or on vacation; they are a model employee.
Culture of interruption
On a typical day, Jamie is working at their desk. People drop by to ask about the update from the all-staff meeting. Ping. An email drops into Jamie’s inbox. Boop Beep. There is an MS Teams message. These little interruptions aren’t much to speak of, and so no one thinks about their net impact on productivity. According to Dr. Donald E. Wetmore, Author of “Organizing Your Life” and “The Productivity Handbook,
‘The average person gets one interruption every 8 minutes, or approximately seven an hour, or 50–60 per day. The average interruption takes 5 minutes, totaling about 4 hours or 50% of the average workday. 80% of those interruptions are typically rated as “little value” or “no value,” creating approximately 3 hours of wasted time per day.’ ~ Dr. Donald E. Wetmore, Author of “Organizing Your Life” and “The Productivity Handbook.”
We at Radar think that 5 minutes is too high, so we use thirty seconds in our calculations (which might be low, you be the judge). Thirty seconds 60 times per day, is thirty minutes spent just on those interruptions. So, 30 minutes per day times the average hourly rate ($110) at the company gives us $55 per day. If we lowball at 20 working days per month, giving us 240 working days per year, then the annual cost per employee would be $13,200.
Interruptions per person per day | 60 |
Time for an interruption | 30 seconds |
Waste per employee per day | 30 minutes |
Waste per employee per day | 30 minutes |
Hourly Rate | $110 |
Cost per employee per day | $55 |
Cost per employee per day | $55 |
Days per year | 240 |
Cost per employee per year | $13,200 |
Cost per employee per year | $13,200 |
Employees | 675 |
Cost per year | $8,910,000 |
At 675 employees, that gives us $8,910,000 of lost profitability due to interruptions.
You know. I am tempted to stop right there. If we can just reduce the number of interruptions each employee has to deal with, the cost savings are amazing. Cut the number of interruptions by one-half and you just saved the company $4,455,000. That isn’t just some esoteric number. It represents 81,000 hours of increased productive time. Time that could be spent doing more work, getting existing work done faster, or in the worst case scenario, if there is no new work it represents 39 full-time salaries that could be eliminated. I hate that option but sometimes it is necessary to let 39 people go in order to be able to pay the remaining 636.
Cost of waiting
Waiting for answers about a particular decision or issue can be costly for companies, both in terms of time and resources. From missed opportunities to decreased efficiency, delays can have a significant impact on a company's profitability and success.
How much time do you have to wait for an answer? A study by Panopto, a video recording and management platform, found in a study of over 1000 employeinefficiencyes that they spend 5.3 hours per week waiting for information.
Of course, they are not sitting around doing nothing; they are still working, but they are also chasing down this problem. According to another study, only 23% of that wait time is lost completely because of waiting for answers, which is about 1.2 hours. Per week, per employee. Let’s do some math.
Time wasted looking for answers | 1.2 hours |
Weeks per year | 50 weeks |
Hours per employee per year | 60 hours |
Hours per employee per year | 60 hours |
Hourly rate | $110 |
Cost per employee per year | $6,600 |
Cost per employee per year | $6,600 |
Employees | 675 |
Cost per year | $4,455,000 |
We see that inefficient communication of knowledge and experience costs our company $4,455,000 annually. If we can cut that number down, we can save real money. Let’s say we cut that number by half as we did above. The savings here is $2,227,500. You have just increased capacity by 20,000 hours or 9 FTEs.
Cost of onboarding
We hire the best people that we can, but even the most astute mind starts off not knowing where things like where the copier is located or who was lead on project x when they start working at a new company. “The average new hire receives 2.5 months of formal training, it can take up to 6 months for an employee to actually ramp up in a new role. These employees often struggle for up to 3.5 months learning the details of their job on their own, seeking out information, and inadvertently replicating work.” “Only 43 percent of employees surveyed had an onboarding experience consisting of more than a one-day orientation and a packet of information on benefits.”
Turnover rates vary by industry. In the tech industry, the average turnover is 13%. However, in the management consulting industry, it is between 30% and 50%. For this article, we are being conservative so we will go with 30%.
So let's take a look at the actual cost of onboarding inefficiencies.
New employees are less efficient than they are when they are fully onboarded. How effective were you in the first six months when you were hired for your last position? According to the Panopto study it probably took you about 6.5 months to become efficient in a new position. The mean time that is wasted due to this inefficiency in that time is 7 hours per week (~30 hours per month). So 30 hours per month times 6.5 months of onboarding inefficiency is 195.65 hours of unproductive time per new employee. The average turnover in the consulting industry is 30%, so of the 675 people at our fictional company, 202 will quit, and new people will be hired to take their place in a given year.
Turnover | 30% |
Employees | 675 |
Employee turnover per year | 202.5 |
Hours per week inefficiency | 7 Hours |
Hours per month (4.3w/mo) | 30.1 Hours |
Months of inefficiency | 6.5 Months |
Unproductive hours per new hire | 195 |
Unproductive hours per new hire | 195 |
New hires per year | 202 |
Unproductive new hire hours per year | 39,390 |
Unproductive new hire hours per year | 39,390 |
Average Hourly Rate | $110 |
Cost per year | $4,332,900 |
So 202 people at 195.65 hours is 39,390 hours at our rate of $110 per hour, which is $4,332,900 per year for onboarding.
I had a great short onboarding time. But, “I quit nine months later. What happened? Well, when I got to my desk that Thursday, it was crickets. My team worked remotely, most of them in other cities. There was only one other person in the office, and he was on a different team. I had to (virtually) hunt down my very busy manager to try to get an idea of what I was supposed to be working on. I got 30 minutes on her calendar early in my third week of employment.”
This experience is not unusual. Most organizations don’t put much thought into the fact that new employees take six and a half months to become effective at their job. The double win here is if you improve the onboarding process, you are likely to decrease the turnover rate.
Three key areas of inefficiency that could significantly impact the bottom line of a company:
Interruptions | $8,910,000 |
Waiting | $4,455,000 |
Onboarding | $4,332,900 |
Grand Total Recoverable Costs | $17,332,900 |
That is a lot of waste on some seemingly trivial things. Why did we focus on these three key areas of productivity waste? Because they all share one factor, they are directly impacted by finding the right answer or person with the answer they need. If requests go directly to the right person, then people who are not part of the problem are not interrupted, reducing the cost of interruptions. If employees can quickly and directly find the right person with the right answers, they don’t have to wait as long. And, if new hires can easily find the right person with the time and resources to answer their question, their onboarding process is smoother.
It is all about being able to find the right answer. If you reduce the interruptions, waiting, and onboarding waste time by 50%, you just increased capacity by $8,848,950 (80,000 hours). How would it feel to be able to decrease expenses/or increase capacity by 80,000 hours, saving the company $8.8MM?
This is why we created Radar. Radar does not try to store all the information in the whole company. That is virtually impossible. 42% of the information for any given position in a company is in the heads of the people doing the jobs, not written down anywhere. Instead, Radar maps the vibrant human network of skills and expertise in a company in order to quickly connect needs with knowledge. Sure we capture the tacit knowledge discussed in these exchanges, but we, by no means, try to capture all of the information in the company. Much of the pertinent information is tacit knowledge that expires within days or weeks. There is no good reason to keep the information. However, knowing who knows about the topic, now is important.
To learn more about how Radar can help your company feel free to book a meeting with us at Meet With Radar Team. We would be happy to walk you through our Productivity Calculator with your company’s information and show you the numbers in black and white.
About the Author
Joseph Flahiff is the Co-Founder of Radar. He brings a strong background as a business consultant, trainer, and coach with expertise in Agile, Lean, and Project Management methodologies. He has over 20 years of experience in organizational agility and transformation, and he has worked with numerous organizations across different sectors, including Fortune 500 companies. He is also an author and public speaker. He has written several books on Agile and Lean methodologies, including "Being Agile in a Waterfall World" and "The New Agile Manager" He is also a frequent speaker at conferences, seminars, and workshops, where he shares insights on Agile and Lean practices and how they can benefit businesses.