Stuart Ingledew, Principal Change Architect for Marbral Advisory, explains how business efficiency is all too often an underappreciated concept within business.
By definition, efficiency measures how much output is produced for each unit of input. In relation to business, efficiency looks at how well a business utilises inputs such as resources, materials and capital and converts these into outputs such as products, services, and revenue.
Building an efficient business is the goal of all business owners, whereby they are able to offer services, build products, and accomplish their goals with the minimum effort, expense or waste. But if you were asked whether or not your business was efficient, how would you respond? Do you think everyone within your business would give the same answer?
Since a business is complex, this is not always an easy question to answer, and it will depend greatly on the performance of the inputs and how they all interact and work together, as well as the industry in which the business operates and its ultimate goals. It is also important when looking at efficiency, to make sure we do not compare businesses across industries – a manufacturing company for example operates with a considerably different business structure and model to that of an online enterprise.
So how do we measure business efficiency?
With almost all businesses, the financial results are critical, and efficiency is therefore often measured by one or more financial calculations.
Revenue Generation as a business efficiency measure relates to the amount of revenue a business is able to generate with a given set of inputs. The more efficient the business, the more revenue will be created by the same inputs. Alternatively, you can consider the profit margin (operating profit) which measures the amount of revenue left over after paying for variable costs of production such as materials and wages. Other financial measures you can consider are ratios such as return on investment (ROI), return on assets (ROA) or return on equity (ROE), and these will be amongst the most important measures for your Finance or Accounting departments.
All of these will provide information on the financial state of the business, but these details in isolation do not give you the full picture of the efficiency of your business – for example, you may be making a strong ROI, but that doesn’t necessarily mean that all of your inputs are efficient.
Let’s consider the hummingbird for a moment…
The hummingbird only consumes between 3.14 and 7.6 calories a day (its inputs) to achieve its goals, and so it must be efficient right? Well on a very small scale, this may seem to be efficient, but when we scale this up and look at what that would look like if a human were to have the metabolism of a hummingbird, well they would have to consume approximately 155,000 calories a day - that's approximately 437 burgers. Still thinking it’s efficient?
Like the hummingbird bird, small businesses may be agile with few inputs, but unless the business is efficient, then it makes scalability and growth very difficult. It is really important therefore to understand the efficiency of all of the inputs when a business is trying to grow.
This ‘scalability’ is a critical factor when considering business efficiency.
So, what might be causing the business to be inefficient?
There are a number of different reasons as to why your business may not be as efficient as it could be, and some of the key reasons are listed here:
The company culture may be poor, and as such may be unattractive to what would be considered to be the best candidates for the jobs, and again, impacting staff turnover.
As you can see, the ‘human’ element plays a significant role in whether a business is efficient or not, and it cannot be stressed enough the importance of spending time focussing on this area if a business is striving to improve efficiency.
Aspects such as managing your employees’ wellbeing are pivotal in maximising this ‘resource’, and this has become even more relevant in recent times when working patterns or locations, including remote working, have dramatically changed due to the Covid-19 pandemic. It is now, more than ever, critical that businesses dedicate time to managing, engaging, connecting, training, supporting, and motivating their people to deliver the best results to maximise the overall efficiency of the business.
When it comes to looking at the efficiency of processes and procedures, there are a number of different approaches and tools that can be used to determine the efficiency in this area. Simple tasks such as time in motion analysis or basic process mapping can help identify opportunities for process re-design, and with a bit of training and experience, this can be a relatively self-managed piece of work. As we progress towards full process re-engineering, then methodologies such as Lean Processing or Six Sigma can be considered, utilising qualified Lean or Six-Sigma (green or black belt) practitioners to support your business in identifying broader opportunities and delivering solutions into your business that are easily and readily adopted by all. Again, even with regards to processes enhanced through Lean or Six-Sigma, the human element is critical to deliver maximised, sustainable results.
So where does the jellyfish come into all of this?
The Marine Biological Laboratory in Woods Hole, Massachusetts, looked at efficiency in terms of the energy required to generate movement, finding that the jellyfish swims about 3.5 times more efficiently than a salmon – its closest competitor for the efficiency crown.
The jellyfish contracts and pushes itself forward before relaxing and making a second movement forward– this second movement (30% of its total distance travelled) actually uses no energy whatsoever, even though it is still accelerating, making the jellyfish amongst the most efficient animals on our planet.
Comparatively, if your business can reduce its inputs through efficiencies, then this will allow you to allocate more of those resources to reinvest in the business, whether that be through research and development, improved infrastructure or technology, or simply driving more business through increased marketing or sales activity – effectively creating your ‘second wave’ of benefits to grow your business and improve the financial results further.
Measurement and Investment
Business efficiency is a concept that every business should be aware of and be actively working to understand how it can be improved and then measuring the results. These measures can be purely financial such as determining profits, ROI etc, but more wholly should include a strong awareness of staff wellbeing and engagement and operational aspects relating to procedural enhancement, infrastructure, and technology.
Improving your business efficiency doesn’t happen overnight, it is a long-term investment in your business, and it is all about understanding the details, specifically the inputs, outputs and the correlation and interaction between the two. Concepts such as ‘continuous improvement’ are about making small improvements every single day, not necessarily about making big infrequent changes, and it is only through engagement with your staff that this can become a reality.
Focus on staff wellbeing, motivation and engagement, utilising surveys, tools, or training (online or otherwise) to give you the ‘human’ state of play of the business and where you need to focus.
Ensuring you have effective processes (both for your business and its customers) is vital, and you can adopt simple techniques or engage in deeper improvements using qualified practitioners to support your business in this respect.
Tracking the efficiency of your business and communicating this effectively will help you to build and scale your business, and it is a very powerful tool that can ultimately help you get ahead of your competitors. Be a jellyfish rather than a hummingbird!
Your business could also be a panda or a snail, but we’ll save that for another day!
Stuart Ingledew delivers change management consultancy, business transformation project management, operational efficiency and digital advisory services to clients in the Channel Islands and Isle of Man. He works for leading change management firm Marbral Advisory. If you are interested in a career in change, then please contact Marbral’s Head of People and Operations: firstname.lastname@example.org