Fall is upon us and its got me thinking about football; specifically, the business of football. Every NFL owner has one goal—use the $167M salary cap to field the best team possible. That team’s job is to win a Super Bowl. They get paid. They are expected to perform. It could not be simpler—spend money wisely to acquire talent at every position, train and coach that squad into an efficient team, and then go win a Super Bowl.
Sound familiar? As remodeling company owners, you have a similar challenge—spend your precious labor dollars to field a team of professionals who can produce maximum gross profit dollars for your company. That’s your Super Bowl.
Author Greg Crabtree, in his book Simple Numbers, Straight Talk, Big Profits!, would argue we all have a salary cap. We can’t overpay for people, relative to our competitors, and let them produce the same gross profit dollars. If we do pay up for better talent, they should produce more gross profit than a lower cost team.
Expressed as a ratio, you get what Crabtree calls the labor efficiency ratio (LER). For every dollar you spend on labor, how many dollars of gross profit do you get back? Don’t over complicate it by delineating field labor vs. office vs. sales vs. management. Every person in your company can contribute to the efficient production of gross profit. We tend to over focus on production employees as the key productive people, but the support staff plays a critical role in determining how productive they end up being. It’s a team sport.
This LER concept is fascinating because it works for big or small companies. Companies that produce lots of small jobs at high margins, and companies that produce very few large jobs at lower margins. It puts remodelers that self perform on equal footing with those that predominantly produce with subcontractors. You spend a dollar on labor, you need a couple back in gross profit. How you do that, your business model, is up to you.
I’d argue that Crabtree’s LER is a more precise measure than revenue produced per full time equivalent, a popular remodeling metric. Full time equivalent is clunky, but dollars are very easily understood and more precise.
Your labor productivity, and ultimately your profitability, will depend on many key factors. How well did you recruit, hire, onboard, and train? How well do you lead and manage? Have you put in place systems and procedures that allow your team to flourish and be as efficient as possible? All of this can be measured and tracked by one simple ratio.
Through our peer group involvement with Remodelers Advantage, we’ve been able to meet and learn from some amazing high performance companies from all across the U.S. and Canada. What we’ve seen is that the best performing companies can consistently produce an LER between 1.85 and 2.1, while some standouts have exceeded 2.35.
How do you increase LER? You can pay less, in hopes of getting the same output, but I doubt that will work for long, especially in this tight labor market. You could sell the same product and service for more, while holding labor costs even, but this is a competitive world and there is an upper limit to that strategy.
What’s left is the obvious—increase employee productivity. Are you budgeting enough for IT and arming your team with the best knowledge working tools available? You’ve spent time and money finding these great employees, but what do you spend on training? Do they have the support staff they need or do you have highly compensated employees doing lower value work, thereby lowering the overall efficiency of the entire team?
Is your team ready to make a run for the Super Bowl?