A Planned Approach to Optimising Labour Productivity

11 May 2016

Allan Feinberg , Managing Director, Remuneration and Reward Services |

Today’s business environment has changed dramatically from that experienced during the boom of recent times. Organisations are no longer able to rely on rising prices to increase their earnings; accordingly productivity is seen as one of the keys to improving business performance.

The opportunity

As explained below, labour productivity is a function of many aspects of an organisation and therefore draws on the expertise of a variety of disciplines and service lines, from operational excellence and organisational design to remuneration, reward and process audits (to name just a few). In light of this fact, only a truly holistic approach to improving labour productivity is going to result in positive and sustainable results.

BDO has recognised the powerful synergies that are created when our business lines work collaboratively for our clients to deliver truly innovative and effective solutions”.

The potential

There is a variety of factors which influence productivity, such as the quality of equipment, new technological developments and the management of material flows, we know that business success in the large part depends on the performance of one’s employees. In labour intensive industries such as mining, healthcare and education, labour accounts for 25% to 40% of operating costs. Labour therefore represents an obvious starting point when seeking to improve productivity in a sustainable manner.

The dilemma

There is a plethora of research and theory available on how to improve labour productivity, making it confusing for organisations to ascertain where to begin and/or what to focus on. This results in many organisations embarking upon a particular course of action without really addressing the fundamental unit of production, which is labour. One can only positively impact labour productivity by influencing and changing those factors that matter to people. Labour productivity therefore is a function of many things which include reward, organisational design and leadership.

A Labour Productivity Framework

To address the lack of practical approaches available to organisations seeking to increase their labour productivity, BDO recognised the need to develop a comprehensive labour framework.

Whilst there are a number of ways to define and measure productivity, we have identified those measures that best reflect work input and work output of the entire workforce.

The Total Employment Cost (TEC) has been identified as a stable and readily available measure which reflects the work input of an organisation’s workforce. TEC is the total cost of employing an individual and includes salary, superannuation, benefits, allowance, travel and accommodation.

In measuring work output, particular industry specific measures of production have been selected, for example tonnes or ounces in mining are dependent on the commodity, and for professional services this would be hourly utilisation.

In considering the labour productivity model which underlies this framework the principle objective is to identify those areas of opportunity to improve Business Growth, Business Profitability and Business Sustainability through the effective management of labour.

We have developed a number of core drivers which are BDO specific, and which from a labour perspective influence and drive Growth, Profitability and Sustainability. These are outlined below and graphically illustrated:

  • Profitability labour drivers are BDO defined labour cost and return, employee retention and return, and affordability of remuneration structure
  • Growth labour drivers are BDO defined remuneration structure, employee leadership advancement and development, and optimal management and staffing structure
  • Sustainability labour drivers are BDO defined employee renewal and attendance, an optimal human resource support structure and associated services as well as leadership stability

Labour Productivity Framework

Each of these core labour drivers, for instance remuneration structure under Growth, is made up of multiple measures which when collated translate into a productivity profile for each business which can be:

  • Compared to their peer group market for benchmarking and ‘best practice’ perspectives; and
  • Used as a predictor to define opportunities for labour productivity improvement.

How does this Labour Productivity Framework help?

This framework assists in contextualising multiple factors by focusing on key identified areas within three key objectives, being business growth, profitability and sustainability. The results are then used to establish a productivity agenda for the organisation which will differ from one organisation to another depending on their needs.

To further discuss this framework and find out how it can assist your organisation in achieving sustainable productivity gains please don’t hesitate to contact me