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How Productive Are the People in Your Business?

September 23, 2024

As you grow, how do you know if you need more or less peo­ple to be pro­duc­tive and efficient?

With­out a good mea­sure­ment to track either of those things, you’re in dan­ger of not hav­ing enough peo­ple and brain­pow­er to get the work done.

Or, more often, hir­ing and pay­ing for more peo­ple with­out actu­al­ly cre­at­ing any more gross prof­its or results.

Strik­ing the Right Balance

To strike the right bal­ance, you have to know your Labour Effi­cien­cy Ratio (LER). 

In sim­ple terms, that num­ber helps you to mea­sure, ana­lyze, and opti­mize labor pro­duc­tiv­i­ty – to know how many dol­lars of peo­ple costs it takes for every dol­lar of profit.

In oth­er words, to know how effec­tive the peo­ple in your busi­ness are at cre­at­ing value.

“Labor is the only cost that comes to work every day with an attitude.

It’s got some good days, and it’s got some bad days.”

-Greg Crab­tree

The LER Calculation

LER is deter­mined by divid­ing the gross prof­it by the total dol­lars spent on labor.

His rule of thumb, for almost every busi­ness, is a 2:1 ratio:

Every dol­lar of labour (direct and man­age­ment com­bined) should gen­er­ate at least $2.00 of gross profit.

  • Fig­ure out where you are today. You may need to do your own research to val­i­date that the 2:1 ratio fits your industry.
  • In your macro deci­sions and macro report­ing, keep your eye on that 2:1 ratio to strike the right balance.

If you real­ly have the amaz­ing, high-per­form­ing, pro­duc­tive team you say you do – and a great strat­e­gy in the mar­ket – your LER will show it.

“It’s not about bod­ies but dollars.”

-Greg Crab­tree

Here’s a video clip of our con­ver­sa­tion about LER.

And a link to the com­plete inter­view.

The Chal­lenge

  • If you haven’t already cal­cu­lat­ed your LER ratio, I high­ly rec­om­mend that you do.

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