When reviewing an operational department or company, one generally needs only nine numbers to assess where potential for improvement might exist.

Number of hours paid

The main cost component of a labor-intensive industry is – what a surprise – the hours of it’s workers. Since the price per hour is generally fairly fixed, the number of hours paid is the basis for most profitability assessments. Any flexibility in the number of hours paid greatly depends upon the local labor market in 2 ways: the flexibility to in- or decrease the labor force itself and the flexibility to move workers’ hours among various months. The pro’s and con’s of flexible labor both in absolute and in distributional senses are obvious but outside the scope of this blog.

Number of log hours

In most production departments, the system to measure the hours worked is basic and limited to measuring attendance. In contrast, most call centers measure exactly how long their agents talk, spend on after work time, go to the bathroom or spend waiting for calls.

The difference with ‘number of hours paid’ is mainly vacation time, illness and time not registered; the latter could be seen as a direct measurement of the incompetence of the operational management, the former two can easily be compared to industry or national standards. The relationship between log hours and paid hours is measured by the ‘utilization’-ratio.

Actual Total Handling Time

Whereas the workers might be present for generally more than 8 hours per day, a significant portion of their time will be devoted to non-productive time, ranging from breaks to training, coaching and management (like team meetings etc.) One time often forgotten is ‘available time’, the time that agents are waiting for work to come their way and without it the waiting queues for customers would be excessive. For a sample overview of some actual numbers, see the blog, “apples, pears and oranges”.

The relationship between Total Handling Time (THT) and log hours is measured by the ‘occupancy’-ratio. In practice, often ‘occupancy’ and ‘utilization’ are mixed up, so make sure you understand what the definition is your business partner is using.

Commercial Total Handling Time

All these efforts of personnel are transformed into actions that provide value to the customer, and thus to the client. Commercial models might be payment per FTE, per log hour or per transaction, whereby the latter generally will be calculated as a unit of (Average) Handling Time. The ratio of Commercial Handling Time and Total Handling Time is a result of the combined operational and commercial efforts and a good quick check of the profitability of the department.

Revenue

Of course, the translation of Commercial Total Handling Time into Revenue is a pure commercial result, which is fixed for the duration of the contract with the client. For in-house departments, the budget might be used as a comparable measure.

Operational Margin 1

In outsourcing the most used internal measurement is the OM1, where the direct labor costs are subtracted from the revenue and expressed as a percentage thereof. Quick and dirty, it is the short term indicator of economic well-being. Generally, the first level managers, sometimes called Supervisors, sometimes called TeamLeaders, are considered part of these direct labor costs.

Operational Margin 3

The ‘ugly duckling’ under the operational ratio’s carries many secrets with it and shows the medium term profitability of an account. It is so easy for outsourcers to skimp on overhead staff like Key Account Managers, Operational Managers, Trainers, Quality Managers, Planning & Forecasting, Reporting but in general these positions are the key to the smooth operation and profitability of an account. On the other hand, it is amazing how bloated those functions can be for in-house departments.

EBIT

Although some Financial Managers love to use this indicator, it is very strategic, which means that any interventions at this level will take some time to have an effect: the lease of an inappropriate building usually is 5-7 years, and certain financial obligations may take even longer. Therefore, any interventions at this level will require major pushes and require the longest stamina.

Price per paid hour

At the final end of the spectrum, the price for labor hour connects the financial with the operational perspectives again. For operational units, this poses the essential question of economic viability of the plant and connects to labor negotiations with unions, alignment with Workers Councils and also whether the site will be expanded, or closed.

Conclusion

When closely looking at the indicators above, the reader will notice that they first show the way from ‘money spent’ up to ‘money received’ via operational indicators. The absolute numbers above can easily be transformed into operational ratio’s can allow for comparison between branches and even industries. After ‘Revenues’ the road is again gone ‘down’ again via financial ratio’s, usually better known. Whereas all these ratio’s give insight compared to other industries or accounts, the development of these ratio’s in time already gives a significant insight in the effects of short term aberrations like system implementations or change of management (style).

(Originally posted on September 26, 2014)