[EDITOR’S NOTE: VITAL holds monthly CI Business Mastery Classes where it addresses important CI business topics via a webinar. Each class is supported by an industry brand. VITAL has agreed to share some of the information from these classes in a monthly column of highlights from its most recent webinar. The seventh CI Business Mastery Class was on optimizing technician productivity, and it was supported by Screen Innovations.]
Today, we’re going to cover strategies on how to optimize technician productivity. First, we’ll discuss the “what” and “why” behind productivity and how we measure it in the VITAL Method. I’ll also introduce you to the three important metrics to keep in mind when measuring productivity. We’re going to close with real-world examples of how you can improve your efficiency and labor margins.
Why should we care about productivity? When productivity fails to meet a standard and improve over time, it limits potential gains and wages, company profits, and long-term company value. Productivity provides a measurement by which to assess the effectiveness of the production department in a CI business. It can make meaningful differences in labor gross margin outcomes, and that contributes significantly to the overall company blended gross margin.
The Three Metrics
How productive should my technicians be? Well, the answer lies in three basic metrics — bill rate to wage rate; financial efficiency; and labor gross margin.
The first metric, the bill rate to wage rate, or labor margin, should be set at four-to-five times the unburdened average technician wage. For example, if your average wage is $30 per hour, you should bill $120 to $150 per hour. Five times is ideal. While it may sound like a large markup to some people, a well-managed team should achieve 60 percent or better labor margin using that markup.
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Metric number two is financial efficiency, which is the measure of billed hours versus total billable hours. For example, say we have $12,000 in payroll for the week and our average wage that we pay our technicians is $25 an hour. If we take $25 and we divide that into our payroll number, that means we paid 480 hours. For labor that week we billed $27,000, and our average bill rate is $125 an hour. If we divide the average rate into what we billed, that means we billed 216 hours. I think you can see where we’re going — our total billed hours are 216 and our total paid hours is 480. If we divide those two, that ends up being 45 percent efficiency. That’s not bad, but our target is 50 percent or better efficiency.
This labor efficiency, which is a hotly debated topic in every roundtable, is yet another area of the CI business where you can measure many things in many ways and ultimately come up with a percentage that is meaningless against someone else’s metric. One example of how to measure labor efficiency is project efficiency, which is often referred to as job costing. It measures the number of hours spent on the job against what was bid, which is very useful for managing the productivity of specific jobs. Here is where project efficiency can be misleading, as it does not take into account unproductive time, such as windshield time, office time, trips to the store, vacations, sick days, and overtime. The unproductive time is often where dealers can find the biggest efficiency improvements.
So which is better — project efficiency or financial efficiency? They both have their uses, and I suggest that you start with financial efficiency and work to improve that number until you get to the point of tracking project efficiency.
Metric number three is labor gross margin, which is ultimately where the rubber meets the road. For example, if we bill a tech out at $150 per hour, and that tech is at 50 percent efficiency, which is our target, that means we billed 20 hours at $150. That’s $3000 in labor revenue for that tech that week. We probably paid that tech 40 hours or more, but let’s say we paid that tech 40 hours for that week and that tech was making $30 an hour. That’s $1200 in payroll. So, our labor gross margin is $1800 or 60 percent. That’s exactly our target, which many integrators struggle to achieve. To illustrate the effect that efficiency has on labor gross margin, let’s run that calculation at 25 percent efficiency. This means we collected 10 hours of labor at $150/hour but paid the same $1200 in payroll. This is a $300 gross margin of 20 percent. Yikes, efficiency dropped by half but we gave away over 80 percent of our gross margin dollars!
What can you do in your company to reduce the unbillable time and improve efficiency? Here are some real-world examples of what we’ve seen dealers implement with great success. The key thing here is we do not suggest implementing everything at once. Some of these things will work for you and others will not for work for you, and it’s important to test and measure.
- Limit the technicians’ time in the office — have them drive direct to the job site and have a delivery service bring out the materials. Of course, you must have a certain amount of volume to have that make sense, but we’ve seen that really improve production.
- Don’t lose money on a partial day’s reroute. If something doesn’t go the way you want it to, always make sure that you have a Plan B and limit the Home Depot and Lowe’s trips. Those cost a massive amount of money for parts and pieces that are low cost.
- Eliminating callbacks is important for creating more billable time on-site.
- Keep the same techs on the job. You will save on the load-in and load-out times, not to mention that a new tech has to take quite a while to get up to speed on the job.
- Have useful production meetings — limit the number of surprises, identify the difficulties ahead of time, and create contingency plans.
- Increase technician skills. Create time for training because that time comes back in multiples, even though it can be painful, especially with how busy everybody is right now.
- Reward on completion of jobs under budgeted hours — we must reward our people.
By making your labor metrics visible and reviewing them monthly, you are going to create subconscious positive change. Taking that a step further to create accountability and reward systems around those measurements will further enhance your outcomes.
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For more information about the CI Business Mastery Classes and the other services VITAL provides, visit http://growwithVITAL.com.