An earlier version of this article was originally published in Forbes.com. Good leaders who look ahead and benchmark against their peers set the bar higher. One of the most overlooked benchmarks is Profit per Employee, or what I call “Return on People,” because it’s a direct measure of how well you turn the talent in your organization into value for your customers. In other words, it’s an advanced measure for productivity and competitive advantage.
Here are the sobering facts:
- Half the manufacturers on the Benchmark earn less than $28K of Profit per Employee… Although they are some of the biggest manufacturers in the world
- The Average manufacturer earns almost TWICE that, at $56K.
- Highly successful manufacturers earn 5X… 10X… UP TO 15X the average.
There are clear leaders in almost every industry, indicating that some are leveraging their assets better than others. And there are clear laggards. Some of the biggest companies in the world are actually negative when it comes to profit per employee. They’re working for less than free! Those results speak to gaps in leadership, strategy, execution, and engagement that need to be remedied.
Which one do YOU want to be? Check out this free infographic.
Many firms measure Revenue per Employee, but I consider it one of the most dangerous metrics out there. If you’ve ever had a great year on the top line and had not much to show for it on the bottom line, you already know that revenue doesn’t always indicate success and that many businesses with lots of sales actually go bankrupt.
In fact, take a look at any year’s Fortune 500 List and you’ll typically find that of the companies that increase their revenues in a given year, 40% will decrease in profits. They’re growing… in the wrong direction!
When I speak to CEO groups, many point to having a healthy gross margin as an indicator of success. It’s better than pure revenue but there are still far too many profit leaks that happen below the gross margin line for it to be a reliable benchmark.
Measuring how well you turn talent into value must include everyone’s efforts that either create or destroy value every day, and that means including overheads and expenses. If you’re not sure how to make that happen, book 30 minutes in my calendar and let’s talk – I’ve been helping companies do it for years.
Seeing the Profit per Employee Benchmark as your “Return on People” sets your bar higher.
There’s a lot to be learned from companies earning B’s and A’s on the Benchmark because, in some cases, their profit is in the hundreds of thousands per employee – and that makes all kinds of growth and investment possible in a business. I’m often asked, “But doesn’t industry matter?” Yes, it does – some industries are inherently more profitable than others as shown in the infographic above, and some are more labor intensive than others.
That’s why it’s important not only to benchmark against the overall index but to look at your own industry within the index. What’s even more interesting, however, is that every industry has clear leaders and laggards, and they’re often very consistent over time. Some companies simply do a better job of turning talent into value than their peers; although, they all have access to the same skills, resources, and technology in a global economy.
You need a playbook and solid implementation efforts to see results, but every company has the potential to move up a grade or more – often within 1 year. What opportunities would that kind of profit increase create for your business?
Nobody likes to feel like his or her performance rates a C, D or an F. Once you see others achieving high grades, it becomes easier to follow in their footsteps. Too many business leaders set their annual budgets on the basis of looking backward at last year’s results, adding a bit of a stretch factor, and topping off their budget planning with a bit of wishful thinking in terms of what will happen this year. That’s a recipe for disappointment because profits become merely the leftovers of lower-than-expected revenues and/or higher-than-expected costs.
Instead, I want you to shift the conversation to one that’s forward-looking by asking, “If our competitors are achieving X more than us, how can we build a plan to meet or exceed their results?” When you change the conversations, you change your results. Huge shifts are possible when your people get motivated to want more and are engaged in making it happen. One building supplies manufacturer turned a loss of almost $10K per employee into a profit of $29K per employee within two years and then fine-tuned its plan and continued to see results, reaching a new high of $31K per employee the following year. Although they’re still at a C grade, it sure beats the F it was earning before and their improved results have made transformational expansion and growth possible.
Next step: Take the profit challenge.
Start by simply setting a goal to improve by one grade from where you’re at today. Contact me for the details of how you can build and implement a proactive profit plan that is focused on driving profitability by delivering more value to your customers, more efficiently and effectively. Avoid typical profit-and-loss approaches based on conventional cost-cutting or downsizing (downsizing is the fastest but most short-sighted way to increase your profit per employee), because that reflects the outdated thinking of trying to shrink your way to growth.
Is it worth taking the time to find out how to achieve more? Let’s set up a call to explore what’s really possible for you.
#1 Bestselling Author, International Speaker, and Accelerator Anne C. Graham is on a mission to help business leaders and their teams double their profit per employee – or more – in less than one year, in less time per week than they’re spending on email per day. Her book Profit in Plain Sight includes the 5-step proactive P.R.O.F.I+T Plan to do it. Connect with Anne on LinkedIn.