Are You Profiting From Your Labor?

One of the topics I address regularly in meetings with my dealers is the pace of change, and that there are very few things you can count on to deliver top line and bottom line results long term.

In these discussions I point out that the product categories I made a living on in the late 1990s no longer exist: CRT TVs, big screen CRT rear projection, VCRs and camcorders.

When I’m traveling with my director, and we’re on this topic, I ask him to list what our top-five products were five, ten or twenty years ago. As you can imagine, everything that was a big seller even five years ago is extinct now. And twenty years ago? We might as well be talking about Daguerreotype photography.

Here today, gone tomorrow, as they say. While products and technologies come and go, you need to ensure that your company doesn’t experience the same fate.

Fortunately there’s one source of revenue that will always be with you. It’s the one that you have the most control over: your labor, and the expertise behind it. However, just billing for it isn’t enough; your labor revenue has to be profitable as well.

When consulting with dealers, I like to use the analogy that labor is no different from inventory: You need to know what you’ve got, what it costs and you can’t let it sneak out the door unpaid.

You already know that there are two ways to bill: bid labor or hourly billing.

When you bid your labor in advance, it’s imperative that you understand precisely how long it takes your team to perform their tasks and then manage that so that you avoid unpaid overruns.

Bear in mind that even with hourly billing, you can absolutely be unprofitable if your team’s processes are inefficient.

I apologize if I sound condescending and harping on class-101-level stuff. However, I’ve spent enough time with enough installing dealers to have learned that not all of them have a clear picture of the profitability of their billed labor.

One of my old bosses and mentors used to remind us that “what gets measured gets managed.” So your task is to ensure that you know how to do that.

One metric I’ve seen used to good effect, and that’s easy to calculate is the ratio of hours billed to wages paid. There are a lot of variables in play, too many to give a pat answer for what that ideal ratio is, but obviously the higher the first number in that ration, the better.

Using that metric, it’s a lot easier to get a handle on how labor contributes to your income statement. And you need to be able to tell from them numbers if your labor is profitable, just breaking even or worse.

The most basic fix to improve labor profitability is to, wait for it, standardize your processes. And when you have standard processes, you need to ensure that they’re being followed. And related to that, you need to know how long it takes any one task to be accomplished.