Employee Operational Skills

Developing and emerging economies go through a known cycle: export of local products and commodities, FDI including agencies and technology transfer.

But what about human operating skills? What use are large amounts of foreign investments, the factories and infrastructure that they build and the advanced technology that is imported if worker operating efficiency does not increase to match the advances in all of the other facets of the economy?

Before we go further we should define what operational efficiency is. Unfortunately there is no single definition and instead it is classed as a group of measure. This wide latitude is both a sign of the complexity of the issue and the reason why problems can so easily be hidden.

Broadly speaking, operational efficiency measures the ratio of some input that a business uses relative to an output. One of the more famous operational efficiency ratios is return on equity. The ROE is defined as net income divided by equity. An ROE of 250% means that for every dirham invested in the business it will return 2.5 dirhams of net income.

ROE is a purely financial ratio, of which there are many, such as the cost / income ratio, in this case the lower the number the better, and there are even ratios that link to the balance sheet such as the total asset turn over = net sales / total average assets.

Important as financial operating efficiency ratios are, there are many other facets to a business that are important to capture in your business metrics. In many businesses and markets it is much more important to focus on the human element as a way to optimise the financial return.

The fast moving consumer goods sector is a great example where the number of customers as a client is a critical measure. Examples of the top such companies in the world include Coca-Cola, Pepsico, L’Oreal and, sadly, Philip Morris. You can see the push for dirham invested to client acquired in the Coke — Pepsi wars that take place in the lobbies of hotels in the UAE: Want a Pepsi? Sorry sir, we are a Coke-Cola hotel. Similarly, consider the amount of free product L’Oreal hands out trying to capture customers.

So what does all of this have to do with operational skills? Simple, they are either not being measured effectively or the results are not being applied efficiently. For example, a leading airline in the country allows me to buy airline tickets online. But if I want to refund a completely flexible ticket, I have to go to a physical office and waste my time with an extremely polite and apologetic airline agent.

Using pure financial ratios this ineffectiveness would usually not appear. However, using as an operational efficiency measure the number of transactions a year managed divided by total client facing employees could correct such an issue. There are caveats of course, such as service quality levels must be maintained at the same levels.

The fear the clients usually have of improvements in human operationally efficiency is that quality levels will drop. But as we have seen with many government departments across the country, it is possible to greatly improve efficiency whilst at the same time improving quality.

Nearly everyone in this country must visit the notary public at some point. 15 — 20 years ago showing up when there were no other customers could still take a day to finanlise your transaction. Today, a building full of customers will delay you at most an hour.

This great start needs to flourish, not least in the private sector. Why do I need to speak to two different people to make a dinner reservation? Why is closing a bank account more complex than brain surgery? Why does exercising a warranty require a United Nations size debate?

Dear CEO, do you even have an employee efficiency measure?

This article was originally published in The National.

1 Comment

  1. Jag

    The most concise (least technical) definition is provided by Webopedia.com: “Operational efficiency is the capability of an enterprise to deliver products or services to its customers in the most cost-effective manner possible while still ensuring the high quality of its products, service and support.”

    The reason that operational efficiency is complex is that it needs to be measured, usually by multiple means. These metrics should be complementary to each other in order to quickly determine how you are doing. The measures should be mutually exclusive, in order to provide a complete picture. Companies need to determine what they are trying to measure, by determining what problem they are trying to solve. There is always a problem, in that companies should always strive for peak performance (lowest cost to manufacture, highest quality as rated by an objective third party). This is called operational excellence, and ongoing process that involves many measures and many reviews, including rightsizing on a continuous basis (are we deriving increased outputs from a marginal increase in inputs).

    Financial measure are fairly straightforward: maximize the value of your investment. They are also easy to use, in that one or two measures will tell you where your money is being best spent. Financial measures become convoluted when looking internally at operations. For example, companies will look at the improved return on a certain product line after changing the inputs, or the increase in sales during a marketing campaign. Companies do not accurately apply a cost of capital to all operations. There is a cost for capital expenditures, and a cost for operational capital, if only an opportunity cost. The truth is operational capital is necessary, since most ventures are ongoing and need to be sustained. Operational measures help determine if the operational capital is being disbursed judiciously (are we over staffed, spend too much money on sundries, etc.).

    Quality measures should not be taken in a vacuum. They MUST be linked to quality improvements or at the very least maintenance of service levels at reduced cost. The takeaway is that a dirham invested should improve efficiency at multiples of that dirham. Clients should never even see the operational changes, just the improvement in service.

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