Verne Harnish: How to Increase Labor Productivity

This article is an excerpt from the Shortform book guide to "Scaling Up" by Verne Harnish. Shortform has the world's best summaries and analyses of books you should be reading.

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What are some ways to increase labor productivity? What difference does labor productivity make to your bottom line?

Once your business is up and running, you should look for ways to keep growing. Increasing labor productivity is one difference you can make.

Continue reading to learn ways to increase labor productivity.

Increasing Labor Productivity

In Scaling Up, Verne Harnish writes that a key to successful implementation of your business strategy is tracking your labor productivity. In other words, how much in revenue comes back for each dollar spent on labor? By measuring your gross margin (revenue minus non-direct labor costs), he writes that you’ll be able to find greater efficiencies and opportunities for each dollar you spend on labor.

Harnish contends that when your company is running smoothly with high labor efficiency, you should be able to achieve 15% profit as a percentage of net revenue (the maximum in most mature markets). Once you reach this point, this is your signal to invest in new productive labor. If you don’t reinvest in labor, he warns, your existing talent pool will become stagnant (skilled employees retire or leave or old skills become obsolete) and you will lose competitive advantage.

Harnish recommends increasing labor productivity overall by:

  • Offering raises to top performers
  • Hiring new talent
  • Getting rid of ineffective or underperforming labor

Although, as Harnish writes, there are some things that individual firms can do to increase labor productivity, output-per-worker or output-per-labor-hour is often determined by global macroeconomic forces that are too large to manipulate at the enterprise level. For example, in Basic Economics, Thomas Sowell notes that much is said about how American goods can’t compete with goods produced by low-wage workers in poorer countries. But in reality, he notes, American workers produce more per worker-hour than poorer workers elsewhere. In other words, American workers are more efficient per unit of output. The efficiency may arise from better machinery, more capital investment, greater average levels of education, or greater economies of scale. For example, Sowell observes that, in India, average labor productivity is 15% of that in the U.S. This means that hiring an Indian worker at even 20% of a U.S. worker’s cost would be more expensive.

Once you increase labor productivity, you will see a boost in the overall growth of your business.

Verne Harnish: How to Increase Labor Productivity

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Elizabeth Whitworth

Elizabeth has a lifelong love of books. She has always appreciated nonfiction, especially about history, politics, and ideas. A switch to audio books has kindled her enjoyment of well-narrated fiction, particularly Victorian and early 20th-century works. As a former intelligence analyst and a teacher of critical thinking skills, Elizabeth enjoys analyzing arguments on all sides of an issue. Her nonfiction preferences include theology, science, and philosophy. She studies the intersection of these three in pursuit of the highest truths. Elizabeth has a blog and is writing a creative nonfiction book about the beginning and the end of suffering.

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