Productivity is the key to a company’s long-term survival. It allows the business to produce more goods and services for the same amount of work so it can stand against competitors in the marketplace.
The productivity formula allows companies to measure and track productivity improvements. It gives them a reliable way to identify common pitfalls and focus on performance management in order to drive improvements in productivity that boost profitability and increase business growth.
In this article, we take a look at the productivity formula – what it is, and how you can use it to calculate workplace productivity and enhance efficiency in your organization.
What is the Productivity Formula?
The productivity formula is a simple equation used by leaders and managers to measure productivity. The formula can be used to determine the productivity of a single employee, a team, a department, or an entire business. It can even be used to measure the productivity of an economy.
In the concept of business, the formula can provide a useful indication of the level of efficiency in converting raw materials, machinery, and employees or teams into useful goods and services.
The formula is represented as follows:
Productivity = Units of Output / Units of Input
It’s a relationship between the physical input (e.g. capital, materials, labor productivity hours, etc.) and output variables (e.g. number of goods produced, sales, etc.)
You can measure productivity in a number of ways. Some of the most common workplace productivity KPIs (key performance indicators) include:
- Revenue per employee
- Number of parts produced
- Customer satisfaction score (CSAT)
- Labor utilization rate
- Employee turnover rate
- Gross profit margin calculated by a gross margin formula
Regardless of which KPIs you focus on, your company will have greater productivity if:
- It produces more using a given variable of inputs; or
- It produces the same level of output using fewer inputs.
This means you will have a competitive edge over businesses that produce a lower amount. The formula also makes it easy to see how companies can increase units of output from each material, machine, or employee hour used.
Why is the Productivity Formula Important?
The productivity formula is important because of its ability to quantify the revenue generated throughout a business by specific, segmented entities (employee, team, department, etc.) to better evaluate how much profit each member, team, and department are generating.
In turn, this allows for a better understanding of where the greatest ROI (return on investment) is being incurred, as well as what work activities and which employees, teams, and departments may be unproductive to the overall business.
Since it’s a measure of a company’s efficiency, productivity is the secret to winning in any competitive marketplace. If you can increase your productivity, you’ll be able to generate higher profits – whether by selling more or charging lower prices to snatch customers from under your competitors’ noses.
Conversely, if your productivity goes down, then you may not be able to operate profitably. And, in the same way, if your productivity increases at a slower rate than your competitors, your business will suffer from sluggish growth.
But with improved productivity, your business can enjoy benefits such as:
- Higher customer satisfaction
- Better terms from suppliers
- More attractive wages
- Increased access to capital
First introduced in 1911, by American engineer-turned management consultant, Frederick Taylor, in his book “The Principles of Scientific Management”, the idea of the productivity formula completely revolutionized practices for measuring office output.
In recent years, it has been discovered that it’s possible to alter productivity by changing specific variables. The productivity formula allows you to optimize different variables so you can maximize efficiency and profits, and, at the same time, minimize costs and eliminate inefficiency.
Examples of the Productivity Formula in Use
Here are some examples of how the formula can be used to calculate productivity in an organization.
1. Employee Productivity
A manager might calculate the productivity of an employee by dividing the goods/services produced by the number of labor hours within a specific period of time.
For example, imagine a hypothetical scenario where one employee, whom we’ll call Jennifer, makes $3,000 worth of sales in a week, working 40 hours, and another employee, Jane, makes $2,000 working 20 hours, then using the productivity formula:
- Jennifer’s productivity is: $3,000/40hrs = $75/hour
- Jane’s productivity is: $2,000/20hrs = $100/hour
As you can see, Jane is more productive than Jennifer, even though she generated fewer sales over the course of the week.
2. Team or Department Productivity
Team or department productivity refers to the collective output of two or more individuals united by a common objective. The productivity of a team might be determined by dividing the sales revenue generated by the total number of hours the team spent on that particular project.
If a business wants to measure the productivity of different departments, it can do so in pretty much the same way as the examples above.
For instance, a software company can determine the marketing department’s productivity by looking at last month’s production output and dividing it by the number of employee hours worked:
- Output: 1,000 leads generated
- Total employee hours worked: 500 hours
- Department productivity: 1,000 leads / 500 hours = 2 leads/hour.
3. Business Productivity
Business productivity can be calculated in the same way and you’ll be able to determine which employees, teams, or departments are most or least productive. You’ll also have a formula for measuring the efficiency of the business as a whole in using its materials and resources.
The image below further illustrates this concept:
The bottom line is that all businesses – whether remote, hybrid, or in-person can use the productivity formula to determine productivity levels and improve efficiency in every area.
However, you may have noticed that this version of the productivity formula is quite limited as a comprehensive measure of productivity because of its simplicity and the restriction in variables. Inputs and outputs are expressed in single units and this provides you with partial factor productivity.
In order to gain a more accurate measurement, you’ll have to use more inputs and outputs for calculating the overall productivity of the business. That’s where the multifactor productivity formula comes in.
The Multi-Factor Productivity Formula
This formula is designed to help managers measure productivity across different departments in the company. It allows for a more efficient measure by taking into account different substitutes or alternatives for input and output (e.g., labor for capital) in order to more accurately represent how each variable affects company productivity.
This formula measures productivity by comparing the output to different inputs that are necessary for production in different departments, including ratios of units produced to labor, materials, and capital.
So, while the partial factor productivity formula makes use of one input, the multi-factor productivity formula uses the ratio of total outputs to a subset of inputs.
Here’s a quick example to illustrate this point:
Imagine a hardware manufacturer that purchases the latest machine technology to increase production. If this equipment allows the company to reduce employee costs by 50% more than a standard machine, then the output will stay the same.
But, since there are now fewer employees, the company’s labor and capital productivity will increase. Also, there’ll be a decline of 40% in material productivity since the company’s output is constant and the purchased material has now increased.
Obstacles to Increasing Productivity
There are many things that stand in the way of becoming more productive in your business. These can include things like:
- Poor time management
- Employees spending too much time on email or building web content
- Too many/inefficient meetings
- Redundant or time-consuming manual processes
- Outdated technology
- Achieving “busyness” instead of productivity
Increasing productivity often means isolating tasks that are wasteful of time, money, or other resources and evaluating alternatives that save time, increase revenue generation, cut fixed and variable expenses, and otherwise create a more productive work environment.
At times, this may include using third-party services to ensure the timely and cost-effective creation of privacy policies or other legal documents.
Other times, it may prove more inexpensive and less timely to hire a registered agent service to assist with the legal side of business operations than trying to do it yourself or building an entire team or department from the ground up with the knowledge and skills necessary to ensure that your business and all related entities remain in full compliance with legal standards.
Many other unproductive tasks, such as time spent on content creation, email correspondence with clients, data collection, or clerical tasks. can be optimized and automated with software like website builders, email marketing software, and similar tools.
There is no one solution that can be used to increase productivity in all situations. Different issues create different levels of non-productivity. Isolating these sources of non-productivity, however, can be accomplished with the productivity formula regardless of the particularities of the situation at hand.
How to Use the Formula to Improve Productivity
Fortunately, these obstacles can be addressed using some simple fixes. All you have to do is to identify and track productivity metrics that are important for your business. This will help you implement appropriate measures to manage and improve workforce productivity.
You can then invest in the efficient use of technology and automation to cut down on labor costs and gain a competitive advantage that allows you to further improve company productivity.
Areas you can focus on for improving productivity include:
- Technological Improvements: Add technological improvements as inputs to expand outputs by more than their cost and boost productivity. For example with the boom in cloud computing and big data storage and analysis, AI contact center platforms help improve efficiency in e-commerce environments, leading to better performance, results and productivity.
- Technical Efficiency: Improve technical efficiency by using your existing technology or improving skills to work more efficiently.
- Organizational Improvements: You may be able to improve productivity across the organizations by reorganizing teams according to strengths to more efficiently complete projects. Learn how to Automate Your Busywork and increase your productivity by checking out this book by Jotform’s CEO Aytekin Tank.
- Increasing Scale: You can increase productivity by scaling your operation. This may require you to add to the number of workers, add new equipment, automate manual workflows, or outsource certain work operations to contractors instead of in-house staff.
I hope this article has answered your questions on what the productivity formula is and why it’s important. If you have any further questions, let me know in the comments below and I’ll be happy to answer them.
Ron Stefanski is a website entrepreneur and marketing professor who has a passion for helping people create and market their own online business. You can learn more from him by visiting OneHourProfessor.com