Doing More With Less: Focus on productivity from planning to execution

Most construction companies are looking for ways to realise cost efficiencies and increase productivity. MICHAEL DONNELLY, Associate Director from GE Capital shares his thoughts on how companies can accomplish this without jeopardising quality.

PRODUCTIVITY improvement is all about finding ways to do more with less. It is the search for cost efficiencies within a company’s operations and the discovery of ways to achieve the highest sales volume and growth. And it’s about accomplishing all of that while maintaining quality and spending the least amount possible.

Michael Donnelly, Associate Sales Director of GE Capital Equipment Finance in Victoria, believes productivity improvement should always be a key goal for businesses, not just a by-product of a difficult operating environment. “Setting productivity goals is a crucial part of our established strategic planning process” Donnelly said.

As important as productivity improvement is to an organisation such as GE Capital, incorporating productivity measurements and setting organisational goals may be even more critical in strategic planning activities for a smaller, growing business. Part of this has to do with the fact that smaller companies have less historical information to work with.

While larger organisations oft en have years of financial results with which to compare and benchmark future goals, while smaller companies with only a few years of operation under their belts will likely find it more
difficult to set goals and benchmarks.

According to Donnelly, “this makes it even more imperative for fast-growing companies to establish the right processes from the start, so they can develop a roadmap for establishing a performance track record, and work to improve on it by managing their operations to achieve productivity gains.”

A PRODUCTIVITY PRIMER:
HOW AND WHAT TO MEASURE

In order to view this clearly, a company must be able to extract certain costs from the income statement over which it has very little control. When costs are isolated in this way, it is far easier for management to gain insights about operating performance shortcomings so it can focus attention where it’s needed.

Specifically, a company will want to examine three productivity measures: variable cost, base cost and total cost productivity. Variable cost productivity measures the costs in businesses that go up and down with sales volume, and would include most material costs and labour costs related to production. Base cost productivity measures those costs that do not fluctuate with sales volume, including most overhead costs. Total cost productivity includes both base and variable costs. Over time a company may be able to switch some base costs to variable, when analysing factors such as repair and maintenance costs, or direct wages versus subcontractor costs, for example.

THE PRODUCTIVITY WALK:
STEPS TOWARD OPERATING PROFIT IMPROVEMENT

Step 1: Start with good data

Setting the right productivity targets requires good information coming into the process, so before calculating productivity measurements, make sure you are mapping costs correctly. Check to see whether you are comparing “apples to apples” from one year to the next. This may involve breaking down line-item costs on the income statements into smaller units to truly understand the items that make up aggregated line-item costs, and how they have been changing over time. “The more detailed the information you obtain on costs, the better informed you will be when setting your own company’s benchmarks.” Donnelly said.

Step 2: Set benchmarks and goals

Once the best, most detailed historical and industry data available are obtained, companies can benchmark their productivity against historical levels, or against a measure of competitors’ productivity. With these benchmarks in hand, management can set goals for a designated time period and for designated areas or cost categories. When setting these goals, do not simply rely on historical data but make every effort to try to obtain information on costs looking forward, whether it’s sourced from within your organisation or from outside it.

Step 3: Identify real-world opportunities for improvement

Once you begin an in-depth examination of the separate costs that go into your income statement, you will want to identify and prioritise those costs where improvement is most necessary and feasible. This goes beyond simply comparing one year’s costs to the previous year’s costs, or comparing those costs against industry benchmarks. Quite often, you will find that areas where the metrics show the most potential for improvement are not, practically speaking, the areas you have the most ability to change.

For example, companies have little control over depreciation expense, as it originates from equipment purchased in the past and must continue according to accounting guidelines.

Step 4: Identify ownership and reach agreement on expectations

Just as important as identifying opportunities for improvement in your cost structure is identifying the department or individual within an organisation that has the power to make changes happen. Figuring out who in your company has the authority or is in the best position to make changes is critical to productivity improvement. Once the parties with the power and authority to make changes have been identified, it is important to obtain buy-in and agree on specific, actionable goals for productivity improvement. “Make sure expectations are challenging but reasonable, and involve owners of the activity in coming up with an action plan to implement changes.” Donnelly suggests.

Step 5: Track productivity progress and stay focused

Finally, you should set numeric goals for the expected cost savings from each activity. You will want to have agreement among management and the owners of the activities as to the amount of cost savings that can be reasonably expected. Typically, productivity is tracked on a monthly or a quarterly basis.

Make sure the owners of the activity are reporting these results to management in a timely manner, and that management is adequately supporting the owners in their efforts to make and implement the action plan. Tracking the performance of these efforts is the area where an organisation often runs the greatest risk of tripping up and failing to realise productivity improvement.

PRODUCTIVITY IN PERSPECTIVE:
GROWTH MATTERS

Productivity improvement is important to the long-term success of any business, but it is only one component of that success. Fast growing small- and middle-market companies in particular need to strike a balance between focusing on cost control and gearing up their business for growth.

For a younger company in the early stages of growth, excessive emphasis on cost cutting in some areas of the business may not be appropriate. Cutting costs just for the sake of cutting costs is never a good strategy.

At GE Capital, with its multitude of businesses at various stages of growth, data is readily available to benchmark appropriate cost levels at companies at different stages in the business growth cycle. Small businesses may not have access to that data, so it is important to find the right sources of information when setting productivity benchmarks.

“Our Equipment Finance customers benefit from a bench marking tool we use that lets them see how they are performing compared to their peers, and also how they’re performing year-on-year. It’s my job to understand my customers business’ and I believe this tool allows me to do just that.” Donnelly added.

While the construction industry in Victoria is going through some challenging times, there’s no better time for companies to look at increasing their productivity, and ultimately doing more with less.

Important note: The information contained in this article is general in nature and is not intended to be financial and/or taxation advice. GE Capital suggests you seek your own independent advice.

Michael Donnelly is Associate Director at GE Capital Equipment Finance. He has been with the company for more than ten years, where he has been dedicated to the account management of Civil Construction clients in Victoria.

During this time Michael has funded acquisitions, cash raises, re-finances and assisted in the funding of succession plans. Michael has worked with a range of civil operations across Victoria, providing tailored solutions throughout the life cycle of their equipment assets.

GE Capital is a long-standing member of the CMPA and the Civil Contractors Federation.

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