The Living Wage Doesn’t Have To Cost Your Business A Penny

I’m sure by now you have calculated how much the living wage increases are going to cost your business over the coming months and years.

So how will you pay for it? On the face of it you have two levers to pull.

The ‘Pass The Cost On’ Lever

For some companies the price increase will be minimal because labour is a smaller proportion of their price. For example with milk at a record low price and stores shifting hundreds of products an hour, you can be sure that at £2.90 for a coffee from Starbucks, most of the cost is not labour. However, for more labour intensive businesses, such as in the care worker industry, there is only so much increase that can be absorbed by the customer.

The ‘Cut Costs’ Lever

The Government’s independent statistics body, the OBR, predict 60,000 jobs will go as a result of the new living wage. Sadly, this will be the first action for many small firms. Well that’s all well and good, but stripping out cost for the sake of it limits your businesses ability to grow. Successful firms have flexible workforces; so cutting back now will hinder meeting future customer requirements at some point.

In July the Government launched a plan to fix the foundations of the British economy. All we need to do is improve our productivity. If we matched the productivity of the USA the UK would raise GDP by 31 per cent, equating to around £21,000 per annum for every household in the UK.

So imagine the impact the same process can have on your business. Let’s explore what we mean when I say productivity.

Productivity means higher output using your current resources, or achieving the same output with fewer resources. People often confuse Productivity with Busy-ness.

Here is my guide to the productivity lever. The ultimate way to pay for the new living wage is to minimise job losses and price increases.

Old Father Time

The Time and Motion studies of the olden days conjure up visions of white coats and stop watches, clipboards and pens. Time is, however, the master of the Universe.

Employee contracts are based on time, shift patterns are based on time and our lives are dictated by time. Yet, ironically, companies have turned away from defining how long a job should take, and this is one of the biggest reasons the UK has started to fall way behind it’s European counterparts in the Productivity stakes.

Any business that wants to ensure it is ahead of its competitors has to incorporate time factors in its performance measurements.

Throwing Light On The Hidden Opportunity

Achieving higher productivity requires standard times to be developed for each activity or area of the business. This defines how long a job should take when carried out perfectly, using best practice – the way it SHOULD be done, not necessarily the way it is being done.

The standard time is a key planning tool. Combined with the quantity or volume of the activity (E.G. 10 invoices at 3 minutes each = 30 minutes), will determine how much work one person, or team, or machine can complete in a defined time frame.

Staff are given greater clarity as to what is expected of them. Rather than the woolly “pull your socks up” instruction or “you’ll have to do better than that” appraisal they’re used to, performance expectations are communicated and can be managed objectively and fairly.

This gives the business the flexibility to decide how much slack they are prepared to allow in their performance planning.

It also provides a point of reference to start analysing what is causing the low levels of utilisation or efficiency and ultimately productivity that I covered in my recent blog The Stress Free Approach To Problem Solving.

Utilisation, Efficiency & Productivity

These three words, Utilisation Efficiency and Productivity, are proverbially, thrown around a lot, but not properly understood or used adequately in management systems.

They are very separate measurements, and all involve the need to measure that very expensive resource – TIME.

Utilisation

Utilisation is how occupied someone is being – their busy-ness. For example, if your employee is being paid for an 8 hour day and are busy for 6 of those, they are 75% utilised (6/8 x 100 = 75%)

However, if the work they were completing during those 6 hours, was not being done very effectively, for whatever reason such as

• Procrastinating, dawdling (professionally termed “pacing”)
• Lack of proper training
• Not following the correct procedures (or making up their own because of the point above)
• The system collapsed
• The world ended

– then their utilisation is a false measure of performance.

Efficiency

Lets assume those same activities, when completed in an expected time frame and to best practice, should have taken 4 hours instead of the actual 6 hours, then their Efficiency was only 67% (4/6 x 100 = 67%).

That’s now starting to show serious performance issues, as we can now see their inefficiency has cost the business 33% of our daily bread.   The light is starting to cast rays of hope over the horizon as to how much hidden opportunity there is to improve performance.

Productivity

That’s not the end of the story. We’ve now established that the TIME VALUE of the work completed is only 4 hours, yet we’ve paid the employee for an 8 hour day. This means their PRODUCTIVITY is only 50% (4/8 x 100 = 50%).

The days pay earned by the employee, has actually cost the business 50% of their daily bread in hidden opportunity to improve.

Unless you can measure it you can’t manage it. Unless you can see it, you can’t start correcting it.

It will take time and energy to establish the standard times. But when you do, you’ll witness a more productive workforce and meet the challenge of the new increasing National Living Wage. You will have a third lever, not just job losses, cost cutting or passing on price increases.

As Arthur Nielsen pointed out “The price of light is less than the cost of darkness”.