Cameron Herold warns that as companies grow they often become less labor-efficient unless they deliberately track per-employee metrics. He recommends leaders compute four core metrics — revenue per employee, gross margin per employee, profit per employee, and salaries as a percentage of revenue — for the last 12 quarters (three years), dividing quarterly revenue/gross margin/profit by full-time employees/FTEs. Herold argues that without tracking these metrics organizations bloat through incremental hiring and unexamined processes, and he illustrates with client examples and anecdotes before urging leaders to use the metrics when budgeting and deciding to hire.
Questions this video answers
Around 30–50 employees (and when moving toward about 100).
The last 12 quarters (three years).
Revenue per employee; gross margin per employee; profit per employee; and salaries as a percentage of revenue.
A client grew from 50 employees to 138 employees in 18 months while revenue/gross margin/profit per employee declined and salaries as a percentage of revenue increased.
He compares hiring to deciding whether to spend $80,000 on a marketing campaign, noting such spends are scrutinized while hiring decisions (~$70k+ salary) are often made quickly.
Chapters
All right, so this is a really critical video that everybody needs to watch and think about. And I would actually show it to your managers and leadership team, your CEO. CEO. It's really about a critical metric that most companies don't measure until they get into trouble or they're not even aware of what's happening. And it usually happens in rapid growth when you're going from a small to a medium sized company or from a medium sized to large size. So I usually see it, the problem creeping in when you're at like the 30 to 50 employee mark and maybe going to the 100. And it's around labor efficiency and how much revenue per employee you're doing, how much gross margin per employee you're doing, how much profit per employee you're doing, and then also what your salaries as a percentage of revenue is doing. So recently at one of our CO alliance events I talked about this and had some of our members write down some numbers. And we realized that across the board members were in very, very different positions, mostly because no one was measuring the numbers. So what happens is we begin to get more and more inefficient as we grow. I was just coaching a client this morning and they've gone from 50 employees to 138 employees in 18 months. But what's happened is their revenue per employee has dropped, their gross margin per employee has dropped, their profit per employee has dropped and their salaries as a percentage of revenue has gone up. Basically they're going in the wrong direction. They're getting less and less efficient over time. So what I recommend you do is, is ask your accounting or your controller or somebody in payroll, anyone who can look at your numbers to pull your last three years of numbers for you and look at it by quarter. So just go for the last three years, what was your revenue, what was your gross margin, what was your profit for each of those periods? And then just divide it by the number of full time employees you have on your payroll or full time equivalents. And you need to be getting more efficient on those numbers. And if you don't track those three numbers, you're going to get less and less efficient over time. You're going to actually create work for people to rationalize their jobs. And what ends up happening is managers, because they don't have the wisdom or the experience like to hire people really quickly. I just need one more person to do all this work. I need one more person to do this stuff. And you end up getting bloated as an organization because the reality is if they're not looking to stop work. If they're not looking to optimize work, if they're not looking to automate work, you end up just adding people. But people help make the company less and less efficient at time. So the numbers that you really want to be tracking are revenue per employee, gross margin per employee, profit per employee, and salaries as a percentage of revenue. Those are the four numbers you want to go retroactively for the last 12 quarters, so for the last three years, and then just plot them on a very simple spreadsheet. It's really, really easy to do. Once you actually look at those numbers, you can start looking for ways to optimize automate or outsource or to get more efficient and to get more done with less people faster. The key is to be looking at those numbers and thinking about those numbers. I'll give you a funny story that ties into this, and it's about how sometimes people are just doing work that we've always done that we don't really need to be doing. There's a woman who's making a ham for her family, and she cut the very end of the ham off before she put it into the pot and to the roasting pan. And her husband said, why do you do that? She goes, I don't know. My mom taught me how to do it that way. So we went into the living room and said to the mom, why do we cut the end of the ham off before we put it in the roasting pan? She goes, I don't know. My. My mom just told me to do it that way. So he goes, okay. So he goes into the dining room and says to the grandmother, why did we cut the end of the ham before we put in the roasting pan? And the grandmother laughed, and she said, oh, my gosh, they're not still doing it that way, are they? She goes, when I was a little girl, our roast cans were very, very small, and we had very small ovens. So we had to cut the end of the ham off to fit it in the pot. Otherwise we couldn't get it into the roasting pan. So they were just doing it the way they'd always done it. There wasn't any rhyme or reason, and they didn't look for ways to become more efficient. You need to go and examine the work that all of your teams and all of your business areas are doing. You need to look at the gross margin that those people are creating for your business. You only have three inputs in your company. You've got Your people, you have your time like days and weeks and you have money and you need to get the highest ROI of those three inputs. And often by adding more people, we get less roi, we create more work, more busy work, more meetings, more communication, more slack messages, more emails. Oh, we just need to hire somebody to help us and we become less and less efficient and such. We end up starting to charge more money to some of our customers who are getting less value and they're not quite happy. And you can create churn. So it's key to look to become more and more efficient as you grow, how to get more done with less people faster, how to get those four core metrics, revenue per employee, gross margin per employee, profit per employee, and salaries as a percentage of revenue going in the right direction for you so that you become more and more efficient as a company. And then as you scale as you need to hire employees, you hire them. If an employee came to you right now and said, I want to spend $80,000 dollars on a marketing campaign, you'd probably spend an hour and a half looking at the campaign, looking at the creative, looking at the keywords, the tags, looking at the metrics, looking at the data, trying to come up with a scenario to say yes or no to spending 80,000. Correct. But why do we let someone hire someone in a one minute decision, oh, I need to hire a manager for this or a person to do that. How much is it going to be? Oh, it's 70 grand plus payroll taxes, etc. Okay, go do it. We literally make these $80,000 decisions really, really quickly. And what happens as your organization builds out your first management team or your first real leadership team with a management team belief beneath them is people start hiring because they don't know any other way to do it. On the bad side of things, you can end up with managers who just want to build out their area, right? They're trying to rationalize their job and they want to build their department to be bigger and bigger and they start adding more reasons and to hire people, some of them are valid. But if you look at the core projects and the product that people are producing, is it creating more gross revenue, is it creating more gross margin, is it creating more profitability or is it merely creating more work? So around 18 months ago, I had someone working for me and they were a hard worker, probably one of the hardest workers that I've ever worked with, but they created more complexity and more busy work and more effort and churn in the business that I'd ever seen before. And they even at one point needed to hire an assistant because there was so much to do. And it was always stuff to do. And again, working harder, working harder, but not necessarily getting the most effective stuff done and getting the most things out the door and not looking for the simple way to do things. They created more complexity. So what happened was my revenue per employee was dropping, my profit per employee was dropping, the complexity of the business getting bigger. I ended up getting rid of her assistant, not replacing either of them in the last 18 months. And our revenue per employee has jumped. Our proper employees jumped. The pain in the ass in the business has dropped. All of the metrics in the business have doubled. We've actually doubled the size of the company in the last 12 months. And it got easier to do it because we looked for ways to become more efficient. So I urge you to take a look at those numbers, to track them inside of your business and find ways to become more efficient and more profitable. And then as you need to hire people, you can do that, but you're doing it because you're tracking those data points. So I would make those a core data point that you're tracking. And then when you do your budget for next year, you know we're coming into our budgeting season this fall for 2022. When you're looking at your budget for next year, think about your hiring plan for the next 12 months. Are you going to get less efficient or more efficient over the next 12 months? And are you growing at the right time pace or you growing in an inefficient way? Or inefficient way? So hopefully that's helpful. Love to see some of your comments. Please share this as well. It's an important data point that most people never talk about.
