When the economy faltered in response to widespread shutdowns in states and countries worldwide, viability suddenly became the challenge at hand for businesses in nearly every industry. Now, as leaders move forward and stabilize their operations, operational efficiency can serve as a compass to guide organizations steadily through crisis response and into recovery.
As a measure for operational efficiency, the Operational Efficiency Ratio (OER) allows executives to take the pulse of the organization’s overall health and operational sustainability. Calculated by dividing expenses by revenue, it shows how much it costs a company to earn a dollar of revenue. When trended over time, OER shows whether expenses are increasing faster than revenue, and it helps executives summarize their company’s cost structure. OER also gives leaders a sense of how their business is performing relative to competitors.
When plotted out over multiple quarters, the OER metric speaks volumes about what is going on in the business. A hospitality company, for example, might have an OER that was reasonably flat before the COVID-19 pandemic hit; that same company, which is operating in an industry that was hardest-hit by the pandemic, is likely to see OER soar when considering the last few months.
While many organizations are uncertain about how OER will look as they emerge from COVID-19, an aligned organizational focus on driving efficiency (measured by OER) can ensure a more durable recovery.
Guided by a holistic operational efficiency review, conversations and decision-making anchored in operational efficiency can help leaders target choices that will serve the organization better than across-the-board cuts, which irreparably harm employee morale and company culture. North Highland's operational efficiency reviews apply process improvements as a critical component. This approach helps leaders fix any cracks in the organization's foundation to deliver sustainable changes, ultimately multiplying positive impacts.
Organizations can use the operational efficiency review and a focus on improving OER to enable organizational performance throughout and beyond crisis recovery with three critical steps:
1. Build leadership alignment: Like any efficiency improvement, improving OER must have the alignment, sponsorship, and buy-in of leaders. Executives need to stand united behind the importance of efficiency, and model that to the rest of the business. Setting an enterprise-wide OER target as the organization’s shared success metric helps ensure that leaders are acting in the best interest of the entire organization, rather than pushing siloed or competing goals forward.
Once everyone has bought in, the company needs a single source of truth, and OER is a consistent metric that leaders can consistently track and report. Transparency, cultural support and messaging, communication, and reinforcement will play a critical role in ensuring that the organization is working together toward this goal.
When aligning the organization around an efficiency target, widen your focus beyond cost to consider shared organizational goals, including relationships with key constituents such as employees, customers, partners, and more. You will likely find that improved and consistent customer experiences will power top-line growth, ultimately driving a more favorable OER.
2. Identify root causes: By examining the organization's financials and operational metrics, it is possible to identify the key drivers of the company’s performance—and then take it a step further. Pull processes apart to their most fundamental levels, asking “Why?” multiple times, to uncover the critical functions that are driving performance. Improving performance and processes at their most fundamental level will address any underlying systemic challenges for sustainable efficiency improvements.
3. Evolve your approach as the organization stabilizes from COVID-19: Our operational efficiency review starts with a top-down analysis to identify the most critical processes and enable short-term decisions. Then, we apply a bottom-up approach, engaging experts to identify, quantify, and implement improvements over a more extended period. As you work your way through the near-term impacts of COVID-19 and the post-pandemic future comes into focus, an OER review can provide critical insights into what’s most important to your organization in terms of performance and driving bottom-line improvements.
North Highland’s operational efficiency review captures three levels of improvements to help organizations prioritize opportunities in and beyond crisis recovery.
- “Just go do them” improvements: These are the improvements, observations, and findings that can and should be acted on immediately. In one instance, we helped a client uncover efficiency improvements that resulted in over $2 million in savings in under 10 minutes.
- In-year improvements: These are the improvements where the benefits will be realized within 12 months.
- Everything else: These are the longer-term improvements that should be prioritized in alignment with your three or five-year strategy.
In our experience, the most meaningful opportunities are often found in-year. For example, in working with a telecom provider, we identified improvements totaling $88 million, with $28 million of those improvements being in-year. For this organization, monthly bills were a critical element driving operational performance. We identified a two-cent improvement per bill which, when multiplied across all bills, amounted to significant, sustainable improvements.
That’s just one example of the power of OER—a metric that, when optimized, yields dividends month after month. Blanket cost-cutting measures fail to address the root causes of inefficiency and don't have the same impact. For example, across-the-board workforce reduction efforts fail to address underlying inefficiencies and will invariably require you to hire people back in the long run.
Following an operational efficiency review, you may not want to pursue all the identified efforts due to capacity, budget, and other feasibility challenges. Still, you can put them on your short and long-term roadmaps to ensure that you align resources against efforts, securing the future of your organization as you move past immediate viability challenges into recovery, and beyond.