Increasing Efficiency Can Be Key To Firm's Productivity, or Survival

By JEFF BAILEY
Staff Reporter of THE WALL STREET JOURNAL

The next time you're grousing with a fellow entrepreneur about ungrateful employees, chiseling customers and high tax rates, take a moment to share a happier bit of news: how you recently made your business more efficient.

In this nasty economy, with price increases so difficult to pass along, lifting productivity is often the only path to higher profits -- or just plain survival if you're in an industry in which the competition is getting more efficient.

But smaller companies are at a disadvantage. They typically lack the scale to operate in the most efficient manner. And measuring productivity -- collecting detailed data on labor and other elements of production -- is a complex and time-consuming task for entrepreneurs. Getting the next shipment out comes first.

In the daily efforts of other small-company owners, however, there are lessons to be learned. Few blockbusters, to be sure, but a bit of common sense here and there that perhaps can help make your company operate just a bit more efficiently. So, some examples follow. And you're invited to suggest your own for a future column, using the e-mail address listed below.

Want more work, not more workers? Ask for it.

Mike Faith, 37 years old, founded Headsets.com Inc. four years ago to sell telephone headsets used in telemarketing and other office settings. Sales, via his Web site and from catalogs he sends out, came rapidly, reaching $650,000 a month recently, he says.

But his payroll was rising, and he felt the San Francisco business wasn't becoming more efficient as it grew. A profit-sharing plan for his sales crew was too complicated, he realized, to spur them to learn how to handle more volume per worker. So, he made it simple: A set percentage of gross sales would be paid out to employees, meaning each worker's piece of the pie would shrink with every new hire.

"Now, they say, 'We don't need another person,'" Mr. Faith says. The revenue bonus is paid to all 11 workers, based on the hours they put in and not on individual performance, so there is a built-in incentive to help each other be more productive.

Mr. Faith's compensation system might not be right for your business. But thinking conceptually about what you really want to achieve and how to provide an incentive for employees to get there could help you find a better pay approach.

Time-stretched? Give yourself a chance to get to what's most important.

Julie Northcutt, 35, founded Chicagoland Caregivers LLC in January to provide in-home care to seniors who might otherwise have to move to assisted living or nursing homes. She and a partner handle sales, mostly to baby boomers looking after their aging parents. And they hire certified nurse aides and others to do the work.

The hiring part soon threatened to overwhelm Ms. Northcutt. It seemed she was always on the phone with a potential employee, going over requirements and work history, and was missing important calls from clients. With fewer than 20 clients, the business already seemed more than she could manage.

Her solution was simply to add a separate phone line for job seekers only, requiring them to provide certain information. She checks the recording when she's free of client work and gets back to the prospects who sound promising.

"I don't know why I didn't think of that sooner," Ms. Northcutt says. Her growth is limited only by "how many clients I can manage effectively," she says. And now she guesses she and her partner could manage 50 clients without seeing service quality suffer.

Putting a priority on certain tasks might take more than another phone line. But a little thinking about managing your day so that you spend it with the people most important to your business could be a big help.

Is there a smaller, more profitable business hidden within your company?

Growth isn't always the way to higher productivity. Larry Scott, 52, has run American Imprints Corp., Tinton Falls, N.J., for 16 years. And he once had 12 employees and close to $3 million in sales, helping companies design and procure promotional products such as beach towels, T-shirts and coffee mugs.

As cost pressures swept his industry, however, Mr. Scott found himself cutting employees and focusing on fewer clients, buying merchandise through fewer suppliers, and making far fewer sales calls on potential new clients. He works smarter. "Infinitely," Mr. Scott says.

Now, it's just him, and he contracts out artwork and other jobs he formerly employed people to handle. Sales are down to about $1 million. But he's nicely profitable.

Even in small companies, sometimes scale matters.

John Lewyta, 49, is president and an owner of CHL Industrial Services Inc., Cornwall, N.Y., and his firm tests oil samples from big industrial equipment to monitor the need for maintenance and repair.

CHL gets paid per sample, and there is well-funded competition. So, Mr. Lewyta swallowed hard less than two years ago and CHL invested more than $500,000 to build a highly efficient lab and spent more than $50,000 developing software that tracks samples from customer to lab and back again, preparing reports that highlight the samples that reveal machinery problems.

It was a huge investment for the lab business, but it allows it to handle up to 60,000 samples a year with just five workers on a single shift -- an increase in volume of between 50% and 75%, Mr. Lewyta says.

Maybe you can afford some sophisticated productivity measurement.

Remington Associates Ltd., Schaumburg, Ill., employs 30 people and provides computer-security services to companies. It always has had a productivity yardstick: the percentage of a worker's 40-hour week that is billable to a client.

But, says Jeremy Simon, director of engineering, "It took a lot of effort to get that number." It was a series of hard-copy work orders, timesheets and invoices. And each worker was spending one to three hours a week compiling the information, hours lost to billable jobs.

Last December, Remington installed some software that tracks projects, workers' time, billing and even calculates profits. "We're better informed and don't go to so much effort to know where we stand," Mr. Simon says. Billable hours are up to about 82% of hours worked this year, he adds, from about 70% last year. Some of that is due to more projects. But some is due to better information and management.