July 7, 2024
*** Watch Jason review these topics live: YouTube Video Link ***
Running a business is no small feat, and one of the most critical yet often overlooked aspects is the documentation of your business processes. Many of the ways companies struggle are due to inefficiencies, high employee turnover, and a lack of standardization, all of which drain valuable resources. With a documented playbook and a systems-focused culture, these risks can be mitigated and a high return on investment (ROI) is inevitable. In this overview, I’ll explain why you can’t afford not to implement a solid employee training program.
Three KNOWN expenses that you choose to ignore:
1. Employee turnover: Also called your “Churn Rate”, losing a key employee because they don’t know how to perform their job well, can be incredibly costly. According to Forbes in March 2023, the cost of replacing an employee can range from 50% to 200% of the employee’s annual salary. The U.S. Bureau of Labor Statistics estimates that the average employee turnover rate across all industries was 3.5% as of February 2024, however, small and midsized businesses often experience higher turnover rates, averaging around 12% annually. This discrepancy highlights the unique challenges faced by smaller organizations in retaining talent. Have 100 employees? Expect to lose at least 3 – 5 teammates this year. If your churn rate is over 20%, you have a problem and need to address it ASAP.
Focusing further on direct hiring costs, how expensive is it to find and onboard a new employee? It might not sound like a lot off the top of your head but the cost of advertising, interviewing, and training a replacement adds up quickly. And if the new hire leaves, guess what, your training investment without a written playbook for that role just doubled. What’s more, unless you have been living in Fiji, you know that there are currently more jobs available than people to staff them. If you are short-handed, you will be paying your current staff 50% more for their OT hours and at some point, they will be upset about covering which will result in more loss. Churn ‘n burn…
A real-world example when hiring a $75k employee
- $250 = Job board ad
- $100 = Social media paid ad
- $18,750 = Recruiter fee
- $500 = 10hrs x $50/hr Manager interview time
- $200 = Background or Drug testing
- $100 = Company welcome swag
- $1650 = 33hrs x $50 Manager training (per Indeed)
$21,550. Total!
2. Decreased quality: Inefficiencies and errors due to poor training can cause missed sales opportunities, poorly made goods, or incorrectly. For example, inaccurate data can lead to losing potential leads and misjudging market demands, which translates into significant revenue losses (Data Ladder, 2024).
In my Lean Six Sigma efficiency certifications, we would call this the Cost of Poor Quality or COPQ. COPQ includes costs related to rework, scrap, warranty claims, and lost business. For example, if a company produces 10,000 units monthly with a 3% defect rate, reworking 300 units at $50 per unit costs $15,000. Additionally, scrapping 50 units at $100 per unit costs $5,000, and handling 20 warranty claims at $500 each costs $10,000. Therefore, the total monthly COPQ is $30,000, translating to $360,000 annually
3. Employee satisfaction: Jason, did you have to use today’s cliché phrase? Yes! When your employee is not feeling good about doing their job well (especially a new hire), they likely won’t say anything. “Quiet quitting” means your employee keeps getting paid but mentally checks out. If you had to perform a job without proper instructions and felt like you were a failure each day you came to work, would you keep doing it? No! Employees who have access to well-documented procedures feel more supported and confident in their roles. As stated by Jobvite in Feb 2024, having a clear understanding of job expectations and processes can significantly reduce the frustration and uncertainty that new employees often face.
If your key employee is responsible for generating $100,000 in sales annually but quietly reduces their effort by 20%, the company loses $20,000 in potential revenue. They can blame the result on any number of items however effort matters and satisfaction drives effort.
Four HIDDEN costs that you are ignoring
1. Aggregated revenue: Consistent, compounded growth across every facet of your company will lead you to profitable growth. It works when investing and it works in business. By continuing to document HOW you perform every step of your business, you can actually fine-tune lagging areas and easily remove waste. Most owners focus on increasing high-level numbers such as total sales or profit margin, but when you improve many marginal gains, amazing results are possible. This is done by building a team that all follow the same system that has proven successful and then looking for ways to continuously improve it. What can a mere 10% gain across each area of ONLY your Sales department do for your revenue?
Metrics to increase Current 10% Improvement
- Leads per year 4000 4400
- Conversion rate 25% 27.5%
- # of Customers 1000 1210
- Transactions per 2 2.2
- Average sale $ $1,000 $1,100
- Total revenue $2,000,000 $2,929,200
- Profit margin (Hold) 25% 25%
- Total profit $500,000 $732,300
- Increased revenue - $929,200
- Percent increase - 46% !!
2. Tribal knowledge: Intuitively known or easily accessed knowledge for an experienced employee can be foreign to a new hire. They don’t know what they don’t know. It can take a new employee several months to reach the productivity levels of their predecessor. During this time, the company may experience decreased efficiency and output or even costly mistakes. When this type of unique information is not captured and accessible, even running this week’s payroll could be a problem.
What’s worse is the often-hidden cost of an existing, tenured employee who is not covering their wage because they aren’t following your company’s best practices. Work in an industry with strict regulatory requirements? Inconsistent practices can lead to non-compliance, which may result in hefty fines and legal penalties. If your whole team isn’t collaborating to operate at a high level across the board, dollars are flowing out of your bottom line. Even small mom-and-pop businesses will have a key employee who is the only one who knows how a certain task is done. Why risk it?
What if you couldn’t properly… Cost to your company
- Process your quarterly taxes Emergency temp CPA, IRS penalties
- Pass an OSHA safety audit Hefty fines or a temporary shutdown
- Ship a high-dollar machine Loss of your best customer
- Help an injured employee Permanent employee injury, W/C case
- Verify out-of-state client’s credit Stolen merchandise with no recourse
3. Client satisfaction: An often-overlooked cost is the effect that an untrained employee will have on your client. If the role is customer-facing, your team might not be perceived as a reliable expert. If they are back of the house, they may manufacture a product incorrectly or deliver poorly tasting food, resulting in customer dissatisfaction. The indirect costs (that you will likely never know about) associated with new hire underperforming are unquantifiable.
Unsatisfied customers tend to share their negative experiences more frequently. If each dissatisfied customer dissuades five potential customers from making a purchase, the long-term impact on revenue can be substantial. For instance, if 500 dissatisfied customers each prevent five others from purchasing, the potential loss of 2,500 customers could result in a revenue loss of $2,500,000 annually (assuming each customer contributes $1,000 annually).
4. Competitive advantage: Benchmarking is all about setting goals for your team based on what your competitors are up to. It's like peeking over their shoulder to see how they do things and then doing it better. By studying the practices and standards of businesses similar to yours, you can match or surpass the industry norms and gain a competitive edge. This approach impacts key areas of your business, like employee salaries, customer services, and even employee morale. In Oct 2023, Business News Daily (BND) put it simply: "To stay ahead, you need to know what your competitors are doing. It's not just common sense; it's essential.”
Watching what your competitors are doing is a waste of time though, if you aren’t integrating the knowledge into your strategy process improvement plan. In my systems documentation programs, I help you to prioritize what to document and when. Having a wider scope of knowledge not only about what your team is doing but your competition gives you a lot more areas to select from.
Companies that fail to standardize their best practices will likely lag behind competitors who have already optimized their employees’ actions. This can result in a loss of market share and reduced profitability as your competitors offer more consistent and higher-quality products and services than you do. I’ll let you fill in the blanks here as to what it will cost your organization.
Conclusion
Investing in process documentation and a systems-focused culture is not just about creating manuals; it’s about building a foundation for long-term success. The initial investment in my 3-month Systems Success program is far less than the recurring costs of inefficient processes and high employee turnover. By documenting your processes, you can save money, improve efficiency, and enhance employee satisfaction, ultimately leading to a higher, often well over 3X ROI.
For more information on how my Systems Success program can help your business save money and operate more efficiently, visit www.henderberg.com.
By taking this crucial step, you can transform your business operations and set the stage for sustainable growth and success. Contact me today to discuss your situation and learn how we can guarantee a great ROI when we collaborate.
