Is 1% a Big Deal? Do the Math…

Is 1% a Big Deal?  Do the Math…

Of course the answer to this question can vary significantly, but far too often, ideas that are supposed to change things by 1% are dismissed prematurely. Why does this happen?

To most people, the number 1 is a pretty small number. If you have to make an effort to change something and you expect the result of that effort to yield a 1% improvement, a common gut reaction is that it’s probably not worth the effort. For motivation, justification, and acceptance of any risk that comes along with a change, people naturally want to see their blood, sweat, and tears yield an attention grabbing improvement:

  • "Sales increased by 20%"
  • "Web traffic increased by 50%"
  • "Lead times were slashed by 25%"

Those statements sure sound a lot better than "Utilization increased by 1%". [Did you just yawn?]

You Have an Idea

I spend a fair amount of time working with business leaders on project justification exercises, where the decision to move forward is often based on whether or not project benefits exceed the cost to complete the project. It is not uncommon to hear a President, VP, or even a CFO respond to a business process improvement idea with the statement, "That would only improve things marginally". I usually ask, "Would it improve things by 1%?" If their answer is "Yes" [it usually is], then I ask them to humor me and do the math.

Do the Math...

Here's a real-world example from a recent discussion with an executive at a professional services firm:

The product that most professional services firms sell to their clients is a person's time, which is typically sold at an hourly rate. I was discussing a $50,000 project with this executive. The proposed project would change the way that they assign their 50 resources to projects. After the proposed change is made, we agreed that their employees would be able to spend an additional 30 minutes each week on billable projects. This would have the effect of increasing their utilization rate by a little over 1%. [Did you shrug your shoulders too?]

Most individuals at this firm are salaried which equates to roughly 2,000 potentially billable hours each year and charge a rate of $150 per hour. The firm’s average utilization rate is 70%.

So, is a 1% increase in the Utilization Rate (about 25 minutes per week) a big deal?

  • Before 1% Increase: Annual Revenue is $10,500,000 (50 people x 2,000 hrs x $150/hr x 70%)
  • After 1% Increase: Annual Revenue is $10,650,000 (50 people x 2,000 hrs x $150/hr x 71%)

A Utilization Rate Increase of 1% would increase revenue by $150,000 in the first 12 months! That's an ROI of 200% in just the first year! This 1% change also drives the company’s 10% net profit up by 15%.

Don't Forget to Measure & Publish Results

Using a similar process, you can easily do the math on your own ideas to improve your company's Key Performance Indicators. Once you decide to move forward with a change that targets improvement in a Key Performance Indicator, don't forget to measure the impact of the change (before and after).

Although it's a lot easier to measure things when measurements are automated and the results are easy to interpret and share [I’m thinking of a SharePoint Dashboard, but that’s what I do for a living], you can certainly keep track of measurements in other ways – try manually updating a Microsoft Excel spreadsheet and generating a pivot table graph if you don’t have Microsoft SharePoint. With SharePoint, everyone in the organization can view the real-time status of the Key Performance Indicator from their web-browser or perhaps on a LCD screen mounted in a break room or on the shop floor. If you don’t have SharePoint, you could email the results to everyone in the organization and/or print and post them in common areas of the office or on the shop floor where everyone will see them.

One reason I am a big fan of implementing an automated dashboard is that the process of keeping a manual dashboard up-to-date can be time-consuming and too often, other “high-priority” tasks pop-up which take precedence over maintaining the dashboard. I think you will also find that over time, the frequency of updating the Excel spreadsheet, sending out an email, and printing & posting results tends to decrease. Soon after you finish a reporting cycle, it’s about time to start updating the spreadsheet again.

The Conclusion

It is pretty simple to show how a “measly” 1% improvement can have significant impact on your business. Having a culture of continuous improvement, driving, measuring & publishing these improvements, can truly drive huge benefits.


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