Why labor standards are the key to hitting performance targets

by | Dec 1, 2017

Today, nearly any article you read about labor or the workforce points to the decline in productivity. It’s a growing concern that continues to impact the competitive and financial performance of businesses around the world. While there are a number of factors that contribute to lower productivity, I believe companies struggle with the issue because they’re unsure of how to effectively measure and manage it. A big part contributing to this lack of understanding is the confusion of the following four terms that regularly prevent companies from improving the productivity of their workforce.

    1. Labor standardsAs I have written about before, a labor standard is the average amount of time it takes the average worker to perform a task correctly. That last word in the definition (correctly) is important because a properly constructed standard defines the steps in a task, saying “this is what the right way looks like.” It gives something concrete to set performance targets. It also helps tell companies if their targets are unrealistic. Labor standards provide a way to identify under-performers (those producing less than they should) and over-performers (those doing more than expected). The issue begins when people start to confuse labor standards with different performance-related KPIs like those outlined below.
    2. Performance metrics – These are backward-looking KPIs that evaluate how productive a worker or group of workers actually were over a period of time. Let’s say your company made 120 widgets per hour over the last quarter. To find out if that’s good or not, a labor standard that indicates how long it should take to make a widget is required. For example, if the labor standard for making a widget is 25 seconds per widget, you would know your company is underperforming (120 widgets per hour is 30 seconds per widget); you should be producing 144 widgets per hour. You can then dive into the problem to uncover why productivity is lower than it should be. On the other hand, if your company is producing 150 widgets per hour it’s over-performing. The reason could be that the team has found a more efficient way to build widgets, whereby the old process should be changed and the new standard set. More times than not though, staff are taking short-cuts in the process by skipping steps or doing things incorrectly, which impacts product quality as well as customer service and safety. Though they may be producing six more widgets than required, if 15 do not meet quality standards, the cost outweighs the benefit.
    3. Performance targets – Here we have a forward-looking metric that represents the performance you would like your workers to achieve; in effect, a set goal. If our widget manufacturer sets a goal to increase performance by 10% and produce 132 widgets per hour this year, how are they actually going to achieve it? In real life, organizations often set goals and just expect managers to hit them (as you’ll see below when I discuss “performance standards”), but it doesn’t usually work. The right way to set performance targets is to make the labor standard the real target. The company’s goal should therefore be 144 widgets per hour. Moreover, this example highlights another problem with performance targets. The original 10% improvement sounds great, but the company is actually setting their goal too low.
    4. Performance standards – Next, we’re looking at the conversion of a performance target into an expectation. In the previous point, I mentioned that too often companies set goals and expect managers to hit them. Performance standards embody this approach. When companies convert a target into a standard, they are baking the goal into their labor plans which is a recipe for failure. Imagine planning a road trip from Chicago to Denver (1,000 miles) in an awesome 1966 Corvette. A ‘66 Corvette gets 13.5 miles to the gallon (mpg). Instead, you plan to get 15 mpg on the trip. Why would you do such a thing? Maybe you don’t know what gas mileage your Corvette should get. Maybe it’s easier to do the math if you round up to 15 mpg. Or maybe you just hope to squeeze extra performance out of the engine. Regardless of your reasoning, you’ll be sorely disappointed when you run out of gas 100 miles short of your destination or have to spend more than what your budget was for gas when you really get 13.5 mpg. And, I have seen similar reasoning when organizations set performance standards only to be disappointed when their workforce does not achieve their productivity goals.

The biggest obstacle for businesses looking to improve the productivity of their workforce is the belief that performance standards are more effective than labor standards. Instead, organizations that are successful at improving productivity recognize that performance metrics and labor standards provide the optics necessary to set realistic performance targets.

As we’ve seen, performance targets, are just that – targets, and represent the goal workers should strive to achieve. If the target is realistic, there’s no issue, but if the target is far-reaching how can an employee really achieve it? Labor is often underfunded and goals are consistently missed. Conversely, if the target is too low, performance looks good but labor is being overfunded. This is why operators need to build labor standards. They provide the measure required to get the work done and provide the service (and consistency) customers expect.

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