Breakfast with Pierre Cléroux, Vice President, Research and Chief Economist at BDC
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The document discusses the importance of measuring productivity for businesses. It notes that most Canadian small and medium enterprises do not formally measure productivity, but that those who do see benefits like higher profits, increased revenues, new business opportunities, and improved competitive positioning. Specifically, businesses that actively measure productivity see sales increases of 5-20% in the next three years. The document advocates for businesses to measure productivity in order to reduce waste, invest appropriately, and respond effectively to changes in order to maximize revenue from available resources.
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Breakfast with Pierre Cléroux, Vice President, Research and Chief Economist at BDC
- 1. Let’s Talk Productivity Pierre Cléroux Chief Economist, BDC October 19th, 2016 – Milton, ON
- 7. How much revenue do you create with your resources?
- 8. 21%No metrics 33%Informal metrics 37%Formal but partial metrics 9%Global metrics Most Canadian SMEs don’t measure productivity SOURCE: BDC, “Survey on the Productivity of Private Companies”, July 2016, n=1,504 respondents.
- 9. Benefits of measuring productivity include higher profit Increased profits New business opportunities Improved quality of goods/services Increased revenues Better competitive positioning 33% 22% 22% 20% 17% SOURCE: BDC, “Survey on the Productivity of Private Companies”, July 2016.
- 10. 66%Businesses who actively measure productivity 5-20%Sales increase in the next three years 19% 14% 33% 20% 10-19% 5-10%
- 11. Export
- 13. $ 11,210,000 2015 3261: Plastics product manufacturing 40 $1,730,000 $1,100,000 $1,040,000$132,000
- 14. CHECK ENGINE
- 15. Reduce Waste
- 17. Invest
- 18. Ontario’s economy is strong 2.6%Economic growth in 2016 18%Automotive export growth in 2016 7.2%Retail Sales growth
- 19. Measure Respond
- 21. Questions?
- 22. bdc.ca | 1-888-INFO-BDC BDC BDC_ca BDC Thank you. Pierre Cléroux Chief Economist BDC
Editor's Notes
- Hello, welcome, etc.
- Imagine a small-to-medium sized business located here in XXX.
- For ten years, they've manufactured plastic coat hangers made of recycled materials. Despite having an engineering background (not a business background), the owners, a couple named Tom and Cathy, have done fairly well building up the business and making it profitable. They’ve amassed a sizable staff and they’re proud to work hard, ensuring the business keeps going so all of the employees receive their paychecks to support them and their families.
- Lately, Tom and Cathy have noticed that though revenues continue steadily, the business’ profit margin is starting to slip. They wonder why this is happening. But they’re also unsure of how to discover the cause of profit margin slip. Caught in the daily grind, Tom and Cathy decide to continue with business as usual. Within six months, though, that slight drop in profit margin increases. And as profits fall, suddenly their sure and steady revenues start to fall, as well. Tom and Cathy’s competitive advantage and positioning erodes as their competitors snatch away some of the best customers in the space. Then, the worst arrives: Tom and Cathy have to start considering laying off some of their employees. By the end of the year, they’re having to think through even more dire options because… They have slipped to the bottom of the trusted supplier list. They can no longer afford to hire the cream of the crop. Their quality standards start slipping. And the competition is approaching them with offers to buy the business.
- Faced with the demise of the business, the owners start to wonder: when did it all go wrong? What could we have done a year ago to prevent this from happening?
- Tom and Cathy are not alone. They are not the only entrepreneurs experiencing this reality. BDC—Canada’s only bank exclusively dedicated to entrepreneurs—hears this story from coast to coast when we come in to help our clients not only survive, but to grow. The answer to the question these owners are asking—“What could we have done?”—can be simply stated as this: Breathe in. Take a hard look at your productivity practices. Then… Measure and Respond. Measure… and respond.
- Let’s begin by talking about Measuring. What could you possibly measure that could have a real and marked impact on revenues, profitability, and your business’ chance of survival? We have just released a research report this week where we surveyed more than 1,500 Canadian entrepreneurs to understand how they approach productivity in their companies. The findings were clear and sobering: By measuring a business’ PRODUCTIVITY, entrepreneurs can get an accurate picture of what’s either causing—or harming—their companies. As you may be aware, productivity is a measure of how efficiently entrepreneurs use input or elements that fuel the production process and measurement includes assessing the efficiency of input like labour, equipment, technology, and processes. Obviously, the more productive a business is, the more efficiently those inputs create revenue. And the more efficiently they create revenue, the greater the business’ profit margin.
- However, here’s what really surprised us: 21% of Canadian SMEs don’t measure productivity at all. 33% use a set of unreliable, subjective, informal metrics to measure productivity. 37% use a more formalized system for measuring, but they only partially measure productivity. Of all of the respondents, only 9% of Canadian SMEs use a systematic, complex, formalized set of metrics to assess productivity. Just 9%.
- So, what benefits do the 9% of the businesses who actively measure productivity in a formalized, robust way enjoy? They’re not negligible: Businesses who measure productivity report improved quality of goods and services, new business opportunities, and… 33% increased profits. Those profits are what keeps the business going… ensuring employees stay on the payroll… and families are taken care of… and the charities and social impact causes supported by these businesses continue to thrive.
- Businesses that take productivity seriously don’t just experience higher profits, though. They also experience overall business growth. 19% forecast 20% or higher sales growth over the next three years. 14% forecast a 10-19% increase 33% forecast 5-10% increase That means that 66% of the businesses who actively measure productivity see between 5 and 20% sales increase in the next three years.
- For many businesses, a substantial portion of this growth is attributable to their ability to export. By exporting, they are participating in a larger market by delivering their goods and services to international trade partners like the United States, Asia, and the rest of the world. This isn’t easy, though… especially considering the fact that our most important trade partner, the United States, has one of the highest productivity rates in the world. It takes high productivity ratings for Canadian companies to establish a competitive advantage strong enough to export to the United States. Many of our exporters already do it, but we need more Canadian companies to take the export plunge.
- So, if our entrepreneurs, Tom and Cathy, had taken steps to measure their business’ productivity, they could’ve actually grown their business by increasing revenue and could have even improved their profit margins. If you recognize this as a missed opportunity… you’d be right. But what keeps someone like Tom and Cathy from measuring productivity? Most small to medium sized business owners don’t do it because— They think it will require too much work to measure their productivity—and they’re busy enough as it is. They think it will cost too much money to measure productivity. They don’t see the benefits of measurement. They believe whatever steps needed to improve productivity would be too difficult or expensive to take. These are the real reasons behind that 9% statistic.
- Helping Canadian companies improve productivity has been top of mind at BDC for several years. We have a solid financing and consulting offering around operational efficiency. We also offer free resources such as e-books and free webinars to entrepreneurs who want to improve impact. This year, in collaboration with Statistics Canada, BDC has created an easy-to-use, completely free online productivity tool. It’s available now on our website, so we can all take the test today and break the Internet. How does it work? It’s easy. By just entering six data points into the system, any entrepreneur in the country can receive measurements of their business’ productivity. Every company in Canada is in our system, so we can benchmark your business’ productivity numbers against other businesses in your industry sector. Sandwich shops aren’t measured against drill manufacturers. They’re measured against other small restaurants. Tech companies are measured against their peers. So are professional services and any other company that’s listed under an industry code. With this tool, SME owners can get a sense of their productivity and find out how they compare with their competitors. The tool shows you four indicators: Revenue per employee Profit per employee Level of labour productivity Capital productivity The tool highlights which numbers indicate the strength of the business and which indicate opportunities for improvement. Again, the tool is both easy-to-use and free.
- If you take your car to the shop and the mechanic tells you you’re low on oil, but you do nothing with that information, in the near future you’re going to find yourself in a useless, dead car in the middle of the highway. In the same way, businesses who measure their productivity must take steps to respond to that information so they can increase their competitiveness Remember, it’s not enough to measure. You have to respond, too. Of course, response requires both effort and investment. If you want to get more oil in your car, you have to drive to the mechanic and wait… and pay to have it done. But the cost of time and money is inconsequential to the benefit: continuing to have a car that works. Responding to productivity measurement will require time and money… but as in our car metaphor, it’s worth it. And, typically, requires less than most SMEs imagine.
- How do industry leaders improve their productivity scores? In our research, businesses that continue to grow consistently focus on discovering areas in their businesses where they can reduce waste. This means, they do what’s necessary to identify inefficiencies and implement new methods to make optimal use of their time and resources—whether financial, human, or material. For many businesses we’ve worked with, reorganizing the workplace has had a profound effect on productivity. For others, it had to do with rethinking their customer experience and removing those actions, steps, and processes which did not have a direct impact on a positive customer experience.
- When we asked successful entrepreneurs what they do to have the most marked effect on productivity, they tell us they train their employees. By equipping employees so they can do their jobs better and more efficiently, they positively impact productivity. Of course, employee training costs both time and money, but in the end, as we saw with the earlier statistics, business who invest in employee training increase revenues, profits, and the likelihood the business will both survive and thrive. Streamlining processes keep an SME more agile and efficient, helping it maintain its competitive edge. Once Tom and Cathy had assessed their business’ productivity and found areas to improve, they could’ve taken their shop employees and trained them on a new, more efficient process creating new molds… or a smarter means of shipping products to customers.
- Investment is also a key component in improving productivity. Today, technology changes so rapidly that to maintain any sort of competitive edge, small-and-medium sized businesses must continually invest in new and more efficient technologies. These include new equipment, software, and robotics. The idea of investment can be scary to many business owners because it usually requires spending money. But it doesn’t always have to break the business’ bank—or credit line—to invest in one or two technological advancements that will improve the business’ productivity. These relatively small technological adjustments and improvements can actually have a profound effect on the company. What cost X amount of dollars can so improve revenues—and profit margins—that the technology pays for itself within a year or two or even sooner. And the profits the technology reaps help expand the business, pay for employee salary increases, or enlarge the staff.
- Many entrepreneurs are hesitant to invest because they question the current stability of the Canadian economy. As an economist, I spend most of my time—besides talking to groups like this—studying both international and Canadian economy trends. I can tell you that right now is not just a good time to invest… it is an excellent time to invest. In 2015, 41% of Canadian businesses outperformed the economy In Ontario for example: Economic growth in 2016: 2.6% Automotive export growth in 2016: 18% Retail sales growth: 7.2% The present state of the Canadian economy is strong… and the future looks bright. We’re on an upswing. And those who take advantage of this upswing sooner, rather than later, will benefit much, much more. Now is the best time to invest to reap the greatest rewards. Tom and Cathy would be well served to invest in a software upgrade—the one they’ve been avoiding—that would help their sales team track contacts and potential clients more efficiently. This would mean their sales people would have to spend less time sorting through both paper and digital files to track contacts and more time actually talking with them.
- Hopefully, by now, you—as a Canadian business owner—recognize the importance and value of being aware or your business’ productivity rates. So, what can you do? I encourage you to—as soon as you can—go to BDC’s website and take advantage of our online productivity tool. It really is as easy as inputting six data points. And it’s truly free. Once you get your numbers, consider your business and where your productivity could improve. Think about places you can reduce waste or invest in technology. As you consider this, contact us at BDC. We work with SMEs in every sector, all across Canada providing both consulting and financing to make it as easy as possible for you to take the small steps necessary to improve your business’ productivity.
- Having a complacent, “good enough” mentality isn’t good enough for SMEs. In fact, “good enough” usually means “good enough for now” but “not good enough” for the near future. Good enough is actually bad. That’s because competition is increasing and profit margins naturally get thinner, without any actions taken. But when businesses measure their productivity—and respond to those measurements—they can continue to grow, increase profit margins, and continue as a business, supporting their employees and communities. If a year earlier Tom and Cathy had measured and responded, they wouldn’t have to think about laying off employees or selling the business. It doesn’t take much. I hope you use our benchmarking tool. (I also hope our website can take all the traffic and we don’t break the Internet by the end of the day). I hope you take the steps necessary to measure and respond so your business can continue for the next year, ten years, twenty years, and beyond.
- [heads into the Q&A]
- Thank you.