Have you ever noticed that in business, you see small, nimble companies that can operate with amazing efficiency, while larger companies sometimes have trouble staying productive?
Whether mowing grass, laying asphalt, sealing parking lots, or spraying fertilizer, a small company, running a single crew and led by a single owner/operator can get an amazing amount of work done in an average day, week, or month.
With Size Comes Complexity
But most of us have noticed that as you add more and more workers, it gets harder to match that high level of work-per-crew member. You may have even experienced this in your own business as you’ve grown?
There may be many causes for this decrease in efficiency, including:
- Motivation could be a factor, as crews of hired workers led by hired foremen will rarely drive themselves as hard as a crew led by the person whose very livelihood depends on efficiency.
- Confusion with priorities and decision making can also play a part when the owner, representing the “bottom line” can’t be on site to make snap judgement calls on unexpected issues.
- Inefficiency can also be a factor, as a company’s infrastructure fails to properly plan for everything from equipment scheduling, to materials delivery, to things as simple as the order in which jobs get completed and the routing of crews between sites.
Any or all of these factors may be limiting a company’s efficiency. But when it comes right down to it, there may be a larger factor at play here, something universal that contributes to issues like Motivation, Confusion, Inefficiency, and many other limitations you might see.
The Law of Diminishing Returns
The real issue may be that your company is running up against something an economist might call the “Diminishing Return on Labor”. The idea of diminishing returns is a widely-accepted truth in all kinds of businesses. According the Encyclopedia Brittanica:
Diminishing returns, also called law of diminishing returns or principle of diminishing marginal productivity , [is an] economic law stating that if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.
In other words, your business is made up of many different “Factors of Production” (Resources that enable you to produce), and for your company to operate efficiently at a higher output, you need ALL of them to function at a higher level.
Your front-line workforce (Labor) is a factor of production, as is your equipment (Capital) and facilities (Land). These are the classical economic factors of production that people generally understand on an instinctive level. But other things, parts of your business you don’t normally associate with production work also function as factors of production. These include your back-office staff, your book-keeping infrastructure and technology infrastructure, and even your own leadership.
And if you add resources to increase only one factor of production (Labor for example), without adding to the others, you’ll eventually reach a point where each added unit of labor becomes less and less effective.
The Potential For Managerial Bias
As your company grows, it’s not uncommon to think that the main thing controlling your ability to produce is having sufficient crews and equipment and base of operations. But by simply adding crews and machines, any company will reach a point in growth where their back-office staff, their infrastructure and/or their leadership will be unable to Effectively support their production. And when that happens, productivity suffers.
Sure you might get more done with every crew or machine you add, but unless they are adequately supported by a robust organizational structure, their Incremental contribution to your productivity will be less and less, potentially holding you back from achieving your production goals.
A Simple Example
Let’s go back to the example of a one-crew company, run by a highly-motivated owner/operator. In this small company, this owner can perform all the functions of a complete office staff, simply by the extreme exertion of his/her own labor.
They can be the estimator, the sales-leader, the bookkeeper, the crew foreman, the logistics expert, the materials buyer, the chief mechanic, and even the collections agent.
But can this same individual maintain this level of involvement and remain effective if the company doubles in size? What if they double in size again next year and the year after that? A time will come when the answer has to be “No”.
Our Best Guess.
It’s our (completely unscientific) opinion, based on simple observation that many (maybe even most) companies in our customers’ industries are operating with a relative skeleton staff in their support functions and trying to grow primarily by adding equipment and labor for production work.
We’ve also seen a fairly widespread aversion to systematic back-office processes and a resistance to adopting technology to help gain efficiency.
But The Law of Diminishing Returns informs us that if these supporting resources aren’t available, a company will lose efficiency with growth. And of course losing efficiency will make it harder for them to reach their goals.
How About You?
Does this sound like anything you’ve seen in your company? Do you see your colleagues or competitors being limited by an uneven investment in their growth? How have you overcome this kind of problem?