Industry Magazine Commercial Kitchen Spring 2016 | Page 28

THE COST OF A BAD HIRE

Greg Crabtree
Author of Simple Numbers, Straight Talk, Big
Profits, is a partner at Crabtree, Rowe & Berger,
PC, an accounting firm focused solely on the
needs of entrepreneurs, helping them build
the economic engine of their business.

THE COST OF A BAD HIRE
Leveraging the Labor Efficiency Ratio

BUILDING a great team is arguably the single biggest factor
in running a successful business. We have all heard stories about
how we should terminate the C players or “hire slowly, fire quickly”
concepts. Speakers throw out numbers from studies about the
cost of a bad hire but it is hard to believe an academic study. I
had always dismissed how big the cost was until I had my own
experience with undeniable measurement.

“I HAD ALWAYS DISMISSED HOW BIG THE
COST WAS UNTIL I HAD MY OWN EXPERIENCE
WITH UNDENIABLE MEASUREMENT.”
In the beginning of 2013, I had been hearing some rumblings
that two of our team members were performing poorly. Since
this was the beginning of our busy season, we thought that some
productivity was better than not having them and our quality
control process would insure the client would get a good work
product, albeit less efficient than we like.
My ability to measure the drop in efficiency was hampered
by not having our normal weekly production reports since we
had just converted to a new time and billing system. We use my
Labor Efficiency Ratio (LER) concept to track individual and team
productivity by measuring Expected Billings divided by Direct
Labor. If we have $2.25 of Expected Billings for every dollar of
Direct Labor during busy season, we will hit our profit target.
Outside of busy seasons, LER has to hit $1.80. Direct Labor is just
the wages paid with no loading for payroll taxes. Keep it simple!
When I got my first production report from the new system,
we were 6 weeks into the New Year and our best bi-weekly LER
was $1.72 ($88,477 in billings to $51,357 in labor). That meant we
needed to take quick action since an hour of productivity is a
vanishing commodity that you never get back.
As soon as I got the report, I fired one of the underperformers

SPRING 2016

and I terminated the other one the next day. We now had 2 less
people, but the bottlenecks were gone. In the next full 2 week
period after the terminations we hit a $2.24 LER. We had produced
$136,339 with 2 less people, a $47,861 increase!
Also note that we pay all of our staff hourly with time and a half
for overtime, we did not just have salaried people work longer for
no additional pay to make up for the 2 people that left. That would
be cheating.
In reality, those two employees cost us $25 ,000 a week in lost
productivity. It was not just their poor performance; it was the
cumulative effect on the whole team. They took time away from
our top performers who had to fix their work and it added to office
murmuring and negative energy.
It was also good to get the numbers from our LER reports to
confirm what needed to be done. The best entrepreneurs use their
gut and numbers to make the best business decisions and this was
a case that I needed the numbers because it was counter intuitive
to terminate them during such a busy time. It also shows the value
of the LER concept in that it does not count how many bodies, it
counts how much production you get for every dollar of labor
spent. In this case, I could afford the overtime at a premium rate
better than a poor performer that brings the whole team down.

IN SUMMARY:
• Monitor your team or individual productivity
using the Labor Efficiency Ratio
• Compare your numbers to what you observe
• Never under estimate the cost of team
dysfunction caused by those who do not fit
• Act!

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