Revenue per employee

Posted by Flux on 

30 March 2023

Interview with Sharon Pearce – business transformation specialist, disruptor and solutionist at Flux Trends.

In light of the massive layoffs that the tech industry has been undergoing, some companies have begun looking at revenue per employee as an indicator of success. [Revenue per employee refers to a rough measure of how much each employee generates for a company. It is calculated by dividing the company’s total revenue by its current number of employees.] (the square brackets indicate the meta description)

Have you been noticing this trend in South Africa?

SP: Revenue per employee is one of those cyclical elements that some companies focus on when things get rough. I have also seen it raised often within the context of agile ways of working implementations in organisations.

What type of companies and when did you start noticing it?

SP: Financial services – pre pandemic – and, of late, technology/big tech organisations. Organisations like consumer goods companies are way sharper at managing their value chain and output, with more effective early warning signals that the business is in trouble and therefore need to rely less on revenue per employee.

How has revenue per employee been working out?

SP: This isn’t a standalone measure that seems to be gaining a lot of traction at the moment. Having said that, you find it rearing its head in indirect ways like transfer pricing between departments, which is not a true reflection of revenue and often-times drives the wrong behaviour e.g. a focus on recoveries for non revenue generating functions internal to organisations. 

What are your thoughts on this trend?

SP: Any measure in isolation is not ideal. Businesses are often cyclical in their approaches and using revenue per employee is one such cyclical phenomenon. These companies who are relying on this measure are likely to cycle back to other indicators of success at a later stage, much like the centralisation/decentralisation cycles in organisational restructuring when, for example, self managed teams such as Zappos reverted back to some level of management. 

In an agile organisation, short cycles of measuring revenue per employee ignore the longer term sunken costs of poor innovation and design. Profit, at times, can come at the expense of innovation. Big tech, at some point sustained a large number of employees due to this agile innovation context. I always have said, and continue to say, there has to be some strategic thought regarding which projects should be part of an agile implementation process vs. innovating for the sake of innovating. Investing in capabilities like customer insight and experience are likely to make more sense than focusing on pure product related capabilities in isolation and, in some ways, reduces the need for a revenue per employee measure. Innovation comes at a cost and over the long term, if done well translates into revenue. 

Many organisations in multiple industries become overstaffed very quickly leading to a low revenue per employee measure. If this measure is relied upon, then we will see massive layoffs like we have been seeing in the tech industry. Optimal resourcing is based on knowing what your organisation needs to be really good at and configuring a value chain that delivers to the customer seamlessly. 

Not all functions will be revenue generating. Employee attrition rates and vacancy rates, as we know, affect revenue per employee measures. At any given point in time, revenue per employee is not a true reflection of what’s going on. It may simply serve as an indicator of something to investigate further. How do you account for a poor sales team vs. the broader employee base with a number like revenue per employee, for example? Is a profit contribution factor not something to consider in future? Saying no to a deal for example may generate greater value than the short term profit generated from an ill-considered deal (that in the long term turned bad). 

Do you foresee more companies adopting this measure?

SP: In challenging times, maybe, but I sincerely hope that boards and executive teams have a more integrated way of thinking about cost to serve and resulting value – this one measure cannot, or rather should not, stand alone. Big employee cuts based on this measure are a case of dealing with the symptoms rather than the causes.

By Faeeza Khan

As the founder and CEO of FreshVision Consulting, Sharon Pearce has gained over two and a half decades of experience in organisational capability-building (aligning strategy, people, process and technology) and large-scale business transformation.

She has worked with companies around the world and across 55 countries in Africa. Her global and local knowledge and experience help her lead companies’ talent and capability agendas and design human capital strategies that are practical and fit for purpose. 

In her role at Flux, she will be helping our clients, through The Solutionist Labs, to use the meaning derived from identified trend insights to create practical and actionable solutions (change). An example of this is helping companies evolve structures, operating models, business practices or even products/services offered.

Image credit: Towfiqu barbhuiya

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