You will be familiar with the seven growth levers if you read last week’s newsletter or attended one of my in-person workshops. One of these levers is to improve efficiency.

If you sell a physical product, efficiencies can come from reduced material costs or minimising wastage.

For everyone else, your largest cost will be your people.

I am not for one second about to suggest you go out and offer your team pay decreases to improve efficiencies - Not exactly an environment that will foster long-term growth. Although it is an inescapable fact, some will use this to slash staff costs through redundancies.

So, how do we improve the efficiency of our people? We leverage technology.

When I analyse technology, I loosely look for it to deliver in one of four areas:

1) Add More Value

Will this tech improve the service/product for our customers? Will they notice the improvement, and will they value it? (whilst your dev team may get off on implementing dark mode, it probably isn’t adding value to 90% of your customers).

Adding more value doesn’t necessarily improve efficiency, though. If this is a new part of the service you weren’t delivering, it might actually increase your costs. What I am looking for here, though, is an opportunity to pull one of the other growth levers, i.e. increase transaction value - deliver more value, and people will pay you more, simple.

If you add more value but can’t increase the price, then it will improve customer satisfaction and, therefore:

• Generate more leads (through referrals)

• Increase lead conversion (more value at the same price makes it easier to sell)

• Keep more clients (better service equals lower churn)

Three levers for the price of one.

2) Improve & Speed Up Communication

This section also belongs under Add More Value, but anything that improves our communication with our customers is a big win for me, and therefore I like to separate these.

The ease of introducing video as our primary method of communication with our customers has been groundbreaking for us.

Zoom is excellent, but what I really love here are the technologies we use to speed up our communications.

Automatic note-taking apps like Fireflies save us time at the end of meetings. As well as allowing us to focus on the meeting itself rather than frantically typing notes.

Loom (videorecording) has to have been our biggest game-changer, though. Asynchronous communications empower our team to be more efficient.

Video has another huge benefit. It allows us to break the one-to-one communication style and deliver one-to-many. One video can be replayed repeatedly, significantly increasing our team’s capacity.

Chatbots are now better than ever, thanks to AI. We have all felt the pain of being stuck in an endless loop of questions when dealing with older-style chatbots, but this should start to become a thing of the past. High-quality chatbots allow your team to serve more customers at the same time - increasing capacity again.

3) Automate

Automation is one of the longest-standing benefits of tech. Completely removing the need for your team to be involved in certain tasks and scaling capacity in some areas to remove all limitations on volume (Perhaps a slight exaggeration, but you get the point).

Bespoke workflow automation in our CRM gives our customer-facing teams.

Zapier pulls everything together from our various platforms and eliminates many admin-related tasks we had to cover previously.

Automation doesn’t just improve capacity, though. Our marketing CRM (Active Campaign) significantly increases our lead conversion rates.

Systemise your process first and then use tech to automate - not the other way around.

4) Give Our Team Super Powers

The explosion of AI drives the newest area of evaluating our software.

Instead of asking what tasks it can replace through automation, we now ask how much faster our team can deliver these tasks (and probably better, too…).

Our marketing teams can use ChatGPT to produce high-quality content in a fraction of the time.

Our developers can build at speeds previously unthinkable and debug more effectively than ever.

These technologies improve the capacity and efficiency of our teams by orders of magnitude!

How do we measure this success?

The problem I have found when analysing businesses is that it can be hard to measure how successful you have been at improving efficiency and how much of that is due to your use of tech.

Sometimes the benefit is obvious, particularly when evaluating a new piece of tech in isolation. The cost is defined (perhaps some time-related costs in implementation and training might be a little harder to define). The benefit is usually measurable in one of the following ways:

• Hours saved

• Increase in profit

• Customer Satisfaction (Net Promoter Score - NPS)

• Reduction in other software costs.

Analysing projects individually is essential, but as a CFO, I need to look at the impact of these together and the business overall.

There is no magic single KPI, but let’s look at some of the metrics I use and how to piece these together.

Gross Profit %

Gross Profit Margin is the ultimate measure of efficiency across the business. It is one of the Seven growth levers (Improve Efficiency).

Over time, if your tech is successful, it should improve your margin. In the early stages, though, there are a few issues with looking at this in isolation.

Firstly, unless you are using your newfound efficiency to make layoffs, you are creating capacity and not reducing your cost of sales. You can now handle more sales without increasing your direct wages (the main Cost of Sale for any service business). In other words, there will be a lag. You must go out and add those new sales before your margin increases, so do not rush to judgement.

When you add more sales, and your Gross Margin starts to increase, you need to balance this with the cost of the new software. Software costs will sit in your overheads, not impacting the GP. For example, your GP could increase by £100K, but you could have added £50K in software costs to your overheads - keep this in mind.

Another issue with relying solely on GP% is that a lot of the team that you will be making more efficient sit outside of the cost of sales and therefore have no impact on GP at all. Think of your sales & marketing teams using automation and your software devs using AI co-pilots. These wages sit in your overheads.

Revenue Per Employee (RPE)

A very simple metric to track that address the direct vs indirect wages issue is Revenue Per Employee (RPE).

*Full-Time Equivalent, i.e. part-time and outsourced, count as 1/2.

This will show you the Revenue you generate across the whole team. It makes it easy to spot the improvement impact if this KPI rises.

For example, taking an RPE of £60k to £100k shows you have increased efficiency (and/or pricing) considerably!

My main gripe with an overreliance on this KPI is it needs to account for the cost of those employees.

If you run a SaaS with an average wage of £80k and an RPE of £90k then you have problems. On the flip side, if you run a service business that uses more junior team members and your average salary is £40k, then an RPE of £90k looks pretty good!

As with GP margin, RPE doesn’t show you the cost (Software increases) of delivering this efficiency.

Staff Costs as % of Revenue

One way to address the issues with RPE is to look at your staff costs overall as a % of Revenue.

This allows us to look at the impact of our tech across the whole team while factoring in wages and other costs.

Like the other KPIs, though, it doesn’t show us the other side of the equation and ignores the increase in software costs.

Software Costs

To get a balanced view of the ROI of any tech we implement, we must monitor our costs. Subscription pricing can quickly increase across your team when you push these improvement projects.

Your bookkeeping should be structured in a way to allow you to monitor the overall cost of software and any increases in absolute terms, but the more useful measure is to look at this in relation to your Revenue or Staff numbers:

These two KPIs help us see how our software costs are increasing in line with the sales and/or gross profit improvements.

They are handy for us to build into our forecasting and modelling when looking forward and scenario planning.

These KPIs also help to stop you from obsessing over the increase in real terms of your software and, therefore, your overheads. If your overheads increase by £50k, but your software as a % of Revenue has dropped, I feel good about your scalability.

One final word of caution on costs. Software costs are the most significant wastage area I see when analysing overheads. It is easy to miss increases in SaaS pricing as you trigger upgraded packages or stop using it altogether and forget to cancel.

Review your subscriptions regularly and ensure you are not paying for any you are not using.

Over the last few years, I have mostly seen incremental increases in the bottom line due to leveraging tech in the businesses I have studied.

Some of these improved by as much as 100-200%, which was great, but this will be nothing compared to what we see over the next few years.

With the pace of AI development, it is not unrealistic to think that we will see output per employee increase in order of magnitude. Just imagine your profit if each person on your team could work with 10x the number of customers whilst providing a better service…

If you don’t find ways to embed new technology into your business’s core, you won’t be able to compete.