Operational efficiency is the relationship between an organization’s output and input,
that when healthy, helps businesses cut down on unnecessary costs while increasing
revenue. It’s what businesses strive to do: produce a high-quality product at scale with
as few resources as possible.
To decrease extraneous costs, the operations manager must be able to identify which
processes in place are not needed. To do this, they need to be able to identify a
baseline of operations.
Productivity vs. Efficiency: Knowing
“Productivity” and “efficiency” are often used interchangeably, but they’re actually very
Mankins at the Harvard Business Review explains the difference simply:
operational efficiency is about doing the same with less and productivity is
about doing more with the same.
Improving productivity requires investing current resources to improve their performance,
so because different companies have different focuses, there’s not a “one size fits all”
approach. For a staffing company, improving productivity would mean bettering the
performance of recruiters. For a manufacturing company, this would mean increasing the
output of machines. For a brick-and-mortar, this would mean upping sales per square foot
of the store.
When trying to improve productivity, operational efficiency managers need to find a way
to take the resources they have and improve their performance, which may mean incurring
additional costs in training or repairs. In this case, the cost is justified because the
output is increased.
Operational efficiency is more concerned about producing at the same level with
fewer resources, so if we revisit our manufacturing company example, this would mean the
company wants to keep the same number of machines but have them produce more product.
What to Improve First: Efficiency
We all know putting the cart before the horse just doesn’t work. Efficiency and
productivity work in the same way. If your goal is to improve the overall performance of
your organization, you’ll want to improve both, but it’s important to improve efficiency
first. Doing so will decrease the level of wasted effort and resources on the part of
the company. Once efficiency has been optimized, the organization can take steps to improve
productivity. With this strategy, efforts to increase productivity will be more
fruitful because these efforts are built upon a baseline of operations that’s
How to Create a Baseline of Operations
A baseline of operations within an organization describes the functions in place that
makes the organization run. You can do this by talking to major stakeholders within the
organization and asking how each department works together to help the company reach its
goals. In larger entities, each department may work more autonomously. In smaller
organizations, roles and functions can crossover.
Questions to ask include:
- What is the purpose of your department within the company?
- How does this department help the company realize its vision?
- What are the major responsibilities of this department?
- What are the steps taken to carry out these responsibilities?
The goal is to be able to understand the major functions each department performs to
carry out its duties.
How to Measure and Improve
Operational efficiency is calculated by dividing output (revenue, sales, cold calls,
inbound leads, etc) by input (resources, man-hours, licenses, etc). As explained by
Mankins in the Harvard Business Review, efficiency is a matter of producing the
same output with less input.
In order to calculate efficiency, decision-makers need to determine which output and
input variables are most appropriate for their organization. These variables are
determined by their key performance indicators; the quantifiable metrics that reflect
the health of an organization (dictionary). These can shed light on the overall
direction of an organization by providing unbiased data about performance.
- Step 1:
Record your performance and compare it against industry standards. This will give
the organization a reference point to measure improvements.
- Step 2:
Review the baseline of operations and identify the functions and goals within
- Step 3:
Understand the key players involved when it comes to executing those functions
- Step 4:
Then review how much time it takes to achieve those goals and the quality of work
done every step of the way.
- Step 5:
Within each step, identify bottlenecks that make that process slower. Bottlenecks
are any functions or steps that are unnecessary for completing the task at hand.
For example, waiting a couple of days for another approval when two approvals
are sufficient would be a bottleneck.
- Step 6:
Remove those bottlenecks. One strategy to eliminate waste is the 5S
method: Sort, Shine, Straighten, Standardize and Sustain. The leadership
team needs to collaborate with other employees to ensure the right steps are
- Step 7:
Measure the performance and compare to the previous baseline of operations to
track improvements. Make sure that the quality of work done along the way is not
- Step 8:
Track performance by creating reports or a dashboard. Convene with your team at
regular intervals to discuss performance and areas of improvement.
Note to the COO
There is much more to efficiency than simply cutting costs. It takes more strategy and
forethought. A study
done by PwC UK showed that two-thirds of UK businesses planned to cut costs over
a 12-month period, but less than 30 percent of those organizations were able to reach
their operational efficiency goals and only about a fifth of them could sustain the
benefits of cutting costs over a period of three years.
Improving operational efficiency within an organization requires identifying areas of
waste and improvement to increase efficiency. Then management can focus on making the
most of those resources to
Operational efficiency is much more than just cutting costs; it requires strategy and
forethought to understand how an organization operates. These strategies create a
win-win: optimal output for the company and an exemplary product for the customer.