The boss gathered us all in the boardroom and said: “Folks, times are tough, we’ve got to improve our performance”. Or did he say “our efficiency”? Or maybe it was “productivity” that he said. Well never mind! We all knew what he meant. I rushed to my department and called John. John is a good guy. Always running around with his sleeves rolled up trying to solve some problem. I told him to sum up some numbers to see how we’re doing.

John is smart. He had anticipated my request and had been gathering data for some time on his notebook. Hours worked, who is friend with whom, that kind of stuff. Trouble is I couldn’t make much of it. The guys at the workshop were working their buts off. Not much to improve here. “With the holidays coming up we are risking burning them out” he told me. But I’m smart too. “We got to watch them closely, I said, and change the processes. That’s how we’ll improve the whatchamacallit”. “I don’t understand, said John, what’s the problem? What are we trying to improve?” “Well, the thing, the productivity. We got to make more money. Produce more. Those competitors are killing us.” “Do you want to improve our internal efficiency, track our performance or increase the productivity?” asked John and I did not know what to answer him.

How many times have you heard the terms efficiency, performance and productivity? How much time have you devoted to discussing them and looking for ways to improve them? And how many good solutions have you found?

Often, as in the example above, there is confusion between these terms and initiatives to improve them are met with suspicion by overloaded employees. From the smallest to the largest companies, all have in one time or another wondered about how to increase their revenue and profit by optimizing their ways of working. Non-for-profit organizations are less keen to visiting such topics but in fact they are the ones who could profit the most, as they tend to have more loose organizations and less stringent, though noble, objectives.

In most cases imminent financial threat is the trigger for actual action on these. A competitor shows up and offers far cheaper prices or better services, sudden cost increase due to external factors such as energy price and so on. Several methods have been developed and involve the business owners themselves in the improvement process (e.g. Lean and six sigma). However, experience has shown that external guidance is key to avoiding complaisant solutions and emotional attachment to current practices. But let’s see the definitions:

Efficiency is the extent to which time, effort, or cost is well-used for an intended task or function. This is where you can have most impact. Improving efficiency implies a clear definition of the intended task and the definition of what is meant as “well-used”. Process improvement, operational excellence and quality-by-design are some popular methods for improving efficiency. A good mix of internal knowledge and external advise is paramount to achieving efficient use of the limited time, effort and cost available.

All modern improvement methodologies more or less follow the PDCA (plan, do, check, act) approach and the Deming wheel shown below for continuous improvement. The PDCA cycle (or it’s OPDCA variant which includes an observation step) allows setting the plan, executing it then, assessing the result and making changes. The knowledge gained is incorporated in operational standards such as SOPs and raises the inherent quality of the work. A new cycle can then begin to further improve the process. While the methodology is well thought, logical and has proven beneficial in countless cases, it remains somewhat theoretical and consumes resources upfront. ROI is not always obvious.

Performance is the measure to which one obtains the right things, the right way at the optimal cost. Measuring performance implies setting targets and thresholds for all three dimensions.

Contrary to efficiency that focuses on setting the processes right, performance measures the degree to which an organization is following internal norms, budgets and the level of achievement over time. Efficiency tends to move in one direction: towards always better, towards improvement, while performance is basically contemplative and analytical. A good monitoring of performance allows detecting threats and opportunities both internal and external. While efficiency applies across the board and efficiency optimization will improve the way things work, performance management will look for the right spots where action can make the difference.

Finally Productivity is the ratio between the invested effort and the final result. In this respect, productivity represents the sum of all the actions in a given process including those devoted to efficiency optimization and performance management and depends not only on the efficiency of each individual process but also on the effect of combination of all processes involved. Productivity is a long-term indicator that can only improve (or deteriorate) slowly over time. It is a multi-factor outcome that cannot be acted upon directly.

So how does the magic equation work? Efficiency x performance = productivity. You may use the PDCA or any other methodology to improve your internal processes efficiency. Do it regularly (e.g. once a year) and involve the people in charge. Have them review their ways of working, plan changes, implement and assess those. At the same time, monitor performance in terms of results (whatever is the output for each department), of know-how (monitor adherence to internal norms) and cost (monitor budget respect). This will allow you to assess if processes are adequate, if output is satisfactory and discover issues and opportunities. At the end of the year, you will be able to assess the overall productivity and hopefully you will see it improve.