How to measure productivity in a small business

Key takeaways

To measure productivity in a small business, compare output with the hours or money used to produce it. Three measures cover most needs: revenue per employee for the whole business, output per hour for a process, and the share of time spent on work customers pay for. Measure teams and processes, not individuals, or people will work to the number.

• Productivity is output divided by input.
• 3 measures: revenue per employee, output per hour, value-adding time.
• Measure processes and teams, not individuals.
• Always pair a productivity figure with a quality figure.

What is productivity?

Productivity is the amount of output produced per unit of input. The Office for National Statistics measures UK labour productivity as output per hour worked. In a small business the same idea applies at a smaller scale: how many orders, invoices, jobs or pounds of revenue come from each hour of effort.

• How BPO can help businesses reduce operational costs
• How to improve operational efficiency in a small business

Which three measures should you use?

Use one measure for the business, one for each key process and one for how time is spent. They answer different questions and none is sufficient alone.

• Revenue per employee: annual revenue divided by full-time equivalent staff.
• Output per hour: items completed divided by hours spent on them.
• Value-adding time: share of hours spent on work customers pay for.

• Revenue per employee: the number that shows real scale
• Staff utilisation rate: the cost of paid idle time
• Non-billable hours: how many is too many?

How do you calculate each one?

Take an illustrative firm with £900,000 of revenue and 12 full-time equivalent staff. Revenue per employee is £75,000. Its accounts team raises 400 invoices in 40 hours, an output of 10 per hour. A time log shows fee earners spend 62% of their week on client work and 38% on admin.

Each number points somewhere different. The first says how the firm compares over time. The second says whether invoicing is improving. The third says a third of the most expensive hours are spent on work a client would not pay for.

• Revenue per employee: £900,000 divided by 12, £75,000.
• Output per hour: 400 invoices in 40 hours, 10 per hour.
• Value-adding time: 62% of fee-earner hours.

• Cost baseline: measure today's cost before you change it
• Run a time audit to find what to outsource

What do productivity measures miss?

Productivity measures miss quality, difficulty and the long term. Ten invoices an hour with errors is worse than eight without. A team handling complex cases will look slower than one handling simple ones. Time spent training or improving a process lowers this month's output and raises next year's.

• Right first time rate: the quality number that cuts cost
• Cost reduction KPIs: the numbers that prove savings are real

How do you measure without micromanaging?

Measure at the level of the team and the process, share the numbers openly, and use them to find obstacles, not to rank people. Individual output targets encourage choosing easy work and skipping checks. Monitoring software that tracks keystrokes measures activity, not productivity, and damages trust.

• Agree what counts as output with the team.
• Report team figures, not league tables.
• Ask what slows the work down.
• Pair every output measure with a quality measure.

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How does outsourcing change the picture?

Outsourcing changes what you measure. Revenue per employee rises when routine work moves to a provider, because headcount falls or holds while revenue grows, so read it alongside total operating cost. For the outsourced process itself, measure output and quality per pound, not per hour.

• Outsourced team productivity: measure it like for like
• Work out your cost per task before you outsource

What does this look like in practice?

A pattern we see in professional firms: everyone is visibly busy, and productivity is assumed to be high. A time log shows the most experienced people spending well over a day a week on scheduling, chasing documents and formatting. They are productive at the wrong tasks. Moving those tasks raises output without anyone working longer.

• See client work
• BPO Solutions for UK businesses

Productivity checklist

Set up measurement with these steps.

• Calculate revenue per employee for three years.
• Pick two key processes and define their output.
• Measure output per hour for each.
• Log how senior time is spent for two weeks.
• Add a quality measure beside each output measure.
• Review quarterly with the team.

• Cost benchmarking: is your business expensive to run?
• The cost lever scorecard: find savings process by process

Next step

Tell us your revenue, headcount and the two processes that matter most. We will help you set up three measures that show where productivity is being lost.