Historically, the industry has adopted a parallel stance between Cost Of Gold Sold (COGS) control systems and Labor Management Systems (LMS). Both systems utilized a peer-to-peer comparison and a percentage of revenue measurement. Using a percentage of revenue was easy to use and understand. Therefore this approach became nearly universal. If restaurant A can hit 26% in either cost area, why would management accept 28% in another unit?
This percentage of revenue approach was useful, but it has its downsides as well. It required that units of a particular brand have very consistent product mixes, and menu items had to be engineered to deliver very similar costs as a percentage of sales. In many organizations, operators who over-achieved the peer average were deemed “cheaters” because overly tight costs controls were perceived as unhealthy, when in fact, they may have simply been the best operators, or they could have been the beneficiaries of favorable product mixes that leaned toward lower cost menu items. Conversely those restaurants that exceeded cost objectives were often targeted as being too loose and were “managed down” in the interest of hitting a percentage target.
Technology Improves Approach & Complexity, but at the Expense of Credibility.
The advent of technology allowed both COGS and Labor systems to be improved. Point of Sales (POS) systems tightened up shrink and slippage, reducing all costs as a percentage of revenue. More complex and sophisticated systems allowed the introduction of complicated tracking of variable product mixes, enabling more sophisticated menu management in multi-unit environments.
COGS control systems grew in complexity as actual product mixes and recipes were used to produce theoretical cost models. Despite adding complexity, the COGS control systems were readily understood by operators, so their credibility was high and resulted in operator acceptance. The percentage of sales as a target of measurement remained important to the language of COGS controls, but gave way to a comparison of actual results to a theoretical model for purposes of accountability.
Labor control systems did not enjoy the same level of credibility and adoption as the COGS control systems. Industrial Engineers (IE) developed labor standards, and these standards became analogous to “recipes” for labor. However, operators did not readily understand these labor “recipes” so credibility for systems based on them suffered. Management usually did not understand these “recipes” either. Often, the “recipes” were adjusted in the interest of short-term profitability. They did so without any operator input, and usually without informing the operators that anything was changing; thereby, contributing to the credibility gap. A standard is only a standard if it is not changeable.
Without operator credibility, accountability systems based on engineering standards did not work well, regardless of the accuracy or sophistication of engineering based systems. Percentage of sales remains both the language of Labor control AND the primary measure of accountability. All the issues inherent in such measurement and accountability remain in place in most organizations today.
Management generally understands that high volume units can hit lower labor targets as a percentage of revenue, but they don’t know how much lower they should be. As a result, high volume restaurants usually over-allocate labor and lower volume units generally under-allocate labor as a percentage of sales. Lower volume units are forced to cut corners, and higher volume units waste a lot of labor.
Budgeting Adds to the Problem.
The budgeting process exacerbates this variance between lower- and higher-volume units. When budgets are created, sales are almost always budgeted to go up, and there would be a corresponding reduction in budgeted percentage labor. However, labor costs also rise. The labor cost increase mirrors the sales increase, maintaining the percentage of sales metrics. This is fully appropriate under most circumstances.
Budgets as control mechanism limited.
In practice, however, labor control accountability is not adjusted for actual sales variances versus budgets because the variable metrics do not exist. If budgeted sales targets are exceeded, the budgeted percentage of labor is spent, and if budgeted sales targets are missed, operators are held accountable to the lower percentage targets. The rich get richer and the poor get poorer. Over time, sales becomes a very accurate indicator of quality of products and services because high volume operators have more than they need and lower volume operators are starved for labor resources.
In addition, this type of labor control accountability creates a disconnection between senior managers and front line managers. Senior managers find ways to “tweak the labor recipes”. Unit managers realize this and a lack of credibility builds at the unit level. In response to the tweaks, unit managers are forced to cut corners to meet the adjusted goals. Senior managers deliver on the short-term targets, but compromise credibility; service and quality are damaged in the process. Operators disengage and simply do what is needed to maintain their employment status. Employees and customers suffer as a result.
NRCP SOLVES THESE PROBLEMS
NRCP helps organizations avoid this vicious circle. The NRCP process resolves the perceptual differences between front line managers and senior managers to develop positive engagement between the organizational layers.
1) We make the targets for labor transparent, so everyone is looking at the same “rules” that govern changes in labor content as volumes change.
2) We identify and reconcile the differences in expectations, perceptions, attitudes and actions between the field and corporate organizations.
3) We identify the organization’s ability to absorb the changes required by a labor management system implementation. We analyze attitudes and aptitudes toward technology, capacity of accountability structures to absorb change, and organizational imperatives for financial performance.
4) We design a roll-out procedure that demands every level of management thoroughly engage in the change management process.
5) We design and build culturally appropriate reporting systems, tools and processes, ensuring a common understanding of the language used to describe targets and accountability for achievement of the targets.
These tools and processes are adjusted during the deployment process as we observe the adoption, absorption and utilization of the new tools and mindset. NRCP monitors the rollout to ensure achievement of commonality. We recommend corrective action as necessary. NRCP also tests and validates all algorithms to verify that the expected financial targets are met. In the monitoring process, we ensure employee engagement remains high and that consumer ratings are improved upon. Throughout this deployment, NRCP remains active with observations, insights and recommended adjustments necessary to maximize performance of the new tools. These adjustments include the identification of potential HR issues surrounding adoption, as well as the speed of the rollout and, its degree of reception.
The preceding information is the work of NRCP. It cannot be copied, or reproduced without the express written consent of NRCP.
National Retail Concept Partners, LLC is a full-service consultancy based in Denver, CO. working with a variety of industries, including the automotive, retail, restaurant and hospitality industries. Their website is www.nrcpartners.com.
Partners Larry DeVries and Dean Haskell wrote the preceding post. These recurring posts can be accessed at their LinkedIn profiles. NRCP recently shared its labor optimization success at the Restaurant Finance Conference. The partners can be reached by email at firstname.lastname@example.org and email@example.com. Mr. DeVries is based in Denver, Colorado and Mr. Haskell is based in Nashville, Tennessee.