Developing and emerging economies go through a known cycle: export of local products and commodities, foreign direct investment (FDI) including agencies, and technology transfer.
But what about human operating skills? What use are large amounts of foreign investments, the factories and infrastructure that they build and the advanced technology that is imported if worker operating efficiency does not increase to match the advances in all of the other facets of the economy?
Before we go further we should define what operational efficiency is. Unfortunately there is no single definition and instead it is classed as a group of measures. This wide latitude is both a sign of the complexity of the issue and the reason problems can so easily be hidden.
Broadly speaking, operational efficiency measures the ratio of some input that a business uses relative to an output. One of the more famous operational efficiency ratios is return on equity. The ROE is defined as net income divided by equity. An ROE of 250 per cent means that every dirham invested in the business will return Dh2.5 of net income.
ROE is a purely financial ratio, of which there are many, such as the cost/income ratio – in this case the lower the number the better – and there are even ratios that link to the balance sheet such as the total asset turn over (which equals net sales divided by total average assets).
Important as financial operating efficiency ratios are, there are many other facets to a business that are important to capture in your metrics. In many businesses and markets it is much more important to focus on the human element as a way to optimise the financial return.
The fast moving consumer goods sector is a great example where the number of customers as a client is a critical measure. Examples of the top such companies in the world include Coca-Cola, PepsiCo, L’Oréal and, sadly, Philip Morris. You can see the push for dirham invested to client acquired in the Coke-Pepsi wars that take place in the lobbies of hotels in the UAE. Want a Pepsi? Sorry sir, we are a Coca-Cola hotel. Similarly, consider the amount of free product L’Oréal hands out trying to capture customers.
So what does all of this have to do with operating skills? Simple, they are either not being measured effectively or the results are not being applied efficiently. For example, a leading airline in the country allows me to buy airline tickets online. But if I want to refund a completely flexible ticket, I have to go to a physical office and waste my time with an extremely polite and apologetic airline agent.
Using pure financial ratios, this ineffectiveness would usually not appear. However, using as an operational efficiency measure the number of transactions a year managed divided by total client-facing employees could correct such an issue. There are caveats of course, such as service quality levels must be maintained at the same levels.
The fear the clients usually have of improvements in human operational efficiency is that quality levels will drop. But as we have seen with many government departments across the country, it is possible to greatly improve efficiency while at the same time improving quality.
Nearly everyone in this country must visit the notary public at some point. Fifteen to 20 years ago showing up when there were no other customers could still take a day to finalise your transaction. Today, a building full of customers will delay you at most an hour.
This great start needs to flourish, not least in the private sector. Why do I need to speak to two different people to make a dinner reservation? Why is closing a bank account more complex than brain surgery? Why does exercising a warranty require a United Nations-size debate?
Dear CEO, do you even have an employee efficiency measure?
Sabah Al Binali is an active investor and entrepreneurial leader with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com.
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