Efficiency vs. Effectiveness: What’s the Difference?

Both efficiency and effectiveness are critical for business success, but when should you focus on which, and how do you achieve them? This guide will define each concept, outline strategies to achieve goals and concentrate on areas of focus for each to help organizations decrease costs and increase revenues through appropriate allocation of operational resources and thought.

Look up any explanation of business efficiency and business effectiveness, and you’ll likely see this quote from Peter Drucker: “Efficiency is doing things right; effectiveness is doing the right thing.” In other words, efficiency makes the most of your resources, and effectiveness is how to drive value for customers. Leaders typically gravitate toward either efficiency or effectiveness in terms of their management style. The goal is to be able to hit both within your business.

Efficiency means doing more with less (or the same) financial, physical and human resources. It’s maximizing output. Effectiveness is the quality that those resources deliver. When a business leader hits the sweet spot between the two, magic can happen.

Let’s examine each concept with a little more granularity.

What Is Business Efficiency?

Business efficiency refers to maximizing the time, effort and resources you put into your functional departments. Efficient operations take fewer resources to deliver similar or increased results, reducing costs and maximizing the return on the investment you make into your organization. Think of everything that goes into producing the product or service your business offers, and then where those items can be streamlined to generate profit.

Do your workers have to go through multiple layers of review and approval before their work can be implemented? Are you still working from spreadsheets and physical paper? Are you taking up more physical real estate than is necessary? Do you have three workers doing the job that one worker could do if you were more efficient?

Inefficiencies mean you’re hemorrhaging revenue before it can turn to profit, because you’re spending so many unnecessary resources to achieve output. When you’re efficient, you can maximize those resources to produce the maximum result with minimal investments.

What Is Business Effectiveness?

Business effectiveness refers to the quality of the results you see from resource investments into functional departments. It isn’t enough to do more with less; that less also has to generate more revenue through improved output. Being effective means that the thought, planning, process, tools and people you put into producing your product or service is hitting the quality KPIs you’ve put in place.

To be effective means that employees are working toward the right goals that ultimately drive the company forward in its growth strategy. They are generating revenue by offering higher-quality products, services, customer support and marketing/sales effectiveness; rather than doing things fast, they’re focused on achieving the KPIs that will help the organization increase revenue rather than decreasing cost.

Key Takeaways

• Efficiency is all about reducing costs and resources required to execute on tactics. Effectiveness is about achieving strategic goals that align with the vision of the organization and drive more revenue.
• Often, increasing effectiveness naturally leads to an increase in efficiency. When you keep both goals in mind as you evolve, areas where you can streamline processes, implement automation and reduce redundancies in many cases become clear.
• Having the right tools in place to facilitate collaboration, communication and data visibility go a long way toward achieving efficiency and effectiveness goals.

Business Efficiency vs. Effectiveness

It’s possible to be efficient without being effective, and vice versa. If one sales rep is making 20% more calls than another but closing half as many deals, their efficiency isn’t producing effective results. If their focus is so much on moving one deal at a time through the pipeline when their goal is to work five leads at a time, their effectiveness isn’t making up for their lack of efficiency.

The ultimate goal is to hit both metrics at once: Organizations should aim to work toward the right goals that will generate more sales while also optimizing resources that allow that revenue to turn into profit. Most companies are better at one than the other. The finish line we’re all striving for is the right mix of both philosophies at once.

Increase the Effectiveness of Your Teams

Increasing efficiencies, as we’ll examine below, is often a matter of putting streamlined processes and automated tools in place to maximize time and cost. Increasing effectiveness, on the other hand, requires higher, more nuanced thinking to make sure that every cog in your organizational wheel is working toward the same goals.

Most often, effectiveness is measured in terms of new sales and the customer satisfaction levels that lead to repeat purchases or renewed services. These are the ultimate metrics that lead to increased revenue, and therefore to sustained growth. Effective organizations typically have a few things in common.

1. They have a clearly defined company culture.

   Effective organizations know the mission, vision and values that they’re working toward, and have communicated that philosophy to every employee. Each worker, no matter their job function, knows there’s a standard they’ll be held to and a quality of product or service (or both) that leadership wants to achieve. The company culture, or the ethos that underlies every operation, is clearly understood and internalized by everyone in the organization.

2. They’re open to new ways of doing things.

   Effectiveness and innovation often go hand-in-hand as employees and managers devise new processes or implement new systems that improve communication and encourage collaboration. A team that decides to implement a daily morning SCRUM meeting, for instance, may find that workers stay focused on the value-add functions and activities that drive results rather than get distracted with tasks that take time, but don’t move the needle. Make sure you’re soliciting input from everyone involved in the process – you never know who will have the next great idea.

3. They focus on the customer.

   At the end of the day, effectiveness is all about driving new sales, upsells or renewals. In order to be as effective as possible, team members need to be able to put themselves in their customers’ shoes and identify what’s going right and what needs improvement. Solicit regular feedback from customers to ensure you’re staying on track and, where needed, tweaking operations so that you’re meeting your customers where they want to be. Be flexible enough to be customer-oriented.

4. They’re committed to open communication between team members.

   Working in silos is one of the fastest ways to ensure that teams aren’t on the same page, and therefore not necessarily working toward common goals. Even if they have the same general idea of what the end result should be, not working in tandem leads to frustrations like delayed timelines, lack of clarity around tasks and having different priorities in different places so that teams don’t have a common idea of how to best execute each task. Invest in a work management platform in order to keep everyone on the same page.

5. They conduct regular performance reviews.

   Constructive criticism is extremely beneficial when trying to support team members to be as effective as possible. If all employees are working toward a commonly defined and well-communicated company goal, it’s important they understand exactly where their role fits in and what they can do to improve importance. Don’t make them work in a vacuum; regularly check in, make suggestions and show appreciation for effectiveness in their work.

Improving Effectiveness Increases Efficiency

Ideally, you want to improve both effectiveness and efficiency, but it can be hard to tackle both goals at once. At the end of the day, though, focusing on effectiveness first tends to lead to more efficient teams since everyone is on the same page, communicating well and working together to optimize operations.

Once you have effectiveness nailed down, then you can turn your attention to maintaining that level of performance while concentrating on operational efficiencies through tactics like process automation, resource management and streamlined task allocation.

Building an Effective AND Efficient Team

Happily, there are a few key characteristics that are equally important to improving both effectiveness and efficiency. Focusing on just a few critical tactics can make all the difference in team performance.

Strategic planning

As we’ve discussed, you need a clearly defined set of goals to work toward – and a strategic plan to get there. Identify the steps you need to take and the tactics you need to deploy in order to reach those commonly understood goals. You’ll often find that you can see areas to improve both effectiveness and efficiency when you’re planning out a roadmap to better results.

As your team completes each milestone, take a look at what went wrong, what went right and where you can apply the lessons you’ve learned as you continue along the path to success. And remember to leave room for flexibility, making sure to create scenario planning paths for various contingencies. Just because you’ve mapped out how you think the process should go doesn’t mean you won’t have revelations along the way that can move the needle even more.

Measuring goals

Let’s take our sales team example. If you’re looking to improve the effectiveness of your team, you’ll want to look at close rates and choose appropriate KPIs. It isn’t enough to just say you want to close more deals; you need a specific goal to work toward, or how will you define success? The same is true of efficiency. Once you’ve gotten that close rate up to par, create an efficiency target – say, a 6% increase in the number of sales conversations your rep has. Again, by measuring toward a specific goal, you can track progress and keep team members’ eyes all on the same prize.

Follow-through

Nothing kills both effectiveness and efficiency like tepid or inconsistent commitment to goals. From an organizational level all the way down to individual team members, each stakeholder needs to be fully committed to meeting metrics relevant to them to keep the entire team on track. Developing a mindset and methodology that focuses on objectives and key results (OKR) is a great place to start.

Make data visible in real-time so that everyone knows how far you’ve progressed, and how far you still need to go. Keep in close communication both up and down the org chart to make sure everyone is renewing their commitment to the goal on a regular cadence. Stay the course!

To improve efficiency and effectiveness together, you need the right tools. The goal is to streamline and automate business processes as much as possible, support collaboration between teams through providing visibility into data and consistently communicate goals. A robust ERP system can be conducive to moving both the efficiency and effectiveness needles at once by making sure everything is in one place, accessible and automated.

Business Efficiency vs. Effectiveness FAQs

Which is more important: efficiency or effectiveness?

Both efficiency and effectiveness are of value; where you focus is dependent upon your organization’s strengths and weaknesses. In general, focus on efficiencies when you need to lower or maximize spend. Focus on effectiveness to increase the strategic impact of efficient tactics.

Which should come first: efficiency or effectiveness?

In some cases, you can pursue both efficiency and effectiveness at the same time, however that can be a challenge. Often, it’s better to focus on effectiveness first. Once you’re achieving the KPIs you’ve set for excellence, you can concentrate on increasing efficiencies to achieve those goals faster and at a lower cost.

What are efficiency and effectiveness in management?

For managers, increasing both efficiency and effectiveness requires clear communication of goals, alignment and commitment up and down the organizational chain of command, transparency with data and continual check-ins with team members. Specifically, focus on efficiency means looking at short-term results through an operational lens and measuring metrics that impact cost. In contrast, an effectiveness focus is more of a long-term game, with a focus on a clear strategy to increase revenue and other KPIs that help achieve business outcomes.