Company productivity is a perennial business topic because it’s the key to remaining competitive. Productivity measures the output an organization produces divided by the inputs it uses, and it’s crucial that a company not only tracks productivity, but does so in a way that shows how it can be improved. That requires identifying the productivity metrics that can make the biggest difference for your company, and then closely measuring the company’s performance against them.

What Is Productivity?

Productivity can be described as how efficiently people, companies, industries or whole economies convert inputs into outputs. These four levels are intertwined. The aggregate productivity of all individuals in a company is an expression of the company’s productivity. The aggregate productivity of all companies in an industry then represents that industry’s productivity. And the aggregate productivity of all industries in an economy is an expression of the economy’s productivity.

What Are Productivity Metrics?

A productivity metric is a measurement that expresses part or all of the company’s output in terms of an input. Some common metrics are revenue per employee, customer satisfaction, number of parts produced, downtime, employee turnover rate, labor utilization rate, gross margin or gross profit and EBITDA (earnings before interest, taxes, depreciation and amortization).

The ideal list of metrics for a given company will depend on whether the business delivers goods or services, its industry, its size and other factors.

Why Should You Measure Productivity?

You need to measure your company’s productivity because it determines how well it competes in the marketplace. Let’s assume your goods or services are equal in quality to those of the competition. If you’re more productive, either by employing fewer people, using fewer resources or producing goods or services more quickly, you can offer goods at a lower price, winning over customers. Greater productivity can also lead to better profit margins, a higher stock price and increased shareholder value.

How Do You Measure Productivity?

Finding the right productivity metric depends on what kind of productivity you are measuring. The metrics and KPIs for a manufacturing company are different than for a software provider, and they often differ from one company to another in the same industry, too. But the process is generally the same: Start by identifying the metrics that matter most to your business, then calculate them regularly over time to get snapshots of the company’s productivity and identify trends.

  1. Choose productivity metrics. The metrics companies measure can be either general — numbers any company will typically track — or specific — metrics relevant to your industry and type of company. For instance, a manufacturer of consumer goods will measure EBITDA, a universal measure of operational profitability that allows investors and other analysts to determine the company’s core profitability before accounting and financial deductions. But it will also want to know manufacturing-specific metrics, such as order picking accuracy, on-time shipments and inventory turnover rate, which shows how many times the company sold and replaced (i.e., “turned”) its inventory during a given time period.

  2. Calculate your business’s productivity. Productivity metrics are often intuitive, but they do require some knowledge to calculate. For example:

    • To calculate inventory turnover rate, divide COGS for any period by the average inventory for that period (beginning inventory plus ending inventory, divided by two). Some companies use sales instead of COGS as the numerator for this calculation, though most choose COGS.

Why Is Productivity More Than Time?

Time is a crucial factor in measuring productivity because you can increase productivity by producing more in the same amount of time. But focusing only on time can damage productivity if doing things faster means you make more mistakes to the point that the increased output is worth less than the additional cost in scrap, rework and customer returns. Over time, these issues can damage your reputation and increase customer attrition.

Focusing too much on time also takes your attention away from other areas: There’s limited value to a 10% improvement in labor productivity, for example, if it comes at the cost of significant improvements in inventory management that could be more valuable.

What Productivity Metrics Should You Measure?

The range of productivity metrics is enormous because so many companies do so many different things. However, some metrics are more widely applicable than others. Here are 9 metrics, most of which apply to any company (each is discussed in more detail below):

  1. Projects completed
  2. Sales close rate
  3. Sales growth
  4. Revenue per employee
  5. Effectiveness ratio
  6. Total cost of workforce
  7. Overtime hours
  8. Turnover rate
  9. Recruiting conversion rate

What Can You Learn From Measuring Productivity?

Measuring productivity is a vital step in improving your company’s profitability. By comparing your productivity against your competitors you can identify which areas can best improve company performance. All other things being equal, the larger the gap between your productivity and that of your competitors in any given area, the easier it should be to make progress. Measuring productivity isn’t just a way of identifying areas for improvement — it’s a way of prioritizing them.

9 Productivity Metrics & KPIs to Measure

The list of productivity metrics will appear endless to someone looking at it without a sense of what matters to their company. That’s why it’s important to identify the metrics that matter most. Below are explanations and formulas for the 9 metrics identified above.

  1. Projects completed. This is one of the basic definitions of productivity in manufacturing businesses, where the same “job” is performed over and over with relatively little variation. Calculating it is a simple counting exercise: How many jobs did the company complete in a given period of time (measured as jobs completed divided by time period)? Obviously, the target number will vary with the complexity of the task and output.

  2. Sales. Sales are the proceeds a company generates from selling goods or services to its customers. They are one of the most basic measures of any company’s health. It’s important to distinguish sales from revenue because companies have supplementary income sources, such as interest, money from litigation, royalties and other fees. As a result, revenue is nearly always larger than sales (although a lawsuit that goes the wrong way can change that). Gross sales can also exceed revenue because, unlike net sales, they are not adjusted for returns and discounts. The formula to calculate sales is:

    Sales = Price of each product or service x Number of units / Services sold

    Net sales uses the same number but adjusts for returns and discounts.

  3. Sales growth. Sales tells you how you are doing in absolute terms. Sales growth, also a vital metric, illustrates you how you are doing relative to past years. The formula to calculate year-over-year growth is:

    Sales growth = This year’s sales – Last year’s sales / Last year’s sales x 100

    or

    Sales growth = (This year’s sales / Last year’s sales) – 1 x 100

  4. Revenue per employee. Another basic KPI that offers a broad indication of how expensive a company is to run — or how profitable it is, depending on how you look at it — is revenue per employee. This metric is often used to compare companies in the same industry, as well as to compare the profitability of different industries. The formula to calculate revenue per employee is:

    Revenue per employee = Total revenue for last 12 months (LTM) / Current number of full-time employees

  5. Effectiveness ratio. There are three versions of the effectiveness ratio: inventory, asset and receivables. The inventory turnover ratio is used to determine whether sales are enough to “turn” or use the inventory, and if so, how many times. The formula to calculate the inventory turnover ratio (or rate) is:

    Inventory turnover ratio = COGS / Average inventory

    The asset turnover ratio is used to determine whether the company uses its assets efficiently. The formula to calculate asset turnover ratio is:

    Asset turnover ratio = Revenue / Total assets

    The receivables turnover ratio measures a company's efficiency in collecting debts and whether it extends an appropriate amount of credit to the right customers. The formula to calculate the receivables turnover ratio is:

    Receivables turnover ratio = Net credit sales / Average accounts receivable

  6. Total cost of workforce (TCOW). TCOW is generally calculated as the sum of a company’s personnel-related costs: all salaries paid to the company’s employees plus benefits, performance bonuses, personnel-related taxes and insurance, events, vacation pay, overtime, training, recruiting and any other cost you pay to, on behalf of or directly because of your personnel. On its own, it doesn’t tell you very much, so it is usually calculated as a percentage of the company’s total operating costs. The formula to calculate TCOW is:

    TCOW = TCOW / Total operating costs x 100

  7. Overtime hours. All “non-exempt” employees (generally, those paid hourly instead of by salary) must be paid overtime for more than 40 hours worked in any week at a minimum of 1.5 times their regular hourly rate. Overtime is a key metric because labor productivity is an important determinant of company profitability and excessive overtime will drive down that profitability. Tracking overtime allows you to keep those costs down. It also helps you bill for projects more accurately. Many companies rely on employees to input their time, often with inaccurate results. Today, however, software is available that automatically tracks how much time employees work and what they spent that time doing. Tracking hours in real time and by project allows you to balance employee workloads to minimize overtime.

  8. Turnover rate (employees). There is another turnover rate: the percentage of employees who leave the company over a certain period of time. The formula to calculate employee turnover rate is:

    Employee turnover rate = (Total number of employee separations / Average number of employees) x 100

    The average number of employees is the number of employees on the first day of a period plus the number on the last day of a period divided by two. Include all full-time, part-time and temporary employees, but not independent contractors scheduled to leave at the end of their contract or employees on temporary leave (parental, medical or otherwise).

    One thing to note: A low turnover rate compared to your industry average is usually good, but not if a lot of the employees leaving are your best ones. Quality matters as well as quantity. This isn’t hard to track — small companies know who their top performers are, and large companies usually identify high performers in human resources (HR) systems.

  9. Recruiting conversion rate. This metric tracks your company’s job offer acceptance rate. If you are having trouble filling positions compared with other companies in your industry, it’s an indication that something isn’t right. For instance, your salaries and benefits may not be competitive with the market.

    You will sometimes see this rate defined as the number of offers extended divided by the number of applicants. This is a “noisy” version of the metric because the quality of applicants may be weak. A better formula to calculate recruiting conversion rate is:

    Recruiting conversion rate = (Number of job offers accepted / Number of job offers extended) x 100

Monitoring and Reporting on Productivity With Software

Once a company reaches a certain size, it isn’t really possible to track productivity at the level required to analyze it effectively and make adjustments without appropriate software. At that point, it’s more a question of what kind of software package you need. Performance management software can make it easier to monitor and improve the productivity of your workforce.

What most organizations need, however, is to work out which productivity metrics reveal the most about their business and then identify the services that best allow them to measure those metrics with real-time dashboards. Standalone performance management software can help, but workforce management software that’s part of a unified platform also allows you to oversee training, recruiting, budgeting and a number of other areas. In manufacturing and distribution environments, these systems are especially valuable when they’re paired with mobile devices that guide employees through different tasks in a warehouse, track their work and highlight opportunities for process improvements.

Tracking performance in a software system allows you to conduct workforce analytics that show whether employee productivity justifies what the company pays employees — and where the problems are. Are employees taking too much time to complete some tasks but not others? If so, what’s getting in the way? Do you have the wrong tools, the wrong processes, undertrained employees or something else? Frequently analyzing the data and conducting reviews can help improve efficiency as well as increase employee satisfaction.

In a competitive economy, companies need to improve continuously, year after year. There’s only so much management can focus on at any one time, however. So it is crucial to choose the right metrics to measure and manage your company’s productivity from among the dozens available.

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Productivity Metrics FAQs

How do you measure productivity metrics?

Productivity metrics express part or all of an organization’s output in terms of an input, which helps a company improve profitability. The effectiveness of a productivity metric is the degree to which adjustments in that metric will affect the company’s profit margin. Service companies, for example, will get little or no value from inventory metrics, but revenue per employee could say a lot.

What are some performance metrics examples?

Some common productivity performance metrics are revenue per employee, customer satisfaction, number of parts produced, downtime, employee turnover rate, labor utilization rate.

How is productivity time measured?

Time is crucially important in productivity metrics and yet simultaneously tricky. It’s crucial because when all other things are equal, producing more in the same time period or producing the same in less time means productivity is rising — and, therefore, profits will rise.

But in the real world, all other things are seldom equal. If an organization saves 10% in time but at the cost of falling quality, profit may fall instead of rise. So while time factors into many productivity metrics, it must be analyzed in the broader context of company performance.