Regardless of your industry, labor is your largest controllable expense. Managing your labor productivity is the key to delivering profit to your bottom line.

When a new business starts the entrepreneur is running everything. As the business grows, the entrepreneur adds staff to deliver the product or service their customers are demanding. In the early days of businesses growth, most of this new staff is required to deliver the service or product. Often, the entrepreneur will find their net profit margin rising as they spread their fixed costs over more revenues.

As the business continues to grow, it becomes more and more complicated to operate. The entrepreneur now needs managerial staff. People to manage the people, the books, sales and customer service. At this stage, you begin to see profit margins drop.

This latest level of new hires is not directly doing the work. They are managing the work. Their salaries are an extra expense that requires a lot more revenue to offset.

This is where the “Salary Cap” can save you. I’ve always been aware that labor productivity was a key metric but had never heard labor productivity compared to the National Football League. That was until I was introduced to the Salary Cap concept by Greg Crabtree in his great book, “Simple Numbers.”

I watch the NFL one time per year and I’m generally in bed way before the end of the Super Bowl. But, but I am fascinated by numbers so I’ll give you my version of the salary cap. The NFL instituted the salary cap to level the playing fields for all the teams. If a rich team could buy up all the talent, they’d surely win the most games. The salary cap forced all the teams to operate under the same budget cap for players. Therefore, labor efficiency became the key to winning games. If you could get great results from a less expensive tight end, you could spend more for your quarterback or vice-versa.

The key is output for dollars spent. If you are a baseball fan, you might have read the book, “Moneyball” by Michael Lewis. “Moneyball” tells the story of the Oakland Athletics general manager Billy Bean and how they were able to compete and win against better funded teams with a fraction of their budget. In 2002, Oakland was able to make it to the playoffs on a $44 million salary budget while playing against teams like the New York Yankees who had a $125 million payroll budget.

How did Bill and the A’s do it? They got analytical. Rather than depending on the gut of their scouts, they focused on stats like on-base percentage and slugging percentage. They analyzed how cheaply they could buy the outcomes they needed to win. By focusing on outcomes, they could look past some of the hottest players who were demanding the most money.

They drafted fewer superstars and more utility players. They avoided drafting high school stars who were unproven and picked up more players with college experience and solid stats they had put up against the next level of competition.

Like in the NFL or Major League Baseball, getting the outcomes you need for the lowest possible cost is the primary driver of profitability in your organization.

Am I saying you must pay below market salaries to win? Absolutely not. Plenty of great organizations like Costco and Starbucks pay above market wages and still produce great profits. These companies win through decreased turnover and greater productivity. The key is outcomes per dollar spent.

Next week, we’ll dive into establishing your salary cap.

Have a business growth topic you’d like me to cover? Send suggestions to cfowler@valuesdrivenresults.com.