Growth Strategies Pillar #4: MANAGE SYSTEMS, LEAD PEOPLE
When I was in college, I held numerous part-time jobs to make ends meet. In one of those jobs, for about a year or so, I contracted with landlords to paint vacant apartments. Painting was where I first encountered Bueche’s Law and the school-of-money-lost taught me the importance of performance pay and systems in business.
When I was painting an apartment alone, I found the work to be tedious and lonely. The pre-painting work of cleaning walls, filling and sanding holes, removing fixtures and coverings, taping trim, mixing paint, etc. was a lot to do just to paint an entire apartment eggshell. But, I was 100% productive and completely focused. Although it took five hours to paint a small one bedroom unit, I got to keep the entire $200 fee for myself.
It did not take long, however, before my entrepreneurial juices began to flow and, with the help of a rudimentary spreadsheet, I discovered a recipe for expansion: hiring a helper would double production! I would pay my helper $75 of the $200. Even though I would take a hit on each job, we would be able to complete twice as many jobs per day. The planned result would be a 25% raise for me – $50 per hour instead of $40. This business stuff was easy ….or so I thought.
Reality & Bueche’s Law Minefield:
Unfortunately, reality was not quite what the spreadsheet predicted. Excel did not foresee the time we spent searching for the trim brushes and tape rolls each thought the other brought, the confusion about what color went where (especially frustrating because we were painting one color – “Semi-gloss in the bathroom and kitchen, flat everywhere else!”). I did not consider discussions (to say the least) resulting from varied opinions on painting techniques or chatter on unrelated topics such as hunting, fishing and football.
Reality: Production didn’t double, not even close. I had doubled labor but had only increased output by 40%. Painting time per apartment did drop from 5 to 3.5 hours but so was my profit – from $40 to $36 per hour!
Hiring a third person only made results worse. There was more confusion and standing around and it was only a matter of time until someone was painting the hard wood floors with their shoes. Three people painting the apartment only cut 36 minutes off our two-person time! My helpers were now making more than me!
WHAT HAPPENED?? I stepped right into the Bueche’s Law minefield and tripped a business-destroying claymore.
The Bueche’s Law Minefield: Bueche’s Law is one of the most consequential and common challenges faced by businesses. It explodes just when businesses are poised for growth and helps explain everything from government inefficiency, to the burger assembly systems utilized by McDonalds, to why machines replace workers in factories. Bueche’s law may also be the coining-source of such witticisms as “How many painters (for example) does it take to screw in a light bulb?”
In economics, we call Bueche’s Law “The Law of Diminishing Marginal Productivity,” also familiarly referred to as “The Law of Diminishing Returns.” Its basic premise is this: Although total output will increase with each additional employee, this increase will be less and less for each additional employee hired. This is a fancy way of saying you’ll save some time by hiring employees to complete a task but the amount of time saved will be less and less for each employee hired.
Arthur Bueche codified this Law into a simple equation, basically stating that the expected increase in production, resulting from each additional employee will be the square root of the total number of employees performing the task. For example, one employee is 100% productive. Adding another employee to the same task, however, will only increase production by around 41% (the square root of 2 is 1.414). Moving from two to three employees will increase output by 73% over one employee (the square root of 3 is 1.73). Want to get a job done twice as fast as one employee? You’ll need to hire three more. The square root of 4 is 2.
The Business Take-Away: Although there is an optimum number of employees for any task be very careful not to exceed this threshold. The smaller the business the more costly exceeding this threshold becomes. To avoid tripping a Bueche’s Law landmine, consider the following precautions:
To summarize, you do not need to throw away your spreadsheets to grow your business; they’re a great planning tool. However, make sure you incorporate the reality of Bueche’s Law into your business planning. If you don’t, productivity and profits will suffer as payroll costs outgrow sales increases. To combat Bueche’s law remember to: 1) focus on creating, implementing, and refining systems before hiring additional employees, 2) consider hiring part-timers before hiring full time staff, and, 3) be sure to quickly remove bad apples from your employment barrel.
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