People analytics teams tend to shy away from calculating revenue per employee. It’s a very macro number. On its own, a single revenue per employee calculation tells you very little. Even large differences in revenue per employee do not necessarily mean anything or, at least, are not particularly “actionable” when immediately discovered. If I’m being honest, I feel like we people analytics folks have collectively decided we’re just a little too nuanced in our thinking to risk spending time on a data point that can be explained away almost as easily as we can calculate it.
But then again, it’s pretty easy to calculate. And, while it is a very macro number, you still ought to be attuned to how it’s changing. I check the weather, not the climate, before going out camping for the weekend, but that doesn’t mean it isn’t important to know if the climate is changing.
So put aside your nuanced expertise with me and let’s do some basic calculations!
The most simplistic view of this metric is to use this formula:
The average revenue per employee = Revenue during period / Number of employees in that period
Ok, so let’s say you get a number like $200,000. So what? It’s not necessarily good or bad. There are happy shareholders out there whose companies have a lower revenue per employee and unhappy shareholders whose revenue per employee is much higher.
So next you want to look at how that is trending over time, like so.
(Source: One Model Storyboard Visualization for revenue per employee using test database)
Trending is probably the best way to look at this data. Ideally, the number trends up, right? But it might not always. Perhaps you are growing and investing heavily in building out teams that will deliver revenue in the future. Perhaps your employee mix is changing. You’re adding call center employees instead of research scientists. Perhaps perhaps perhaps.
And so, even though we might be able to explain any changes away at this point, that’s exactly the value of making the simple calculation in the first place. The resulting thought process leads directly into asking really fantastic questions about your people strategy. Are we investing in people now for future revenue later? Are we running significantly leaner than we have in the past? Maybe too lean?
Pulling this data together into a simple graph took me 5 minutes and 24 seconds.
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Ok, let’s get back to our thoughts about call center employees vs research scientists. Both are valuable but you would expect an organization with more of the latter to have a higher revenue per employee. So in your own analysis, you can do a couple of things next.
While you may not always be able to attribute revenue earned to specific departments, it will give you more insights if you monitor changes over time. If revenue per employee is dropping or increasing over time, it could indicate that adjustments need to be made on a departmental level.
If you do find some interesting insights as you trend out revenue per employee, you may want to check whether you are aligned with finance on the dollar amount that best aligns with the company's business strategy. If not, presenting this information to the C-level could be a mistake. You may find it relevant to look at net income or the amount left after all expenses. Here are the various levels of income to think about.
Gross Revenue
If you’re losing money, Net Income could help you determine which areas of the business may be contributing to that more than others.
Again, these revenue per metrics are more of an early warning system than a root cause analysis. Use them as a scanner to home in on more specific analyses. Once you get going, you can start to cut the data in more ways to see what stands out.
Measuring this metric by quarter or by month may give you an idea of how the business cycle evolves. However, be sure to compare similar quarters YoY (year over year) or Months YoY to get a better idea of if things are improving or getting worse over time.
These last few years have been tough. As HR leaders, we know that getting new employees can directly impact the productivity of the company. If you have had a lot of turnover, you may want to align dates to see how this has impacted your revenue per employee ratio. Rather than celebrating a spike in revenue per employee, you might raise the alarm that you are stretched much thinner than before.
If new employees cost more, then your most tenured employees must be worth the biggest bang for your buck, right? Breaking your data out by various cohorts will give you a better idea of how effectively you're building your talent.
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Another upshot of this relatively simplistic metric. You can often estimate it for publicly traded companies.
The easiest way to do this is to choose at least 3 to 6 public companies in your space. Because they are publicly traded, finding that information on the investor relations section of their site is much easier than trying to collect that same intel on private companies. In most cases, you can find that information over time as well. Once you have that, finding the estimated number of employees can be found on many database websites, or even on Linkedin.
That said, revenue per employee by the industry for private companies can require a substantial amount of work. Look for investor information, and search for news articles on earnings.
For starters, don’t panic (or celebrate). If you notice big differences between your organization and others. A competitor may use a much larger number of contingent workers who don’t appear in their employee counts. Or have a very different support model. Again this might feel like it devalues the comparison because so much just depends. That said, doing the calculation suddenly gets you thinking things like, “Hey has their people strategy changed significantly?” “Do they use more/less contingent staff?” These are great questions!
Now that you’re in a strategic mindset, start thinking about the levers you have at your disposal in order to adjust these numbers: