Benchmarking Your Human Capital
Over the past month, we’ve introduced and reviewed three key metrics for trucking companies to focus their attention on. These three measures work in conjunction with each other, and Jack Porter (Lead Facilitator of TCA’s Best Practice Groups) has coined the term “Golden Ratio” to define them. As a reminder, they are: 1) Gross Margin (measuring your results after subtracting your variable expenses from your top line), 2) Admin overhead as a percentage of the above Gross Margin, and 3) Fixed Overhead as a Percentage of Gross Margin. The target (or Golden Ratio) for a healthy trucking company should be 25% : 25% : 25%. If you do the math, reaching these targets (or getting close) provides a very healthy Operating Ratio, while also ensuring that your capital is deployed in the proper proportion. Obviously, there can be dramatic changes to these measures on a monthly basis (seasonality, economic ebbs and flows, year-end bonuses etc), however, over a rolling six or twelve month period, these targets should be achievable, and if they seem out of reach, it provides a compass for where to focus your operational attention.
For this post, we are going to focus our attention on the second of the two measures – Admin overhead as a percentage of gross margin. To start, to properly measure this value, some standardization needs to be applied to your financials. This is helpful internally for reporting purposes, but also externally when benchmarking your performance against other companies. First, let’s define exactly what we mean by “Admin”. Based on years of iteration and feedback, TCA’s Best Practice Groups have defined admin overhead to include the following roles in a trucking enterprise: 1) Owners, Executives, GM, 2) Sales/Marketing, 3) Operations, 4) Safety/Risk & Orientation, 5) Information Services/Technology & 6) Finance/Administration. Noticeably absent from these categories is Shop Personnel (including Shop management). For benchmarking purposes, we include Shop Wages/Benefits in the Maintenance category (so, as a result, if you are including, this will provide an immediate improvement to your admin overhead calculation). Once you have identified, and segmented these roles into the above categories, the next step is to begin capturing the Salaries/Wages/Benefits for these roles and categories separately – ideally on your monthly P&L (we provide all inGauge users with a template P&L to use in this regard).
Now that the proper roles and categories are defined for admin overhead, it is useful to start calculating various measures to determine if you are in line with both your historical results – and that of the industry. Here are some metrics which you should be able to calculate very quickly:
- Driver to Non-Driver Ratio – this one is the easiest for companies to calculate. Simply take the number of active drivers and compare to the count of active admin personnel (as defined above, not including your Shop personnel). For the average Dryvan operator, this measure should be above 4:1, and closer to 5:1. Depending on the operating mode, size, Average Length of Haul, and other business-specific factors, this measure can vary dramatically. This reinforces the value of benchmarking this metric versus companies of similar operating attributes. As an analogy, you expect to generate specific revenue targets per truck per week/month/year. You should expect the same type of production/leverage from your admin personnel.
- Non-Driver Wages & Benefits (% of Net and Gross Revenue) – although your Driver to Non-Driver Ratio may be in line with your industry peers, that doesn’t automatically mean you don’t have a problem on Admin Overhead. The next step is to calculate your Admin Overhead (Salaries/Wages/Benefits) as percentage of Net (excluding FSC) and Gross (including FSC) Revenue. Typically this value should be around 8% (net) and 7.5% (gross) as a percentage of revenue. But again, this will vary based on your operating attributes and size.
- Admin Turnover – Although turnover on the admin side isn’t a pressing industry issue, calculating your turnover for admin staff is something that should be measured consistently. Similar to Driver Turnover, there are both hard and soft costs associated with recruiting and retaining a high-performing admin team. If your managers and staff are constantly training new people, you are not going to get the same degree of leverage from these people over time – which means your admin overhead will be higher than average. Maybe it is not necessary to calculate every month, but probably good idea to calculate at least once per quarter depending on your size. Also, focus on the Short Term Turnover (Admin Personnel Departed hired in last twelve months divided by the Admin Personnel hired in last twelve months). If this result is high, you could have more than a financial issue, it could point to a culture issue (which can have dramatic long term consequences).
Now that you have calculated these important measures, you need to consistently track in order to drive improvement. If you are attending this year’s addition of Workforce Builders (June 12-14 in Kansas City, Missouri), we will be running an interactive presentation/workshop on workforce benchmarking. Angela Splinter of TruckingHR will be joining us to provide her valuable insights and Best Practices based on her many years of studying the Trucking Industry’s HR trends and opportunities.
Next week, we will focus on the third key measure: Fixed Overhead – making sure you are properly segmenting your fixed expenses, and ways to improve on the final component of the Golden Ratio.