As an accounting firm, you’d be right in thinking that these are both critical measures for us when assessing a business. However few people understand the differences between them and what each can bring to their business – so we thought a review might be timely.
Efficiency refers to the system or process to achieve maximum output or productivity with minimum wasted effort or expense. Think higher throughput of customer orders, quicker order taking time, less errors in your accounting system.
Effectiveness is the degree to which something is successful in producing your desired result or outcome. Think more sales, higher market share, more referrals, higher business sale price.
How efficiencies can create a problem in business
Many people think and have been promised (usually by someone selling a system of some kind) that achieving efficiencies in their business will guarantee business success. And whilst that can be true, sometimes the opposite can happen – depending on what outcomes (of effects) those efficiencies create.
If you, your team or your processes are creating efficiencies in outputs that aren’t useful to the business or worse, they’re creating negative outputs, that can put your business in danger. You might be wondering how that’s possible. Let me explain.
Let’s assume you, as the business owner, are sensational at developing new business (effectiveness), but somewhere in your customer service or output chain 90% of those new customers are getting disgruntled – from poor service, poor quality or something else they’ve had to battle and therefore don’t transition to repeat business – your business is very efficient at creating both non-repeating business and negative customer sentiment.
How can that possibly happen? A manager might have instigated a system that rewards employees for dealing with customers quickly (spending only 5 minutes a call) – ie: the more they get through, the higher their pay – sounds good. But the problem might be, that in order to supply super quick service the customer might be cut-off when explaining their issue and they’re getting the wrong product or service. And to boot the whole experience might leave customers feeling their concerns aren’t being listened to – that someone just wanted to sell something – anything to them regardless of what they needed.
Hence their overall experience is that their business is unimportant to the company – and something like 68% of all customers that leave your business, leave because they don’t feel valued.
The problem with creating that kind of efficiency, is that no matter how great or effective you are in gaining new business or making the best widget or how polite your team are on the phone, those efficiencies will most likely result in poorer outcomes over time that if not fixed can kill a business. In order to retain 30 customers, you would have to turnover 200.
Why effectiveness is usually better
Continuing with the last example – a second customer service team take things a little more slowly (10 minutes per call) and always take the time to really assess what the customer needs, thank them for their business and supply them with the right product or service. Their customer retention rate is significantly better. They retain 70% of all customers who become long-term fans of the company.
Let’s look at the numbers.
Team A is more efficient at through-putting customers, spending 5 minutes on 72 customer calls a day but losing 85% results in approx only 11 customers being retained.
Team B is less efficient, but more effective. They spend 10 minutes achieving 36 customer calls a day (but only losing 30%) resulting 25 customers being retained a day.
Of course we’ve assumed each customer’s transaction value was equal – but you get the idea. In this example not only will the financial effect be greater, so too is the customer lifetime value, the likelihood of being able to build the business and the salability of the business as well.
Far better to focus on effectiveness until you’re at a stage where a little efficiency tweak will make real differences to the bottom line.
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