Doesn’t it just warm your heart when someone outside of HR makes the case that paying more attention to employees is the key to business success? In this case, it’s my colleagues in operations research. While they typically study supply-chain problems, it just so happens that, in a new Wharton working paper, employees turn out to be the story.
My colleagues focused their study titled “Setting Retail Staffing Levels: A Methodology Validated with Implementation” on bricks-and-mortar retail. In an industry with low margins where the conventional wisdom is led by Walmart, the key to success is lowering operating costs. A big part of those costs are in labor, so it is no surprise that the retail industry has been a leader in using more part-time and temp workers to keep labor costs down, holding the line on wages, not training, and, with few exceptions, seeing employees as a cost to be minimized. There is no doubt that these businesses fight for every dollar of margin and do not have the luxury of the huge profits per employee that trend-setting tech companies use to fund innovations.
The two-part Wharton study began with a look at the performance of individual stores in big retail chains, data that were compared to employee inputs: i.e., staffing levels. What researchers found was that companies were often staffing their stores far too lean, and that many stores performed better with higher staffing levels and were more profitable. Let’s let that sink in for a minute: The stores were making more money (with all other things being equal) when they spent more on employees.
They also found that retailers didn’t do a very good job tying staffing levels to actual demand in those stores. In fact, they set staffing levels identically across stores, even when the needs of the stores varied considerably. The average store did not appear to be understaffed, but there were enough that were understaffed that the effect on overall company profitability was substantial.
Studies with this method are reasonably common in academic research, but my colleagues were able to do something quite different. They persuaded the retail chain to run an experiment with them and raise staffing levels to the amount that their analysis of historical data suggests would be optimal. Yes, labor costs obviously jumped when they did that, but so did revenue. In retail, labor is a small percentage of costs–the biggest chunk is the cost of the products they sell. So, the net effect was an increase in profits of $7.4 million across 168 stores on an annual basis.
In separate analyses, they found that an hour of training per month for employees with sales responsibilities contributed to a 6 percent increase in revenue for that employee per month, far more than the cost of the training.
What’s the takeaway from this? One question worth pondering is: Why should more staffing and training pay off? Especially now with the growth of online retail, the one thing stores still have going for them is customer contact with salespeople. If retailers cut that down to almost nothing, then they have effectively eliminated their competitive advantage against online stores.
A point to acknowledge is that research like this takes a lot of resources, so we should not blame the companies for not knowing these effects. It is another reminder, though, that the 1980s economist’s view of business people–that they are rational, optimizing machines who know the best way to do everything–isn’t true.
The company that was the subject of the study is apparently taking away a lot from these findings and is trying to implement them elsewhere. Will anyone else when they learn about the results? What will CFOs think about this study? It has all the hard numbers and careful analyses that they appreciate, and retail stores are struggling to find any way to make financial progress. What’s your guess?