Restaurants: The Hidden Costs of Intangible Factors

The Restaurant Context

The restaurant industry is one-of-a-kind: a fast-paced atmosphere, many moving bodies, hard-working employees, service rushes, long hours, close quarters, sweat-inducing environments, and demanding clients; it’s a tough place to work in, and it’s certainly rewarding.

Busy restaurant kitchen

Photo by Michael Browning on Unsplash

It’s definitely not for everyone, however; you have to be cut out for restaurant work. I know this from experience: it took me 5 years and 6 restaurant jobs to figure that out.

It’s difficult for all staff members alike: employees, managers and owners.

For managers, dealing with the chaos of the restaurant is just one half of the job description; the other half includes all the managerial responsibilities, and there are many.

Managers have a lot on their plate, one could say.

Because there are so many things happening in a restaurant at any given time, it’s hard to stay on top of it all. After all, there are so many things to consider:

  • How are my employees doing?
  • Do I need to hire more or less employees? Which employees should I hire?
  • Are my customers happy?
  • Am I spending too much/too little on ingredients?
  • Am I spending too much/too little on labor?
  • Should I renovate the restaurant?
  • Should I change/revamp my current menu?
  • Am I complying with all the necessary labor laws?
  • Etc.

If you think about it, many of these decisions ultimately come down to time and money; how do you make the best use of both?

When it comes to time and money, it’s never simple; as manager/owner, there are so many things you spend your time on in a given week, and so many different sources of spending. In this type of environment, it’s difficult to evaluate whether your time and money is being spent well.

Man calculating labor costs

However, even though this is difficult, this evaluation is crucial; every business owner/manager must do this. Unfortunately, so many business owners and managers don’t (or not consistently), and/or aren’t even aware of potential time and money savings; in fact, they’re losing money as we speak.

The Problem, Explained

When analyzing your company’s costs, it’s easy to fall in what I call “overly simplistic” thinking; this is what happens when you fail to look past the surface of the problem. Here’s what I mean by that.

Let’s say you notice that your labor costs are higher than usual; your first response may be to look at the lack of employee productivity as the primary cause. And why not? This is a common cause of overspending in businesses. To remedy the situation, you may look to discipline your employees, train them more, or even replace them altogether.

But wait. Are you sure that’s the problem?

Here’s an idea: what if the lack of employee productivity is a symptom, rather than the cause of the problem? What if the cause is something else entirely?

In many cases, this is what managers get wrong. They fail to look past the symptoms to the source.

Basically, the point is this: in order to truly diagnose the cause of overspending, one must look to the primary causes of the increase, not the secondary ones.

Let me explain using the example mentioned above:

“Overly simplistic” thinking:

  • My labor costs increased.
  • Why?
  • It’s most likely due to a decline in employee productivity.
  • Diagnosis: The problem is the employees: they are not good workers, so we should replace them
  • Result: Employee turnover, costs increase

Correct thinking:

  • My labor costs increased.
  • Why?
  • It’s most likely due to a decline in employee productivity.
  • OK, but what could have caused the decline in employee productivity?
  • There are probably certain factors which affected the employees’ performance.
  • Diagnosis: The problem is not the employees, but other factors which influenced the employees.
  • Result: Employee productivity increases

See the difference? In the first scenario, failure to look past the symptom to the cause led to a misdiagnosis, and thus an incorrect (and costly) solution. In the second scenario, recognizing the lack of employee productivity as a secondary cause rather than a primary one led to a correct diagnosis, and thus a correct and more realistic solution.

So, what causes high labor costs?

If you look deeply into the root causes of high labor costs, you’ll find that many of them are intangible (often hidden) factors. For example:

  • Employees are dissatisfied and disengaged.
  • Employees are angry with the policies of the organization.
  • Employees’ basic needs are not being met.
  • Employees cannot communicate effectively with one another.
  • Internal processes are outdated, inefficient and error-prone.
  • Managers are spending too much time on low-ROI activities.

These factors are hidden because none of them are found on the balance sheet. Employee satisfaction, for example, cannot be quantified or ‘weighed’. That’s why these factors are so difficult to measure, and why it’s so important to keep track of them.

What are the primary sources of high labor costs?

The primary sources are related to employees and managers. I’ve broken them down into 3 categories for you: employee productivity, manager productivity and manager decision-making.

Employee productivity

Labor costs are closely tied to employee productivity.

And, employee productivity is very closely tied to employee satisfaction/engagement. Generally, the more dissatisfied/disengaged an employee is, the lower their productivity will be, and the more likely they are to quit their job (see here for information on the costs of employee turnover.)

There are a lot of different theories about what contributes to employee satisfaction/engagement, but most organizational psychologists agree that, at the very least, employees must have their basic needs met in order to operate.

Generally speaking, basic needs can be split into 2 categories: human needs and work needs.

On one hand, human needs have to do with the individual. We’ve talked previously about them, which some thinkers have identified as autonomy, mastery and relatedness. These are extremely important.

On the other hand, work needs encompass things that relate to the workplace. In a restaurant, these may include:

Job

  • Do employees have the tools necessary to perform their duties?
  • Do employees have the tools necessary to perform their duties effectively?

Scheduling

  • Do employees have access to their schedules?
  • Are employees able to navigate their schedules? If so, easily and effectively?

Communication

  • Are employees able to communicate with one another? If so, easily and effectively?

Time and Attendance

  • Can employees log their hours worked? If so, easily and effectively?
  • Can they access those logs? If so, easily and effectively?

Payroll

  • Can employees access their pay information? If so, easily and effectively?

You might be wondering, “Why are ease and efficiency important?”. Because just having a schedule or just being able to communicate is not enough; your business’ tools and processes must be enjoyable to use and of high quality. They must enable your employees to flourish, not just to subsist. If employees are not happy with them, they will be dissatisfied and disengaged, which will lead to higher costs.

Manager productivity

Another significant portion of labor costs comes from you, the manager and/or owner.

As a manager, a portion of your week is spent on administrative tasks: scheduling, communicating with staff, dealing with shift/availability changes, hiring, onboarding, training new candidates and more. These tasks make up a significant portion of your weekly activities.

These include:

Scheduling

  • How much time per week do you spend scheduling your employees?
  • How much time per week do you spend collecting employee availabilities and dealing with any changes that come thereof?
  • How much time per week do you spend dealing with shift change requests and other employee requests?
  • Do you find that managing schedules is enjoyable, or difficult?

Communication

  • How much time per week do you spend communicating with your employees?
  • Do you communicate across one or multiple platforms? In other words, is your communication centralized or decentralized?
  • Do you find that communication with your staff is enjoyable, or difficult?

Time and Attendance tracking

  • How much time per week do you spend collecting, verifying and validating the records of your employees’ worked hours?

Payroll

  • How much time per week do you spend verifying and validating employee timesheets?
  • How much time do you spend relaying your payroll information?

Have you ever considered whether or not your current processes/tools are actually efficient, optimized and user-friendly?

If any of them are either inefficient, not optimized and/or error-prone, you are losing money.

Manager decision-making

[*Note: This is not a labor cost per se, but I’ve included in this list because it is a high cost.]

As a manager, you make hundreds of decisions every day concerning your staff and your business.

Some of these may relate to:

  • How many hours you should schedule your employees
  • Which employees to schedule
  • When to schedule your employees
  • When to hire new employees
  • When to replace employees (if need be)
  • Whether you should advertise and where
  • Whether to revamp your menu and when

I don’t need to tell you this, but good decisions are based on information. The more information you have, the more likely your decisions will lead to good outcomes.

So, do you base your decisions on information? Do you have the means to obtain that information? For example:

  • Are you tracking your labor costs?
  • Are you tracking your sales data?
  • Are you tracking customer data? (e.g. average attendance, average serve time, etc.)
  • Are you tracking website/social media data?

Decisions not based on data will lead to gross overspending in all areas of your business.

In the end…

In light of all that was said in this post, I must leave you with, yet again, a set of questions. If you are as wise as I presume, you will consider them carefully.

Generally:

  • Do you evaluate your spending on a regular basis?
  • When evaluating, do you consider the intangible factors in your business? Do you give them enough weight?
  • Are you aware of the primary causes of costs (as opposed to the secondary ones)?

Specifically:

For your employees:

  • Do your employees have their human and work needs fulfilled?
  • Are they happy/engaged?
  • Are they satisfied with the current tools and methods you offer them?

For you, as a manager/owner:

  • Is your time being well spent?
    • Can some of your core daily/weekly tasks be performed more efficiently and/or accurately?
  • Are your decisions well informed?
    • Are your business decisions based on reliable data?
    • Do you have means to collect data on key metrics?

By considering these questions, you’ll be doing yourself, your employees and your customers a service. You’re welcome!

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