Scaling Up: How a Few Companies Make It...and Why the Rest Don't (Rockefeller Habits 2.0)

by Verne Harnish

Start with direct labor, determining which employees spend 50% or more of their time delivering on the product or service your business offers. All other labor goes into management labor. If you have a sales team, as in the example below, break out those employees separately. • Avoid splitting a person across multiple groups. • Do not add payroll taxes and benefits. Only count what you pay employees in wages and bonuses, to keep the calculation simple. • Here’s why contribution margin is used for management and sales labor: Workers you classify as direct labor are accountable only for the work you put in front of them; that is why they are measured against gross margin. But management and sales labor are held to a higher standard. We want management to manage gross margins, direct labor performance, and sales. We want the sales team to grow our revenue.