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Dear Workforce How Do I Quantitatively Measure the Size of Our Workforce

October 8, 2004
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Dear Head-Counter:

Senior managers and CFOs are notorious for refusing new head count. The primary reason behind their resistance is that they often see employees as an expense rather than an asset. The fewer you have, the more money you save.

It’s possible to do a quantitative analysis to demonstrate to a cynical CFO whether you have "too many" or "too few" employees. I call that process determining "head-count fat." The process can be used for either justifying new positions or demonstrating the need for layoffs.

Determining whether you need more positions is based on a series of ratios or relationships. The process assumes that there is a relatively fixed ratio between the number of employees needed and certain business metrics. By looking at historical patterns within the firm, you can generally determine a reasonable range for these ratios.

For example, some firms start with a simple ratio known as revenue per employee to determine the number of employees they need. If you have 10 employees and you generate $500,000 in revenue, then the firm’s standard revenue-to-employee ratio is one employee for every $50,000 in revenue. Using this formula, you can justify an added position every time that corporate revenues (or revenue forecasts) go up by $50,000.

There are, however, other more complex internal ratios than revenue per employee that can be used to determine whether you have too many or too few employees. Some of these other ratios include:

  • Employees to managers

  • Employees to new customer orders or backlogged orders

  • Employees to inventory levels

  • Employees to number of customers

  • Regular employees to overhead employees (for adding overhead head count)

  • Labor costs to all production costs

  • Employees to the percent utilization of production capacity

Beyond these internal ratios, some external factors can also indicate the need for additional hiring. For example, as the economy grows, many firms begin to hire so that the newly hired employees will be well trained by the time the increased economic growth eventually leads to increased sales. Some other external factors that often cause companies to increase head count include:

  • An increase in consumer spending

  • A decrease in the unemployment rate

  • An increase in consumer disposable income

  • Increased purchases of durable goods

  • Increased housing purchases

  • Lower interest rates

Whichever ratio you select, work with your CFO’s office to ensure first that they buy into the concept of a fixed ratio, and second that the calculations for that ratio are credible and reliable.

If the ratio concept doesn’t work, the only other viable approach is to shift the burden to influential business-unit managers. They often have more political pull than human resources and can successfully argue that since they were budgeted the money, they ought to be allowed to spend it.

Incidentally, across-the-board hiring freezes are generally silly because they hamper the business units that need to grow rapidly, even during tough economic times. A freeze that focuses exclusively on overhead and no-growth/low-profit business-unit hiring makes more sense.

SOURCE: John Sullivan, head and professor of the Human Resource Management College of Business at San Francisco State University, November 3, 2003.

LEARN MORE: Did You Get the Employee You Wanted?

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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