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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Dear Workforce:
