When considering if you can afford to hire someone, you need to go beyond calculating just their salaries and fringe benefits. In the first blog post of this series, we discussed some of the costs and cash needs you need to consider when determining if you can make a hire. In this post we’ll discuss some of the metrics and measurements you should explore so that you can confidently make the decision: can you afford to make that next hire? Can you afford not to?
Capacity planning is key.
If there was one back-of-the-envelope, shoot-from-the-hip calculation we’ve seen most business owners make, it is around capacity planning. While most owners can tell you what’s in their pipeline, the number of hires they need to make to fulfill that demand is more of a SWAG. If your company is in rapid growth mode, and money is flowing in the door whether through investment or revenue, you may feel like you must hire to grow. Yet many investors complain that companies flush with cash ramp up staffing too quickly before they achieve product market fit, and therefore run out of cash too soon.
A better approach is to ensure that you are modeling out the demand while looking at the existing capacity within your organization. Do this by looking at the available hours your team has to work, and how much of their time is being spent on production, admin and other activities. A good way to measure capacity is by looking at metrics like how many programming hours it should take to get to the next milestone, or employee utilization. Understanding your existing capacity and the demand on resources new business or investment will require is critical to not over-hiring or under- hiring.
Inventory ALL the work.
When determining if you need to make a hire, a good exercise is to list all the tasks (without names) done on a daily, weekly, or monthly basis for a function, such as sales, marketing, finance or administration. For example, if you were looking to hire a sales person, look at the entire sales process and all the tasks involved in a sale and post-sales service. What you may find is there is work you expect the new hire to do that could be pushed to lower levels in the organization, like administrative tasks. By reshuffling the work among your team, you’re not only getting the best ROI for your hiring dollars, but you are assigning work to the new hire that is commensurate with their pay grade. What we often find through this “work inventory” exercise is that you don’t need a full-time headcount, or only need one person instead of two. If you do this exercise for all parts of your organization and look at the work, not the people you have, you may find that just through reallocating the work among the existing team you may not need to make a full-time hire, or not need to make a hire at all.
Hiring often hurts productivity, not helps it.
Hiring can often be a band-aid approach to an underlying productivity problem. Often adding a new person exacerbates those inefficiencies. When our existing staff gets stretched, our natural tendency is to immediately think we need to add more people. You may find in doing the “work inventory” above, there are a lot of things you shouldn’t be doing– whether it is for a single process or across the organization. If you address these inefficiencies and extra work processes before you hire, you will not only find hidden capacity in your existing staff but also get a better ROI on your spending. Simple metrics that you can measure include revenue per employee, profit per employee, output per employee or billing realization rates. You may be surprised if you track these metrics over time you may see decreases in efficiencies rather than increases as you add more staff.
Mitigate losses through Management by Objectives (MBOs)
So you’ve made a hire. Great. How are you holding them accountable? One way to ensure that you have made a good hire– and get the ROI you expect– is through Management by Objectives, or MBOs. MBOs are goals and objectives to which you hold your staff accountable. Especially for new hires, it’s important to establish 30-60-90 day goals so that you can evaluate their performance, and make course corrections early. (Do yourself a favor, and set up the review dates for the 30-60-90 conversations the first week the person is hired!) We all know how expensive turnover is, both in salaries and opportunity costs, so ensuring you can identify issues early is important to mitigating losses your managing cash flow, and the time horizon you expect that person to become fully productive.
When your business is running on overdrive and you feel your staff is overwhelmed, it could be time to make a hire. Or it could be time to do some internal housekeeping and efficiency-building in order to free up capacity with your existing staff. Hiring a new person is an expensive endeavor that can consume a lot of cash in these uncertain times. However, if you have a good handle on your numbers and are watching the new hire’s expected performance and productivity metrics you should be able to get the expected ROI of every hire you make.
If you need help modeling out your demand and need help with capacity planning tools, reach out to us. We’d be happy to help.
