Think You Know Your Total Cost of Workforce? Think Again.

Do you have a detailed and accurate understanding of your total cost of workforce (TCOW)? If your organization is anything like most large businesses, the answer is no.

Organizations are usually pushed to review their TCOW only when facing upheavals, crisis, or simply a pivot in the sector. This is because, in too many organizations, just finding the data can take several months, and as a result, this kind of overwhelmingly large project is only considered when it can no longer be avoided.

The reason the data is so hard to find is because it’s contained in a number of disparate systems. In order to gain a true TCOW, you need HR data, such as headcount, salary and benefits, as well as finance data on workforce overheads, and external market information, such as unemployment data and local market salary data.

TCOW is essential to building an efficient workforce plan and staying competitive. Yet most organizations are not able to accurately calculate the ongoing cost of an individual employee, let alone an entire workforce. So, how do you start to get more data accuracy?

Start with the True Cost of Individuals

The focus of a CHRO should be to manage talent in a sustainable way to avoid escalating costs—essentially, sustain a group of the best people at the lowest possible cost.

When it comes to forecasting TCOW, the most common approach is for the finance department to calculate the cost of an individual and aggregate that amount upwards. But for this approach to work, you need to understand the true cost of a new hire.

This goes far beyond salary and benefits. To understand the real price associated with each hire, the following costs must also be considered:

  • People: This certainly includes pay, but there’s a lot more to it. In a competitive market, do you offer top talent market price or above? Are there variable compensation costs such as bonuses that you could consider? How expensive is recruitment, onboarding, and training? What about employee retirements and unavoidable costs such as insurance?
  • Overhead: This is another cost that can be easy to miss. How many people are required to manage staff? What’s the right ratio to keep costs low without affecting productivity and performance?
  • Facilities: From square footage load to IT considerations, there are a litany of cascading costs that should be considered for each new hire.

This data is all critical to calculating the price tag associated with each person in the company. Unfortunately, this is where poor processes can make precise forecasts impossible to achieve.

Too often companies intentionally and unintentionally add padding to the cascading costs of managerial and facility expenses as a “just in case” measure —but it’s not always easy to pinpoint this financial bloat. Costs may be allocated into different team buckets, and it can be difficult to determine what’s actually necessary until you find yourself with a surplus of funds at the end of the financial year, when you really needed resources earlier.

Data visualization shows actual total cost of workforce versus budgeted total cost of workforce

Paying for What You Need in a Competitive Market

Of course, viewing people as purely numbers on a page is dangerous. For example, finance may see an empty chair as a cost saving, but an HR professional (or a manager drowning in work) sees the a potential hire in that chair and the opportunity for increased productivity and revenue.

The trick to hiring the right people at the right time, while keeping the TCOW under control is to use workforce segmentation. It’s important to understand what roles or groups of roles are absolutely essential to the success of your organization, and where you may be able to re-allocate costs. Essentially, which chairs can legitimately remain empty without sacrificing productivity or the bottomline.

Here is a common workforce segmentation from workforce planning expert Mark Huselid. He suggests dividing your workforce into the following groups:

  1. Critical: These people are the real differentiators at your organization, and generally are highly skilled workers who drive disproportionate value. You may need to pay a premium (i.e. above market rates) to recruit top talent into strategic roles in this bracket.
  2. Core: These roles are required for your business to function. You should be willing to pay market rates to attract talent.
  3. Necessary: These are positions that you require, but do not require the same skills or experience required as the top two categories. If there is a surplus of talent available, you may be able to offer below market rates and reallocate those funds to the critical pool.
  4. Flex: This category is not a necessary cost to your business, or may be seasonal or only required in busy times. You may be able to outsource this category entirely or fill positions at the lowest possible cost.

Keep in mind as you go through this process that there are other factors affecting workforce segmentations including the local unemployment rate, cost of living, and whether you are located in a hot or abundant market. This will impact your TCOW and therefore, your workforce plans.

It may be, for instance, that a tech startup in an expensive city simply has to offer a higher rate for the developers it needs to reach its strategic goals. Alternatively, a company with more limited funds may be able to attract critical or necessary employees by offering flexible options, such as performance-based bonuses or telecommuting, or even opening a satellite office in a more affordable, family-friendly area outside of an expensive city.

Data visualization showing actual total cost of workforce versus budgeted total cost of workforce filtered by organization hierarchy

Plan Well, Plan Often

Unfortunately, too many large organizations put TCOW in the “too hard” basket. Even knowing what data to include and where to find it can be a headache. To then create a compelling story that convinces executives to make a change is even harder.

However, you can’t manage what you don’t measure. That’s why using analytics and reviewing data on an ongoing basis is so important. Don’t wait until a crisis hits to know your TCOW. Once you have calculated this once, it will be easier to do again and again. Additionally, you’ll be able to do the kind of agile workforce planning that will allow your organization to take proactive action ahead of any new business or market realities.

Ultimately, understanding your TCOW on an ongoing basis will enable your business to adapt to business cycles, filter out noise in the market, and gain a higher level of insight to engage more competitively in the market.

Author Photo
Ian Cook |
Curious about the differences between gaussian and pareto distribution? Ask Ian. Want to know what it’s like to kite ski North of the Arctic Circle? Ask Ian. Not only is he an expert in statistical analysis and HR metrics, he’s also an avid cyclist, skier and runner. At Visier, Ian helps customers drive organizational change through linking workforce analysis to business outcomes. He is responsible for the workforce domain expertise within the Visier solutions.