Total Cost of Workforce
Contents |
Overview
Human capital costs accruing to a firm are known as the Total Cost of Workforce (TCOW); TCOW is an aggregate of several costs including employee compensation, cost of contingent contract labor, benefits and perks for the employee, costs originating from HR functions, retiree or inactive workforce costs and so on. TCOW is the largest cost component for an organization, sometimes as big as three-fourths of its operating expenses. In a rapidly changing business environment workforce costs can become increasingly hard to manage and control.
Importance of TCOW
Since TCOW is the largest cost to an organization, it is important to optimize associated costs to reduce expense and gain efficiencies. Again, since poorly measured areas of concern will remain poorly managed, it is important to measure all parameters related to workforce effectively, which provides direction for decision making. Merely relying on budgets and spreadsheets for requisitions and positions control, in the growth phase may lead to sub optimum results. One the other hand, in a decline phase, superficial cuts and across the board layoffs may result in greater long term losses.
A greater understanding of an organization’s TCOW can enable really meaningful effective measures, whether it is in recruitment or reduction in force, reorganization/acquisition or divestitures, completely in tune with the real requirements of the organization. An example of the impact of a TCOW optimization at a Fortune 500 was the realization of approximately $30 million from a one percent TCOW savings.
Traditionally, the finance tools for zooming in on TCOW have been budgets and spread sheets. Unfortunately, not only are these tedious to study, the chances of gaining insightful information for decision making in crunch periods are very lean. In addition, the constant state of change in policies and in the business environment may impact the organization’s budget.
Changing the Cycle
The typical organizational reaction to handling staffing related challenges in the absence of a proper assessment mechanism, looks like a binge-purge cycle: it hires more during the growth phase and cuts workforce during a decline phase.
Recruitment of additional workforce is a complicated procedure which can bring additional costs especially if a need arises in specialized positions (like those which require high competency levels) or if there is a sudden need to staff up to implement a strategic solution. Likewise layoffs designed to trim fat may hit the organization hard without a process for identifying non-performing or below par divisions.
A real and palpable difference can be made only if an organization carries out a systematic assessment of workforce costs and arrives at solutions which can be administered with clinical precision for pain relief. Decisions made without insight into critical job roles, optimum span of control, clear visibility into real replacement costs, or knowledge of sub-optimized employee groups will not be able to bring about desired results.
The availability of intelligent software tools has made a huge impact in this area. These tools are able to provide visual “at-a-glance-charts” which aid in assessing relevant aspects of the workforce, both on an aggregate and individual basis. Not only is the understanding of key metrics better, these tools can also help visualize ‘what if’ scenarios for determining future needs and projections.
The insight arrived at after a 360 degree view of the situation helps the implementation of the aforementioned clinical measure, enabling saving throughout the process.
