Calculating the true cost of your employees
December 15, 2009
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Calculating the true cost of your employees!
by: Jed Black
I remember a couple of years ago, I was chilling out at a construction site in southwest Georgia with a crew of commercial plumbers at the end of a long hot day. I was on site working with the owner to help him return to maximum profitability. This company was a successful commercial contracting company that helped build new hotels and multi-family dwellings. While the rest of the country was deep in the midst of the summer recession of 2007, this company was growing by 45% annually. The owner was a natural entreprenuer. A hard working plumber that could do it all and suddenly had 70 employees, more sales than ever and less hitting the bottom line. He knew that something was broken and was smart enough to be willing to ask for help. As we sat in that south Georgia heat that afternoon and watched the owner roll out in a cloud of dust, the conversation good heartedly got back to all the money the owner was making. The men in the field thought he was rolling in dough, because after all, they got $22 an hour and the estimating team charged $35 for every hour they worked. Heck he is making $13 on each of us every hour we work! We laughed about it but the conversation gave me a keen insight to one of the things that was broken. No one really understood what the real cost of the crews was and therefore crew productivity was never thought to be an issue. I worked with the owner to identify his true fully loaded labor costs and how to utilize the proper pricing formula to bid his jobs. We also had a series of meetings with the field supers, crews and estimating teams to spell it out. Once everyone understood the true cost of labor, they understood that even a 10% increase in productivity could mean hundreds of thousands of dollars to the bottom line. I have placed the calculations for pricing and if you would like a handy dandy calculator that you can use to identify your fully loaded labor cost and what small adjustnments to productivity can have on the bottom line, email me and I will send it to you! Please use this to be sure your pricing is correct and as a tool for ongoing communication with your teams. Thanks.
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Why hiring an Interim Manager makes financial, economic and market sense
More than two years after the Great Recession began, some feel that the nation is in the midst of a slow and fragile — but jobless — economic recovery. Some economic indicators seem to suggest that robust economic growth will soon resume, others point toward a “double-dip” recession and still others indicate little change in the economic situation. So what does a fledging enterprise do when it needs to replace an executive at the CEO, COO, CFO, Executive VP, VP and Director/Manager levels? Invariably it comes down to a benefit-cost scenario for companies, where risk reduction in hiring the right manager or executive is a real ‘crap-shoot’ when business growth, market share, competitive advantage and strategic direction are at play. Companies seeking to replace an executive have a real challenge and this is where an Interim Manager offers a great win-win opportunity to meet a critical organization need.
According to Bradford D. Smart, PhD, in his book, ‘Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People, an executive who is hired at an average base salary of say $114,000 who turns out be a bad choice, will actually cost a company about $2,709,000; greater than 24 times base compensation. Dr. Smart further points out that this dollar amount increases or decreases as salary levels (and responsibilities) increase or decrease. For instance, a bad hiring decision involving a $60,000 per year manager would cost an organization $1.4 million, and a bad hiring decision involving a $350,000 per year executive would cost an organization $8 million. Even if you doubt these high costs, change 24 times salary to 12 times salary, an organization will realize significant costs. At 25% of the researched amount, an organization is looking at a $2 million dollar cost for a bad hiring decision involving a $350,000 per year executive. That is a high cost for a hiring mistake.
Mr. Paul Frankenberg, President, CEO, and Principal in Kraft Search Associates; a retained Executive Search Firm specializing in the recruitment of high-value Executive Leadership throughout the Healthcare Industry, referenced Dr. Smart in a recent report on the cost of making executive hiring mistakes. Mr Frankenberg reports that hiring a permanent executive who turns out to have been the wrong choice is not only very pricey and expensive, but results in long-term “opportunity costs” that can result from sub-standard service, inadequate research, missed deadlines, failed marketing campaigns, missed sales targets, and flawed accounting or investment strategies. Added to this cost scenario are recruitment, training, and severance expenses, in addition to the cost of sub-standard performance and replacement costs for a new executive. All in all, making a wrong hiring decision can have significant and ling term negative consequences.
So, what is the alternative? Well, quite simply it is the Interim Manager or Executive who is actually an employee of an executive placement firm that specializes in providing highly trained “impact players” to accomplish strategic business objectives of a company in a timely manner. An Interim Manager can be used to help solve critical business issues, such as a clearing up a clouded vision and direction for growth, addressing customer needs, reducing over spending, improving free cash flow, business planning, developing a business structure to optimizes core competencies, managing growth and exploring new ways to grow business. When the term of Interim Manager has been completed, an organization is in a position to hire that Interim Manager out right, or insert a full time executive that can continue the successes established by the Interim Manager.
The Interim Manager is a cost effective solution that provides many advantages such as:
Flexibility – An organization maintains a lean business structure while utilizing flexible Interim Manager’s expertise without the high cost of an executive job search and hire that may turn out to be more costly than beneficial.
Experience – An organization utilizes a seasoned, highly experienced Interim Manager who provides the strategic expertise needed to meet business needs.
Speed – An organization optimizes the capabilities of an Interim Manager who can hit the ground running with little training necessary to solve strategic business issues.
Value — An organization gains value through the utilization of an Interim Manager whose annual salary is itemized as a variable cost that is tax deductible as a business expense and is cost effective.