Step 1: Calculate Staffing Costs
Costs must be considered when staffing strategies and plans are being developed. In some cases, it is necessary to calculate the costs of several different staffing scenarios before the selection of the best strategy can be made. In other cases, costs need to be determined so that requested budgets can be prepared and defended. In still other cases, costs must be calculated in order to build coherent business cases for change (as mentioned in Chapter 12).
There are two separate types of staffing costs that should be analyzed: the cost of maintaining your desired workforce configuration, and the cost of making the transition from your current workforce to that desired future state. I sometimes describe these two types as the “cost of being there” and the “cost of getting there.” Total staffing costs for any given planning period are the sum of the maintenance and transition costs for that period. Methods for calculating both types of costs are described here.
Workforce Maintenance Costs
Maintenance costs are the costs that an organization incurs when it maintains its workforce in a given configuration. At a minimum, this includes all direct and indirect payroll costs (e.g., salary and benefits). It may also include costs associated with physical space, overhead, and other infrastructure expenses (e.g., personal computers for every employee).
To calculate the cost of a given staffing configuration (e.g., your “supply then” or “demand then” scenario), you will need to estimate the maintenance costs for each job category in your model and then sum these costs across all job categories. Follow these steps:
- Identify all the types of direct and indirect costs that you need to consider for each category (e.g., whether space and overhead will be included).
- Define the appropriate time frame for your calculation (e.g., that you are defining annual or quarterly costs).
- Obtain or project the cost information for every individual in each job category or cell that is included in your staffing model. Make sure that the cost estimates are consistent with the time frame of your analysis (e.g., that if your time frame is one year, you have used annual salary costs). Include in your calculations cost estimates only for positions that will actually be filled. Cost estimates for open positions may need to be included when you are preparing budget estimates, but not when you are calculating actual costs. These open positions will not require actual cash outlays until they are filled.
- Sum these costs across all the individuals in each cell to calculate a total for each job category.
- Sum the costs across all job categories of your model to determine total staffing maintenance costs.
It is always best to base your calculations on real data—that is, the costs that will actually be incurred during the period in question. If you have actual cost information for each employee, use it. If for some reason actual costs cannot be determined, calculate and use weighted averages for each cost (e.g., based on midpoints or “compa-ratios” for that job) for each cell. However, detailed compensation and benefit cost information usually is readily available in your human resource information system.
Finally, remember to consider changes in costs that are to be expected during the planning period in question (e.g., specific merit and overall cost of living increases). Don’t base your estimates on current costs (or, worse yet, historical rates), as these are probably much lower than the costs that will actually be incurred. Use whatever costs you think will be appropriate for the period being analyzed.
Figure 24-1 is an illustration that is based on the staffing model example described in Chapter 9. Suppose that we need to calculate the cost of maintaining this “supply then” configuration for a year:
| Software Engineers | Object-Oriented Programmers | Total | |
|---|---|---|---|
| Project Manager | 12 | 9 | 21 |
| Lead | 25 | 21 | 46 |
| Individual Contributor | 62 | 52 | 114 |
| Entry Level | 83 | 77 | 160 |
| Total | 182 | 159 | 341 |
First, determine costs for each job category or cell. Suppose that an analysis of current salary costs shows that the weighted average salary for individuals currently working in the software engineers/project manager job category was $77,295. However, a 3.5 percent average salary increase was also expected for the coming year. That would raise the average salary for this category to $80,000. Estimates for benefits, space, and overhead are also created. Assume that your analysis produces the results shown in Figure 24-2.
| Software Engineers | Object-Oriented Programmers | |||
|---|---|---|---|---|
| Project Manager | Salary: | $80,000 | Salary: | $75,000 |
| Benefits: | $20,000 | Benefits: | $20,000 | |
| Space: | $5,000 | Space: | $5,000 | |
| Overhead: | $5,000 | Overhead: | $4,000 | |
| Total: | $110,000 | Total: | $104,000 | |
| Lead | Salary: | $60,000 | Salary: | $55,000 |
| Benefits: | $12,000 | Benefits: | $12,000 | |
| Space: | $4,000 | Space: | $4,000 | |
| Overhead: | $4,000 | Overhead: | $3,000 | |
| Total: | $80,000 | Total: | $74,000 | |
| Individual Contributor | Salary: | $50,000 | Salary: | $45,000 |
| Benefits: | $10,000 | Benefits: | $10,000 | |
| Space: | $3,000 | Space: | $3,000 | |
| Overhead: | $2,000 | Overhead: | $2,000 | |
| Total: | $65,000 | Total: | $60,000 | |
| Entry Level | Salary: | $40,000 | Salary: | $35,000 |
| Benefits: | $8,000 | Benefits: | $8,000 | |
| Space: | $3,000 | Space: | $3,000 | |
| Overhead: | $2,000 | Overhead: | $2,000 | |
| Total: | $53,000 | Total: | $48,000 | |
We estimate that it will cost the company (on average) $110,000 to employ and support a project manager in software engineering for the planning period in question. To calculate the total cost per job category or cell, multiply the total number of staff that will be in each category (as described in the “supply then” matrix) by the cost per category (as shown in the cost matrix) and sum your results across all job categories (see Figure 24-3).
| Software Engineers | Object-Oriented Programmers | Total | |
|---|---|---|---|
| Project Manager | 12 × $110,000 = $1,320,000 | 9 × $104,000 = $936,000 | $2,256,000 |
| Lead | 25 × $80,000 = $2,000,000 | 21 × $74,000 = $1,554,000 | $3,554,000 |
| Individual Contributor | 62 × $65,000 = $4,030,000 | 52 × $60,000 = $3,120,000 | $7,150,000 |
| Entry Level | 83 × $53,000 = $4,399,000 | 77 × $48,000 = $3,696,000 | $8,095,000 |
| Total | $11,749,000 | $9,306,000 | $21,055,000 |
It will cost this organization $21,055,000 to maintain the workforce configuration described in this particular “supply then” scenario for one year, given the cost assumptions that we made.
One additional adjustment may need to be made in your estimates. It is likely that any new hires that are to be added may be paid at a rate that is higher than that of existing staff. If there are any categories in which you are anticipating significant hiring, you may want to bump up your figures for average salary in order to account for these higher rates of pay (e.g., assuming that base pay for project managers would be $82,000 instead of the $80,000 that we assumed initially).
In some cases, such as the one just discussed, it may be appropriate to calculate the costs of your “supply then” configuration. If you use “supply then,” your calculations will reflect the costs of the actual staff configuration that will exist if all your assumed staffing actions actually take place. This includes the extra cost of any surplus staff that is being carried; similarly, this approach will not include the cost of any open positions that are not filled by the staffing actions described and included in your plan.
In other cases, you may want to calculate the costs associated with a desired state (i.e., “demand then”), even if that state may not actually be achieved. This situation would arise, for example, when you are comparing the staffing costs of proposed scenarios or solutions before choosing the one to be implemented. If you would like to determine the cost of your required configuration (whether or not all those staffing needs are actually going to be met), the calculation routine just described still applies; however, you will need to base your calculations on “demand then,” not “supply then.” Calculations based on any “demand then” scenario will not include the cost of surplus staff or the savings associated with open positions.
Transition Costs
Usually, it is insufficient to consider only the costs of maintaining a given workforce configuration. Transition costs and other staffing-related expenses that arise when your organization moves from one workforce configuration to another during a planning period (e.g., the cost of moving from “supply now” to the desired “supply then”) must also be calculated.
Your staffing plans (as produced by your strategic staffing/workforce planning process) describe all kinds of staffing actions that are to be implemented to reduce staffing gaps and surpluses (e.g., hiring and redeployment). Each of these actions has a cost associated with it. This typically includes the costs associated with search, recruiting, candidate evaluation, placement, relocation, initial training, outplacement, severance, and early retirement packages.
To calculate these transition costs, first determine the costs associated with each type of staffing action that you plan to implement. Base your estimates on current costs, adjusting those estimates up or down as necessary to reflect what you think those costs will be during the planning period. Wherever feasible, keep the cost estimates for each staffing action separate and distinct. The more specific these estimates are, the more realistic your cost forecasts will be. For example, don’t just estimate the average cost of hiring a person into any job; instead, estimate the average cost of hiring a person into a particular job. Better still, estimate what would be the cost to hire a person into a given job from each source (e.g., Internet recruiting vs. external search firms). If this level of specificity is not possible, calculate overall averages. At a minimum, develop estimates for the following:
The cost of placing an external candidate into each job category or cell of your staffing model. Include costs associated with recruiting, agency fees, relocation, orientation, and initial training. If cost differences between sources are significant, calculate costs for different sources separately (e.g., Internet vs. agency or one agency vs. another). Consider adding in interviewing and candidate processing costs if they can be calculated.
The cost of placing an internal candidate into each job category. This includes all those who move from one job in your organization to another. Consider relocation, training, and any other related costs. Include estimates of lost productivity if this is significant.
The cost of having an individual leave a given category. Calculate separate costs for each kind of termination (e.g., voluntary, layoff, and severance). For each type, include costs related to separation packages, severance pay, and outplacement services. There is a section later in this chapter that describes how the true cost of turnover can be calculated.
To calculate total transition costs, simply multiply these estimates by the number of such moves that are expected during the planning period in question (as defined by your staffing plans).
Here is an example of how staffing transition costs might be calculated for the staffing model example described in Chapter 9. Suppose we need to calculate the cost of implementing the staffing plan for software engineers included in that example (see Figure 24-4).
| Type | Staffing Action(s) |
|---|---|
| Promotions | 5 from software engineers/lead to software engineers/project manager
12 from software engineers/individual contributor to software engineers/lead 16 from software engineers/entry level to software engineers/individual contributor |
| New hires | 12 into software engineers/individual contributor 38 into software engineers/entry level |
Suppose further that you had developed the cost estimates shown in Figure 24-5 for staffing actions within software engineering.
Calculate total transition costs by multiplying the number of actions (as defined by the staffing plan) by the cost per action, as defined in your estimates (see Figure 24-6).
| Staffing Action | Total Cost per Action |
|---|---|
| Promotion from lead to project manager | $15,000 × 5 such promotions = $75,000 |
| Promotion from individual contributor to lead | $10,000 × 12 such promotions = $120,000 |
| Promotion from entry level to individual contributor | $5,000 × 16 such promotions = $80,000 |
| Hire into individual contributor positions | $50,000 × 12 such hires = $600,000 |
| Hire into entry level positions | $30,000 × 38 such hires = $1,140,000 |
| Total transition costs | = $2,015,000 |
It would cost this organization $2,015,000 to implement all the required staffing actions for the software engineering group. Note that in this example there are no planned losses. If such reductions had been required, the cost of those reductions would have had to be calculated as well (i.e., the cost of each severance times the number of such reductions) and added to the total.
Combine Maintenance and Transition Costs
Usually, an organization needs an estimate of overall staffing costs when making staffing decisions. A complete analysis of staffing costs would include both maintenance costs and transition costs for each planning period. To calculate total staffing costs, it is necessary to add together both types of cost for each planning period. In the previous example, staffing-related costs for the first period in software engineering would equal $13,764,000 (i.e., $11,749,000 in maintenance costs and the additional $2,015,000 in transition costs). Remember that your actual total should include staffing costs for all planning periods, not just for one period (as we just did in the example).