Wednesday, December 01, 2004

Headcount targets - encouraging inefficiencies

Any HR manager knows about headcount targets. They are the generally imposed from the finance department eager to control costs and make the business more efficient. But do they really do this?

To start this we need to make a few assumptions about the organisation. First, that there is usually one (or a few) general aims. In many firms this is to maximise profit for shareholders. In a public sector body it might be to serve more people. Whatever the aim the organisation needs to maximise ‘value for money’ – ie do as much as possible for as little cost.

For most organisations labour cost is the biggest cost. In many organisations it is around 70% of total costs. So to reduce or control cost then firms should control labour, right? Certainly, but the aim is to reduce cost and there is not a perfect link between cost and headcount.

Let me give you an example from a firm we have worked for. The firm gave each manager a headcount target and budget. What were the effects?

Well, managers tended to hire experienced hires only. Given the choice of hiring someone who could do the job from day 1 to somebody who would need training they always went for the immediate effect. What was wrong with this? Well it took away succession planning and over the medium term increased cost – the percentage of trainees the firm took on was tiny, they always had to pay recruitment firms large amounts to hire staff and pay hirer salaries to attract experienced hires in a competitive market.

Secondly, the firm tended to hire lots of none-permanent staff as these avoided headcount. They also cost more, and again succession planning was limited.

Finally if a great staff member delivered their project early then nobody was willing to have this ‘redundant’ headcount on their headcount target until they were aligned a new project. So the firm tended to get rid of some of their best project managers, just the ones that they should have been working hardest to keep.

So what was the overall result of the aggressive headcount targets? Well the total cost per head was much higher than if the managers had just had to manage their budgets. Succession became something that was only worried about at senior levels. And because some of their best staff lost headcount they either lost people, or encouraged people not to deliver early.

Surely a better way of managing is to control labour costs? Well of course, but few firms really know how much there staff costs, especially over the longer term when you have to factor in cost of acquisition and disposal, equipment costs, floor costs as well as salary and benefit costs. But this in itself is not impossible, and the benefits, we think, and worth aiming for.

If the aim is to give managers a better way of managing scarce resources then we should measure that resource in a way to make optimal decisions – by measuring the total productivity given a certain cost.