Kindheartedness can kill your business in less than 15 years if you are paying for staff or salaries that you don’t need.
Compensation is your biggest cost
If your company is a nonprofit or service company, the biggest budget line is compensation. You only have one thing to offer the public – the actual service of your staff. For example, the cost of owning a barbershop is not the chair and the razor – it’s the barber.
You create savings or leverage for more results only on your biggest line item in the budget. That line is your biggest expense so that is where the profit or loss really happens. Your line item to watch is compensation. In the case of the barber, saving 30% on the cost of razors is very nice but doesn’t really change the bottom line. The cost of razors is a small cost compared to the cost of barbers.
A common way that labor can be changed is buying technology so that a manual task can be automated. We used to have a time clock and cards which were manually input into payroll with cards and work papers stored. We bought hand scanners which directly enter the online payroll program. We require direct deposit so there are no checks to distribute. We changed the pay date to twice a month instead of biweekly and went from 26 payrolls per year to 24 payrolls. The result is a reduction of 18 hours of labor per month.
Technology is only one way to leverage labor. Use your imagination!
Reasons Not to Change Labor Costs
It would seem logical to reduce positions, hours, or compensation when needed except that:
- You’re a nice person and hate to cut hours even when staff have nothing to do
- The staff member is 55 years old and you’re afraid she can’t get another job
- You’re concerned about age or other discrimination
- The staff member scares you and you’re worried that he will damage the company online after the termination
- You have two sisters working in the same company so you will end up with two headaches while changing one job.
Since these are all real feelings, let’s look at each one –
- Starting with two sisters – never hire related persons in the same department. Move one of them as soon as possible into a different department so that each can be supervised on their own merits. If the company is small, it can be very difficult without losing both of them.
- The staff member scares you – I remember one staff member who scared other staff. When I fired him, I felt like a lion tamer facing an unusually hungry beast. He left the firing room to accuse other staff of hating him and sent notes to customers about my untrustworthy behavior. My only mistake – you need to escort the person off the property as soon as you finish telling them the news. Ignore the threats
- Discrimination – you must follow labor law scrupulously. Consult your attorney. The money you spend on the attorney can be paid with the dollars you save from making the change. Document all your actions and employee responses.
- Age – There are now more and more people working later in life in all companies. That is wonderful as long as they add value. You can protect the company and protect them with an immediate policy that they have to invest in their skills development every year to keep the position. In my first job, the company had a policy of requiring progress towards a Master’s Degree within 3 years of hiring or the 3rd year would be the terminal year. They wanted the freedom to change the work force as needed without damaging employees. What a graceful way to handle staff relations! I’ve always followed it.
- The biggest problem in making change is your own feelings as a manager. It’s an awful feeling and responsibility to disrupt someone else’s life. And it’s part of the responsibility that comes with your compensation.
Our economy is changing rapidly. “The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.” (BBC News). I can’t predict how your agency will manage external threats and opportunities. What I can say is that labor costs in a service organization are your major challenge. If you don’t manage those costs, your chance of survival is bleak. Good luck!
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