Beyond Labor Costs
If you’re in a leadership role, you may think you know how to cut workforce costs. But the answer may not be what you think. Why? Wages and benefits make up only about 40% of your total workforce cost.
After working with thousands of clients over the years, we’ve found that the total cost of your workforce could be 1.5 times higher than what appears on your financial statements.
The first step in optimizing, even lowering, your total workforce cost, is knowing what it actually is.
The average company’s costs fall into three main buckets:
- Labor – 40%. These include wages, benefits and talent acquisition costs
- Opportunity – 35%. Costs such as overtime, turnover, unfilled orders and supervisor time
- Hidden Costs – 25%. Items like safety, compliance, unemployment and training
While many companies have an understanding of their labor costs, it’s the opportunity and hidden costs that often are overlooked—but have the power to make or break a business.
Factors in Play
Achieving an efficient, cost-effective workforce is a complex issue—now more than ever before. Why? We are seeing some consistent long-term trends.
- Difficulty attracting talent. According to the Bureau of Labor Statistics, there are 7 million open roles in the U.S. today. While this is somewhat lower than it was a couple of years ago, it’s substantially higher than pre-pandemic levels. With so many open roles, job seekers can afford to be choosy.
And they are choosy. In our global report of workforce trends, 31% of workers across all industries say that they would take another job in the next month if it offered a better blend of work and lifestyle. This mirrors what we’re hearing from our clients.
- Difficulty retaining talent. In a job market such as this, new employees who don’t feel valued won’t stick around long, especially if your competition is offering better pay or working conditions. It costs about 25% more to hire versus retain, so anything that improves retention deserves your attention—even if cost is involved.
- Rising talent acquisition costs. The multiple factors that go into talent acquisition can really add up: third-party agency fees, long fill times, advertising agency fees, job fairs, online job board fees, travel cost of applicants and staff, relocation costs, recruiter pay and benefits, background checks and onboarding expenses. All these elements contribute to the rising costs of bringing in new talent.
- Major shifts in the marketplace. Rapidly advancing technology and market uncertainty are two factors that affect nearly everything else. As you proceed down the road to digital transformation, skills gaps will widen and a large portion of your workforce may need reskilling. (See The Human Resource: Is Your People Strategy Green? for more on this.) And market uncertainties due to global conflicts and climate change continue to cause supply chain interruptions.
How to Save
Raise Wages
Yes, I’m listing “raise wages” as a potential money-saving strategy. Think about it—if you’re offering pay that’s below average for your area, you’re going to have more trouble attracting candidates, and they’re more likely to leave if a similar opening comes up elsewhere. If you have high turnover, this could be the reason why. While it may be counterintuitive, it can actually save you money to raise wages.
Here’s a real-life example of what I’m talking about:
One of our clients, a global cosmetics manufacturer, had runaway turnover, vacancies and overtime costs that were contributing to missed production deadlines. In fact, the turnover rate had risen to 40% and overtime costs were accounting for 30% of the payroll.
We determined that a better workforce management plan would help tackle these issues. We also recommended increasing compensation by $2/hour. Even after this wage hike, the client saved $1,919 per year.
Improve Safety
This also may seem counterintuitive, but investing in safety can favorably impact your bottom line. Studies have consistently shown that every dollar invested in safety programs provides a payback of $4 to $6 in reduced costs. How? Through fewer medical bills, decreased absenteeism, fine avoidance and greater productivity.
Don’t go overboard on overtime
It’s easy to see how overtime costs can quickly chip away at the gains you’ve made elsewhere. How much is too much? The break-even point for overtime hinges on several factors, like fixed and variable costs, and the selling price of your products.
Reduce turnover
There are many ways to approach the turnover issue, and our blog, How to Reduce Employee Turnover does just that. One key takeaway, when workers say they want flexibility, it pays to listen. According to our new research, increasing work-life balance is the number one employee retention strategy employers are using today. Remember, work-life balance means a lot of things. If you can’t offer remote work, consider alternative scheduling to suit worker needs, or additional time off, child care or commuter benefits.
Keep them engaged
The best way to reduce turnover, of course, is to keep your employees engaged. In the recent report, The Engagement Illusion, only 48% of workers described themselves as fully engaged, while 29% say they’re actively disengaged. This is an alarming statistic.
Developing a skilling or reskilling program is an excellent way to increase engagement. It may be as simple as tweaking the one you already have.
Manpower’s Solution
We can’t promise to improve turnover or engagement, but we can help you uncover where your workforce dollars are going.
The Manpower Total Cost of Workforce calculator will uncover opportunity and hidden costs, and combine them with your known labor costs. This tool uses deep insights gathered from your business and compares them to standard workforce costs around the industry to deliver a clearer picture of what you’re really spending.
If optimizing, even lowering, your workforce cost is imperative for your organization, calculating what your workforce is actually costing you is your critical first step.
Learn more about Manpower’s Total Cost of Workforce Calculator today.
Author Profile
Rich Weed serves as the Vice President of Solution Selling for Manpower, bringing over 20 years of leadership experience to the role. Rich has serviced many of Manpower’s largest enterprise accounts, providing him with a deep understanding of what truly resonates with clients. A recognized thought leader, Rich leverages market insights, competitive trends, and proprietary tools to create tailored workforce solutions with actionable goals for Manpower’s partners.
