At Simple Numbers, we consult with several hundred small business clients at any given time. We are asked many questions, from hiring to firing, capital, investment, labor efficiency, etc. Let’s focus on hiring for a moment regarding businesses looking to scale, as there are typically two approaches to adding the next person or persons to the payroll. To examine both methods, let’s start with the corresponding hiring questions:
I have so much work coming in; how much labor should I add?
I could have so much work coming in, but I need labor; how much should I add?
Sound familiar? You may have thought of these as well and the risks associated with each. In turn, the best way to describe the hiring approaches is to think of it as Catalytic vs. Lagging labor spend:
Catalytic labor spend is when you hire ahead of the growth. The business owner knows that the market is ripe, but without labor, they would fail the customer and have been turning away work or adding it on at a much slower pace than they would like. This is a much cleaner decision for businesses with plenty of capital since they could float the cash while waiting to fill up the bucket of new team members. For capital-strapped companies, this can be a considerable risk. The clock will be ticking on their cash position if the work doesn’t arrive at the expected pace.
Lagging labor spend is where you wait until the workload is complete on your current staff and then add the next person for relief. This makes a lot of sense financially since you are stressing your existing team and processes without spending the money; however, the issues can pile up quickly. If the right workflow processes are in place and you are not managing the workload, you can burn your team out quickly. On the client side, service failures will likely increase.
The answer to both scenarios lies in constantly monitoring your labor capacity. How do you currently measure your labor capacity? Is it hours? # of clients? Reports written? Calls made? At Simple Numbers, we believe in direct (dLER) and management labor efficiency (mLER) ratios. These key performance indicators are the cheat code to help you measure and track your current and newly added labor capacities. Understand what is optimal for your business and enhance your hiring decision.