How to Calculate the Total Cost of Your Workforce

Introduction

​About five years ago, Wes Stoskopf, SHRM-SCP, realized he had a problem. As vice president of finance and human resources at Phillips Screw Co., a fastener system manufacturer based in Burlington, Mass., he knew he should have a solid understanding of the total cost of the company’s 80-person workforce. But he didn’t.

[SHRM members-only toolkit: Benchmarking Human Capital Metrics]

Step 1: Identify Your Goals

Make a list of questions. What do you want to know? What problem do you want to solve? How will you use the information? It’s not helpful to amass a mountain of data, no matter how accurate, that has no practical application. Ask yourself, “If I knew the true cost of our workforce, how could I use that information to impact business goals?” 

If TCOW is new to you, start small. Identify one question you want to answer and start there. Begin with a subset of employees to make it easier to define parameters and produce actionable insight.

For example, a beer distributor Kropp knows of evaluated success based on one key metric: number of kegs delivered each day. When senior leaders were only looking at salaries and benefits for delivery drivers, they wouldn’t consider the HR manager’s recommendation for higher wages. But once she could demonstrate that high turnover and high time-to-fill rates were reducing the number of daily deliveries, she had their attention. 

“Don’t try to convince leaders that your HR metrics are right,” Kropp says. “Find out what metrics are most important to them.” After you demonstrate the impact of TCOW in one problem area, you’ll have support for a broader and deeper analysis across the workforce, he says.

Step 2: Define Your Variables

Once you know what your goals are, you can identify the types of information needed to conduct cost analyses. Look at the data you already have and figure out what more you need. 

When Steve Ransone was promoted from an HR role to vice president of rooms operations at Merrillville, Ind.-based hotel management company White Lodging, he soon realized that the typical salary-and-benefits data was not truly representing his properties’ housekeeping labor costs. Ransone’s team provides support for housekeeping operations at all 165 properties managed by White Lodging. To get a better sense of the total cost of housekeeping staff, a group that has notoriously high turnover rates industrywide, Ransone began factoring other expenses into the equation. 

“Your costs can look low on paper, but when you consider all these other things, costs are high,” he says. “What’s the cost of recruiting, interviewing and hiring? Training time? Onboarding? How long does it take a person to get to full productivity?” 

​After several years of calculating TCOW, Ransone and his team now take a broader view of how these labor expenses fit in with a property’s overall success. For example, they compare the relationship between housekeeping costs and guest satisfaction scores. The results can reveal a variety of things. “If you really look at the data, paying a little more [in salary] may reduce costs because turnover is lower or … because the employees are more efficient,” Ransone says.

Recruiting, onboarding and training costs are common variables in TCOW calculations. All three data points typically fall under HR’s purview—which is one reason HR’s perspective is critical to incorporating and interpreting these elements. 

Other, more complex factors will vary by industry and economic forces. “In a period of growth, you may have recruitment costs, training costs [and] diminished productivity due to employees on a learning curve,” Stoskopf says. “During periods of contraction, you are faced with costs associated with outplacement.” Employee characteristics can also affect your calculations: “Perhaps your workforce is more tenured, and your rates of pay and vacation benefits are higher than they would be with a growing workforce,” he adds.

Other variables that may impact your analysis include short-term and long-term disability insurance premiums, workers’ compensation payments, and expenses related to ongoing certifications and training mandated by your industry. Your experience as an HR professional is invaluable in helping the business identify and evaluate all these factors. 

You’ll also need to figure out where various data are housed. Often, datasets will be stored in different computer systems so those platforms must be configured to “talk” to one another. 

For example, at Phillips Screw Co., data that contribute to the TCOW calculation exist within three different systems. “Our ERP [enterprise resource planning] and time and attendance systems hold some data, our HR database has other information, and it’s all brought together,” Stoskopf says. 

Step 3: Present Your Case Wisely

Whether the term TCOW is used or not, chances are your finance team is already crunching data to create a labor cost figure. Think about what their goals are, and present yourself as an ally in that process. “[Finance] is trying to tell a story with the data,” Ransone says. “But there may be a bigger story than they’re aware of.”

Schedule a meeting with the appropriate finance employee, ask questions about the current calculation, and share your ideas about how to make the analysis more robust. “Talk to each other, respect each other’s expertise, and listen,” Stoskopf says. “Brainstorm [together] on the elements of cost in relation to your workforce.”

Once finance is on board, consider scheduling a joint presentation to managers to explain the new calculation. “Plan a training session to walk through [TCOW’s] purpose and components,” Stoskopf says. “And have your finance counterpart by your side when you do. Be prepared to be peppered with questions. Ideally, if management is receptive, they will come to understand at a macro level how certain decisions they make will affect the overall number.”

Depending on your company’s structure and internal factors, you may want to cultivate key alliances in other departments to collect the data. Remember to try to see the issue from others’ perspectives and express TCOW’s value in terms they can understand. “If you’re not sure what [data] to go after, look at the key performance indicators that other department leaders have, to see how they’re going to be evaluated,” Kropp says. “Then talk to them about those metrics.” Whether it’s customer satisfaction, sales or revenue growth, demonstrate how a firmer grasp of labor costs will move the organization in the desired direction.

Step 4: Repeat Regularly

TCOW analysis is not a once-and-done proposition. To be useful, the metric needs to be calculated frequently, compared against past performance and continually re-evaluated to assess its validity.

At Phillips Screw Co., the management team meets quarterly to review figures. “It’s an ever-changing environment,” Stoskopf says. “Some items within the calculation, such as variable labor, move with sales. Others are more static, like indirect costs.”

Consistency is key. “Whatever the number comes out to, compare it to last quarter’s [number] and figure out why it went up or down and how the parts interrelate,” Stoskopf says. In this way, management can assess how various conditions and interventions affected the outcome.

Over time, the data will reveal trends and patterns that can be used for workforce planning. Experts say that even though businesses have to be able to make course corrections quickly, planning is still important. “Nowadays, [the workforce planning horizon is] shortening dramatically. It’s not years; it’s quarters in many cases,” Kropp says. “[Executives] need to be thinking about how things are going to play out over the next couple of quarters.” With solid historical data, leaders can make educated projections.

Demand for human capital analytics is likely to grow. “Executives are seeing analytics everywhere,” Kropp says. “There are more and more stories of how HR analytics are changing the decisions companies make. Your CEO and CFO are going to come knocking on your door at some point asking for this.” Start now, and you’ll be prepared when they do.

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