Tuesday, January 1, 2013

When does a vacancy start hurting you?

One of the reasons I've gotten into IT recruiting as a service offering, besides the obvious benefit of being paid to match employers to employees is to help educate my clients on their hiring process.  One of the most interesting things that I find about companies I speak to is that they generally have no idea about how much having an open position actually costs them.

Employers typically have very good macro information about the costs of their operations in general.  That is to say if I ask a small parts manufacturer how much they are spending in labor, they can give me that down to the penny.  If I ask them what the unit cost of a specific part is, they can typically break it down to labor, materials, and processing costs... again, down to the penny.  However, if you try to break this down to an individual position, employers typically have no idea which specific factors of a position we can attribute to a revenue activity.

So what happens on an IT team when vacancies are unfilled?  Well, for starters it can appear that your operation is more profitable because your costs are less than what you have budgeted.  While the books see a short term blip in profitability due to this, obviously it would be absurd if you were to reduce most or all of the headcount because eventually the wheels would come of the machine.  My point in this is that the pressure to fill a vacancy on your IT team rarely comes finance.  Almost certainly the need comes from the team (allieviating an overburden of work/burnout) or from the customers, internal or external who have valued work in the queue that they want to get done.  Getting a position open is often difficult in this respect because it's very easy to quantify cost which creates a management bias against hiring... precisely because the benefits of filling a job is rarely tracked.

Tracking the benefits of your IT positions does take some effort, but it is often worth the exercise.  Let's take a theoretical insurance company for example with nice round numbers.  The claims department has claims processors that handle claims submissions, and the company likes to complete a claim within 30 days of submission, since this is the sweet spot for regulatory and customer satisfaction.  They have a book of business of 100,000 policies and process 10,000 claims per month.  Each claims processor can process 500 claims per month, so in order to meet demand, the company at minimum needs to employ 20 claims processors who bear an average cost of salary and benefits of $50,000 per employee per year.

The business, particularily the marketing department has decided to embark on a big push to get new customers, and aniticipates that they will double the number of customers this year, so that means that to maintain the existing service levels they will have to hire another 20 claims processors at a cost of a cool million dollars per year.

Meanwhile, the claims department has been working with the I.T. on some ideas for automation and process improvements.  They think that if some changes are made to the claims processing applications that they could increase processor productivity by 20%, such that the number of claims processed per month would increase from 500 to 600.  By taking the time to do the math, we quickly learn that if marketing is successful in growing the book of business, these productivity enhancements would allow the company to only have to hire 14 additional processors instead of 20, at a cost savings of $300,000 per year.

Now that we have that number, we can quite easily look at the marketing projections and put a monthly valuation against those claims enhancements.  Of course, in large organizations there are typically far more requests for work than there are staff to handle them.  So lets assume that there are other priorities ahead of this enhancement that are taking up all the time of your existing staff, so the company decides to open a vacancy.  At what point does the vacancy really start hurting the company?  As soon as they hire the 14th processor.  Depending on the rate of growth that the book is facing, the claims processors will have to be hired in advance to maintain service levels, so by using the company projection we can find a reasonable inflection point on when that 14th person will be hired and start taking costs out from there.

The interesting thing about cost exercises like this is how quickly I get managers and executives eyes to bug out when they realize that since IT talent takes time to find (3 to 6 months on average at the time of this writing) that if they drag their feet on creating the vacancy and filling the vacancy that after the inflection point is reached the opportunity costs of having not filled the vacancy start to mount pretty substantially.  So what then is the value of that position?  At minimum $300,000, but the longer it drags on, the more value is lost by the company.  Point being, if you have access to the numbers, it's very easy to create a visual aid like a graph.  If the reason a vacancy lingers open is because of unrealistic requirements or unwillingness to raise salary rates, you have a very compelling arguement to change hiring strategies the closer you get to that inflection point.

Another, much scarier scenario is that of burnout.  When vacancies are open because the team is overburdened, the team's overall productivity starts to drop as morale starts to decline.  As your baseline begins to fall the added value of the additional staff starts to increase.  In the worst case, employees get tired of the burnout and extra hours and leave the firm, which represents a massive productivity hit to the team and increases the burden proportionally on the remaining staff.  In IT this should be a huge concern, because turnover is exceptionally expensive when you add up productive time lost, time spent onboarding new workers, recruitment fees, etc.  Studies have put the cost of employee turnover in IT at 150% of annual salary, so burnout is something I encourage my clients to be acutely aware of.

Unfortunately, although my IT brethren tend to be very gifted at math, I very rarely see them try to break down the value of their positions like this in spite of fielding many complaints about being treated like a cost center.  My advice?  Jump at the opportunity to get your hands dirty with the numbers and strive to understand the costs that drive your customer's departments.  It will make you a better partner, more persuasive in the board room, and drive the profitability of your business.  So ask yourself, what steps can I take to better understand the valuation of my IT staff?

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