Updated: Nov 12
Understand all the costs you need to consider before bringing someone on board in these uncertain times
It's the classic chicken or the egg situation.
Do you hire a new person to handle all the new business you think is going to come in? Do you wait for the new business to come in then hire someone?
It’s the age-old question every entrepreneur has had to consider. And, especially during the times of COVID and uncertainty, it becomes more important to make the right decision.
Hiring a new person is like buying a house. Because, literally, in some cases you may be spending as much on a small house as you would on a new person. You don't take the house purchase decision lightly, so why should you go out and hire someone with out thinking through the economics of that decision?
When you are growing fast and everyone on staff is overwhelmed it's easy to default to adding new people. Or if you are not growing as fast or want to make a big move, you may be considering hiring a new person.
This is the first part of a two-part series discussing the economics around hiring. Today we'll talk about some of the biases that lead people into making poor decisions on when to hire. (There are plenty of great resources to show you how to find the right person. Contact us for some of our favorites.)
Here are some tips to make sure you've got your mind wrapped around the whole idea of hiring a new person-- the good, the bad, the ugly:
Look through your own window. What we often find when clients come to us saying they need to hire a new person, they've already convinced themselves of the benefits of hiring that person. They've done some top line calculations and have it all worked out… picturing how wonderful their lives will be with someone to bring in new business, reduce their personal workload, etc. We can all talk ourselves into, well, anything, but hiring a new person requires objectivity. That's why you need to take a step back and think to yourself if you were outside looking in to your business, what would you do? What would you advise a colleague to do? Does it really make sense?
Check the runway. The runway is how long can you sustain this person before they "take off" and start paying for themselves. This is probably the most underestimated factor in any new hire. Like a house that needs renovations, a new hire needs time to get acclimated, build a book of business, learn the ropes, etc. New hires are also disruptive to the whole organization-- they require time, training, hand-holding and acclimation into the company culture. While all this learning is going on, cash is flying out the door in salaries and lower productivity. Be realistic and put together the numbers to make sure that you quantify when the new person is going to start paying for themselves and make sure you have the cash reserves to sustain them.
Show me the money. I mean it. Show me how much money you think this person will make you in increased profits, better productivity, billable hours, etc. These aren't back-of-the-cocktail-napkin kind of numbers-- I want real numbers. Then... slice those numbers in half. And half again. What does that do to your whole equation? The reality is, short of a salesperson and maybe a billable producer, it is really hard to truly quantify how much money a new hire will make. So if COVID has a significant impact again on the economy, and if halving your numbers of expected benefits doesn't make the economics work, think again before hiring.
Don't forget the fringe. Along with every paycheck comes fringe expenses including payroll taxes. benefits, new computers, vacation, etc. Also, despite the fact you want your staff to spend 100% of their time on productive activities, there is always time that is dedicated to administrative activities so make sure you take fringe benefits and costs into account when looking at the whole picture.
Look at your track record. Before you go and hire someone, it's a good time to do a post mortem on your last hire. Did they work out? What was their ramp-up time? Were they as billable/ productive as you thought they would be? Turnover is expensive! Really, really expensive. So don't underestimate your costs if you make the wrong hire, whether they don't perform or they don't fit with your culture.
What's the opportunity cost? I put this last because people always think about as a means to justify a hire. The reality is, none of us have a crystal ball, but we do have logic, history, and, yes, some "gut feel" for these things. There are things you cannot do if you don't hire the person-- whether that is go after new markets, fix your in-house operations, etc. What's it costing you now by not going after those activities? Quantify them as much as you can and be realistic. The fact is, sometimes you need to make the leap and hire someone to get you to the next level.
A new hire is a big decision… It's the equivalent of the house that needs renovations and a significant investment of time, patience and attention. So whether you are growing really fast and are at a point of desperation, or you are looking to take your business up to the next step of and are at a point of contemplation, it makes sense to slow down and take your time on this big decision.
Look for part 2 of this blog next week when we talk about some metrics you should consider when making the next hire.