Finance teams in large organisations are tasked with managing complex labour budgets, ensuring that all the various improvement projects planned for the year are funded alongside regular business operations. Allocating too little funding to these projects can lead to cost blowouts later on, whereas allocating too much starves other areas of the business that could lead to growth.
Estimating the associated costs and returns on investment from each project is critical to making informed decisions but with multiple improvement projects being delivered at the same time and the complex relationship between these projects and labour costs, estimating the true cost of each project can feel like more of an art than a science.
In this article we explore how to uncover the hidden labour costs, avoid negative multiplier effects and manage risk to ensure the right projects get funded while improving confidence in the budgeting process.
Understanding Hidden Labour Costs
Labour costs on the surface appear to be fairly straightforward to calculate. With a few inputs such as salary, benefits, overtime & allowances alongside headcount you can begin to calculate a fairly accurate picture of labour costs. Where these costs begin to diverge in reality is the unaccounted-for costs that impact payroll costs and sales volumes.
- Unaccounted for overtime & holiday accrual
- Agency or casual recruitment to fill capacity gaps
- Productivity impacts of staff absences & training
- Productivity impacts of new hires and their ramp time
When accounting for the true labour cost of a project and thus the return on investment, it’s important to take into account both the direct and indirect impacts of the project on labour costs. For instance, if a project requires training for front line teams, additional team members may need to work overtime and accrue more holiday leave while covering their colleagues.
Additionally, if the business is required to fill any short term capacity gaps with agency staff or short term contracts, the higher hourly wage and hit to productivity need to be factored in. Properly accounting for short term costs ensures the organisation isn’t taking on too many costly projects at once or blowing the budget.
Breaking Down Planning Silos & Avoiding Multiplier Effects
In a recent Harvard Business Review article, the authors studied a Fortune 500 retailer who was suffering from falling productivity, quality issues and employee burnout. After their analysis, it was found that over 90 improvement projects had been initiated in the previous 6 months with the sheer volume leading to a lack of focus and resource constraints in the project teams. In the assessment of the roots of the problem, the authors cited one common problem, leading from “Multiplier Effects”.
When teams undertake improvement projects, they often plan in isolation but rely on other teams for support or to complete an objective. This can quickly create multiplier effects where work committed to by one team creates work that spills over into others, multiplying the work in progress and making teams less effective. As in our example before, if many improvement projects require training of frontline staff over a short period of time, this can quickly multiply their training load and reduce frontline capacity leading to staffing issues.
Using “What-If” Scenarios to Manage Budget Risks
By getting a complete picture of project costs, a true return on investment case can be made and therefore funded by the business with confidence. However, with every project, there is always a risk of failure, either a partial failure to achieve the project goals or abandonment of the project altogether. Quantifying and managing risk is a critical part of the finance team’s role.
As we saw earlier, planning silos can lead to work spilling over into other teams but it also contributes to risks being misunderstood and mismanaged across teams as well. If the outcomes of a project in one department are on the critical path for projects in others, it’s important that teams downstream are aware and account for them. If not, they could find themselves less able to control their own costs.
“What-If” scenario planning is a great tool to account for project risks. By planning for multiple likely scenarios, finance teams are able to test the impacts of things such as delays, underperformance or even overdelivering against objectives. Collaborating on What-If scenarios across departments allow teams to better manage risk and adapt the budget should anything change in the status of their projects.
Developing Your Corporate Operating Model
In this article we’ve explored why working out how to fund each improvement project in your business while planning your labour budget is a complex exercise. The hidden costs to your labour budget from direct and indirect impacts on productivity, spillover effects between teams and difficulty managing risk stand between the finance team and certainty over their budgets which makes planning feel like more of an art than a science.
This is where building your corporate operating model in Quorbit can help. By describing the dynamics of your business, from demand drivers to labour standards and HR metrics, the model can quickly test the impact on productivity from improvement initiatives. By dialling model parameters up or down or testing them under different sales scenarios, Quorbit delivers powerful insights directly to planning teams.
With What-If scenario planning built-in, department heads can also collaborate on plans together, avoiding spillovers and aiming for positive multiplier effects. By breaking down planning silos, risks are able to be managed more effectively, and the finance team can have increased confidence and clarity around the labour budget over the coming weeks and months.