As a result of our current environment, many organizations have been forced to rightsize. This means scaling down or up within the organization to the right number of people. In other words, defining accurate payroll and the optimal amount of staff needed based on the organization’s volume of business. Ninety percent of the teams I work with are thriving and growing; they actually need to hire more employees. Either way, it is important to create a proactive plan when rightsizing an organization.
In my experience, one of the biggest challenges that small and even mid-sized business face is transitioning from making decisions based on their gut (even though it has served them well so far) to blending that intuition with clear and accurate numbers.
A simple way to begin is to reflect on a time when the organization was profitable and things felt manageable. The overtime was minimal, salaried folks were working under 50 hours a week, and you were making money. Everyone was happy and you were in a groove. Go back to that moment to find these three numbers:
- Gross revenue
- Net profit
- Total number of employees
Now that you have these numbers, you will be able to determine the gross revenue and net profit per employee during a time when your business was thriving. Although it is pretty straightforward, it establishes a starting point. From here, you can compare where you are today to build a proactive plan and adjust accordingly. You may even need to contract or add staff.
To be clear, this is only a starting point. There are many other factors that affect these numbers, the value to the leadership team, and the resulting rightsizing strategy. How sophisticated and accurate the organization is with the numbers will have the greatest impact on how detailed the analysis can be.
When drilling down, the first step may be to separate the net profit from the frontline/contributing employees’ payroll to determine the impact on the actual cost to deliver the product or service. This allows you to appropriately rightsize the frontline workforce. The next step is to take the difference between the gross profit and net profit then divide that by the number of fixed support staff, office staff, and management personnel. This will provide a snapshot of how much the “support” part of the business costs. You can also look at that from a profit per support staff perspective. In some cases, the actual payroll may exceed the revenue. When this happens, some hard decisions will need to be made. These tools will provide the leadership team with a guide to define what needs to happen and how to properly adjust.
As organizations adopt this sort of thinking, they become more sophisticated in their rightsizing approach. Ideally, each department or division can be broken down and analyzed. Also, in a perfect world, to help validate or support your numbers, you should research and find “best in class” comparable metrics from a trade group, association, or within your industry.
COVID is challenging everyone to look at things differently, adapt, and take new courses of action. Those who do this well will thrive…and those who do not will go extinct. Hopefully, the lessons learned, and newly adopted tools and processes will positively impact businesses for years to come.
Are you a leader who needs guidance in adapting to our new world environment? Are you interested in learning about the rightsizing process? Reach out to us today to find out more!