Resourcing Efficiencies – Part 1

18 Mar 2021

Outside of an organization’s core competencies, on-demand services can add tremendous value to an organization’s operations. The perception that on-demand, external services are more expensive, or less cost-efficient, than internal resources is based on assumptions which, when examined closely, do not hold up. The actual cost and inherent inefficiencies associated with maintaining internal capacity is vastly underestimated, a fact that will be demonstrated in detail.

There are three core issues with analyzing the true cost of internal capacity are examined; the actual costs of employees, inefficiencies due to multitasking, and the inability to react to changes in demand. These three factors are often misunderstood and, as a result, underestimated when calculating the cost efficiency of an organization’s output. Below we outline our thoughts on the true cost of employees and why these principles are so important in understanding your business’ unrealized costs of internal capacity.

We will continue our discussion on the next factor, multi-tasking, in our next insight piece in April.


The True Cost of Employees

In addition to an employee’s salary, there are three other cost areas that need to be accounted for in order to fully understand the true cost of an internal staff member. These are the costs of extra-salary compensation, the cost of managing employees, and materials and space.


  1. Extra Salary Compensation

Various models exist for holistically calculating the dollar amount expended on directly compensating employees. These models vary slightly, but the majority identify additional costs such as health and dental benefits, holiday pay, life insurance, and employer-paid taxes. Joe Hadzima, a Senior Lecturer at the MIT Sloan School of Management, states that ‘the real costs of your employees are typically in the 1.25 to 1.4 times base salary range’ when benefits and taxes are accounted for.(1) The variance between the two factors reflects differences in tax rates across jurisdictions and the level of benefits or insurance an employer opts to provide. Nevertheless an additional 25-40% is a large sum to miss when compensation is incorrectly analyzed. If an employee’s annual salary is $60,000 the total outlay will potentially amount to $75,000-84,000.

(1) PWC Annual CEO Survey

2. The Cost of Managing Employees

The cost of managing employees should be viewed as a rather broad and multifaceted cost. It involves the usage of resources to find, hire, onboard, and train staff. It should also include the resources expended on supervising and directing an employee on a daily basis, and in administering the processes associated with keeping employees in house, such as maintaining and updating HR policies, resolving issues between employees, addressing performance issues, payroll and so on. All of these costs will vary widely depending upon the nature of a given role, the size and structure of an organization, and the management styles applied. However, there has been some work done which attempts to estimate these costs. 


3. Materials Costs

The costs of the materials and tools needed to enable an employee to fulfil their function are easy to calculate, but often forgotten when the true cost of an employee is being calculated. Things like work stations, computers, subscription fees, real estate, etc. are often accounted for as operating costs, rather than costs associated with staffing. However, these costs are tied directly to whether or not you are using internal resources and will increase and decrease in line with how many internal staff you have. While it is difficult to determine an exact dollar amount on these expenses, you will need to spend around 25% of an employee’s salary to enable them to do their job from an operational infrastructure perspective. (4)

Already we can see the direct cost of an employee is much, much more than their salary. In fact, the above considerations indicate that employees probably cost a business as much twice as much as the employee is paid, depending on the business, role and seniority of the employee

(4) How Much does an Employee Cost

Click here to see all of our past articles and our exploration of on-demand services will continue next month!

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