managing your workforce spend: are you in control of your indirect costs?

Keeping costs under control is a key priority for most procurement leaders. Whether acquiring raw materials, providing client services or managing labor costs, your top goals are to maintain quality while keeping costs as low as possible. When it comes to managing your workforce spend, this is no easy feat, especially considering today’s tight labor market and rising costs.

For instance, just trying to track recruitment costs can be difficult. You can break these costs down into two primary categories: direct costs and indirect costs. While direct costs are easier to qualify and track, indirect costs cannot be ignored. To get a clear picture of your total workforce spend, it’s vital that you understand the difference between direct and indirect recruitment costs.

This article explains this difference to help you accurately calculate your full workforce spend.

indirect costs vs direct costs

In business, direct costs represent expenses you can directly tie to the production of goods or delivery of services. This might include raw materials, equipment and supplies. Regarding workforce spend, direct costs are those that you can directly attach to managing your workers.

Direct costs are usually easier to identify, which makes budgeting for these expenses less complicated. Typically, these costs are accounted for in the company’s overall budget. However, direct costs associated with workforce management can be variable, which means that these costs can change based on various business conditions.

On the other hand, indirect costs are those expenses that are more difficult to link to production or workforce management. In fact, these costs often go unnoticed, and therefore, business leaders may not accurately plan for them. Failing to account for indirect workforce management costs can wreak havoc on the company budget and impact your bottom line.

direct costs examples

Below are several examples of the most common direct costs employers face. These examples can help you better understand how these expenses might impact your workforce management spend.

direct labor costs

The most common direct labor costs organizations face are wages and benefits. This includes wages, both regular and overtime pay, planned bonuses and benefits, such as health care, stipends and paid time off. The wages and benefits of your general workers are often tied to the production of goods or the delivery of services. It’s the wages of your HR team, hiring managers and trainers that you can also link to workforce management expenses. You must account for both types of compensation when calculating your overall workforce spend.

Because salaries and benefits make up a large portion of your budget, it’s often an area where cost management is a necessity. On one hand, you need to maintain competitive salaries so you can retain and acquire the talent you need to meet production demands and grow your business. On the other hand, compensation rates that are too high can damage your organization’s bottom line.

This makes it imperative that you set optimal compensation offerings for your workers. Using talent insights and salary analysis to better understand what today’s workers want and how your salaries compare to industry standards can help you create the right salary and benefit packages.

workforce management technology

Today’s innovative technology can help to streamline many aspects of the recruitment and workforce management process. For instance, ATS platforms make filtering through applications faster and more efficient, while scheduling software ensures each shift is filled with the right workers.

While this technology can significantly improve workforce efficiency and outcomes, there’s also a fee attached to purchasing and utilizing this software. Because these costs are easily trackable and tied directly to your workforce management efforts, they fall under the direct costs category.

recruitment fees

Studies show that direct recruitment costs can range as high as three to four times the position’s salary. When you multiply this figure by the number of new hires each year, it’s easy to see how recruitment costs can quickly add up.

While some recruitment tasks fall under the indirect cost category, such as training and onboarding, many other expenses are more directly related to workforce spending. For example, advertising for open job roles is a direct cost. This includes posting on various job boards, updating the company’s career webpage and engaging with potential candidates through social media.

Attracting potential candidates is just the first step of the recruitment process. You also incur various direct costs through the selection process, such as screening resumes, holding interviews, conducting pre-employment assessments and reference checking.

When working with an HR solutions company, they may handle many of the recruitment costs for you, such as job board posting, applicant screening and interviewing. Instead of accounting for these direct costs individually, your agency fees will cover these expenses and make it easier for you to calculate your workforce spend related to recruitment costs.

indirect costs examples

While indirect labor costs may not be as easy to anticipate as direct expenses, it’s still important to track these expenses and recognize how they might impact your overall workforce spend. Here’s a look at some of the most common indirect costs related to workforce management.

absenteeism and turnover

A high rate of absenteeism places a substantial financial burden on a business. When people aren't available to do work that needs to be done, you face the choice of paying to bring in additional staff at short notice, asking your employees to work overtime or redeploying the workers you already have. While the first two options can take a direct hit on your labor cost, the latter can result in lost productivity as people are taken away from their regular work and might not have the right skills to do the job in question.

Ultimately, high levels of absenteeism can increase worker burnout, reduce workplace efficiencies and result in higher turnover rates.

There are similar costs and disadvantages associated with high staff turnover. If people are leaving in unsustainably high numbers, you'll find yourself spending a lot of time, money and energy on recruiting to plug workforce gaps. Aside from the obvious financial implications, this can cause disruption in the workplace and damage morale.

The costs associated with both absenteeism and turnover can be minimized by taking a proven, effective approach to recruitment. Following established processes to ensure you acquire the right people will increase the chances of new hires having a healthy, happy working relationship with your organization. In turn, these can help your organization reduce its absenteeism and turnover rates.

prolonged fill times

Too much time spent filling vacancies is another good example of an indirect workforce cost that can be easy to overlook. The more time you dedicate to hiring, the less time you're able to spend focusing on your core business, bringing in revenue and driving profitability.

One of the most important things you can do to optimize performance on this front is to establish relevant metrics and key performance indicators. Tracking the right data can help you identify inefficiencies in your recruitment process and develop strategies for improving hiring outcomes. For example, working with an HR solutions company can speed up the hiring process by providing direct access to a network of prescreened candidates.

Conducting a skills gap analysis can help you get ahead of your recruitment needs. This in-depth analysis lets you evaluate the current skills needs of the company and predict its potential future needs. With this information, you can develop a multifaceted strategy to identify candidates that best match your current and future needs and create an employee development program to equip your current workers with the necessary skills.

training and induction

The recruitment process doesn't end when you've completed your assessments, selected your chosen candidates and they've accepted a job offer from you. To really get the best results out of your staff, you need to support them as they familiarize themselves with their new roles and settle into the organization.

It's possible that this process might include some informal training or mentorship from other employees. While this could make a vital contribution to new hires getting up to speed and becoming productive, it might not be viewed as an obvious cost of recruitment, even though it's taking up time and affecting the productivity of other staff members.

Furthermore, you'll need to consider the additional costs involved in certifying people for particular skills and temporarily stepping up your quality control measures, as well as the potential for reduced productivity across the entire team.

Induction and onboarding are other areas where you can gain vital advantages from the latest tech and expert support. Modern tools can help you take an integrated approach to everything from advertising roles to onboarding. With the right HR solutions partner, you can find the most effective technologies and processes to get the best results in these areas. 

productivity loss

As a business leader, there’s no doubt that maintaining peak productivity levels is a top priority. Unfortunately, there are several factors that can negatively impact output, such as equipment failures, high levels of absenteeism, frequent turnover and internal skills gaps. When these issues slow down productivity, it can be frustrating for your managers and supervisors as well as your workers.

It can also be quite costly. Every time your production line comes to a halt, you have to shut operations down early or you close a shift, it’s costing your company money. These costs may not be easy to track, but productivity loss can have a significant impact on your overall workforce spend.

For instance, if a manufacturing plant runs a shift without enough qualified forklift drivers, its workforce cannot operate at peak performance. While the organization must still pay nearly the same direct labor costs to run the shift, the output will be less. In turn, this leads to an unanticipated loss of the company.

It’s important to account for these indirect costs and to create hiring, training and scheduling strategies that can minimize the impact of productivity loss on your company budget.

time loss on managing contingent workers

Today’s fluctuating market and seasonal demands are encouraging more employers to depend on contingent workers. Studies predict that by 2025 contingent workers will make up between 35% and 40% of the global workforce. The use of these temporary workers can let you scale up or down your organization’s workforce needs to meet current production demands. This strategy can help you cut labor costs by only maintaining the labor force you need to meet production goals.

While labor costs related to contingent workers fall under your direct costs category, the time and resources you use to manage these workers don’t. Depending on the size and scope of your contingent workforce, administrative costs related to managing them can be substantial.

Just like your permanent employees, contingent staff must receive ample training to ensure compliance with safety and quality standards. Shift scheduling is another time-consuming task that can cut into your workforce spend. You need to make sure each shift is fully staffed, and you must have workers with the right skills and qualifications on duty. Otherwise, you risk limiting productivity rates, safety and quality.

With our Randstad Inhouse Services, our teams can handle the contingent workforce management process for you. We offer end-to-end solutions but allow your organization to determine exactly what services they want our team to handle and what tasks you wish to keep in-house. This strategy can make it easier to track costs related to contingent or temporary workers.