Balancing Fixed and Variable Labor Costs in Workforce Management

The use of contingent labor—whether temp staffing, SOW/project workers or straight independent contractors—is largely driven by the need to reduce operating costs in ever increasingly competitive markets. The challenge is in achieving the proper workforce composition and balance between full time and contingent resources. Too many of the former and labor costs can drag on profitability. Too many of the latter and overall operational efficacy can suffer. Let’s examine how organizations can achieve the proper balance.

The objective should be to identify which job roles cannot be adequately performed without full-time resources. These positions represent the organization’s fixed costs for labor. Fixed labor costs are defined by business information resource site, Bizfluent.com as “any labor costs that will remain constant no matter what the production level of the business. An example of fixed labor costs is management salaries. Manager are typically paid salaries that do not vary with the number of hours they work.”

Once all mission-critical roles have been identified, the remaining roles/positions can be considered for engagement via contingent labor which is a variable cost. Again, Bizfluent explains, “Variable labor costs are any labor costs that go up or down with production levels. Examples of variable labor costs include overtime wages and temporary staff wages. These are costs that increase when production increases and drop when production decreases.”

Organizations that engage contract labor can reduce the significant costs associated with fixed costs on labor because temporary resources:

• Preclude the payment of employee benefits (like healthcare, unemployment and others which are not typically paid to temporary laborers) to the staffing agencies
• Help organizations avoid administrative costs associated with sourcing and onboarding contractors which is often handled by staffing providers
• Deliver improved staff utilization enabled by leaning on contractors for seasonal, project and non-essential job roles thereby avoiding overstaffing.

However, the benefits of increasing use of variable cost contingent labor must be weighed against the liabilities that can undermine the desired efficiency and savings. The potential liabilities inherent in using contractors as part of the overall workforce mixture can expose an organization to potentially costly ramifications including:

• Fees and penalties associated with compliance infractions such as worker misclassification, co-employment risk, failure of suppliers to properly insure candidates, tax implications
• High turnover and training costs, lack of dedication among contractors, negative impacts on full time worker morale
• Higher potential for intellectual property theft/leakage as contractors come and go

Achieving the perfect balance between fixed and variable labor costs can be complicated and without prior experience making these determinations, workforce management leaders are often at a disadvantage. Good thing nextSource has performed these assessments and supported numerous organizations’ efforts to achieve the proper balance with a keen eye toward compliance and proper execution.

Contact us today for help assessing your situation and developing an effective plan.

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