How to exit the C19 crisis with higher profit margins
Working from home. Holding our breath each time the Government mentions the Covid-19 wage subsidy for employers.
We sit in our makeshift offices watching our children cut shapes out of the cardboard from our last online delivery wondering how we are going to continue cutting costs at work. Who or what is next?
Increasing profit margins doesn’t come cheap. There are financial and non-financial costs of doing so. So how can finance, operations and business managers afford them as the healthcare crisis gives way to a looming economic one?
The situation.
The hard truth is that the majority of businesses in Ireland have had to let go of staff since COVID-19 reached our shores. Cutting labour costs is always one way of maintaining profit margins in a crisis. Of course, other factors such as redundancy costs (particularly now that the 60% government rebate is gone), inventory, logistics, rent and lower revenue all impact profit margins.
Because of this, Finance Managers are expert jugglers when it comes to maintaining profit margins. Their skills are vital, but they are only human. Letting staff go, cutting wages, negotiating rent and new credit terms for inventory can only continue for so long before we need to get a little bit more creative in order to stay ahead of our competitors.
Attention CFOs & CPOs.
In 2006, a study by the
Harvard Business Review on the US retail giant, Costco, revealed that the foundation of their success, year after year, crisis after crisis, lies in low staff turnover rates. Harvard found that Costco's staff turnover rates (of first year employees) were less than 10% compared to the industry average of 65%. According to
CNN Money, the turnover rate has held strong since.
An often-overlooked risk in a downturn comes when employers least expect it – the recovery stage. Why? Because our best staff, those we strategically kept during the crisis, tend to leave quickly for another company during a recovery.
There are numerous reasons for this:
- Staff churn due to the natural risks of a bad hire. For instance, those highly skilled people that bought into the “start-up dream” tend to retreat back to the multinationals;
- Your employees haven’t been exposed to other companies' management responses to the crisis and therefore ‘the grass is (somewhat) greener’;
- They are unsure of their current employers’ sustainability either because they have been continuously exposed to recurring bad news or because of lack of hope, due to the lack of communication from leaders expressing their own hope, future strategies and sustainability plans;
- The wage cuts that were imposed during the crises were higher than industry and/or competitor averages;
- Economically, there are more jobs available in a recovering economy. ‘New climate, new job’;
- Naturally, burnout is higher in businesses during a crisis. Couple this with the fact that many of their key teammates were made redundant. Couple all of this with the new ways of working (from home) that were possibly mismanaged during the crisis. ‘New job, new me’.
The point is that there are many reasons why employers should expect some great staff to leave for another company much sooner then they think. In the last two weeks alone, the majority of new job seekers that have reached out to RECRUITERS directly have been those that are currently employed but are battling with at least one of the above.
As financial planners, of course you must consider the liquidity risks when the wage subsidy scheme comes to an end. But as business people, you must consider the blindside risk of higher staff turnover post lockdown on top of potentially further short term redundancy decisions which also bring redundancy costs and lost opportunities.
Many SMEs are under a lot of stress right now, but it’s important not to be too focused on the short term
Warned Mary Connaughton of the CIPD, a professional body for HR professionals (The Sunday Times, June 7, 2020).
In order to avoid these costs and more, it's time to communicate your company's plans for the future including its financial and operational sustainability in order to keep your existing team tight and staff turnover costs low. But more importantly, it’s time to look at your numbers and consider alternative ways to improve profit margins in ways your competitors are not.
Let’s run some numbers.
The Harvard report noted Costco’s low staff turnover rates was due, in part, to the higher wages and company benefits they offer their staff compared to Walmart - their biggest competitor. Despite this,
Forbes also found that Costco offers the smallest markups on their products at 15% or less, compared with 25% for supermarkets and 50% for department stores.
So, how does retaining high labour costs and lower markups translate into higher profit margins? By spending less on hiring and recruiting.
According to a
recent HR Barometer report, the average cost of recruiting a replacement employee in Ireland is 37% of their salary. With an average salary in Ireland sitting at €39,000, that’s roughly €14,430 to replace an employee, on average.
Taking a hypothetical example, if the average cost to replace an employee in your business today is €14,430 but only €10,000 for a competitor (because they continued to cut wages further), it looks like your competitors win. Based on a company size of 100 people, if you kept your staff turnover rate at 11% (Ireland’s average) and 11 employees hand in their notice in the weeks/months following a crisis but your competitors have double the number that leaves (22% - for reasons outlined earlier), your cost of turnover will be €158,730 compared to your competitors, €220,000.
The most impactful point made in the Harvard Business Review study is the amount of revenue Costco made per employee compared to Walmart though. Costco earned $43 billion in 2005 compared with $37 billion for Walmart and with 38% less hiring. That translates to “$21,805 in U.S. operating profit per hourly employee, compared with $11,615 at Walmart”.
Therefore, Costco generated almost twice the revenue per employee than its closest competitor. Perhaps you risk liquidity issues and can’t offer the high wages that Costco does, but you can improve your hiring, communicate and plan more effectively to ensure your team is the best to begin with and that they stick together through good times and bad. This will improve your operations and increase your operating profit in a way that is often overlooked.
Similar to COVID-19, staff attrition is a silent killer. It pushes your costs up, pushes your margins down and throws your ability to capture opportunities in a changed market out the window.
Looking ahead.
If you’re reading this, it’s likely that you are looking for new ways to improve your profit margin. You might be thinking, this is great for the retail sector, but what about my industry? The same principles apply.
You need to hire a strong team and you need that team to stay in good times and bad. When it comes to significantly reducing your staff turnover, cutting your hiring costs and improving your profit margins, a trusted recruitment partner like RECRUITERS can help you do this in ways your competitors are overlooking. You might also find this article interesting on
how recruitment agencies can reduce the cost of replacing employees in that regard.
Don't have the time to plan? Our mission at RECRUITERS is to put consulting back into recruitment. That's why we provide non-obligation consultations for non-client companies.
The RECRUITERS team of experienced consultants that provide you with a roadmap to hiring better people that stay for longer across all divisions. You can
contact our client services director anytime in relation to your people strategy...or lack of one.
Where you can, hold on to your existing team by offsetting some of the common reasons people leave a company post-crisis that I mentioned earlier. Remind them of their value, acknowledge their contributions and don’t just assume that they are grateful for not being fired. Communicate your future strategy and sustainability.
Before making any further redundancies to cut costs, think of how any spare capacity could be used to let teams explore possibilities for new product or service developments to meet the changed market and new opportunities.
Final thoughts.
Depending on how you managed the recent health crisis, holding on to key people as we exit lockdown will be your next biggest challenge. Don’t undercut yourself as a finance, operations or business manager. Instead of planning for your next round of redundancies, start contingency planning for when key people leave in a recovery.
You don't want to be faced with redundancy costs and staff turnover costs in a recovery. There are many ways to hold on to good talent besides high wages too. People's values towards work have changed a lot since the 2006 Harvard report.
When it comes to profit margins in a crisis, few consider holding on to staff as a key to financial strength. Just like COVID-19, staff attrition is a silent killer. Therefore, avoid the herd mentality of further redundancies in the short term as you may be hit with staff turnover costs soon. When your competitors keep cutting wages and make redundancies, be the industry outlier by spotting the financial opportunities that exist with a good hiring and people strategy.
Spend less on hiring and recruiting. Fast efficient hiring with a trusted recruitment partner with a
long history of success will result in better hires, lower staff turnover and an improved employer brand. Taken together, or independently, these inputs will ultimately improve your profit margins
significantly and put more time in your busy schedule.
Working with RECRUITERS, whether it's for your contract / temporary recruitment or your permanent recruitment will become a new competitive advantage for your business when it comes to increasing your profit margins in ways you might not have considered before as we return to work post the COVID-19 lockdown.
Andrew is the Marketing Manager at RECRUITERS and a member of the Association of Chartered Certified Accountants (ACCA).
