Because of the war for talent, there is a shortage of skilled workers for many positions. In response to the labor shortage, some companies deliberately try to hire extra workers to ensure they have enough labor. However, there is also a danger of overstaffing. If you have too many workers or your workers aren’t efficient enough, it can directly harm your company’s profitability and long-term success. 

How Overstaffing Harms Your Company’s Long-Term Growth 

Overstaffing directly impacts your labor productivity, costs, and long-term growth. If you’re overstaffing your business, you’ll likely notice some of the following symptoms.

• Higher operational costs.
• Decreased efficiency.
• Reduced productivity.
• Worse employee morale. 

While each company and industry is unique, overstaffing tends to cause similar problems. From higher labor costs to poor morale, the following issues typically happen at organizations that have overstaffing issues.

Overstaffing Directly Impacts Your Labor Costs 

If you hire additional workers, it will directly impact your labor costs. However, this added cost won’t be balanced out by increased revenue because those extra workers don’t have anything productive to do with their time. You end up spending more, but you don’t receive better results that could justify that spending.

Your Labor Efficiency Ratio (LER) Determines Your Success 

The labor efficiency ratio (LER) is created by comparing your gross margin to your labor dollars. When you look at this figure across all types of companies and industries, you can see that every business with $2 in gross margin per $1 of labor costs turns a profit. Companies below this cutoff generally don’t. 

When you are overstaffed, you spend more on labor costs. Because your revenue doesn’t change, you end up destroying your LER. If the situation isn’t remedied, it will hurt your company’s long-term profits and success.

Overstaffing Means You’re Playing Catch-Up

After a business realizes it is overstaffed, it will often try to keep the staff and try to hit a higher revenue level. Playing catch-up won’t solve your problem. Once you start playing catch-up, you’ll end up chasing revenue forever. 

Excessive Labor Spending Reduces Your Labor Productivity 

By overstaffing, you also end up harming your labor productivity. If there are more workers present than you need to do the job, then some of them will end up without any work to do. Over time, this will harm your labor productivity.

Too Many Cooks Makes Coordination a Challenge 

As the saying goes, you don’t want too many cooks in the kitchen. When you’re overstaffed excessively, it makes coordinating between different teams and workers more difficult. Instead of having a simple team meeting with just five people, you have to bring in ten workers. This takes longer, leads to more confusion, and makes coordination challenging.

Overstaffing and Necessary Layoffs Hurt Morale 

For all of the previous reasons, overstaffing can end up hurting morale at your company. Because overstaffing typically leads to layoffs, your morale will eventually take another hit as well.

Employee morale issues, layoffs, and coordination problems impact your overall productivity and profitability. Before long, this kind of overstaffing can put you at a serious competitive disadvantage.

Why Companies Make the Mistake of Overstaffing 

While not overstaffing your business sounds straightforward, it isn’t always easy. Companies often hire extra workers because they’re concerned about labor shortages or forecasted poorly. Depending on the business, there are a variety of reasons why overstaffing might happen.

Concerns About Labor Shortages 

Right now, there is a war for talented workers going on. Thanks to the retiring baby boomers and smaller subsequent generations, there are fewer workers available to fill important roles. Because of how worried they are about not having enough employees when they need them, some workplaces go overboard by hiring extra workers. 

Poor Forecasting Skills

Organizations typically forecast the number of workers they need for future projects, so they can have a reasonable estimate about how many people they should hire and train. If the company doesn’t forecast accurately, they’ll end up hiring too many or too few employees. 

Not Addressing New Technologies 

As new technologies come out, it makes some jobs obsolete. For other jobs, technology merely makes them more efficient. Instead of requiring four workers to handle a department, new technology may mean you only need three workers. 

A good example of this is with artificial intelligence (AI). Previously, a social media specialist may have spent a significant amount of time locating the best photos for each post. Now, they can use AI to quickly create a photo that perfectly matches their marketing post.

Lack of Awareness of Existing Skills 

In order to hire accurately, managers have to understand what skills are needed. Sometimes, a manager will hire workers who have overlapping skills because they are unaware that the new team members are unnecessary. When this happens, it can lead to overstaffing issues.

How To Staff Correctly: Track Your Labor Efficiency Ratio 

Understanding your employees’ skills and forecasting labor properly are just a few of the things you should do to avoid overstaffing your company. To quickly figure out if you have the right number of workers or not, you can use your labor efficiency ratio (LER).

The LER compares your gross margin revenue to your labor cost. To be profitable, you need a LER that is 2 or higher. If you are earning less than $2 in gross margin for each $1 of labor costs, you won’t earn a profit. 

Once you have your accounting and HR software integrated, you can calculate your LER as frequently as you need. You can even break it down into different divisions, departments, clients, or team members. After analyzing this information, you can instantly see which teams and departments are unprofitable and close them down. Likewise, you can try to target specific client profiles that have the best profits. 

Your LER is a valuable tool that you can use to determine how profitable your company is. More importantly, it can help you instantly see if you are overstaffing so that you can make rapid adjustments.

Set Your Company Up for Success 

Whether you are a small or large business, overstaffing can be debilitating. Your labor cost is likely the most expensive cost involved in running your business. If you’re spending too much on labor, it will impact your ability to turn a profit. Additionally, it will harm your team members’ morale and eventually lead to layoffs. 

From evaluating your LER to managing overstaffing issues, Asure can help with all of your small business needs. To learn more, reach out to our small business HR and payroll experts today.