There is a lot of ego in being able to say, “We employ X amount of people.”
The truth is, growth at a company can take on a lot of different forms. Some companies take pride in the size of their workforce. Others take pride in how few people they employ in order to provide a world-class product or service. I can absolutely say that with my first venture, I saw headcount as a marker for growth. The bigger the company got, and the more people we employed, the “faster we were growing.”
I quickly learned that more people means shelling out more money and creates tremendous risk.
It’s an interesting lesson to learn as an entrepreneur that if you can do the same job with fewer people, you could be much more successful. You also have a better chance of surviving—versus spending so much money on overhead and payroll. And so, before you start getting excited about hiring more people, for more roles within the company, it’s worth slowing down and questioning where that desire is coming from. Why do you want to hire this person? Is this a new role you want to create, or is someone else on your team overworked who you think needs some extra help? Is there technology that could accomplish the same or better? Or do you simply have a lot of cash on hand and you think the best thing to spend it on is “more people?”
Over the past decade being an entrepreneur, there are 5 questions I have learned to ask myself before I get carried away with hiring.
Question #1: How expensive is this person—and how do you know whether they are a positive or negative cost to the company?
Hands down, I didn’t analyze this as much as I should have and it was one of the biggest lessons learned from my first company. This should be your very first step in making the decision to hire or not.
What many companies do is make general assumptions. They take the salary, bake in a percentage for bonuses and commissions, and then maybe incorporate an additional 14 to 20% for expenses associated with "burden" or "fringe".
The real question, however, is whether or not that assumption ends up being correct. How do you know that percentage is the right percentage? And then, more importantly, how do you balance that out against what you think this person is going to produce for the business? If you think this hire will produce $X in new sales, how do you quantify the sales they bring in versus the expense of the employee? And finally, how long is it going to take you to break even? What happens if that person doesn’t accomplish the sales goals you set out for them? How long is it going to take you to know? What impact will that have on your financials?
This is what’s so hard about the decision to add to your headcount, and why companies and managers are always looking for tools to help them forecast true costs associated with their decisions. This was, without question, one of our biggest challenges, and what ended up inspiring my current venture, PlaceCPM—which allows managers to accurately forecast and determine the true costs of their decisions. You can determine not only whether you can afford to hire someone, but you can also determine the benefits you get from hiring them (and then play around and see what the numbers look like if it takes you six months to hire this person versus two months).
Being able to see the impact a given decision can have on the business is critical.
Question #2: What do you think the result of hiring this person will be?
Specifically, what is this hire going to do for the business?
- Are they going to increase revenue?
- Are they going to decrease expenses?
- Are they going to take responsibilities off your plate, allowing you more time to focus on more important tasks?
When you are a small or mid-sized company hiring someone should never be done from a place of convenience, and always with a very clear goal in mind.
The second piece of the puzzle is then knowing how you are going to measure the achievement of that goal. What are you going to do to accurately assess why you hired this person? How are you going to know whether you made the right hire or not? Or, more importantly, is there a way for you to accomplish the same thing without hiring someone in the first place?
Too many companies hire people without stress-testing whether they truly need to add headcount in order to achieve the same result.
Question #3: How much does it really cost you to hire this person?
So many founders think about hiring in a vacuum—I was one of them!
They see it as one decision, as opposed to really taking the time to understand all of the resources that are going to go into making that decision in the first place. First, you have to find the candidate. Then vet them. Then you have to interview them. Then onboard them, and have other team members train them. Does your team have the capacity to do that? Who, specifically, is going to be responsible? And anyone involved in that person’s onboarding, how much is their time worth? How much is it going to cost you for them to be distracted for a period of time hiring someone new?
These are the types of questions you should be asking before you even begin even writing the job posting.
Question #4: What level of person do I truly need to hire?
With my first company, one of the reasons we needed so much cash-on-hand was because we were hiring very expensive employees.
We were originally headquartered in San Francisco and ended up moving our headquarters to Chicago specifically because of the cost of labor. It was so much cheaper to hire in Chicago, and the talent was just as good. In San Francisco, not only was it difficult to find the right employees, but we also had to compete with all the other tech companies down the block offering high salaries and huge benefit packages.
Another big mistake companies make is they want to be frugal with who they hire, so they nickel and dime people hard for positions. As a result, they end up getting subpar players in roles where they need rockstars. Had they spend the extra $30,000 to get the right person, that hire would have had an exponential impact on the business. Going back to what I detailed above, this is why determining the “true cost” of an employee is so important. Paying $30,000 extra for the right person might seem like a lot in the moment, but how much is it going to cost you if you hire someone cheaper who doesn’t perform?
Question #5: At what point are you going to let a bad hire go?
And finally, you have to know when it’s time to pull the plug.
When you hire someone, what is the minimum expectation? Salespeople are the quintessential example. What level of sales do they need to bring in to justify keeping them on the team? And if they don’t hit those numbers, what’s going to happen? How many warnings are you going to give them before you decide they aren’t the right fit?
This was something we really struggled with. We would hire salespeople who didn’t perform, and yet we’d keep them on. We gave them the benefit of the doubt for too long—when we should have let them go. It’s not fair to that employee, the rest of your team, your customers or your investors.
It’s much better to set these stakes in the ground from the beginning and make the outcome extremely clear to the new hire and to the team members responsible for managing them. What’s the minimum expectation? And if that person doesn’t hit that minimum expectation, then it’s not the right fit and end it.
In a perfect world, the answers to all these questions would be clearly defined from the beginning. But that’s not how business tends to go. Building a business is an abstract process and one that involves a never-ending amount of questioning.
Your team is the number one thing that will make your venture successful, but really make sure you are hiring the right team members, at the right time and for the right reasons.