Savings on staff explained in numbers

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Is your organization changing its staffing plan? Is there a voice that taking more graduates on board will be beneficial? Does it look like seniors (expensive and hardly manageable) are replaced by juniors (freshly thinking and self motivated)? This topic is coming up every noun again, and we decided to examine it in numbers from an organization capability standpoint.

two people hitchhiking

Assume a virtual engineering company which has 5 seniors and 5 juniors. This team currently does 100% of the monthly work and makes a gross monthly revenue of $150K average. The salary fund is 1/3 of this number and the seniors are paid twice more than juniors, thus we have the equation  5*2*x + 5*x = $50K, where from a junior gross salary is $3.300, and a senior is getting $6.600 gross.

By applying the Pareto principle, we can sensibly assume that the seniors produce 80% of value adding results, e.g. those results the company is paid for by clients. The juniors then produce the remaining 20%. To start with, let’s now assume all seniors are equally productive among their group, and all juniors – among their group. As such, each senior has a 80% / 5 = 16% and each junior has a 20% / 5 = 4% share in the total 100% of the monthly work done in the original configuration of the company (refer Chart 1 in the figure below).

charts one and two

Now, the time for change came: Two seniors were dismissed or have resigned or got retired (consider your organization options), and were replaced by two juniors. The salary fund is now 3*2*x + 7*x = $43.330 and we have $6.600 savings. What happened to the organization load capacity? It is now: 3*16% + 7*4% = 76% (refer Chart 2). This will likely mean that in the next month the organization can only invoice 76% * $150K = $114K (providing that it’s fully loaded as before). The balance is:

  • Savings +$6.6K
  • Losses   – $36K
  • Net: $29.5K loss

The result is shown in the Chart 2, which is yet optimistic! Applying the same phenomenological Pareto principle, we can conservatively expect that 20% of the seniors group (e.g. 1 senior) usually does 80% of the useful, value adding work (and the same applies to juniors). This original 100% work done pie is now re-sliced as shown in Chart 3:

charts three and four

As per our organizational change scenario, two seniors resigned. As a matter of chance (we will quantify it just below), one of the dismissed was that very senior who did the most work (40% capacity in red in Chart 3). The Nature compensated the misfortune by sending over one more very talented junior (same as 10% capacity in blue in Chart 3) amongst the two newly hired juniors. What is the company work capacity now? 3*10% + 2*10% +5*2.5% = 62.5% of the original one, hence the next month organization invoice will be: 62.5% * $150K = $94K The balance is:

  • Savings +$6.6K
  • Losses   – $56K
  • Net: $50K loss, e.g. the whole value of the salary fund.

One third of the company’s revenue was lost, not mentioning reputation and business development consequences.

Finally, what is the chance of dismissing one specific person in a team of five by selecting two people? The chance to tick the right mark in the list is 1/5 for the fist attempt and 1/4 – for the second attempt, that is 25% probability if the persons are selected randomly. In reality, that senior who does the most work can be especially targeted and he is likely the most inconvenient and grumpy personality in the organization. So, the real life Chart can even be worse, it depends…

one in five people

We might now debate that juniors and seniors are given different tasks, that juniors can do basic tasks better than seniors (is that right?), but in application to engineering activities, seniors do perform most of value adding work, and probably, at the 80% / 20% ratio, would you agree?

The message from this arithmetic analysis is that the policy of retaining knowledge and talent must be adhered to, equally in the modern context of money driven decisions.

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