Headcount benchmarking is a specific type of benchmarking used in business to assess workforce efficiency. In this useful guide, we will explain everything that you need to know, including:
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Headcount is the total number of people who work for a company. Sometimes this metric can refer to the total number of employees, while at other times the term can also include contractors, volunteers and outsourcing providers. It is important to clarify which people are included in the definition whenever this metric is being analyzed.
Headcount should also not be confused with another term called "FTE" (meaning Full-Time Equivalent), which is a measure of how much each person works on a full-time basis. For example, if an employee works full-time (defined as five days per week) then they will be quantified as 1 headcount and 1 FTE. Alternatively, if this employee works part-time at three days per week then they will be quantified as 1 headcount but only 0.6 FTE, which is calculated as 3 / 5 days worked per week.
Benchmarking is the process of comparing something to a group of similar things. Through comparison it is easy to understand whether something is better, worse, or similar to others. Benchmarks are used to understand the performance of many things; but it is mostly used to understand the performance of business activities.
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There are two main types of benchmarking, which are internal and external. Internal benchmarking relates to comparing different departments or functions within a company, while external benchmarking relates to comparing parts of a company with other companies. Let’s explore two scenarios to understand how they work:
Apple Logistics operates in the USA, Canada, and the UK. The revenue by country is split equally at $1M each, which totals $3M revenue at the Group level. However, the profitability is different in each country, as follows: $0.3M in USA, $0.2M in Canada, and $0.4M in the UK. From this comparison, we can identify that operations in Canada has the most potential for improved profitability.
Banana Logistics makes $1M revenue and $0.2M profit. There are 10 other logistic companies that also make $1M revenue each and have a median profit of $0.4M. So, how good is Banana Logistics profitability? Not very good. Banana Logistics is performing at 50% of the benchmark median, which highlights the significant potential for improved profitability.
Headcount benchmarking is the process of comparing the size of a workforce from one company with a group of other similar companies. This can be the total size of the organization, or the number of employees within specific a function or location. The goal of headcount benchmarking is to determine whether a company is overstaffed or understaffed compared to its peers, and to identify opportunities for improving the efficiency of its workforce.
Consultants, investors, HR, Finance, and executives typically use headcount benchmarks to inform and support key workforce decisions. Some common scenarios behind these decisions include the pursuit of higher profitability, rightsizing after a significant change (e.g., merger or acquisition), and rapid cost out to preserve cash during tough times.
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Below are the five steps to perform external headcount benchmarking. You can follow the same process for internal benchmarking, except for step #4 where you will need to gather data from within a company instead of other companies. Now let's walk through the steps:
Is it the whole workforce? A department or function? Or employees in a specific location?
Is it revenue? People? Something else?
For example, people is usually the driver for benchmarking the HR function, so the benchmark metric could be the ratio of total employees to HR employees.
In the example for the HR function, it will require sourcing the number of HR and total employees in comparable organizations.
If the company has a higher ratio of total employees to HR employees, then it suggests that the company has an efficient HR function. However, if this ratio is lower relative to peer companies, it may indicate an inefficient function that should be explored further.
CompanySights is a leading provider of headcount benchmarking data. With over 1 million data points, our database is one of the largest available, helping HR, Finance, and consulting leaders make informed decisions on workforce planning, organizational design, and cost optimization.
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