The Cost of Not Changing: Tangible and Intangible Costs

October 23, 2020

Business author Alan Deutschman popularized the business catchphrase, “Change or die“. Taken literally, that‘s a pretty draconian view, but it rings true with many of the clients we work with in the skilled trades arena, particularly those that are looking for new and creative ways to solve their staffing shortages. But change is hard and it often takes a significant level of pain to bring an organization to the place where they are ready to adjust course and try something new.

This tipping point often occurs when the cost of not changing exceeds the comfort of the tried and true.

In this article, we will explore some of the ways that the costs of inability to address staffing shortfalls may be having substantial impacts on both the bottom line and overall health of your business. Recognizing these costs and making informed decisions to address them may be difference between prosperity and failure.

The pain of not addressing staffing challenges

At Skillwork, we specialize in helping our clients navigate these challenges. In fact, we are currently working with some customers in the manufacturing space where their staffing challenges have reached a point that requires an immediate solution. For them, the impact is a significant reduction in run time and a forced idling of crucial lines in their plant due to lack of needed staff. In their world, and likely yours, their facility is designed to run at capacity—anything less means dissatisfied customers and lost opportunity. Not to mention the fact that the fastest way to hurt your bottom line is lack of volume or inability to get volume through the facility.

Unfortunately, their current methods and sources are not meeting their needs so they are looking for an alternative solution. We’ve had the good fortune of establishing our credibility with them in the past, so they are seeking our help in an innovative pilot project designed to alleviate the pain.  This is a clear case of reaching the tipping point where the cost of not changing is enabling innovative solutions.

This is an obvious, but necessary statement—lack of skilled workers has significant cost impacts. Statistics, surveys, and business metrics routinely rank a lack of skilled labor as one of the greatest risks facing business today.  The direct costs are usually the most obvious impact of being understaffed, but there are also more subtle hidden costs that you might not be thinking about. Let’s look at some of both and also ways you can mitigate the impacts of those costs.

The different types of costs of the trade gap on your business—and what to do about it

Actual costs

These are the tangible costs that businesses routinely track that directly impact your bottom line:

  • Missed deadlines, delays in new starts, or inability to meet production commitments often come with a significant penalty and significantly diminishes your reputation with customers.
  • Material defects, rework, and spoilage increase.
  • Safety-related mishaps result in lost time, increased workers’ comp costs, and even onerous legal costs.
  • High turnover and attrition causes increased overhead cost related to hiring, training, and onboarding new employees.
    • Statistics indicate that the average new hire cost employers anywhere from $8,000 to $10,000 per employee
  • Production lines are unable to run at full capacity or sometimes, even idled. Manufacturing plants and equipment are designed to run at capacity—it almost always costs to get machinery running after a shutdown.
  • Overpaying for less experienced and capable talent results in higher costs for less productivity.
  • Increased healthcare costs due to employee burnout and stress-related medical conditions.
    • A Stanford University Graduate School of Business reported that employee burnout costs the U.S. 190 billion dollars per year in health care expenses, as well as 120,000 stress-attributed deaths.
    • Gallup reports hows that employees who experience burnout at work “very often” or “always” are:
      • 63 percent more likely to take a sick day
      • Half as likely to discuss how to approach performance goals with their manager
      • 23 percent more likely to visit the emergency room
      • 6 times as likely to be actively seeking a different job
      • 13 percent less confident in their performance

Source: https://www.bamboohr.com/blog/examining-employee-burnout/

Hidden costs

These are underlying factors that, while not as obvious, often have more long-lasting and devastating effects to your business.

  • Lost opportunity to grow: it’s hard to quantify the business opportunities you miss, the projects you turn away, or the customers that you are unable to convert.
  • Loss of morale and drive in employees: the internal attitudes of defeatism, cynicism, and self-preservation reduce output and degrade productivity.
  • Culture degradation: it takes years, or even decades to develop a great culture, but it can be destroyed in a matter of months.
    • I experienced this firsthand during my time at Union Pacific.
  • Loss of experience: it’s hard to quantify the hidden cost of an experienced employee that walks out the door, but the impacts are obvious to those left to pick up the slack.
  • Business reputation: like culture, it requires years to build, but can be lost almost overnight.

Steps to take to mitigate the actual and hidden costs of being understaffed

At the risk of sounding like Captain Obvious, it’s pretty clear that being understaffed and not adjusting course to resolve it has significant costs—both real and underlying. While no strategy or approach offers a guarantee that we never face staffing issues, there are some steps we advise you to consider taking.

First, identify and quantify both the quantitative and qualitative costs of being understaffed. Track and mitigate it as you would any other threat to your company. You can’t address a threat without recognizing it first.

It’s important to not underestimate the hidden costs associated with staffing issues. While not as easy to quantify, they often eclipse the apparent/real costs. Get feedback from your team, assess morale, and correlate missed days, safety issues, and defects against staffing levels.

Through this process, be patient and recognize that it takes time to turn these trends around. Changing course by adding staff, getting them on-boarded and trained takes time and resources. Using an analogy of a large naval ship, the ship’s course cannot change unless you are already underway and moving forward. Change doesn’t happen overnight, so get ahead of the problem now and just keep moving forward.

Lastly, partner with someone like Skillwork that focuses on solving this challenge all day, every day so you can focus on what you do best. We are experts at getting to know you, understanding your needs, and providing exactly what you need, when you need it.

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