No, it has nothing to do with cows. Raise your hand and go Moo if you thought about cows as soon as you heard the term. Don’t worry, that’s what I thought at first also. But there is more to it than a hilarious phonetic relation to cattle. (Yes, I laugh every time I say TCOW).
The point of all metrics involved in workforce’s analysis is to help determine how much value is created by it, how much the company invests in it, the workforce’s behavior, and transforming a entropy of data into concrete information that identifies spaces for improvement and help managers make informed decisions, coherent with organizational strategy.
One of the (I dare say) most important metrics is the TCOW, or Total Cost of Workforce. We’ve heard many times before that the workforce is a company’s most important asset, but measuring its dimensions is still not a strong point in HR divisions. I’ll give it to you- Measuring the workforce may sound relatively simple, but it becomes complex when start digging in and you consider all the activities that this implies (MOO if you agree). The TCOW is a starting point for this analysis because it considers the investment in the HR ingredient, and it can do it on a large scale, or by divisions or business units. How much are we investing (or spending) in a group of people throughout a period of time? I bet that’s a question we all would like to answer as fast as a reflex.
So, how does TCOW participate in this crusade? Here is how:
First, it considers ALL expenses made in favor of the workforce, meaning all compensation costs or any other involved in benefiting the employees. More precisely, the TCOW is the sum of Compensation Costs, Benefits costs, and Other workforce costs.
Simple and integral right? YES! It may take a while to sum up all the values, but it is NOT rocket science (Again, Moo if you agree). However calculation is not the issue here. It is more important to figure out how we put this information to good use.
ALL IN: Beware! The information that you will use for calculating the TCOW must be the most up to date and accurate. Stick to reality people, using imagination here is like using bad compost: results won’t be pretty. Pay a visit to your HRIS central and find out how much is going into each category: Base salaries, Productivity compensation, Additional Salaries, Paid leaves, Commissions, Health plans, Insurances, Pension Plans, Loans, Contingent workforce, (Moo and add your own category).
Figuring out “how much is it”, is exactly your TCOW. It’s the value ($) of the workforce. This number by itself is enlightening, but others may go (Moo): So what? Well, like I said, there is more to it.
Traditionally, the total cost of workforce is tracked but not analyzed. The information is there for managers to reach it, but usually it is not used for looking beyond a dollar value caused by the company’s operation in the past. If it’s measured then its most common use is as a productivity indicator: Is it an increasing cost? Are we creating more by paying the same? If the cost goes up then it may lead to layoffs, budget cuts, and even restructuring.
Best use of the TCOW: LEADING! Mooing towards workforce cost optimization.
The TCOW is a starting point. You can use this calculation for determining for example, how much (as a percentage) is the outsourcing costs part of your TCOW. (Total Outsourcing cost /TCOW). This can be used as a leading indicator of future workforce cost savings and increased efficiency, especially when combined with customer satisfaction and productivity indicators that compare your own workforce to the outsourced service.
You can also determine how much the TCOW is taking part of your expenses. Compare the TCOW to the total expenses of the company (TCOW Percent of Expenses= TCOW/Total Expenses). The larger the percentage, the greater the impact it will have in your company when changes in employee and workforce value such as savings or productivity increase it will have.
One more MOO and I’ll let you run…
When expressed as a percentage of the total operating revenue, TCOW shows the relationship between the cost and the revenue generated by the workforce. You can analyze the costs by job groups, roles, or a specific position to determine the impact of their cost in financial performance. You can manage your costs through time by simply calculating TCOW percent of revenue (TCOW/Total Operating Revenue). And if used in synchrony with metrics such as productivity, employee engagement, tenure, it can be used as a predictor of trends in employee performance.
You may now go MOO at your head of HR and start moving forward in workforce analysis.