TCOW - Total Cost of Workforce
When management thinks of workforce spending, wages typically come to mind. However, that is only a fraction of the organization's total workforce expenses. Other costs include benefits, payroll tax, training, HR operating costs and contingent workforce costs to name a few.
A recent survey found that almost 40% of companies consistently discuss human capital matters at every board meeting. Topics typically include how much the organization is spending each year on salaries and benefits, recruiting, training, development, etc. and the impact these investments have on the organization.
To provide the management and the board with a true picture of workforce spending, HR and Finance should start measuring, tracking and benchmarking their Total Cost of Workforce or TCOW. This guide will tell you everything you need to know about this key metric, how to calculate it and how to use it to make data-driven workforce decisions.
Beginners Guide to TCOW - Total Cost of Workforce
2. Why TCOW
What is Total Cost of Workforce?
TCOW or Total Cost of Workforce is the sum of the total amount of money an organization spends on its workforce. It includes all compensation, benefits, and HR operations expenses such as talent recruiting and development. The main purpose of this metric is to provide management with full visibility into labor costs and its drivers. We have written a white paper on this metric and its significance in workforce optimization.
To get a detailed list of what should be included in this metric, please go to the "How to calculate TCOW" section.
Note that TCOW should also include expenditures on the contingent workforce, outsourcing workforce or gig workers if they work exclusively or spend a substantial amount of time each month working for your organization. Historically, companies omitted these expenses from the calculation and, in turn, miss this important source of expenditure.
Why Measuring Labor Costs
With labor costs as much as 70% of an organization's total operating expense, it does not take much persuasion to convince management to care about TCOW. Especially with laborcosts projected to increase steadily in the next decade. Before COVID-19 took place, the overall 2020 salary budget was projected to grow by 3.3% according to SHRM.
Many factors are pushing up labor costs. Here are the top workforce trends that companies need to keep track of:
Climbing minimum wage - Many states are slowly rolling out their $15/hour minimum wage and companies need to stay on top of this to maintain their bottom-line margin.
Rising labor costs - Even before the new minimum wage took place, labor costs have been on an upward trajectory in recent years, especially for highly-skilled positions (i.e. cybersecurity analyst and software engineer) or skills that are in high demand (i.e. Python, RN nurses and analytics translator.)
Demand for more transparency in human capital management - More institutional investors and activist groups are demanding more transparency around how companies are managing their workforce such as labor cost, pay equality and diversity.
How to Calculate Total Cost of Workforce
TCOW or Total Cost of Workforce is the sum of the total costs of the workforce and includes all compensation costs, benefit costs, and other employee costs. Data required to calculate TCOW can be found in the Human Resources Information System (HRIS) and Finance database.
Use TCOW to Make Data-Driven Workforce Decisions
Better measuring, tracking, and reporting TCOW is a great start for any HR team. But what kind of insights that HR can get from TCOW? Below are some examples of how companies used TCOW to make data-driven workforce decisions.
Example 1: Understanding Drivers of Labor Costs
As shown in figure 1, management of this company recognized that managing workforce costs is an important element of their strategy. They tried to keep labor costs under control by trimming their headcount and tightening their compensation policy. However, their labor costs continued to climb.
By tracking TCOW and its components, management was able to discover that a significant portion of their Total Cost of Workforce came from their relaxed use of contingent workers.
In fact, their contingent workforce expenditures were almost as high as what they paid for their salaried workforce. And this number was projected to continue growing in the next few years.
Armed with these valuable insights, management was able to take precise interventions to reduce their contingent workforce spending and regain control of their labor costs.
Example 2: Benchmarking Total Cost of Workforce Against Competitors
A simple benchmark comparison against closely matched competitors can provide valuable insights into your labor cost.
For example, as shown in figure 2, TCOW as a percentage of Expense for this organization is at 63% and TCOW as a percentage of Revenue is around 35%. The percentages are high, but it makes sense since this is a Financial Services company. This helps management better understand their bottom-line margin but begs the question: how are they doing versus peers?
When putting them against competitors of similar size and geographical location, it is clear that the company has higher TCOW as a percentage of both Revenue and Expense. The good news is that while they are behind their peers, they are not that far off. Also, all the competitors are very close to each other, so no company has a sizable competitive advantage over the rest.