Headcount Planning in 2024: An overview

What is headcount planning?

Headcount planning is the process by which an organization determines the size and structure that's required of it, in order to meet short or long-term business goals. Simply put, it ensures that a company has the right number of people, with the right skills, employed at the right time.

For example - if part of your long-range plan includes expansion into new territories, the headcount plan is how you ensure that you have seats filled by the time the office opens.

The responsibility for headcount planning is split between HR, finance, and functional leaders - each of whom have different priorities:

• Finance care about the bottom line - ensuring the organization has the headcount to meet business goals, while staying within a defined budget.
• HR are interested in filling skills gaps, determining the correct structure for teams, and ensuring they perform.
• Function leaders are interested in hiring the best possible talent to work in their department.

What are the challenges with headcount planning?

Economic unpredictability

The past decade has been particularly unpredictable, which is never good news. A recession could mean that plans for expansion need to be thrown away - when that happens, it's important to have a plan.

Shifts in the way we work

The work-from-home impact of the pandemic was something nobdoy could have seen coming, but it had massive implications for the headcount plans of a lot of organizations. It's possible that we'll see similar shifts with the advent of generative AI technologies - they have the potential to radically change workforce requirements over the coming decade, and it's important organizations are ready to fill skills gaps where they present themselves.

Data

There are a lot of systems involved with workforce planning - HRIS, ATS, ERP, EPM - and they all need to work together if you are to achieve a holistic picture of the workforce in its current state (and potential future states). To complicate matters further, larger organizations may be dealing with multiple types of the same system, as a result of acquisitions of smaller companies, for example.

The type of data is also difficult, because workforce data is extremely sensitive information. Since it’s usually not policy for everyone in an organization to have access to salary information, strict controls around how information is handled and presented are required. This forces processes that are siloed, since only some people can access all the data.

‍Collaboration

Collaboration on headcount planning can often be extremely difficult. Siloed processes, while necessary when dealing with sensitive information, create natural delays and inefficiencies. The number of different stakeholders involved also has an impact - and they all have slightly different priorities when it comes to headcount planning, which means often that compromises must be made. This can, unfortunately, lead to an extremely protracted process.

Short-sightedness

Often, because headcount planning is so difficult to get right (and collaboration takes a long time), organizations are left with only a myopic view of what they'll need for the year ahead, at most. What this leads to is less-effective, reactive hiring procesess that hurt company performance and employee morale - ultimately compounding the problem.

Budget

Finance and HR are back-office functions, so if you're looking to make an investment to make headcount planning work better, it's critical you justify the spend.

What are some key headcount planning metrics?

It’s important to track certain metrics during the headcount planning process to be able to prioritize your efforts and measure the effectiveness of your planning model. Here are the must-have headcount planning metrics you should keep track of:

Turnover rate

A company's turnover rate is the number of employees who leave during a given period, typically a year.

Turnover rate = Number of employee exits / Total headcount

Most reasons for turnover are voluntarily initiated by employees who quit or change employers. Involuntary employee turnover occurs when employers lay off workers for subpar performance, failing to complete a probationary period, redundancy, or breaking corporate policy.

Attrition rate

Attrition describes the natural turnover of employees. Attrition specifically refers to voluntary exits, when an employee leaves of their own accord.

Attrition rate = Number of voluntary employee exits / Total headcount

It is important to monitor attrition levels carefully, as too much attrition can lead to negative consequences such as a drop in productivity or an increase in absenteeism.

Ramp time

Ramp time is the period of time between a new employee's hiring and the time when they begin to be productive at their new position. Existing documentation on guidelines, processes to follow, and training programs for new hires can reduce ramp time.

Time-to-hire

Consider opening the position on November 1st, receiving the first application on November 5th, and successfully closing the position on November 29th. The time it takes to hire (time-to-hire) a candidate for a particular position is 24 days.

The risk of applicants slipping out of the funnel increases during delays in the recruitment process. The longer those delays last, the worse they are for both the applicants and your team. The more time and money you invest in what could be a simple hiring process through tests and interviews, the more expensive it becomes.

Full-time equivalents (FTE)

Employers can standardize their headcount by combining their part-time workers' hours to determine how many full-time employees would work those hours using the full-time equivalent (FTE) method.

A part-time employee's FTE value, for instance, would be 0.65 (26 hours worked / 40 hours) if they worked 26 hours a week.  

Employee net promoter score (eNPS)

eNPS refers to a person's inclination to suggest their employer to family and acquaintances. High eNPS scores, in other words, show that employees are loyal to and engaged with a company.

Headcount Planning best practices

Use the checklist below while working on headcount planning to ensure you implement better headcount planning for a smarter workforce.

1. Bring all your data into a single source of truth
   Simplifying data is paramount for headcount planning. The entire planning process will be futile if your data is scattered across software and departments. Data from finance, and other departments should lodge in a single software that can display reports based on that data.
2. Scenarios, scenarios, scenarios
   Ensure you're running as many scenarios as you can to understand the implications that economic downturn, higher-than-expected attrition, or a sudden need to expand would have on your headcount requirements.
3. Connect your models
   If your headcount plan is connected to the other models you use to run your business, it can help you make smarter decisions. If your financial model has plans for what you want your long-term revenue growth to be, you can then use that information as a starting point for your headcount plan. As a platform, Pigment allows you to do that.
4. Bring your teams into one place
   Headcount planning requires collaboration between HR, finance, and department leads - but they can't all be working in isolation. Working in a platform like Pigment enables everyone to be aligned around the same numbers, and helps finance quickly demonstrate the implications of the different decisions you may consider while building a headcount plan.
5. Run plenty of scenarios
   Visualize best, worst, and baseline case scenarios using scenario planning. Ensure you're running as many scenarios as you can to understand the implications that economic downturn, higher-than-expected attrition, or a sudden need to expand would have on your headcount requirements.

Headcount planning is an essential tool for all businesses, big or small. By understanding your company's strengths and weaknesses, you can create a workforce that is more adaptable to changes in the market.