How Tying Costs to Revenue Can Make Your Company More Scalable

If you're looking to optimise your profitability and scalability have you considered whether you've got the right mix of permanent and contract or variable-cost team members? Shifting to a variable staffing model in some areas of your business, could be a game changer.

What is a Variable Staffing Model?

In short, it is a way to optimise your gross margin and profitability. It is done by more closely linking the cost of your wages to revenue so that it rises and falls in lock-step. This means that some (or even a lot) of your team are only being paid when a financial outcome is achieved like when a sale is made, or when a service is being delivered to the customer.

Why Shouldn't I Just Have a Fixed Wage Model?

Variable staffing can make your business more flexible and scalable, as you won't have to scale your permanent team at the same rate as you grow your revenue.

It's also an attractive feature for investors or potential buyers as they love the fact that if your business drops 20% in revenue for some reason, yes it will still see a drop in its profitability but you won't have to cut 20% of your fixed-wage workforce which can have a bigger impact on the culture inside your business. With a variable staffing model, you can keep more of your permanent team in place and just use less variable staff whilst your revenue is down.

Let's look at a few examples...

Staffing Models to Consider

If you think some variable staffing could be an opportunity for you, then next step is to consider the different types and what could be best for your business.

Outsourced Delivery Models

Independent contractors who serve numerous masters like Uber and Didi are a good example. The drivers deliver the service, and they're all contractors. They're paid as a revenue share and can work for multiple companies in the same industry.

Project team members that only come on for the term of a project as often happens in civil construction and engineering projects are another common style.

Consider a less obvious services business - the education industry. A sales recruitment and training business that I know don't recruit permanent trainers. They have agreed a rate of $5k per day for a group of contractors they've trained up, but the day rate doesn't increase if they have more students. Their courses cost the client $1k per day per student in revenue, so the training provider breaks-even at 5 students but typically they get 20-25 students - making 75% to 80% gross margin on a cohort. If they had those trainers full-time they'd have to constantly keep them busy otherwise their margins would suffer. Now they just get a nice gross profit boost every time they have a training opportunity.

I used to use a mix of full-time and sessional or casual instructors in a number of the education businesses I led to ensure that when our revenue dipped in holiday periods, we didn't carry the full headcount cost through those dips.

Outsourced Sales and Marketing Models

Agency, or commission models are very common in digital marketing, where someone seeks to generate sales for your business. For example, paying an affiliate marketer a percentage of the sale when someone follows their marketing efforts through to your sales page and converts.

But that doesn't only work in the world of digital.

Let's say you have a services business and your cost of sales and marketing is 20% of your revenue for your permanent team. Why not pay an external party 20% of the value of each sale they make with no retainer and let them take on the fixed headcount risk? Or if they want a retainer, offset that against any commission invoices so the cost is still 20%. You can use this to augment rather than replace your current team to reduce the risk. The third-party sales become an upside for you as you bear no cost unless there's a sale made.

Pairing Less Experienced Resources with Variable Cost Senior Resources Whilst Scaling

Consider perhaps now, not sales and marketing or delivery, but leadership.

If you're a growing business you might not have the budget to add a super-skilled senior member to your team to help you build or execute a key strategy. You need some wisdom at the table. Instead of hiring someone with lots of experience, perhaps hire a more junior role, and engage a variable cost senior team member to mentor them and guide their development.

For example: pair an HR Coordinator or HR Manager with a "fractional" or variable cost Chief People Officer. Or your Management Accountant with a virtual Chief Financial Officer. Or a Digital Marketer with an external Chief Marketing Officer. The list goes on.

You might only need the C-Suite exec a couple of days a month to help oversee the strategy and the performance of the more junior team member but now you've got the wisdom you need without the 250-300k+ per year price tag, and you're developing someone internally that you can't develop yourself (because you probably lack that functional skillset) and you're getting lots of tasks done - not just lots of advice with no-one to execute that advice.

How Can I Optimise My Own Staffing Model?

Now its your turn to look at your own business. Here's a few questions you can ask to optimise your staffing costs to help your business become more scalable.

1. Where could I deliver some or all of the service to my customer using a contract workforce? Do I have any "quiet periods" and how could I change the mix of my delivery team so that I carry less headcount cost through those quiet periods?
2. Where could I use external sales and/or marketing resources to secure additional customers on a % of revenue basis?
3. Where could I use fractional or contract C-Suite executives to bolster my leadership capabilities and develop my team?

Risks to Consider

Variable staffing models aren't all sunshine and rainbows. There are some downsides of course and some risks. People who aren't on the payroll may not be as loyal or likely to go above and beyond, because you aren't fully committed to them and so their loyalty in return to you may also be limited.

Super importantly, ensure you always seek quality HR advice if outsourcing parts of your delivery because sham contracting (where you've disguised employees as contractors to get out of some financial commitments to them that they'd be otherwise entitled to if on the payroll) is a real thing with big consequences. Don't let that put you off doing the thinking, but do get good advice before acting.

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