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Article

The Logic of Sizing a Service Organization

By Merit Smith
Vice President
Director, Health Care Practice

Fall is in the air, and it's budget time. It’s the season for “management dialogs” about staffing the service operation. You know the ones we’re talking about:

	The executive says: “I’m concerned that given the staff you are projecting we will not be able to achieve next year’s huge bonus paying financial plan.”
	The hapless service director says: “We’re projecting a 6 percent growth in transactions. You’ve cut my first round budget increase from 3 percent to 2 percent. What more do you want? As it is, we are going to be arguing about unplanned overtime in March… Let’s get real.”

They don’t really say these things, but they do think them. And lacking logic for determining staff size, they make decisions about staffing that are the managerial equivalent of a crapshoot. This article will not solve all your budgeting and staffing problems. But it will give you a way of thinking through the questions you should ask as you build next year’s staff budget. Because some readers think in terms of numbers and some get concepts best via graphics, we’ll give you the logic in words, numbers and pictures.

How many people do we need to run the service center? The service center’s total staffing should equal its fixed staff plus its variable (or transaction-related) staff.

The size of the fixed staff is determined by management decisions about levels and layers, spans of control and how we design jobs for managers and executives. The fixed staff is the staff needed if we wanted to have the service center, but it didn’t have any transaction or volume flowing through it. Increases in volume have little impact on how large the fixed staff is.

What do we mean by “management decisions about levels and layers, spans of control and design of jobs”? These management decisions are really the result of organizational culture and philosophy.

What about the variable or transaction related staff? How many should we have? Variable jobs are driven by two factors: transaction volumes and transactional efficiency. The size of the variable staff should be driven by the number of services they will deliver multiplied by the time needed for each transaction.

The transaction volume is the number of services we must deliver. A key measure for volume is “the submission rate of transactions per source of transactions.” For example, if we get 50 written inquires per 1,000 contracts per month, we have a submission rate of .05/contract month. Smart organizations know the submission rates for their major types of transactions and use the submission rates in their budgeting. Submission rates are stable and predictable over long periods of times but show a lot of seasonality.

Volume is driven by a number of factors: The size and growth rate of the market we serve, our market share, the demographics and the type of products we are servicing.

Many organizations overlook differences in the transaction volumes created by differences in products. For example, in health care, 1,000 HMO members will generate many more phone calls than 1,000 PPO members will. New customers unfamiliar with your products and processes may generate more transactions and higher rework rates than customers who have been with you for a number of years.

Transactional efficiency is measured by the number of minutes needed to service each transaction. For example we know that it takes the staff 20 minutes to deal with a written inquiry. Smart organizations know two things about minutes "per thing”: how long it takes today and how long it should take. Good record keeping and expense records tell us what is happening today. Several things influence transactional efficiency. The key influencers are:

	Design of Work. There are two meanings to this phrase. The first is how processes and work activity are designed and structured. A work process can be designed in ways that fragment and divide work, creating inefficient hand-offs and other non-value-adding activities. The second meaning is about how we design our conditions of work. How many hours of a typical staff member's year are available to provide service? A typical worker may have only about 1,200 hours per year to deliver service. Knowing the hours available per year is a key part of staff budgeting.
	Staff Efficiency. The hours that are available for service have to be adjusted for staff efficiency. These adjustments are needed because people work in different ways and have different levels of productivity and skill. Fatigue and delay are also a factor. A rough rule of thumb is that about 85 percent of available time is used in productive service.
	Technology. Economics 101 told us that we can substitute capital (i.e., technology) for labor (staff). Work processes that are designed with intense use of technology can use less staff. A less technology-supported process may require more staff.

So let’s put all this together in a simple formula. Let’s use one transaction type. The total staff is equal to the fixed staff and the variable staff. The variable staff is equal to the transactions multiplied by the time per transaction, and then divided by available hours per year. Using about all the high school algebra I can muster is an equation: Y = a + b(x/c).

Y is total staff; a is fixed staff; b is the time per transaction; x is the number of transactions; c is the number of hours our staff is available for service.

Here's a diagram that gives you a picture of the logic we’ve been discussing.

Let’s do a simple example to tie some of these concepts together. Here are some assumptions and data. The question is "How many people do we need to support the correspondence function in the service center?" Here we go.

	Our corporate policy is that we will have one supervisor or team leader for every eight service staff.
	Our HR policy lets a typical staff member work xxxx hours per year. We think they are highly effective. In fact, we think they are productive 90 percent of the time.
	We have 250,000 clients. The submission rate for written correspondence is .045 per contract per month.
	Written correspondence is a complex transaction. It takes us 25 minutes to service a written inquiry.

How many staff members do we need? How many team leaders?

Now that you have the logic, here are nuggets of experience that might help you.

Spend time on the facts and assumptions used in your budgets. Know what is known and what is assumed.

Encourage your staff to talk about their assumptions. “What’s driving your thinking about that?” and “How did we settle on that assumption?” Talking about assumptions and how they were made leads an organization to sharpen its thinking. Over a period of time they will be able to find facts that are better than the assumptions they have been using. As they do this, your entire budget process becomes more fact-based, and your life will become easier.

Just as you question how assumptions were made, verify “facts.”

Focus on the critical few transaction types. In most Contact Centers there are three or four transactions or services that account for 80 percent of staffing. Invest time and money (perhaps consulting dollars) in understanding these transactions. Once you understand them, work to reduce the effort needed to service them.

If you are concerned about fixed staff positions and costs, focus on:

- Your assumptions and beliefs about organization design and structure.

- Your management practices and expectations for managers and
supervisors.

- If you are concerned about variable staffing positions and costs,
focus on:

Redesigning products and services to reduce submission rates.

Redesigning existing processes without changes in technology to increase transactional efficiency (minutes per transaction).

Redesigning process with new technology.

Fixing processes that are in place before you invest in new technology. The savings you get from fixing the present processes may be able to fund the new technology. If it doesn’t, at least it will make it easier to implement the new technology.

If you have a good idea about the baseline staffing for your organization, you’re not done. Baseline staffing tells you the average-sized staff you need to meet your average demand for service. But staffing to meet average demand will result in substandard and unnecessarily expensive service.

Why? In the industries Nolan serves, the demand for service is subject to significant seasonal variation. If you staff based solely on average demand, in peak periods you will be unable to deliver acceptable service. Unacceptable service will result in backlogs, increased call volumes, increased error rates and rework. These symptoms drive increased temporary and overtime staffing and higher cost of service.

But economic reality is that you can’t staff to your peak demand. So what do you do? You adjust your baseline staffing to reflect some part of peak demand, and you use other tactics to balance service supply-demand. There are a variety of operational and technology approaches to this problem. Helping clients understand and use these tactics are the “bread and butter” of Nolan consulting. Using these tactics begins with a clear understanding of your specific problems of seasonality.

If you aren’t yet using “seasonal adjustment factors” in planning your staffing, it's likely that your staffing will either be too large and expensive or will result in seasonally unacceptable levels of service. Understanding seasonality is important to balancing service demand and service delivery while achieving optimal cost.