The Overtime Lie
How Traditional Labor Strategies Damage
the Call Center Bottom Line
By John Frehse, Core Practice
[dropcap2 variation=”purple”]I[/dropcap2]n a recent contact center strategy meeting, the Vice President of Operations talked about carrying over a strategy from the previous year of keeping overtime below five percent. Overtime was listed as a key performance indicator and minimizing it was critical to the management team’s bonuses. While in many environments where demand is flat, this overtime avoidance would be a worthwhile goal, in a contact center minimizing overtime can actually be financially irresponsible. The seasonal variations in workload, coupled with the peaks and valleys of call volume from day to day and hour to hour, make contact center staffing a unique challenge. Staff must be available to respond to customer contacts on a timely basis and getting the “just right” fit of workforce to workload is nearly impossible with traditional 8-hour, 5-day a-week staffing models. This article will explore the cost, service, and productivity tradeoffs associated with contact center labor strategy and how overtime should fit into the plan.
Three Labor Tradeoffs
There are many different approaches to staffing for a seasonal or variable work demand in a contact center. One approach that should be considered is to staff to “normal” call volumes and then utilize overtime to cover the peaks. Other approaches minimize overtime, but have their own inherent problems. Here are just a few of the approaches often used by call centers to minimize overtime and their associated risks.
- Peak demand staffing: In an effort to minimize overtime costs and to staff for peak demand to always have enough labor to get the job done on short notice, many organizations hire more full-time staff. However, additional full-time employees are expensive due in part to all the fixed costs associated with health benefits, vacations and holidays, and taxes. These fixed costs are in place even when demand drops, resulting in idle, unproductive time.
- Sacrificing service: A second option would be simply not to hire, avoiding overtime as well as fixed costs. While this might result in cost savings, a staff shortage would result in long delays, poor service, and likely loss of revenues. This understaffing strategy hurts bottom-line profitability, has a huge negative impact on customer service and loyalty, and stresses the existing staff.
- Scheduling with traditional shifts: Using traditional 8-hour work shifts is limiting when trying to closely match the workforce to a volatile workload. Many different shift possibilities are needed to gain the flexibility typically to meet service levels without dramatically overstaffing, but this variety does not exist in many centers.
Clearly none of these three strategies are ones that are optimal for the organization. Let’s explore how some different staffing strategies can save money, improve service, and keep staff happier.
The following scenario comes from a contact center with 455 employees. The center has seasonal and variable demand and accurate forecasting is difficult. They know they cannot afford to miss critical calls, and staffing to the peak has traditionally been their insurance policy that almost all calls will be answered.
The chart shows the extreme choices this center can make to avoid either overtime or idle time. The current staffingstrategy is to staff to the peak (455 employees or 18,200 hours). To fully understand cost and service implications, it is important to look at the true labor costs associated with being either understaffed or overstaffed. Let’s begin with the use and cost of overtime, within reasonable limits as a way to flex up to meet variable and seasonal demand. Companies carry only the headcount they need during low-volume periods and flex with overtime hours to meet customer needs. Because employees are already trained and benefits are already paid in the first 40 hours (assuming 100 percent absorption of those hours), the incremental or adverse costs associated with this strategy are relatively low.
Labor Cost Breakdown
Labor costs must be broken down into three key components to fully understand how they work during different modes of customer contact volume. An accurate understanding of these costs is crucial to make sound financial decisions.
Average Wage: This is the base wage, not including benefits, typically paid to a particular group of employees within a contact center group. The average wage should be considered based on each queue or skill group. Temporary, part-time, and seasonal employees should also be considered.
Fringe Benefits (Burden): These benefits are typically fixed costs, including medical insurance, 401(k) plans, and dental plans, to name a few. Other items such as FICA, FUTA, and SUTA should also be included. They should be expressed as a percentage of the average wage.
Pay Ratio: This ratio represents the total hours an employer pays an employee over the course of a year divided by the hours the person actually works. This calculation incorporates costs including vacations, holidays, and other paid time off.
Once you have identified the average wage, fringe burden, and pay ratio, the three numbers can be used to get the fully loaded cost of one labor hour on straight time. For example, if the wage rate is $15, the benefit burden is 35%, and the pay ratio is 15%, the cost of regular “straight” time is: $15 x 1.35 x 1.15 = $23.29.
For overtime, the numbers change. We assume full absorption of labor during the first 40 hours. Every minute of the work period will not be 100% utilized and therefore one may want to use an occupancy goal as a baseline to determine full utilization. Assuming agents achieve the occupancy goal, starting with the 41st hour many of the costs go away because they are fixed and already covered in the first 40 hours. These costs include the entire pay ratio (vacations, holidays, and other paid time off are not typically increased based on overtime) and some of the burden associated with fringe benefits. Although health benefits are a fixed cost, taxes must always be paid on overtime and some retirement benefits are often included as well.
In our sample calculation, the cost of overtime would include an assumption of the same base wage rate of $15, an overtime penalty or multiplier of 1.5, and a benefit burden of 10 percent. Using these numbers, the cost of overtime would be $15.00 x 1.5 x 1.1 = $24.75.
Finally we take a look at the adverse cost of each type of labor. Adverse costs are the additional costs to the company of the mismatch from either being overstaffed or understaffed. If the workforce exactly matches the workload, then only straight time is needed and there is no adverse cost.
If there is an hour of time where an employee has been scheduled but now the call volume has dropped and the agent is not needed, the agent’s paid time is simply idle time. Therefore the adverse cost of this hour is the entire $23.29.
Finally, the adverse cost for an hour of overtime is just the incremental cost of what the overtime charge is compared to the needed straight hour of time. The adverse cost of overtime in this example is $24.75 minus $23.29, or only $1.46.
Considering the vast difference between the non-valueadded cost impact of idle time ($23.29) vs. overtime ($1.46), making the wrong decision to overstaff, or to underutilize employees during the workday, can be very expensive. In this example, idle time is approximately 16 times more expensive than overtime when measured on an adverse cost basis. If we apply these numbers to the initial chart showing the workforce and the workload, we can see which decision has the lowest cost.
The lowest-cost solution represents the line where the center is understaffed approximately 16 times more often than it is overstaffed, reflecting the difference in adverse costs. In this case, avoiding overtime by overstaffing generates $3.1 million in additional labor costs. If we apply these numbers to the initial chart showing the workforce and the workload, we can see which decision has the lowest cost. This analysis alone should be a compelling argument to take a fresh look at strategic overtime usage. It should also convince management teams that idle time should be the main target when looking at labor cost reduction opportunities. This facility was able to capture the cost savings, and the management team was able to educate its own executive team on the truth about overtime.
Dispelling the Overtime Myth
Old truths like “Overtime is more expensive” and “Keep overtime below five percent” need to be reexamined and new decisions made on facts. The fear of overtime has forced management teams to overstaff and drive occupancy too low.
The effective use of overtime can create large amounts of flexibility in a contact center when done correctly. Staffing levels can be kept lean while not affecting customer service by creating a more on-demand environment. Overtime-savvy management teams can implement labor strategies that allow additional calls to be handled on short notice. The workforce can flex up to handle these spikes, and calls can be answered almost on demand and delivered just in time. Scheduling with overtime optimization in mind can allow for better customer service and lower labor costs, giving your company the ability to compete more aggressively. Overtime can translate into a lower cost per call. Instead of overtime being a bad thing, overtime can become an effective business tool that will help you achieve your goals.
Some Overtime Cautions
While overtime viewed this way may look attractive, you want to make sure it is employed properly. The argument against excessive overtime is most logical when it relates to unnecessary overtime due to idle base hours or low occupancy — when your first 40 hours of work are not absorbed by productive activity.
Activities like excessive handle times and a lack of first call resolution can trigger overtime. In these cases where demand is not the driving factor, the lack of operational effectiveness is driving additional costs. This argument makes sense and should not be confused with overstaffing to manage seasonal or variable call volume fluctuation. Overtime is an effective tool, assuming employees are effective during the first 40 hours paid.
Health and safety factors limit the amount of overtime an agent can work. Once management teams grasp the reality of the cost, it is easy for them to become too aggressive with the use of overtime. Experts agree that over an extended period of time, employees should limit the time they work each week to no more than 53 hours. Employee appetite for additional work hours may exist, but it is critical to balance employee preferences with healthy boundaries.
Companies with seasonal or variable demand often are not sure how high the “highs” will be or how low the “lows” will be. The caution is that management teams can run too lean and end up not being able to satisfy their peak call requirements. Although they are in the low-cost position, if too aggressive, it can hurt customer service if calls cannot be answered due to the magnitude of swings in demand. Conversely, if management teams believe that high demand spikes are going to occur and those spikes do not materialize, they can end up with a staffing level that is too high. Accurate forecasting is always extremely difficult, and management teams should proceed cautiously – and with the right tools.
Making Overtime Work for You
Companies that have been trying to minimize overtime but are challenged with high levels of seasonal and/or variable demand can look forward to massive cost savings by leveraging an effective overtime strategy. Typical cost savings can range between 10 and 17 percent when coupled with proper change management strategies and the implementation of other operational best practices. Changing schedules is emotional and potentially disruptive. Call centers may only have one chance to get it right — so it is important to do the calculations properly and plan for a forthright conversation with frontline staff as early in the process as possible.
This article has discussed how overstaffing and resulting idle time can be more expensive than the cost of overtime. However, this does not mean that overtime is the perfect and preferred solution. While a better solution than idle time, overtime is still more expensive than a solution where staffing better matches the workload and only straight time is needed. There are many schedule optimization strategies to get a better match of workforce to workload and call centers should look to deploy as many of these strategies as possible. However, where mismatches between workload and personnel exist based on volatile demand, the smart manager will employ a carefully designed overtime strategy to maximize service to callers and minimize cost to the organization.
John Frehse is Chief Strategy Officer for Core Practice, a strategic labor consulting company and can be reached at firstname.lastname@example.org.