Wednesday, May 10, 2006

Business Tip: Labor Intensive Businesses Should Adjust With Market Conditions

If you're the CEO of a labor intensive, skilled business such as a services firm, one of the biggest challenges you have is recruitment. In Southwest Florida, where we lead the state with a 2.2% unemployment rate, it is an incredible challenge for a labor intensive business.

Many employees are "job shopping" for greener pastures. Over the course of this blog entry, I'm going to comment on some mistakes that I've seen labor intensive companies make and how you as a business owner can avoid it.

Understand Market Conditions
Market conditions change for a variety of reasons. The more growth a region has, the harder it is for you to recruit. Supply and demand. The more jobs available, the less inventory of applicants. As the number of jobs grow, the wages have to increase in order to compete.

If you are finding that your business is now competing at the same level of pay as unskilled workers like fast food chains, you know you have a problem. The problem won't disappear and if the future forecasts state that growth isn't slowing anytime soon -- start changing.

Don't get me wrong, you can still hire people even if your wages are below the industry average in the area. But you are not attracting the best and brightest, but rather the unskilled or those that may require significant coaching and training.

Increased Wages and Margins Sacrifice
The major reason that companies do not increase wages is due to profit margins. Your customer may not be willing to pay anything extra to address your labor cost. So profits stay the same but the cost of wages go up. This is actually normal as your business industry is maturing: more choices for the customer, and less profits for you. Come on now, we learned that in business school. :-)

The truth is, you need to seriously look at your options:
  • Increase the wage and sacrifice parts of your margins
  • Continue to be underperforming in terms of wage levels and have a slow death through a labor crunch, or have an unqualified workforce handling skilled jobs
  • Look for other income streams
  • Close shop, look for other regions that are more competitive -- you'll probably face this same issue when the market conditions change in that area

    Some profit is better than no profit -- don't get too greedy. If you don't invest in your workforce in a competitive and growing region...consider yourself dead. About seven years ago I gave the same advice to a services company. Listen to market conditions, adjust your labor. Sadly, it fell on deaf ears, and they closed down in a few months. Labor issues affect morale, and if you are not addressing it head on, you are a sinking ship. Don't panic, don't play politics, don't push other people, just fix the obvious problem: listen to the market.
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