What is headcount planning?

Headcount planning is a strategic process for ensuring an organization has the right people to meet its goals in the near future. It involves assessing the current team, anticipating future hiring needs, and aligning those needs with business goals and budgets.

Effective headcount planning ensures that people with the right skills are in the right roles at the right time, optimizing productivity and controlling labor costs.

What is the headcount methodology?

Businesses define their headcount in four steps:

1. Analyze current headcount and gaps: As a first step, HR prepares a report on the current headcount and skill availability/gaps.
2. Predict business requirements: Business leaders share the future requirements and potential skill sets required to fulfill them.
3. Define budget: The finance team and business come up with a budget for hiring and retaining staff.
4. Forecast headcount: Based on all the above data, HR finally forecasts the potential headcount.

Are FTE and headcount the same?

FTE (full-time equivalent) and headcount are related concepts, but not exactly the same:

• Headcount refers to the total number of individual workers, regardless of whether they work full-time, part-time, or on a contract basis. Each person counts as one headcount.
• FTE measures the total workload equivalent to full-time employees. For example, two part-time employees working half-time each together equal 1 FTE. It’s a way to standardize labor effort regardless of hours worked.

So, while headcount counts people, FTE counts the amount of work being done, adjusted for hours.

Imagine your company has:

• 3 full-time employees (working 40 hours a week each)
• 2 part-time employees (working 20 hours a week each)

The headcount: 5 employees total (3 full-time + 2 part-time).

FTE calculation:

• Each full-time employee counts as 1 FTE → 3 full-time employees count as 3 FTE
• Each part-time employee working 20 hours a week is 0.5 FTE (since 20 is half of 40) → 2 part-time employees × 0.5 count as 1 FTE

Total FTE = 3 + 1 = 4 FTE

Who is responsible for headcount planning?

HR, business leaders, and the finance team collaborate closely for effective headcount planning. This coordinated approach is essential as headcount planning is a multifaceted process where the business drives future requirements, finance estimates the budget, and HR forecasts the cost of hiring and retention. All the factors need to align for successful headcount planning.

What are the responsibilities of HR in headcount planning?

HR drives the entire headcount planning process by:

1. Analyzing the current workforce: They check the current headcount, skill gaps, and potential turnover impact.
2. Understand business requirements: They further collaborate with the business to understand business requirements and future staffing needs.
3. Finalize budgets: After the business shares the requirements, HR coordinates with both business and finance teams to understand hiring and retention budgets.
4. Forecast headcount: With all the available information in hand (business requirements, budget, and attrition), HR forecasts the potential headcount.
5. Create hiring and retention plans: HR further develops strategies to recruit, onboard, and retain the necessary talent, taking market trends into consideration.
6. Evaluate progress: HR also tracks the effectiveness of headcount plans and adjusts the count if needed.

Also read: How to perform headcount planning in six simple steps.

What’s the difference between headcount planning and workforce planning?

Headcount planning can be considered as a small subset of workforce planning. Workforce planning contains hiring, upskilling, reskilling, and succession planning of the workforce to meet the long-term goals of the organization. On the other hand, headcount planning is only focused on hiring by predicting staffing needs.

What is the relationship between headcount planning and financial planning?

Effective headcount planning cannot be done without financial planning. Financial planning helps to set the overall HR budget for any hiring and retention efforts. By closely linking headcount and financial performance, companies can:

1. Maintain cash flow: Labor costs are recurring expenses that must be taken into account while hiring. When HR and finance work together, the organizations can plan this expense well in advance.
2. Control costs: Finance teams can set a threshold on labor costs that the company can accommodate. Then, HR can rework or optimize the strategy, keeping costs within the budget.
3. Achieve desired profitability: Labor costs are a major expense and one of the significant factors impacting overall profitability. By working together, HR and finance can create an optimized hiring strategy that helps the organization achieve its desired profitability.

What are the key factors to consider in headcount planning?

Some of the key factors that heavily impact headcount planning are:

1. Business objectives: What are the short-term and long-term goals of the organization?
2. Skill requirement and gaps: Which skill set would be required to meet business needs, and does the current workforce have it?
3. Employee turnover rates: What is the current turnover rate, and how will that affect your future headcount? Will you lose employees for the in-demand skill set?
4. Internal mobility and succession planning: Can the company promote some of the existing employees to in-demand positions and reduce the need for external hires?
5. Market conditions: How are the economic and market conditions? What is the expected pay scale for the role and skills you plan to hire?
6. Talent availability: Which skillset is tough to hire? Does a retention strategy or upskilling initiatives make more sense for that skillset?
7. Budget and profitability target: How much budget is the financial team ready to approve for hiring?—The cost of labor is a significant factor that will affect profitability.
8. Customer needs: Are you in a sector that has seasonal worker needs? Can you cover with temporary contractor staff rather than hiring full-time?

Why is headcount planning important for businesses?

Headcount planning is necessary for businesses to:

1. Meet organizational goals: Without proper headcount planning, companies may face understaffing, making it tough to complete desired projects and meet business goals.
2. Achieve profitability: A lack of headcount planning can also lead to overstaffing, which has a significant impact on the bottom line. Headcount planning helps the company to stay profitable.
3. Improve productivity: Headcount planning ensures you have the right staff with the right skill set in the right roles, boosting the productivity of the workforce.

How does headcount planning impact team dynamics?

Headcount planning ensures adequate team members with the necessary skills to improve productivity. Poor headcount planning can lead to:

1. Understaffing: An understaffed team trying to bite more than they can chew. Such shrinking teams propagate burnout.
2. Overstaffing: An overstaffed team has more team members than tasks. Low-quantitative jobs create boredom and disengagement.

Headcount planning ensures the right mix of workforce and better team dynamics.

How can headcount planning improve workforce productivity?

Effective headcount planning ensures that the right people are in the right roles at the right time, optimizing productivity by:

1. Reducing skill gaps: Not having workers with the right skill set has a direct impact on productivity. Already, over a third of leaders are reporting limited innovation and growth as a result of existing skills gaps, and nearly a quarter say they’re seeing decreased revenue and productivity. Headcount planning ensures workers are equipped to perform their roles.
2. Optimizing workload: Headcount planning prevents both overstaffing and increasing the work burden on a smaller set of workers. It also prevents overstaffing, which reduces proper utilization of the workforce. It helps companies to reach the sweet spot where workers have the right amount of work.
3. Boosting worker morale: When headcount planning is properly done, workers also have tasks that align with their skills. They are neither bored due to overstaffing nor in constant pressure due to understaffing. These factors help boost worker morale.

What role does headcount planning play in global hiring?

Headcount planning helps identify workforce needs in different geographies based on business requirements.

Every jurisdiction has its own local labor laws that must be adhered to when hiring. You may either need to open a local entity or partner with an Employer of Record (EOR) who hires on your behalf to adhere to these laws. Headcount planning helps you plan all the nitty-gritty details of global hiring in advance.

How do companies track headcount?

HR tech systems like HRIS and payroll systems make it easy to track headcount. Nowadays, companies are consistently investing in HR technology. In fact, 41% of organizations are planning to increase spending on HR tech. Digitization of the data makes it easy to track headcount.

What metrics are associated with headcount planning, and how are they measured?

Key HR metrics that must be tracked for headcount planning are:

1. Headcount: What is the total headcount of workers (full-time employees, contractors, part-time workers, etc.)? This can be easily calculated by using existing HRIS or payroll systems.
2. Full-Time equivalent (FTE): How much full-time capacity does the organization have? It can be calculated by dividing the total number of hours spent by all types of workers by standardized full-time hours of the organization.
3. Employee turnover rate: What is employee attrition over a set period? This data can easily be pulled from the existing HRIS system.
4. Cost per hire: What is the expense of recruiting and onboarding per worker?
5. Time to hire: What is the average number of days required to fill up an open position? It basically measures the time from when a candidate applies or is sourced to when they accept the offer. HR tech solutions like applicant tracking systems (ATS) show recruitment metrics like time-to-hire and cost-per-hire.
6. Budgeted vs. actual headcount: How much variance is there in the headcount forecasted vs current headcount? It simply needs a subtraction from the budgeted to the actual headcount.
7. Vacancy rate: The percentage of unfilled positions within the organization. It can be checked in ATS.
8. Utilization rate: Utilization rate metric helps to detect overstaffing or understaffing. You can track the total percentage of billable hours per employee time divided by actual available hours.

HR professionals can measure these metrics using HR software, workforce analytics tools, or manual tracking methods to refine their headcount planning processes.

What are the challenges involved in headcount planning, and how can organizations overcome them?

Major challenges organizations face with headcount planning are:

1. Scattered worker data: HR uses existing worker data to analyze current headcount and skill gaps and predict future requirements. Having this data scattered all over the place for the workforce becomes the first challenge in forecasting headcount. Companies must consider shifting to digital HRMS to centralize global workforce data.
2. Fluctuating market: Sudden market shifts, such as fluctuating labor costs, can send the entire hiring strategy for a toss. To solve this problem, HR must be flexible with their strategy. For example, if hiring is tough for a role, they can improve retention strategies. Or they could increase the budget for certain roles while setting lower thresholds for other roles.
3. Increase in turnover: An increase in turnover will increase the variance for the budgeted vs. actual headcount. This again impacts the planning process and requires HR to rework hiring and retention strategies. This can be handled by anticipating a small variance in turnover to provide some flexibility during headcount planning.
4. Poor metrics tracking: Lastly, it’s easy to fall into the trap of checking only the headcount and not checking other key metrics like cost-of-hire, time-to-hire, utilization rate, retention rates, etc., affecting the company revenue and profit.

What tools or software can assist with headcount planning?

The following HR systems are effective in tracking people data and completing the headcount planning process:

1. HR management systems (HRMS): Platforms like Deel HR help you track current headcount and also come with a dedicated workforce planning module to forecast workforce needs.
2. Payroll management system: Payroll management systems show the current payout for the roles you are hiring, forecast the cost of further hiring of such roles, and also track the overall labor cost to measure the profitability generated by the forecast planning process.
3. Applicant tracking system: Applicant tracking systems further help to track the key metrics to check if hiring is going as per plan
4. Survey tools: Running surveys can capture engagement levels and overstaffing/understaffing issues to track the effectiveness of the forecasting process

These tools streamline the planning process, ensuring accuracy and efficiency in forecasting and decision-making.

Streamline workforce planning and management with Deel

Deel HR is a complete HR suite for global workforce management. With Deel HR, you can:

• Track global workforce data in a single Global HRIS
• Manage compensation workflows and have any changes linked to payroll processing
• Track skill gaps and development programs
• Run surveys to assess engagement levels

Now, here comes the best part: Deel HR not only centralizes this data. It also comes with a workforce planning module to draw insights from this data, build scenarios, and provide potential targets. One your job requisitions are approved, send them directly to your ATS to fill the positions. Check back on how the additional headcount matched the original budget allocation, and more.

Request a quick demo to optimize your strategic workforce planning process.