When I hired my first employee it was because I felt like I didn’t have any options to do otherwise. I didn’t have 6 months of retained earnings sitting around and I wasn’t doing highly profitable work. But I felt like it was better to risk failing than it was to keep going as I had been.
The common advice would have been to figure out a way to earn more profit, save some money, and then hire with that safety net beneath me. This is cost based hiring.
I didn’t end up going out of business with my new hire and I actually made more money. Unintentionally, I had executed a different hiring strategy: growth based hiring.
Entrepreneurs gravitate towards cost based hiring because it’s clear and safe. But it can drastically limit your potential and carries hidden risk beneath its conservative demeanor.
Cost Based Hiring
The common recommendation on when to hire is when you have the money and a clear need.
The benefit to this is safety. It’s low risk because each hire is rooted in profit and some internal demand.
Unless your business is riding a hockey stick trajectory, it’s also slow. And slow has its own inherent risk.
Possibly an even larger drawback to cost based hiring is that you limit the business’s potential to its current constraints.
Imagine a talented 15 year old gymnast in a small town in rural Idaho. She has roughly 4 – 7 years of her career left. She knows that she needs better coaching from a gymnastics center in Salt Lake to be able to compete at a higher level.
The cost based hiring approach would be to get a job and save up the money to travel to Salt Lake on her weekends. By the time she’s 16, she’s got the job and savings and is able to spend 8 days a month training with a better coaching staff.
But she’s lost a year of her career, 25% – 14% and still isn’t achieving what’s possible if she was full time in Salt Lake. Meanwhile, the clock is counting down.
Growth Based Hiring
Another approach to this question is to hire based on impact on growth.
When I hired that first employee, I was surprised to find that our earnings actually improved. I hadn’t been taking into account the increased throughput an employee brought or what freeing myself up would mean for other needs of the business. I had only been focused on covering the costs and the risk and downside of overhead.
Bringing people into your business will always have a positive and a negative impact.
People are the largest expense for most businesses. But the right person in the right role can provide exponentially more value than their cost many times over.
Success in hires often has a compounding effect. By not hiring the right people at the earliest possible point, you curtail your business’s future potential.
If our gymnast took a $3,000 loan from a loving grandparent and moved to Salt Lake she would be training full time immediately and competing at the highest levels in a year. Assuming that gymnastics has a tangible ROI, she could pay that loan back and earn a much higher amount over the rest of her career. This rather than hit her peak two years too late and get a mediocre return for all those extra hours she worked to save.
Choosing the Right Risks
It might seem like I’m advocating for the growth based approach- and I am if growth is what you’re looking for.
Both approaches have some degree of risk.
Cost based hiring can be risky in competitive or dynamic environments. It can be problematic when you’re aiming for big goals. Sometimes not taking chances actually exposes you to worse risks.
Growth based hiring can be risky if hires don’t lead to growth. What if my employee had sucked? What if we hit a dip in leads or the market had taken a hard turn for the worst?
Making growth based hiring decisions comes down to your skill in identifying growth opportunities and your ability to mitigate or manage the downsides.
Because of this, it’s not a great approach for new entrepreneurs, but it’s a more useful paradigm if you’re deeper into your career and better understand your environment and options.
Trapeze artists image credit: By Copyright by the Calvert Litho. Co., Detroit, Mich. – This image is available from the United States Library of Congress’s Prints and Photographs divisionunder the digital ID cph.3g02091. Public Domain, https://commons.wikimedia.org/w/index.php?curid=1465840