Manpower cost benchmarks – how it misleads CEOs in healthcare
Most hospital CEOs benchmark their manpower costs and use this KPI to develop staffing and hiring policies. Yet according to Vivek Shukla, Managing Partner at Surge Growth Partners, relying solely on this KPI can paint a misleading picture.
The aggregate manpower cost is one of the most misleading figures in healthcare finance. Because it averages everything together, and in a hospital, averaging everything together is how you make good decisions invisible, resulting in bad ones surviving for years longer than they should be.
Further, many leaders do not know what the KPI number actually means. They see the number, say 48% of revenue. They benchmark it against the industry average, decide it is acceptable or alarming, and then they either breathe easy or initiate a hiring freeze. But break the number apart and a completely different picture emerges.
Instead, take direct clinical departments like surgery, internal medicine, ICU, maternity, or diagnostics, and calculate manpower cost as a percentage of revenue generated by each one individually. What leaders will find, almost without exception, is a small number of departments running at genuinely efficient ratios and a larger number that could not justify their cost base if they were evaluated as standalone units.
In practice, this means that the high performers are subsidizing the underperformers silently and consistently. Every single month. And because the aggregate looks acceptable, or at least explainable, nobody is having the conversation that needs to be had.
Support functions
Then there is the support function problem – and this one is worse. Support functions like human resources, finance, administration, facilities, IT, call centers, among others, do not generate revenue. They enable it. Which means the question is never whether they cost money. The question is whether what they cost is proportionate to the clinical and commercial output they are supporting.
In most hospitals, that answer is no. Not because support teams are incompetent or bloated by design. Because they were built for a facility that was planned to reach a certain scale, and either that scale was never achieved, or it was achieved and the support structure was never rightsized to match what actually materialized.
The result is a support cost base that was calibrated for a different hospital than the one that exists today.
When support function manpower costs are mapped against the revenue-generating departments they serve, the cross-subsidization becomes visible in a way that an aggregate percentage will never show. Some clinical departments are carrying a support overhead that is structurally incompatible with their margin profile. They are not underperforming. They are overloaded.
The reframe that is needed
At Surge Growth Partners, our advice to hospital CEOs is clear. Stop asking: what is manpower cost as a percentage of revenue? Start asking: which departments are generating enough revenue to justify what they cost to run them, including the support infrastructure allocated to them?
That second question will make some people in the leadership team uncomfortable. But that’s not a bad things – discomfort directed at the right question is how organizations improve.
It will also show leaders something that a hiring freeze never will: that the manpower problem is almost never a headcount problem. It is a distribution problem. Costs concentrated in the wrong places. Revenue too thin to carry the structure above it. Support functions scaled to a strategy that may no longer exist.
The hospitals that manage this well do not have fewer people. They know exactly what every cluster of people costs – and exactly what revenue that cluster is responsible for generating or enabling.
