Cause and effect. Sometimes it’s clear, sometimes it’s not. You get a haircut, the next day someone comments on it. You land a new client, your revenue goes up. You run a new ad, and the top of your funnel fills up. There’s usually a clear indicator that what you did had the desired effect.
Hiring is one of the times it’s not. You make the change, and then you wait to find out whether it did anything.
Over the last few weeks we’ve talked about which work to hand off first and how to follow up once you have. Sometimes the handoff goes to someone new, and that raises a different question: was hiring them the right move?
Did the hire pay for themselves? How would you know? How long would it take to find out?
Most owners answer with a feeling. The person seems busy, the clients seem happy, I got my evenings back (or I didn’t). Feelings are fine. They’re also too vague to base an objective assessment on.
I love a good number, and there’s a number for this. Take your gross profit and divide it by the amount you spend on labor. Gross profit is what’s left of your revenue after the direct costs of delivering the work, not counting people. Labor is everyone: wages, payroll taxes, benefits, and you, at what it would cost to hire someone for your job. Contractors count too. If a contract attorney or an outside paraplanner does work you’d otherwise pay staff to do, they’re labor, even on a 1099.
We can call the resulting number “the labor dollar.” For every dollar you put into labor, how much gross profit comes back? There’s no single right answer for every firm, but good still exists, and you can work yours out.
Here’s a made-up firm. $1,700,000 of gross profit. $700,000 in staff wages, taxes, and benefits. And the owner, counted at $250,000, which is what it would cost to hire someone to do the owner’s work. That’s $950,000 of labor, and a labor dollar of 1.79 ($1.7M / $950K).
Leave the owner out and the same firm shows 2.43 and looks a lot better than it is. You’re doing a job, and the job has a price.
So start by finding your own labor dollar. Calculate it for the last twelve months. If you want to go further, pull the same number for each full year over the last four or five years, gross profit over labor, and see what those numbers look like. Your last twelve months is your baseline. The earlier years tell you whether it’s rising or falling.
What’s a good number for your firm? I couldn’t find a trustworthy published range for this exact ratio, so your baseline is the minimum. A hire that drags it down means you’re getting less back for every labor dollar. Then look at where you need to be. Gross profit has to cover your labor, cover your overhead (rent, software, insurance, everything that isn’t labor or a direct cost of the work), and leave the profit you want. Add those three, divide by your labor, and that’s your target.
In our made-up firm, say overhead is $450,000 and the owner wants $400,000 of profit on top of the owner’s pay. That’s $950,000 plus $450,000 plus $400,000, or $1.8 million, divided by $950,000. That makes the target about 1.9. The firm is currently at 1.79, so it has a gap to close.
As soon as you hire someone, your baseline becomes the line they have to hold. If our made-up firm’s labor dollar was 1.79 before the hire, then once they’ve settled in, the new hire shouldn’t reduce that number ... you want to hold steady or improve it.
Labor isn’t like a haircut. The effect is slow. A new hire takes months to reach full productivity. Then the work they do is billed, collected, and recorded, and since you’re not looking at profit every single day, it shows up in the next quarterly or annual report. If you hired someone in the last three or four months, look at the most recent twelve months and see what has changed in your ratio, if anything. Expect it to be small. A single month of data is mostly noise, and a full twelve is what shows the broader impact. To tell whether they’ve earned their keep, give them time to settle in, contribute, and for the results to come out the other end.
That’s also how a bad hire survives. “It takes time” is true, and it works as an excuse for as long as you let it. Treat this like any other large decision. Identify some guardrails on good and bad before you’ve got an actual person that you have feelings about, or right now if you already do.
Write down what the person costs, fully loaded (wages, payroll taxes, benefits). Write down the labor dollar you’re aiming for: at least your baseline, ideally your target. A rough way to size it: multiply the cost by the ratio. At $150,000, holding the line at 1.79 means about $268,500, so call it $270,000 of gross profit the person needs to bring in, or increase. At the 1.9 target, it’s about $285,000. Then write down what you expect to see at 30 days, 90 days, six months, and twelve, and put those dates on the calendar before their first day.
What about the roles that don’t bring in revenue? An assistant doesn’t work billable hours or drive revenue. A bookkeeper doesn’t sign clients. But every role influences revenue or profit, because the work would otherwise sit on the people who do bring it in. The math is the same, one step removed: the hours that person hands back, times what those hours earn. Say a $60,000 hire frees up ten hours a week for an attorney, an advisor, or a partner. That adds up to about 500 hours a year. If an hour of the freed-up person’s time brings in $225 of gross profit, that’s $112,500 (made up, as before), comfortably above the roughly $107,000 it needs to hold the line.
The catch is that the hours have to go somewhere. If that person gets ten hours back and spends them on email, the hire saved time and didn’t pay for itself.
You don’t need to run this math every week. The ratio already nets it out, so keep your eye on it over time.
Between their first day and the twelve-month mark, watch the early signs, and pick two or three for each date.
At 30 days, you’re asking whether they’re set up and moving. Is the onboarding done? Have they finished a first piece of real work, and how much of it needed fixing? How many hours did you spend training them? This is the cost side, and it should never be higher.
At 90 days, they should be carrying real work. How much of your time did you get back? If it didn’t affect you directly, who did it affect? How much are they handling (matters, meetings, accounts, tasks) compared with what you expected? How much of it goes out without you reviewing it? How much faster are things going out the door?
At six months, it should be showing up in output and money. If they bill, are their hours getting invoiced and collected? If they don’t, what work are you taking on that you couldn’t before, and where did the freed-up hours go? Is there a first read on the gross profit from their own work?
At twelve months, you’re back to the number itself: the labor dollar against your baseline, and the gross profit against the figure you wrote down before their first day.
Most of these early signs aren’t profit numbers, and the one that is will be rough. All of them show up sooner, and they tell you where your profit, or your quality of life, is headed. Write the answer you expect for each before day one, even if it’s a guess. Your first set will be off. That’s what you learn from.
It’s the same move as putting the first check-in on the calendar the moment you hand something off. The date exists before the emotion does.
The labor dollar can run away from you in a few ways. Part of it is hiring ahead of profitable revenue ... you bring someone on for work you expect, and the work shows up late or not at all. Part of it is pay raises tied to nothing in particular. Part of it is roles that grew by accident, where someone started doing one thing and now does four and nobody can say what the job is. And part of it is the hire that nobody set a checkpoint for. The question behind every labor change is simple: will this person bring in enough gross profit to keep the labor dollar where it needs to be?
If the work you handed off went to a new person, this is how you’ll know whether the handoff was worth it. A dip in the labor dollar after the handoff is both normal and a reason to check in, not a reason to blame them.
This week, find your number. Take your gross profit and total labor cost for the last twelve months, with yourself counted at market rate for your role in the firm. Divide one by the other and write it on a card. That’s your baseline. If you’re about to hire, or just did, write the checkpoints next to it.
I would love to talk to you about this. You might not like numbers all that much, but numbers light my fire. Email me and tell me what you found, or just whether your number came out higher or lower than you expected. And if you’ve never looked at your business this way, welcome to data-driven decision making.