Why do companies over-hire?

It has become fashionable (at least in certain quarters of Twitter) to complain about “bloated tech companies”, filled with “lazy entitled workers” who spend their days recording “a day in the life of” TikToks instead of working. While there is an element of truth in that sentiment, it doesn’t capture the reality for most employees in over-sized organisations. Most people want to do their jobs well. Most companies don’t intentionally over-hire. However, there’s a universal law of organisational growth which states “the more you hire, the more you hire”. Without a philosophy of deliberately staying lean, over-hiring tends to just sort of happen over time.

Organisations can become over-sized for many reasons. Many companies, including those with highly publicised layoffs, open roles at this time of year as planning season wraps up. I wanted to take a look at the main reasons why over-hiring happens and what can be done to prevent it from recurring*.

[*Caveat: This is more applicable to small and mid-sized companies. Companies with 1,000s of employees tend to reach a hiring escape velocity. This is more difficult to stop without extreme measures such as hiring freezes.]

Causes of over-hiring

1. Hire for growth

Occurs when organisations hire ahead of anticipated growth or to drive future growth. This is due to:

• Hiring to meet market demand that stalls: Sectors that were booming at the start of the year have slowed due to consumer behaviour reverting back to pre-pandemic norms (e.g. shopping in-store) and economic concerns impacting some sectors (e.g. fast fashion).

• Placing bets that aren't sustainable: Companies branch out beyond their core value propositions. Some endeavours turn out not to be as fruitful as expected.

• Hiring to force growth: Sales and marketing teams expand in an attempt to drive growth. This can work if the product is market ready. Premature scaling can lead to a X% increase in team size that is less than X% revenue increase, negatively impacting the company’s bottom line.

For the most part the above are the risks of running a business and therefore are the most difficult to prevent. You’re never quite sure which initiatives will pay off or how macro environments will change. If hiring due to the reasons above ask yourself, what would the leanest version of hiring look like? What is the expected output difference versus current hiring plans? It may be possible to achieve most of your growth goals with a smaller team.

2. Operational Challenges

Occurs when organisations are operationally intense or hyper-scaling. This is due to:

• A need for location specific roles: Some business models require a lot of people upfront to do unscalable work so that the business can take-off. This is the case for any business that needs "boots on the ground" to build a local presence e.g. food delivery apps, vacation rentals.

• A lack of tooling and automation: During hyper-growth, companies often throw people at a problem, until they have teams in place to build internal tools and implement operational efficiencies. Once improved workflows are in place, the original teams hired typically move into programme management roles. This can lead to a lot of people working on incremental improvements where the input resources required doesn’t exceed the output upside.

• Leaders not familiar with efficiency: Some environments are more prone to hiring people to do the work rather than investing in tech solutions. Consulting is one example of this, as are industries that have a philosophy of "hire many, hire cheap" (a lot of physical consumer products and services fall into this category). Over-hiring occurs when the default solution to every problem is to hire more people.

For some organisations, over-hiring due to operational challenges is a point-in-time problem that balances out . If you suspect that over-hiring for operations is more habit than necessity, ask yourself, what would investing in operational efficiencies look like? How could this reduce future headcount requirements? What service tradeoffs would you be willing to make to decrease headcount? e.g. increasing average support response times by 2 hours, having fewer strategy & planning roles to provide ad-hoc analyses.

3. Non-Optimal Organisational Structures

Occurs when existing roles and team structures are not the best fit for the company stage. This is due to:

• Limited thought given to inter-play between teams: Hiring is usually considered on a team basis. This can lead to little thought as to how roles in adjacent teams will interact with each other, ideal reporting structures for cross-functional work and duplication of roles at times (e.g. each team hires their own data analysts rather than sharing centralised resources). Lack of clarity or dialogue on ownership can lead to over-hiring. It can also lead to the creation of excessive internal processes which slow down progress.

• Wrong mix of roles: Companies require different role profiles and experience levels. Too many generalists can lead companies to over-hiring as they lack the expertise to execute effectively. Too many specialists can lead to over-hiring as roles are broken down into niche subsets. Instead of having people flex outside their comfort zones a new role is created. The wrong mix of seniority can lead to over-hiring. Senior folk sometimes want to to avoid “in the weeds work” and junior teams tend to require a higher ratio of middle managers.

• Devising org structure around people problems: Sometimes companies build org structures around problematic individuals rather than dealing with them directly. This tends to occur with co-founders who don’t scale with the business or with people who have a privileged position within the company e.g. early hires, personal relationships. These companies design org structures and role designations which don’t optimise for the good of the company overall. There is often an unspoken but widely known fact that someone is being worked around. This leads to over-hiring as additional roles are filled to compensate for the person’s weaknesses. This can lead to multiple people carrying out the same role.

A holistically-minded COO or CPO can be invaluable in ironing out organisational issues related to people. When planning headcount ask yourself, how is your current org structure helping and hindering you? If you were to design it from scratch today, what changes would you make? What, if any, changes could you make that would increase efficiency and reduce headcount requirements? Sometimes simply moving a few people to different teams can solve issues that would have otherwise been resolved through additional hires.

4. Performance Issues

Occurs when hiring is used to try to paper over performance issues. This is due to:

• Ok-ish performers: Under-performers tend to get “managed-out” of an organisation over time. However, performers who are mediocre are usually left to carry on with their work albeit operating at a lower efficiency level. This can lead to over-hiring as managers don’t want to overload team members with additional work or invest resources in upskilling them.

• Poor leadership / management: Bad managers, or inexperienced ones, often don’t know how to build great teams and inadvertently over-hire. Sometimes a bad manager will deliberately over-hire to build an empire or to mask their own individual performance.

• Cultural issues: If there is a low performance culture or a blame culture in place, over-hiring can occur as it reduces what any one individual can be accountable for. It also ensures there are enough scapegoats in place to deflect blame too…

There is no easy answer to this problem as solving it requires strong leadership to implement a high-performance culture, which they themselves must also embody. It also requires a willingness to have difficult conversations consistently. If you feel this might be an issue in your organisation, ask yourself how is your culture currently serving you? How many aspects of it are hindering the company? What actions can/should be taken to change this?

5. Incremental flywheel

The more people you hire…

• …the more people you hire. This is especially true when you hire people managers who naturally want to build out well-resourced teams.

• …the more people you need to hire for backend functions to support all the people you’ve hired e.g. People Operations, Workplace Services, IT.

• …the more work that gets created. Not all of it is valuable or necessary.

I’m not sure there is any company out there that has actually stuck to hiring within its headcount budget but it’s worth a shot…If you’re concerned about headcount inadvertently escalating, set a reminder every two months to evaluate existing headcount and hiring plans, and make any adjustments required.

The Power of Small

Not all hiring is bad and often it is very necessary. However, there is a certain beauty that is generated through small teams who can get things done (see Linear who have built a well-loved product and successful company with <50 people). Small teams aren’t bogged down by the self-imposed bureaucracy of large organisations. Each individual can have an impact. They have skin in the game. If you're hiring soon it's worth bearing in mind that small teams are powerful. They also tend to be more fun!