The manager count implied by a span of control, the saving function by function, and the redeployment and severance that turn the gross figure into the one a buyer will credit.
Work out how many managers each function needs at its target span, using managers = (individual contributors − 1) ÷ (span − 1), and price the difference at each function's manager cost. On an illustrative 1,058-person company, widening spans removes 33.4 manager roles, a gross saving of 3,488,583. With 30 per cent of displaced managers redeployed into open roles, the net saving against a budget that includes those open roles is 3,169,335 a year, 28,524,015 at 9.0x, for 1,221,004 of severance.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A spans and layers review asks how many people each manager leads (the span of control) and how many levels sit between the top and the front line (the layers). It is one of the first organisational diagnostics an operating partner commissions, because narrow spans are where management cost accumulates without anyone deciding it should.
In any reporting tree, every person except the top reports to exactly one manager. If each manager has s direct reports, managers × s = total headcount − 1 = contributors + managers − 1, which gives:
Managers needed = (individual contributors − 1) ÷ (span − 1)
Layers ≈ LN(contributors) ÷ LN(span)
In Excel: =(IC-1)/(Span-1) and =LN(IC)/LN(Span)
Spans here count all direct reports, including managers. The formula assumes an even tree, which no real organisation is, but applied function by function it is accurate enough to size the prize before the HR data are cleaned.
| Function | Individual contributors | Current span | Target span | Manager cost | Contributor cost |
|---|---|---|---|---|---|
| Operations | 600 | 10.0 | 11.0 | 75,000 | 52,000 |
| Sales | 120 | 6.0 | 7.0 | 120,000 | 85,000 |
| Finance, HR and IT | 120 | 3.5 | 5.0 | 105,000 | 70,000 |
| Engineering | 60 | 4.0 | 5.0 | 130,000 | 100,000 |
Costs are fully loaded per year. Of the managers whose roles go, 30 per cent are redeployed into open contributor roles at their existing pay; the rest leave with six months of cost as severance.
| Function | Managers now | At target | Roles removed | Layers now | At target | Gross saving |
|---|---|---|---|---|---|---|
| Operations | 66.6 | 59.9 | 6.7 | 2.78 | 2.67 | 499,167 |
| Sales | 23.8 | 19.8 | 4.0 | 2.67 | 2.46 | 476,000 |
| Finance, HR and IT | 47.6 | 29.8 | 17.9 | 3.82 | 2.97 | 1,874,250 |
| Engineering | 19.7 | 14.8 | 4.9 | 2.95 | 2.54 | 639,167 |
| Total | 157.6 | 124.2 | 33.4 | 3,488,583 |
Finance, HR and IT: (120 − 1) ÷ (3.5 − 1) = 47.6 managers today against (120 − 1) ÷ (5.0 − 1) = 29.8 at target. That one function, with 13.3 per cent of the contributors, carries 53.7 per cent of the saving and loses almost a full layer. Operations, already at a span of 10.0, contributes 14.3 per cent even though it is by far the largest function.
Leavers: roles removed × 70% × manager cost
Redeployed: roles removed × 30% × contributor cost, the hire they avoid, because they keep their manager pay
Net saving = 3,488,583 − 319,248 of redeployment leakage = 3,169,335 a year
Severance = leavers × manager cost × 6 ÷ 12 = 1,221,004, a payback of 4.6 months
| Function | From leavers | From redeployment | Net saving |
|---|---|---|---|
| Operations | 349,417 | 103,827 | 453,243 |
| Sales | 333,200 | 101,150 | 434,350 |
| Finance, HR and IT | 1,311,975 | 374,850 | 1,686,825 |
| Engineering | 447,417 | 147,500 | 594,917 |
| Total | 2,442,008 | 727,327 | 3,169,335 |
The 727,327 from redeployment is a hire avoided, not a cost removed. It counts only if the open roles are budgeted hires; against last year's actual cost base, the saving a buyer can see is the 2,442,008 from leavers.
At 9.0x the net saving is worth 28,524,015 of enterprise value. The phasing of the severance against the run-rate saving, which turns the 4.6-month simple payback into a longer cash payback, is worked in how to calculate the payback on a restructuring programme.
| Target span | Managers | Roles removed | Net saving |
|---|---|---|---|
| 4 | 39.7 | 7.9 | 749,700 |
| 5 | 29.8 | 17.9 | 1,686,825 |
| 6 | 23.8 | 23.8 | 2,249,100 |
| 7 | 19.8 | 27.8 | 2,623,950 |
The saving rises steeply at first and then flattens, because the formula divides by span minus one: going from 3.5 to 5.0 removes 17.9 roles, from 6 to 7 only four more. The first step on a narrow span is where the money is, and the last step is where the control problems start.
How a cost initiative like this sits beside growth, leverage and the multiple in the value created is laid out in the free workbook for this book.
It depends on the work. A common rule of thumb is that teams doing similar, measurable tasks can run wide spans, often 10 or more, while specialist teams run narrower ones. The signal is a span well below what the work needs: here finance, HR and IT at 3.5 needs 47.6 managers for 120 people, against 29.8 at a span of 5.0.
Roughly the logarithm of the headcount in the span's base: log(contributors) divided by log(span). For 120 people at a span of 3.5 that is 3.82 layers below the function head; at 5.0 it is 2.97, so widening the span removes about one layer of approval and cost.
Because not every displaced manager leaves. Here 30 per cent move into open individual contributor roles at their existing pay, so the saving on them is only the hire avoided. That leaks 319,248 a year and takes the saving from 3,488,583 to 3,169,335.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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