Human Resources (HR) Leaders are always treading a fine line to stay aligned with the strategic and financial targets set by the top management while ensuring a world-class employee experience.
When an economic downturn strikes, they may have to resort to unprecedented cost-cutting measures making it even harder to attract and engage top talent. However, ad-hoc or poorly designed initiatives can lead to unsustainable savings and, in fact, slow down organizational growth.
Per Gartner’s research, only 43% of business leaders achieve their cost-saving targets in the first year of cost reduction. Only 11% can sustain these cost savings for three consecutive years.
Instead of treating cost optimization as an intermittent isolated exercise, HR professionals must undertake it as an ongoing discipline to maximize business value.
How Can HR Reduce Costs?
There are three main ways in which HR functions can decrease costs for their enterprise,
1. Upgrade HR Processes
HR teams can increase the efficiency of their processes and day-to-day operations to cut costs. It includes leveraging automation, digital media, and improving service delivery models.
2. Decrease HR Spend
HR departments can cut spending specific to their teams. It includes costs related to HR IT systems, outsourced HR services, third-party training, and more.
3. Optimize Workforce Costs
HR Teams can generate savings on compensation costs by helping to rationalize employee counts across the organization. It includes temporary workforce reduction measures, restructuring as well as layoff management.
Checklist To Mitigate Economic Downturns
Download Now to Reduce Huge Costs
HR Cost Reduction Strategies
Enterprises incur discretionary as well as non-discretionary expenses. The latter relates to critical operational services. Organizations can optimize these expenses but cannot defer or eliminate them.
Discretionary expenses include one-off spending and projects that add long-term capabilities but are not essential to the daily HR operations of your enterprise. These often present as the easier-to-cut option in tough economic environments.
Following is a comprehensive list of HR cost-optimization measures you can choose from based on the business environment you operate in,
1. Promote Internal Redeployments
Internal redeployment enables companies to transfer current employees to new roles or projects, temporarily or permanently, per business needs. It allows enterprises to fulfil business-critical work demands without spending on recruitment and onboarding.
Talent mobility is one of the hallmarks of agile organizations that continually work with a growth mindset. It also enables employees to broaden their skillsets and find new career paths. It, in turn, can boost talent retention.
2. Leverage the Gig Economy
According to Mckinsey’s research, only 29% of employees who quit without another offer return to traditional full-time employment.
A vast majority switch to temporary, contract-based, or part-time roles. Temporary contractors are not entitled to as many benefits as permanent employees and can be recruited only for specific time-bound projects.
HR leaders can search these talent pools to plug gaps in enterprise skillsets at lower costs. It reduces training as well as compensation costs. Hiring quality part-time interns for temporary work assignments also can help cut costs.
3. Switch to Internal e-Trainings
The pandemic has convinced enterprises of the cost-effectiveness and efficiency of online learning platforms.
Per a 2021 Deloitte report, more than 75% of organizations are willing to have at least 40% of all their training content developed or delivered virtually. It cuts the logistical costs associated with in-person coaching.
HR Teams must also leverage in-house subject matter experts to create and deliver training content. It reduces the costs of contracting, onboarding, and maintaining third-party training providers without compromising the quality of coaching.
4. Freeze Hiring
A hiring freeze is when the enterprise stops recruitment on an immediate basis. While this has an instant, positive impact on financial savings, it can lead to a sense of discomfort among employees.
A hiring freeze can prevent potential layoffs. It provides opportunities for HR to assign leadership roles to current employees and refocus on tighter team collaboration.
5. Deploy Robotic Process Automation (RPA)
With RPA, your HR function can deploy software bots that mimic human interaction and execute rule-based business processes to automate repetitive tasks.
Typical use cases include the screening of resumes or robotic chat support for employees. It reduces the time HR professionals spend on mundane tasks and allows them to focus on strategic initiatives, thus increasing productivity.
Per the 2021 Deloitte Global shared services report, 69% of the surveyed organizations say RPA is their chief digital enabler and will remain a key focus area for the next 1-3 years.
6. Look Out for Savings in Software License Renewals
Most modern HR teams utilize one or more cloud-based tools to automate HR processes. These tools are billed monthly or yearly on a per-user basis.
The HR team must ensure that the renewals occur for the appropriate headcount. Any downsizing or workforce rationalization should reflect correctly in the renewals to avoid overpaying for licenses.
Also, some cloud service providers offer free plans with limited features or special discounts for annual subscriptions. These options may help cut costs temporarily.
7. Implement Temporary Workforce Contraction
To preserve jobs, HR Teams can explore temporary workforce reduction mechanisms such as rotating furloughs or reducing work hours and associated wages.
Furloughs are unpaid leaves of absence for a specific period after which the employee can resume without going through the hiring process again. It is ideal for companies experiencing a transient cash crunch and employees who wish to take time off without severing their ties with the employer.
8. Review Investments in HR IT Systems
HR and IT departments can coordinate to pause non-critical large HR software projects temporarily during a downturn. However, the HR team should weigh these decisions against the long-term cost savings attainable by implementing each of these IT projects before taking the decision.
The HR team should also monitor the usage statistics and effectiveness of existing HR applications and eliminate underutilized systems to save on costs.
9. Rejig Outsourcing Activities
Per the 2020 Deloitte Global Outsourcing Survey, lack of physical co-location of resources was the chief inhibitor in many outsourcing transactions in the pre-pandemic period.
However, remote working and hybrid workspaces are the norms now.
HR heads must leverage this shift to remote work culture to embrace the outsourcing of repetitive tasks, like payroll.
Outsourcing can save costs because of geographical cost arbitrage, trained teams, and specialized IT tools available with the outsourcing partners.
10. Review Compensation for Savings Opportunities
HR teams can study the market salary ranges to identify overpayments that may be occurring for specific roles to make corrections. The HR team and enterprise leadership can set an example by embracing pay cuts at top management levels while keeping salaries at mid and entry levels unchanged.
Enterprises must limit variable payouts and increments to top performers only. Generally, during an economic slowdown, market trends allow for reducing base salaries for new hires during probation periods.
11. Rationalize Benefit Packages
The 2019 UK Benefits Trends Survey by Willis Towers Watson revealed that steep employee benefit costs were a cause of concern for 51% of the businesses surveyed.
HR teams must analyze the current benefits packages to identify non-essential components whose adoption is low, say club memberships or discount vouchers. Complicated benefits packages can sometimes undercut cost optimization goals.
You can eliminate these to simplify the benefits package and cut HR costs without affecting a significant part of the workforce.
For instance, a large chunk of the benefits costs generally goes towards healthcare benefits. These can be reduced by incentivizing employees for regular health check-ups and attending fitness programs.
Economic downturns also offer opportunities to renegotiate contracts with vendors providing the benefits services.
12. Streamline Hiring Practices
As per the SHRM Talent acquisition benchmark report, the average recruitment cost per hire is $ 4,425. It rises to $14,936 for executive roles. The average time to fill is 36 days.
You can slash these costs significantly by automating the hiring process. It includes scheduling online interviews, conducting remote test assessments, and using self-service portals to enable candidates to upload digital documents. HR teams can also temporarily reduce spending on job portals and leverage low-cost social media avenues to advertise job openings.
13. Limit Overtime
Depending on the local labour laws, overtime expenses can substantially add to the HR expenses for your enterprise. HR Teams must analyze the business units that incur more than expected overtime expenses for inefficiencies or incorrect shift scheduling.
Consider implementing a strict overtime policy that mandates manager approval before taking any overtime. You must leverage enterprise data and analytics tools to forecast workforce demand and plan for busy periods.
Flexible work hours also can enable employees to plan work better and complete assigned tasks without overtime.
14. Cut Outsourcing Costs
HR Teams must explore if they can execute some currently outsourced tasks in-house. These include easy-to-learn activities, say creating emailers for employees. These also include activities that cost more to outsource.
Some activities take a lot of time to explain to the outsourcing partner. In such cases, it is prudent to complete the tasks in-house to save money and time. Many companies outsource termination during downturns to avoid a negative turn of events.
However, handling terminations in-house is a sign of courtesy to your outgoing and retained employees. It also provides greater control of the termination process, generates more feedback and insights, and cuts costs.
15. Check for Government Support Programs
Governments of multiple countries offer tax rebates and financial incentives to prevent job losses during economic slumps. The HR and finance teams must identify such programs and apply for these incentives. The government also supports employee upskilling and training programs.
16. Protect Employee Experience (EX)
Cost-cutting measures can damage EX critical to productivity. It, in turn, can result in high attrition costs.
Per Gartner’s research, employees’ intent to stay at organizations they believe are unlikely to cut costs is 49%, while that at organizations likely to cut costs is 28%.
In this context, it is essential to be completely transparent and quick in communicating the intent behind the cost-cutting measures. You must clearly explain how the initiatives impact their daily activities and are prepared to handle dissent. Effective communication can also lead to employees delivering higher productivity during difficult times leading to higher cash flows.
17. Renegotiate Terms with Vendors
HR functions engage several third-party vendors for various tasks such as candidate sourcing, training, payroll management, and employer branding.
HR teams must consolidate vendor lists across business units and check if they meet service level agreements and charge per market standards. They must also eliminate duplication of services by multiple vendors to cut costs. Internal sourcing experts also must be part of renegotiating terms for HR service vendors.
18. Plan Succession and Manage Talent Risk
Succession planning is a process of nurturing talent to replace leadership executives or other key employees when they transition to different roles or organizations. It is crucial because executive talent is hard to find and prohibitively expensive to replace during economic downturns.
HR teams must also leverage data analytics to ascertain flight risks for chief personnel and take measures to retain them. They must also engage potential successors effectively with clear career development plans and growth opportunities.
19. Switch From On-premise to Cloud-based HR IT Systems
If your enterprise utilizes on-premise IT systems to manage HR processes, you can save considerable costs by switching to cloud-based solutions.
You save on the expenses of maintaining the hardware infrastructure and deploying specialized resources for software upgrades and cybersecurity. Cloud-based solutions offer flexibility with monthly payments and can be easily scaled down or paused if there is a cash flow crunch.
20. Involve Employees in Ideation
Contrary to popular belief, employees can contribute meaningfully to devising cost optimization measures. It enables the employees to own the initiatives rather than think of them as top management diktats.
HR teams must create systematic avenues where employees can post impactful cost optimization ideas related to their expertise for consideration. If the ideas fall short due to practical considerations, the HR team must take time to educate the employees about the same. It helps employees understand the management perspective better.
Enterprises may have to reduce headcount to cut costs in extreme cases. They must assess the legal, financial, and organizational risks associated with downsizing. HR teams must consider that it can cause a problem in the future as rehiring the same staff is extremely tough.
It may lead to substantial costs in hiring, onboarding, and training new staff once the downturn is over. Layoffs can also affect the morale of retained employees and trigger attrition. As a last resort, the HR team may consider termination for employees whose performance is not meeting expectations.
The 2019 Gartner Global Labor Market Survey shows that almost every cost-cutting measure has an adverse impact on employees and their performance.
The survey recorded up to a 7% decline in employee engagement and a 5% decline in the percentage of employees meeting performance goals. It is necessary to evaluate cost-cutting measures using a structured best practices framework.
1. Evaluate the Hard and Soft savings
For every cost-cutting measure, evaluate its potential for generating cash flows and savings. Hard savings directly impact the income statements and can be quantified in monetary terms.
Intangible soft savings like increased compliance or improved EX may not be easily quantifiable but must be a part of the evaluation. Based on their perceived financial benefit, you can categorize the measures as small, medium, and large.
2. Gauge the Business Impact
You must asses how each cost-cutting measure will impact the day-to-day business operations. Take feedback from business unit leaders to assess the feasibility of each initiative. Also, think of any possible unintended effects on business activities. You can then categorize the measures as having a negative impact, no impact, or positive impact.
3. Predict the Timelines
Judge how much time would be required to realize the expected savings once each cost-cutting measure implements fully. Initiatives that can capture savings within the current fiscal year may need to be prioritized. You can then categorize the initiatives as short-term, medium-term, and long-term.
4. Calculate the Investment
Some cost-cutting measures may require an upfront investment before realizing savings. For example, shifting activities in-house or automating HR processes may necessitate spending on change management and IT applications.
The leadership must take a call on whether they are willing to make an upfront investment at all. Accordingly, you can categorize the initiatives as small, moderate, or large based on the quantum of investment.
5. Assess Organizational Risk
Most importantly, you must assess if your organization can adapt quickly to the cost-cutting measure to realize the benefits. Layoffs can lead to a significant redesign of business workflows and changes in the organizational structure and reporting mechanisms.
The HR functional leaders must ensure that these modifications execute as required. Based on this assessment, you can classify the initiatives as high risk, medium risk, or low risk.
Once the cost-cutting initiatives are categorized based on the above five parameters, you can map them to visualize the tradeoffs between the benefits and the associated timelines, costs, and risks. It will enable you to create a strategic road map for cost optimization.