Cost management is here to stay
The economic crisis has driven most organisations to drive down costs – a vital part of survival in any recession.
In most downturns, cost reductions are about short term cost control: reducing excess capacity, discretionary spend and project work. Rising demand during recovery eventually brings relief and rebuilds profitability.
But this recession is different. Demand remains depressed as damaged banks are constraining credit and governments are cutting spending. At the same time, low cost competitors will keep prices low.
Companies must reconsider their current recovery plans to compete and rebuild their profit profile. One route is through lowering costs – not with short term cuts, but through uncovering a wholly lower-cost way of operating.
So where does HR fit in?
In most cases, HR’s role is constrained to managing HR costs, which makes it more difficult for the business to unlock more efficient, unified and cost-effective ways of working. HR should be playing a pivotal role in driving down costs across the whole organisation: it holds many of the levers of change through the direct people management costs, and also more widely through influencing the cost of labour.
There are several things that HR directors can do to play a more pivotal role:
Optimising the efficiency of the people management space
HR should manage down the cost of HR and people management in the business – this affects overall cost and demonstrates that HR can lead cost management. HR can expand its role by thinking beyond direct HR costs, and looking at wider people management costs, including the overall cost of managers and staff undertaking people management activities.
There is more value driving end-to-end efficiency in people management processes than in just reducing the HR functional cost.
Going beyond the traditional bounds of HR
HR can influence the overall business cost base. Labour costs are a big slice of total cost – and HR can help reduce them by:
Introducing workforce planning and organisation design to improve utilisation of capacity, smooth peaks of demand and reduce operational delivery cost
Utilising smart capability management, enabling the business to anticipate future capability requirements and driving down reliance on expensive contractors
Introducing flexible reward which can reduce the fixed cost of remuneration, improve motivation to deliver performance and re-risk the total wage bill
Encouraging talent, through reward and career planning, ultimately helping to retain and develop staff and reduce the costs of attrition
Improving efficiency by encouraging a cost-conscious culture.
Thinking differently about sourcing as part of the solution
HR can approach sourcing in a way that challenges the old business models and leads to excellent cost reduction results by:
Avoiding implementing changes to self-service that push administrative work from low cost admin resource to expensive managers
Considering the long term impact of supplier gain share programmes that may reduce cost by reducing service to a minimum, but can increase loading time and cost back into the retained organisation
Considering provider options – being prepared to consider cross-functional, single provider, multi-location, front office/back office split deals
Considering the implications of meeting a constrained HR budget so that the costs are not relocated elsewhere in the business
Achieving economies of scale by sourcing cross-functionally, avoiding ‘specialist’ suppliers when other incumbent providers could be brought into the HR space.
HR can and should be a leading player in restoring competitiveness and rebuilding the profitability of a business through sustainable cost management.
To discuss our thinking about HR’s role in cost management, please contact us now.