Extreme situations often call for extreme and unavoidable measures, which is why we see employers deferring hiring, freezing or announcing cuts in salaries and benefits, and in some cases resorting to layoffs and redundancies.
However, managements run the risk of getting rid of the muscle, not fat, if they resort to indiscriminate and across-the-board reductions in headcount and costs and this could hurt them when the tide turns and businesses return to the growth mode. This article elucidates techniques and tools that
HR directors and the C-Suite can use to ensure that people cost management is done in ways that strengthen the company’s long-term competitiveness, while making tangible reductions to the cost base.
Lessons from materials management
To understand these techniques and tools, let us take a leaf from the science of material cost management. Materials management professionals have, over the years, developed sophisticated concepts, models and techniques to optimise the cost of ownership of materials.
Fundamental to the advancement of materials management as a science and a discipline is the recognition that the cost of materials is not just its purchase price but its receipt, inspection, storage and use over time.
Such a recognition has led to the development of value engineering, waste reduction, alternate materials, as well as vendor and parts rationalisation, vendor managed inventory, sophisticated buying practices etc.
Deciphering spends
What is the ‘total cost of ownership’ your organisation is bearing for your people? In order to define the elements of the current people cost base the important starting point is to categorise people costs into direct costs, indirect costs and intangible costs.
Direct people costs are what show up in a company’s profit & loss account, namely salaries & wages, benefits, welfare and training. These are a function of workforce numbers and employee-mix as also pay levels and pay mix and structure. Like the iceberg, direct costs are what are visible above the water and constitute a fraction of the total people costs an organisation incurs. As the name suggests direct costs are visible and are, therefore, easier to monitor, benchmark and control.
While workforce reduction is the most obvious means of reducing direct people cost, it is not the only means. Nor is it a sufficient one.
For, having the right numbers is only a part of the story. Equally important is the right rewards strategy for the right skills. Surprisingly, most companies do not have an explicit compensation philosophy and pay positioning. Those companies which do not evolve their own philosophy of paying for skills, competencies and performance end up mimicking the market.
One way for employers to control direct people costs is to review their compensation structure and benefit plans to ensure that they are cost-effective but more importantly relevant and sought after by the workforce as well. For example, the withdrawal of undesired benefits may cause little damage to workforce morale while saving employers considerable sums of money.
Indirect people costs are costs that do not show up in the profit & loss account, such as the cost of absenteeism and idle hands, cost of sourcing, selection & attrition and people administration. Less amenable to measurement, these costs are far more insidious and difficult to control in the short-run.
For example, companies in the services sector, especially in IT & ITeS, retail and financial services, have mastered the art and science of large-scale hiring. Yet few of them know how much they spend on sourcing and selection, and fewer still measure its efficiency and effectiveness. The costs and benefits of alternate sourcing strategies (in-sourcing versus outsourcing, the use of search firms, media advertising versus company portals, employee referrals, job fairs etc) are seldom evaluated.
A part of the problem is the absence of ready information but therein lies the nub. Good management practices mean ‘establishment of measurement’ and ‘procurement of relevant information’ as the first step in implementing a strategy or process. Regrettably, few companies invest in these basics.
On sourcing, given the precedence, especially of the past few years of war for talent and the mad scramble to get what talent there is, companies had little bargaining clout with search firms and ended up paying through their nose for poor selection and service levels. Too few of the contracts incentivised search firms to excel and fewer carried penalties for shoddy performance. Now is the time to restore the balance by reviewing contracts, tightening service levels and renegotiating fees, linking them tightly to performance and the achievement of acceptable service levels.
Tracking underutilised resources
Opportunity costs of underutilised resources and attrition are rarely, if ever, tracked and used. Now is the time to examine these costs and take steps to realign resources and put in place measures to track employee utilisation.
Finally, examples of invisible costs include the loss of productivity due to poor processes and management practices and lack of appropriate tooling, non-value-adding activity such as repeated follow-up and wasteful meetings etc. Observation and anecdotal evidence suggest that at least 20% of management time is unproductive and wasted on non-value-adding activity such as following up, attending aimless meetings, and quite simply dealing with the poor infrastructure that bedevils us as a nation. The absence of the right tools and processes contribute enormously to inefficiency.
Much managerial inefficiency stems from an absence of clear priorities as managers grapple with multiple tasks and areas of responsibility, often confusing the urgent with the important. Email is another villain, in so far as it has made instant response a reflexive habit, thus, forcing managers to waste time on inessentials. Again, such costs are invisible and are, therefore, hard to address.
If ever there was a time for executives to take a serious look at the invisible people costs that sap productivity, increase stress and enhance inefficiency, it is now. By clarifying goals, simplifying and streamlining processes, equipping employees with the right tools and demanding accountability, managements can minimise invisible costs and help create a culture characterised by simplicity, accountability and speed.
Calculating and working steadily to optimising the total cost of ownership of human resources will help employers develop a sustainable people cost base. Doing so will require understanding, capturing and analysing the costs over the entire period an employee spends in the company, optimising the whole rather than each of the components of the total people cost base on a sustained basis and applying the principles of systems thinking to cost management.
The adage “the best time to fix the roof is when the sun is shining” should remind companies that it is still not too late to embark on such an exercise. If they wait until conditions worsen, it could be too late.
The author is executive director, PwC and and can be contacted at sankar.ramamurthy@in.pwc.com
Source : http://www.financialexpress.com/news/optimising-people-cost-in-a-downturn/400619/0
