Human Resources is supposed to be more strategic these days and yet historically its focus has been on managing and reducing costs. While cutting costs is important, there are several reasons why it is essential that HR shift its focus away from cost cutting and towards increasing output and revenues for the organisation.
Hidden Costs
Every organisation is striving to increase profits and margins. For every government department, the challenge is to ensure it is increasing its ‘added value’. However, in striving to meet those goals it is important to realise there are two distinct parts to any profit and loss equation: revenue and expenses. A business can increase profits in two basic ways; firstly, by reducing costs and, secondly, by increasing revenue. HR has traditionally focused almost exclusively on the cost-cutting portion of the equation, quite possibly because reducing people costs is relatively easy (or should I say within scope) and fits with the process mentality that is seen in most HR functions.
The Downside of Downsizing
Unfortunately, reducing people costs can have disastrous consequences. HR’s long-standing practice of not considering the ‘hidden costs’ is one of the prime reasons HR fails to increase productivity. Hidden costs relate to not considering the additional effects caused by a bad practice or process because these unintended consequences are not directly connected to the initial action by HR.
What to Consider When Cutting Costs
Some obvious examples of dubious cost cutting and hidden costs might include recruiting people with fewer skills in critical positions – yes, it’s cheaper than recruiting individuals with superior skills but it may negatively impact product quality and innovation. How many times have you had high-performing individuals demand more money? Yes, they can be replaced with cheaper, albeit less effective workers that in the long run create the need to recruit significantly more people just to maintain the same level of production. The big challenge is ignoring the going market compensation rates and salaries. If you are known as an organisation that underpays people either on salary or benefits, you will ultimately hinder the ability to recruit and retain top people as they won’t be attracted to the organisation in the first place
Productivity Containment
As you can see, there are some potential negative consequences of arbitrarily cutting costs without looking at the impact on revenues and productivity. In fact, any accountant can cut costs but it takes a true productivity expert to understand that cutting costs and forgetting the hidden costs can actually have a significant negative impact on the organisation.
Keeping the Competitive Advantage
The strategic target for HR must be to increase revenues and productivity whilst maintaining or reducing people costs. It’s easy to say and hard to do, but give any CEO a choice as to whether they prefer increasing revenues or cutting costs, they invariably pick the option to increase revenues. This is because when revenue is increased in a competitive marketplace it’s obvious you are improving your products and services, which represent a long-term competitive advantage. Short-term cost cutting might improve short-term profits but in the long-term, profits may go down and careless cost cutting may permanently harm your competitive position and image among customers.
Build the Foundation for Growth
This shift in HR thinking is critical to ensuring that your organisation is ‘fit for purpose’ when it is in a position to actively drive forward growth. This, of course, assumes HR has the measurement systems in place to measure the changes—but that’s another story!