Academic journal article Human Resource Planning

How to Reduce the Cost of HR and Continue to Provide Value

Academic journal article Human Resource Planning

How to Reduce the Cost of HR and Continue to Provide Value

Article excerpt

In a recent survey by Hewitt Associates, (1) 75 percent of HR leaders said they were under pressure to reduce costs. The first step in managing HR costs is to establish a solid baseline; however, taking that first step can unearth unsettling news: True costs may be considerably higher than initially thought. Faced with increasing cost pressures, many HR executives find that a holistic view of HR costs, while shocking at first, is essential to finding cost-effective measures for streamlining HR.

One of the early findings from Hewitt's HR Analyzer[TM] (HRA) benchmarking study is that most organizations initially underestimate the cost of HR by as much as 50 percent. (2) Among companies that conducted a detailed assessment of total HR cost, the median per employee investment was close to $2,955, considerably more than the $1,300 to $1,500 per employee benchmarks commonly accepted as "appropriate" HR expenses. The same holds true for HR staffing levels; the median reported in the first release of HRA findings was 71:1 (company employees to HR employees), which is more than 25 percent less efficient than the 100:1 gold standard.

Companies like Verizon and Southern Company have achieved (or expect to achieve) sustainable cost savings in HR by taking a hard look at their current HR cost structure, and using that information to rethink their approach to delivering HR services. Before walking through some of the steps that these companies and others are taking, let us unbundle the HR cost equation.

Understanding the True Cost of HR

What is behind the higher than expected HR costs? In our experience, there are three drivers:

1. Hidden Costs: Focusing solely on the HR budget instead of taking a holistic view of HR delivery and the related costs.

2. Incomplete Transformation: Going down a path of centralization/shared services or outsourcing, etc., but not doing enough to change the HR organization or the behavior of employees.

3. Poor Alignment with Needs: Continuing to provide "soup-to-nuts" programs instead of focusing on the areas that are most important to the business.

Hidden HR Costs

HR is more than a department: It is a set of broad-reaching activities that support the organization in managing its people. At many companies, some of the costs associated with providing these services do not show up as part of the HR budget, but are still part of the total investment in human capital. To better manage these expenses, HR leadership must capture and quantify all HR costs. Three common hiding places are: the HR budget itself, decentralized HR activities, and HR technology investments.

The HR Budget. Across companies, there are great inconsistencies in HR budgeting practices. Does the company account for both federally mandated (FICA, unemployment) and health benefit costs for the HR staff in its labor loading rate? Is the cost of outsourcing vendors fully captured? Is HR assessed for real estate and office equipment? Is the cost of advertising for open positions and fees for search firms captured? What proportion of training is managed or delivered by HR? Are there expenses that pass through HR (severance costs, disability payments, etc.) that need to be excluded from the HR cost baseline?

Trying to reduce HR costs without first getting a handle on the entire HR expense is like trying to clean the corner of a swimming pool: You will have short-term success but will not change the overall quality of the water. HR may not directly control all the costs associated with HR, but has the responsibility to know what they are and to help provide stewardship for the company. For that reason, the definition of HR baseline costs should be based on objective standards.

Decentralized HR Activities. Thinking about all the activities that HR performs, there is a good chance many of them are not performed by HR professionals. Take something as basic as benefits administration. …

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