Focus On

by David Millner

With increasing pressure on HR to be more strategic, it will always remain a real challenge when historically its’ focus has been on managing and cutting costs. Whilst cutting costs are important there are several reasons why it is essential that HR shifts its focus away from cost cutting towards increasing output and revenues from the organisation especially as the impact of the pandemic continues to unfold.

Every major private organisation is striving to increase its profits and margins, especially in these challenging times.  For every public sector department, the challenge is to ensure that it is tangibly increasing the ‘added value’ that it provides to its’ communities and customers.  However, in striving to meet those goals it is important to realise that there are two distinct parts to any profit and loss equation, revenue and costs. A business can increase profits in two basic ways, firstly by reducing costs and secondly by increasing revenue (either by charging more or selling more). HR has traditionally focused almost exclusively on the cost cutting portion of the equation, quite possibly because cutting people costs is relatively easy and fits with the process mentality that is seen in most HR functions.

Unfortunately, cutting people costs can have some disastrous consequences. HR’s long-standing practice of not considering the ‘hidden costs’ is one of the prime reasons that HR fails to increase productivity. ‘Hidden costs’ relate to the forgetting and not considering the additional costs caused by a bad practice or process because these unintended consequences are not directly connected to the initial action by HR.

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 upon product quality and innovation.  How many times have you had performing individuals demand more money?  Yes, they can be replaced with cheaper, albeit less effective workers that in the long run creates the need to recruit significantly more people just to maintain the same level of production.  The big challenge is connected to 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 just won’t be attracted to you in the first place.

As you can see, there are some potential negative consequences of arbitrarily cutting costs without looking at the impact of cost cutting on revenues and productivity. In fact, any accountant can blindly 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.  The pandemic has again raised the challenge of cost management and as pressures on costs continue to emerge, ongoing conversations with HR revolve around possible rightsizing, restructuring, or downsizing.

Decisions in this respect will need to be more evidence and data based than ever before given external ‘social’ pressures and possible future based changes in work content, the workforce makeup and workplace demands (hybrid working etc.). The development of clearer assessment criteria covering for example diversity, performance reviews and rankings, capability ratings and ranking, absence durations and ranking and any other critical organisational data.  This creates a risk-based profile for employees based upon the data and the criteria being assessed, and ensures that decisions are based upon wider business issues, not just costs.

The strategic target for HR should always be to increase revenues and productivity while maintaining or reducing your people costs. It’s easy to say and hard to do but if you give any CEO a choice as to whether they would prefer increasing revenues or cutting costs, they invariably pick the option to increase revenues. This is because whenever you increase revenue in a competitive marketplace it’s obvious that you are improving your products and services, which are long-term competitive advantages. Short-term cost cutting might actually 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.

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 that HR has the measurement systems in place to measure the changes – but that’s another story!

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