Slashing Costs and Maximizing Value: How Much Should HR Spend?

In an uncertain economic climate, HR professionals are being forced to reduce spending and ensure that any investments they do make are delivering tangible returns.

But with finance departments insisting on savings and quick results, how can HR ensure they’re still providing a good service and supporting their company's employees effectively?

The question of how much you should be spending is an open one. While financial teams will no doubt be keen to reduce outgoings as much as possible, this must be balanced against the negative impacts this will have on the business. Reduce costs too far and you'll have to deal with unhappy staff and poorer productivity.

Many HR costs can't be viewed in purely financial terms. When evaluating potential return on investment (ROI), it's vital to take into consideration areas such as improved productivity and the potential for more staff churn if people are dissatisfied.

When it seems cuts are inevitable, what should you be doing in order to make sure you're getting the maximum value out of your HR department?

The need to optimize your costs

The first step is to be aware of the difference between simply slashing your costs and realigning your spending to optimize your investments. It's important not to treat any cost-cutting initiatives as a knee-jerk reaction to external pressures, as this can result in good ideas being abandoned in favor of short-term gains that may leave the business worse off in the long run.

A thorough review of your spending should identify which areas are indispensable and which can be removed without significantly impacting performance. Look for areas where efforts are being duplicated or where you can pool resources currently spread out over different departments into a single, centralized location.

This shouldn't be a one-time exercise. Cost optimization needs to be viewed as an ongoing process that looks beyond the headline figures on the balance sheet. Gartner highlights three areas to focus on when seeking to optimize costs:

1. HR service delivery - Ensuring that services are delivered efficiently, with a clear structure for processes and governance.
2. HR spend - Making sure  there’s a strong rationale for any expenditure on areas such as HR tech, shared services and outsourcing.
3. Workforce costs - This should determine how firms balance the benefits and costs of employee reward schemes, how the workforce is structured, and how any layoffs will be implemented.

The first two of these remain closely focused on cost optimization initiatives within the HR department itself, while the final one takes a wider view of workforce costs across the organization.

Minimizing the risks caused by cuts

Data from Gartner’s 2019 Global Labor Market Survey shows that some downsides are inevitable; depending on the depth and type of cuts, there will be negative reactions from the workforce. For instance, it found that on average, firms can expect to see up to:

• An 8% drop in average satisfaction with an organization’s employee value proposition.
• A 7% decline in employee engagement.
• A 5% decrease in the percentage of employees who are meeting or exceeding performance goals.

To keep these consequences to a minimum, you need to go about any reductions in the right way, with a focus on long-term impacts as well as any short-term gains you expect to see as a result of spending cuts.

Good communication with employees is a key part of this. If you can spell out exactly what's changing and reassure them about how it will affect their day-to-day work, you can reduce disruption. You should also identify opportunities where you can reinvest when circumstances allow it and keep these as a visible priority for the future.

Where to focus your spending

It's also vital that the remaining costs are being focused on the right areas, and sometimes this means also thinking about when not to cut.

For example, employee wellbeing programs are often one of the more expensive HR cost centres and are sometimes viewed as a 'nice-to-have' incentive rather than an essential, so often come up early when firms are looking to make quick savings.

However, this can be counterproductive, as these benefits can save more money in the long run and help your employees with their work-life balance, mental wellbeing and physical health, which will make  them happier, more productive workers. Therefore, it's important to carefully consider the potential drawbacks of such cuts, and look at  alternatives to avoid any ill-feeling among your staff.

Other areas in which spending should be prioritized include professional development and training, as the benefits this brings to you in terms of increased expertise should outweigh any costs and reduce the need for expensive hiring processes to bring in the right talent.

Ultimately, HR cost optimization efforts need to keep employee experience and productivity a top priority. If people feel they're getting a worse proposition from the HR team,  their morale will be affected, leading to increased turnover, and the costs associated with this will quickly negate any savings you've made.