Turn to cost optimisation (not cost cutting) during economic uncertainty

why cost optimisation is essential in future-proofing organisations against economic volatility

HR leaders are starting to feel the pinch with increased economic uncertainty, and Aaron McEwan explains why cost optimisation is essential in future-proofing organisations against economic volatility

Worried CEOs and CFOs are looking for ways to rein in spending ahead of a potential downturn – and putting pressure on HR leaders to do the same. Gartner data shows that a significant 92 per cent of HR leaders are focussed on budgeting and cost optimisation initiatives. However, only 20 per cent consider how these measures contribute to the organisations’ overall bottom line.

While economic uncertainty is unsettling, it can actually present an opportunity for HR leaders to raise their profile in the organisation and become a valuable resource for other senior executives.

To avoid the consequences that come with making last-minute budget cuts or having knee jerk reactions, savvy HR executives are looking beyond simple cost cutting and instead supporting broader business outcomes.

The bigger picture
HR leaders who watch for early warning indicators from both internal and external sources are better prepared for potential economic uncertainty. That means looking out for rising unemployment, falling productivity and reduced consumer spending along with individual HR markers like plummeting payroll and declining ‘intent to stay’ rates.

HR leaders should also partner with other leaders within the business to establish a cross-functional dashboard. For example, utilising aggregated data from different organisational functions, such as strategy or finance, provides a more accurate forecast about the economy and potential issues.

“When handled well, employees who have experienced cost-optimisation can move forward and be helpful to the business”

Ways to optimise HR costs
Successful cost optimisation strategies look beyond short-term cost-cutting and instead promote options for immediate efficiency gains, while not impacting long-term business performance.

Cost optimisation is an ongoing business discipline as opposed to a one-off exercise, which requires HR leaders to focus on:

  1. HR service delivery – optimise, automate and digitalise the HR service delivery model, governance structure, processes and roles
  2. HR spend – obtain the best pricing and terms and rationalise spend for shared services, HR technology and outsourced versus insourced services
  3. Workforce costs – optimise via smart total rewards models, workforce structure and layoff management

The first two areas focus on cost-saving efforts within the HR department, while the third is aimed at HR’s contribution to cost optimisation across the organisation.

Be transparent
Once these strategies are in place, it is important that organisations communicate transparently with employees to provide updates on cost-saving progress.

When handled well, employees who have experienced cost-optimisation can move forward and be helpful to the business. In fact, Gartner research found that 61 per cent of employees who have experienced cost-saving measures in the last five years were confident in the future success of their organisation.

Put simply, keep employees informed.

“There is no doubt that HR leaders can play a major role in helping an organisation’s ability to mobilise in response to market shifts”

Organisations need to walk a fine line between being transparent as a sign of respect to employees and not frightening them into searching for jobs elsewhere. No one appreciates walking into the office to find out that half of their colleagues are being made redundant that day without warning; but keeping staff out of the loop can have a big impact on their morale and loyalty.

Balance short-term business needs with long-term effectiveness
To support decisions on cost optimisation opportunities during all phases of the economic cycle, HR leaders should regularly benchmark their talent base, HR services provided and HR-related technology deployed against relevant industry peers.

Likewise, HR leaders should encourage other organisation leaders to benchmark cost drivers in their respective functions.

Not only does this strengthen transparency across the board, it is also crucial in times of economic volatility where HR leaders must act quickly and coordinate with other functional leaders, to identify and agree on cost-saving initiatives.

Cost-optimisation efforts typically fall under at least one of these major categories:

  • Implementation of dedicated activities directly aimed at immediate cost savings
  • Reprioritisation of current services across the function
  • Reallocation of current capacities across the function to drive short-term cost
  • Optimisation while accounting for long-term growth

There is no doubt that HR leaders can play a major role in helping an organisation’s ability to mobilise in response to market shifts. And those that quickly adapt to changing business and economic conditions – especially those fixed on driving growth – will have a greater chance of thriving beyond the current instability.

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