A framework to evaluate cost optimization decisions is key to identifying how HR can manage costs to drive strategy.
The mandate for HR leaders today is to satisfy the digital aspirations of the CEO and the needs of the workforce — while transforming the HR function to be a more efficient and strategic partner to the business. Cost optimization initiatives are a critical component of this transformation process, but they too often get lost as the transformation progresses.
Over time, leaders can lose sight of their original aims and targets, and their assumptions may become invalid or out of step with emerging pressures and conditions. Opportunities are lost — and emerging opportunities for new cost savings are missed. Cost optimization needs to remain an ongoing discipline designed to balance cutting costs and maximizing business value as the transformation proceeds and progresses to the next phase.
Sometimes change fatigue sets in or transformation teams de-emphasize cost-op initiatives during implementation out of fear that any talk of costs will demotivate colleagues.
“And sometimes, the initiatives weren’t well enough understood to begin with — or the cost-op goals were set from outside the function and just weren’t realistic,” says Piers Hudson, Gartner's senior director and analyst.
HR leaders can do three things to ensure that cost optimization efforts don’t slide during transformation.
Understand the Cost Base
Sometimes the HR function is targeted for cost cuts by finance, or as part of enterprisewide cuts, using crude measures such as HR productivity by headcount or HR cost to company revenue. To avoid arbitrary assessments, present a differentiated view of HR costs that sets proper expectations with HR and other stakeholders.
HR leaders can learn from IT partners and the way they separate “grow” and “transform” costs from everyday “run-the-business” costs. It’s sometimes difficult to identify transformation-specific costs, but examples for HR might include items such as spend associated with bringing completely new-to-world capabilities into the business to expand new business opportunities. When you can’t easily identify such costs, you might want to combine grow and transform costs into one “change the business” category — as some IT leaders do for simplicity’s sake.
Cost optimization initiatives should also be aligned with business priorities to avoid an arbitrary focus on, for example, large line items targeted simply for their size, not their substance. A disciplined cost optimization approach weighs the business benefits/value of various initiatives against the potential savings.
The Gartner cost optimization decision framework offers a rigorous way to define the investment, risk, time and benefits associated with different cost-op initiatives. Note that the assessment depends highly on the function’s maturity and the organization’s industry and size, so every company’s outcomes will be different.
Encourage Employees to Own Cost Initiatives
Just as a changing business context can change priorities (e.g., growth in revenue or the need to focus on a new market), so can the aims of a transformation effort. Cost management priorities may change as a result, rendering some targets irrelevant or unattainable — or creating new cost-savings opportunities that weren’t originally envisaged. To make sure cost optimization plans adjust with an evolving transformation, keep employees engaged and owning the initiatives.
But don’t hide or blur the cost rationale behind decisions. That will just confuse employees. Splitting costs into the run, grow and transform-the-business categories helps employees understand the nature of the cost-saving targets and clarifies the end-state HR operating model. Articulating what share of spending is still intended to help grow the business will give greater confidence that cuts are in line with the overall corporate and HR strategy. And specifying where cuts are being made and what the impact may be can clarify the rationale for the cuts designed to support transformation and growth.
IT leaders also sometimes map how their different costs and cost-savings targets relate to a corporate capabilities map. HR’s version of this approach shows how cuts are balanced throughout the different parts of HR — such as HR costs related to acquiring in-demand talent versus HR costs for managing existing core talent. This kind of mapping adds credibility to HR cost-savings decisions.
It’s also critical to keep an ongoing account of cost initiatives. Use dashboards to monitor progress and build targets for HR transformation projects into the key performance indicators of the chief human resources officer, as well as the change sponsors sitting outside HR.
Champion Ongoing Improvement
Keep cost optimization initiatives alive by ensuring that cost-savings efforts don’t end with the post-transformation project reviews. Make sure to use stakeholder structures (for example, project steering committees) created during the transformation as the basis to form ongoing improvement program boards. Remember that the membership of these groups may need to be adjusted over time and be given a different mandate for improvement.
Engage with end-users (frontline HR staff) to help identify new barriers and opportunities for savings in organizational setup and systems. In addition, revisit specific challenges (not just general lessons learned) that arose during the HR transformation project — or afterward.
Eser Rizaoglu, Gartner's director and analyst, wrote this article, which can found here.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of HR&DigitalTrends.