As the impact of the COVID-19 coronavirus pandemic spreads, HR leaders — like all functional leaders — face pressure to cut costs, but it’s critical to avoid a knee-jerk response. A strategic prism must trump ad hoc urgency, because the way you manage your cost decisions now will determine how well you sustain performance during this crisis and emerge as it passes.
Gartner has long positioned cost optimization as a strategic approach to cost management, designed to deploy capacity to critical initiatives and deprioritize initiatives with lower strategic importance — in short, a means to fund innovation and growth. But how does that approach apply during a crisis?
Organizations need to view the effect of cost-cutting measures on employees as a hidden cost.
Simply put, HR leaders must act to identify and capture short-term efficiency gains, including immediate spend reduction, while managing the risks associated with those cost decisions. In the case of HR, that primarily means protecting employee experience and productivity.
HR leaders as efficiency drivers and risk managers
Some basic actions will get you started.
To get your functional house in order:
- Conduct scenario planning to assess the current and future impact of COVID-19 on your function in a structured way, applying reliable criteria. Based on likely scenarios, define your response from a cost optimization perspective.
- Plan and manage HR cost-saving initiatives. Use proven cost-saving libraries to select the most promising and realistic ways to cut HR costs immediately. But make sure to assess the likely impact and potentially negative impact of all cost-cutting measures in scope — and be vigilant about identifying inadvertent and potentially hidden associated costs.
To be a proactive risk manager:
- Protect employee experience and productivity. HR’s ultimate value proposition isn’t only to drive talent outcomes in good times, but to protect investments in talent outcomes during adverse times. Cost-cutting initiatives and de-investment can damage employee experience, which is critical for engagement and productivity. Understanding that impact can help you avoid rash decisions that could damage key talent outcomes in the long term.
- Communicate effectively. Make sure that all cost-cutting efforts are made transparent across the organization and stakeholders.
6 rules for rapid spend reduction
If you have to take immediate action on costs — even if you haven’t had time to fully formulate a strategic cost approach— you can help to avoid rash decisions with these simple rules.
- Target immediate impact. Eliminate, reduce or suspend items that will have an impact in one, six or even nine months, not in years. Examples include expenses incurred and paid monthly, quarterly or on a “pay as you go” basis, rather than annually.
- Reduce, don’t freeze. Focus on costs that can truly be reduced or eliminated from the cost base, not just frozen out for the current period only to reappear again later.
- Treat cash as king. Target line items that will have a real cash impact, such as real operating expenses like service costs. Don’t focus time and effort on noncash accounting treatments.
- Plan to do it once. Few organizations cut deeply enough the first time, so they then need to revisit cost cuts — creating a destructive and unproductive cycle of uncertainty, effort and lost productivity. Cut or reduce “hard” enough the first time, and only do it once, especially in workforce decisions where cycles of ongoing reductions can be particularly destructive.
- Address discretionary and nondiscretionary spend. Discretionary spending (such as for new “change the business” projects, additional capabilities or services/products) can often present the easier-to-cut option. There are also, however, opportunities to reduce usage and service levels of nondiscretionary, “run the business” services.
- Tackle both variable and fixed costs. Fixed expenses remain constant, regardless of activity or volume like payroll/compensation, so focus on eliminating them. Variable costs change with activity or volume; examples include contractors, consultants etc., so focus on both reducing and eliminating them.
Different cost measures carry different risks
But even with — and perhaps especially with — immediate cost decisions, it’s critical to identify and manage the associated risks. Those risks often emerge long after misguided cost actions take place.
In the case of HR, Gartner research shows that cost cutting creates risks for employee experience, and can inadvertently derail potential future growth opportunities.
Data from the 2019 Gartner Global Labor Market Survey of nearly 10,000 managers and employees shows that almost every potential cost-cutting measure has at least some adverse impact on employees and their perceptions. These results hold true across a broad variety of initiatives, regions, industries and employee segments. Depending on the cost measure chosen, the analysis shows:
- A decline of up to 8% in average satisfaction with an organization’s employee value proposition.
- A decline of up to 7% in employee engagement.
- A decline of up to 5% in the percentage of employees who are meeting or exceeding performance goals
The research also shows that the more direct and personal the impact of a measure is on employees, the more adverse the reaction.
In short, organizations need to view the effect of cost-cutting measures on employees as a hidden cost — and include that assessment into their broader calculations of any planned cost cutting initiatives across the enterprise.
For the longer-term
Looking beyond this COVID-19 pandemic, strategic cost optimization is a must-have if HR is to help the organization prepare to rebound and grow. Your first two steps in establishing a sustainable cost optimization roadmap are:
- Understand your cost and value baseline. Establish your current spend and efficiency. Without a transparent cost base, you will struggle to identify clear targets or valuable opportunities, especially when facing mandatory budget cuts and given a short time frame to cut costs. Benchmark your spend and efficiency against peers to identify target areas for improvement, depending on functional and enterprise goals.
- Identify and prioritize opportunities. Assess the likely impact and potential downside of all cost measures in scope to ensure the best fit. Make sure to identify and prioritize initiatives that best support your objectives. Provide transparency into the prioritization mechanism, and engage your CFO in selecting initiatives to drive commitment and support for your choices.
Notably, if you adopt cost optimization as an ongoing and always-on discipline, you will already have identified the cost actions to take first in a crisis. You can also avoid some of the incessant ad hoc budget pressure.
The result: You will have moved beyond primarily defensive, reactionary and tactical cost cutting to a continuous and proactive approach in which you invest resources and capabilities to optimize business value. Stakeholders will know and support your business-driven budget position — and will call on you less often to justify and reduce your costs.
The original article by Daniel Dirks, managing vice president in the Gartner HR practice, is here. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of HR&DigitalTrends. Photo credit: iStockphoto/AndreyPopov