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The current economic climate has caused organizations to slash budgets, freeze hiring and look for opportunities to reduce costs as they weather the COVID-19 recession. As an HR leader, you have an important role to serve in these cost-reduction measures.
You must not only consider the short-term gain, but also the long-term impact of the decisions you and other leaders are making today. For example, reducing headcount may help reduce costs in the short term. But it can also leave the remaining employees demotivated and worried for their own positions, in turn lowering productivity and competitiveness. Layoffs may also reflect negatively on the company from a customer perspective.
In other words, it's important to think through what the right HR cost reduction ideas are for your organization's particular situation. Here are a few to consider.
- Pause large software projects. Both HR and IT can freeze large software projects, such as a new HCM system, until IT can perform an assessment to determine if there's sufficient value and funds to continue the project.
- Explore software license renewals. Many cloud-based HR systems are licensed based on monthly or annual employee headcount. It is important to understand how the vendor invoices the organization and ensure that the correct headcount is being used. For example, if the organization is billed based on monthly headcount and the organization reduces the workforce, someone within the organization will need to ensure that the next invoice reflects the smaller headcount. If the annual renewal is coming due, someone should confirm the headcount and adjust the contract accordingly. Someone in HR or IT can also talk to the vendor about discounts they may be offering during the economic downturn.
- Hiring freeze. This is a common practice and one that is often implemented quickly when the economy goes into a downturn. While a full freeze may be required at certain times, it will be important to reevaluate all the open positions and identify those you and other leaders deem as key roles within the organization so that those roles can be reopened and filled in a timely manner.
- Reduce dependence on third parties. Where possible, you and other leaders can consider bringing the work done by third parties in-house. This is especially important when internal resources have the required skillset and time available to take on the additional work. Your team can also support the organization as they determine if they can also use their internal employees for these new responsibilities.
- Outsource nonessential work. If your organization has work that is nonessential to your day-to-day operations, you might want to consider outsourcing it to a third party. While this option may lead to headcount reductions within your organization, it may help your company survive the downturn and reduce costs in the long term.
- Cancel outsourcing contracts and bring the work in-house. Your organization may be paying a premium for the flexibility offered by a third party. If you have the bandwidth to do the work with internal resources, it could be a win-win since you'd be able to save money and retain your employees. It is important to consider any contractual obligations you may have with the third party before canceling the contract. For example, there may be a fee to break the contract, which would have to be factored into your decision.
- Redistribute work internally. As projects are canceled or delayed, the demands on the HR team may change. To avoid layoffs and hiring in different areas, you may be able to redistribute work within the HR team. For example, if recruiting slows to only critical roles, you may be able to use the recruiters' time in other areas of HR.
- Hire a temporary workforce. Temporary employees or consultants may be a viable option to control costs since they may not be entitled to all the benefits received by permanent employees, such as health benefits and bonuses. You can also control the length of the agreement, so that you are only committed for a short period of time or specific projects.
- Monitor and limit overtime and shift premiums. Both your core HR team and payroll can play an important role in helping the organization analyze hourly rates by reviewing scheduling practices to reduce overtime and shift premiums where possible. There may also be features the HR team can enable in their HR software that will flag overtime when an employee is scheduled for too many hours in a pay period, providing a proactive approach to reducing costs.
- Freeze nonessential HR initiatives. The HR team may have programs underway that rely on the expertise of outside organizations. Examples of these types of projects include developing e-learning courses, workforce planning and total rewards. These are also the types projects you could consider having internal teams tackle.
- Streamline processes. By reviewing your current HR processes, you may be able to identify areas where efficiencies can be found, freeing up employees to work on other tasks that would otherwise require additional staff. You may also identify work that can be temporarily stopped or eliminated altogether if it's no longer needed.
- Make temporary workforce reductions. HR can help the organization plan and execute a strategy to temporarily reduce the organizations employee-related costs by introducing job-sharing programs, reducing employee hours, furloughing employees or implementing temporary layoffs.
- Identify and apply for government programs. Governments in multiple countries have offered incentives for companies to avoid layoffs, offered special tax rebates and other programs that an organization can use. HR is well positioned to partner with members of other departments, such as finance, to identify the programs that apply to the organization and implement them.
- Review total compensation programs. Your organization may offer programs that are expensive for your company to administer and provide, yet have very little interest from your employee base. Therefore, they may provide a potential cost saving without upsetting all employees. For example, your company may offer $5,000 per year in tuition assistance, yet most employees do not take advantage of the program. While eliminating it altogether will save money and only impact a small number of employees in the short term, you may be able to simply reduce the annual amount, and therefore find a balance between focusing on cost reduction at the expense of losing a benefit that might help attract and retain top talent.
- Control spending on nonessential items. Launching an organization-wide freeze or implementing approvals for nonessential spending may lead to significant savings. For example, you might be able to wait on purchasing new computer equipment, rearranging desks in an office space or purchasing new office furniture. By implementing more stringent approvals, your organization will be able to ensure that essential items move forward.
- Eliminate or reduce external training. Training is important for organizations and employees, since it can build new skills, help with retention and provide the organization with new ideas. If you don't have the budget for external training, perhaps you have subject matter experts within your company who can run training sessions to fill the gap. For your top talent, you may want to consider reducing the number of external training sessions taken in the given year, but not stop them all together.
- Encourage employees to use banked leave time. Having employees use banked leave time, such as vacation time, will reduce the organization's debt. While this doesn't provide a cash benefit, it does improve the organization's balance sheet.
- Deal with underperforming employees. As a last resort, if you have employees who are not meeting expectations, this may be the right time to terminate their employment. While never easy, at a time when the organization requires cost savings, it is an added reason to focus on your higher-performing employees.
While all recessions have some degree of uncertainty, the COVID-19 recession presents unique challenges. Companies have experienced hardship in past recessions, but few could have predicted the near shutdown of the economy around the globe.
HR cost reduction -- as well as cost reduction throughout the organization -- is a game of lightning speed adaptation. As the COVID-19 spikes and retreats, leaders must respond to marketplace conditions, supply chain challenges and ramifications of social distancing in the workplace.