By Lindsay Macintosh, CHRP
Today’s employers face the daunting task of developing effective cost containment measures.
At the end of the day, it is people that both count and cost most greatly. Labour, not products and services, is the most significant factor affecting the financial bottom line. Many organizations like Coast Mountain Bus Company and GM Place spend as much on employer branding and attracting workers as they do on their products and services. This is most immediately evidenced by the advertisements aimed at attracting employees that have proliferated in recent years.
Maintaining a competitive edge in today’s increasingly fierce market with looming labour shortages requires employers to attract and maintain valuable employees. Organizations need to identify the true economic costs of human capital and establish cost containment measures in every area of business.
Campbell Lund, C.A., senior manager of Price Waterhouse Coopers says, “HR has the responsibility to work with business leaders to analyze data and assist in developing activities to address turnover and absenteeism and their consequent costs where they are deemed to be unsatisfactory. Beginning with benchmarking statistics relating to turnover and absenteeism to establish acceptable ranges, HR practitioners need to assess and prioritize issues needed to be addressed.”
Identifying the costs of employee turnover and absenteeism is a major challenge today’s employers face. It is crucial for employers to develop programs to attract, select, develop and retain valuable employees. Calculating the cost of employee turnover and absenteeism involves calculating both direct and indirect hidden costs, not just direct costs.
Direct costs are finite and clear cut. They include:
· Recruiting Costs: job advertising, agency fees, time spent on reviewing resumes, time spent on interviewing candidates;
· Separation Costs: time spent on exit interviews, separation pay, administration costs related to separation;
· Vacancy Costs: overtime pay for employees’ time covering duties of departed employees, cost of temporary help to minimize lost productivity;
· Training and Orientation Costs: cost of courses, time spent on employees’ training and orientation; and
· Administration Costs: payroll, benefits, setting up office, etc.
Tracking the metrics of such direct costs is not overly difficult and even a cursory tally shows that turnover carries a financial burden for all organizations. Less tangible are the hidden costs.
Managers do not understand hidden costs that affect the bottom line.
While managers understand direct costs, many do not understand the indirect costs that substantially reduce the organization’s financial bottom line over time. Hidden costs are often overlooked by organizations and are difficult to measure. Some examples of hidden costs are:
· Loss of Corporate Knowledge and Experience: knowledge of customers, products, markets, company policies, internal processes and procedures, and legislation pertaining to the company’s industry and employee’s field of work;
· Impact on Customer Relationships: overworked and dissatisfied employees have a negative impact on sales and revenue;
· Decreased Employee Morale: increased stress and decline in attitudes lead to higher turnover and absenteeism that have a negative impact on business;
· Delay in collecting money and loss of interest earned on that money;
· Cancelled meetings;
· Delayed projects; and
· Reduced productivity of other employees while they train new employees.
Employee turnover and absenteeism comprise a big chunk of the organization’s human capital costs and overall finances and can take a heavy toll on the bottom line.
Gaps in knowledge and productivity are costly. For instance, the time between the departure of a valuable employee and the optimum performance of their replacement is of capital importance. It takes time for the new employee to reach acceptable levels of production. This gap can be a few weeks or for higher-level jobs, many months. Many costs associated with this gap are hidden costs and this increases with the complexity of the position and its interdependence with other positions.
Many organizations with high employee turnover experience low productivity due to a lack of bench strength. The transition period, as costly as it has been proven to be, is perpetual in such organizations. Often new employees bring little or no experience. Consequently, organizations constantly direct their resources to training new staff.
Hidden costs are complex and difficult to measure.
Hidden costs due to lost business are difficult to pinpoint and measure. For example, the cost of lost customers due to a high turnover of sales people is evidenced by a decline in revenue over time. Identifying and measuring hidden costs cover long periods of time are done on a trend basis rather than on absolute value. Methods of identifying and measuring hidden costs depend on the business model of the organization and vary from one organization to another.
Organizations often measure hidden costs for internal use only. Lund elaborates, “Hidden costs don’t get reported on financial statements. Financial statements are a snapshot of the company’s financial position at a given point of time that reports only what is required for the company to report to the public”.
Cost containment measures mainly come from identifying and controlling direct costs. They include reducing time spent on the recruitment process, compensation programs, and more cost-efficient training and orientation programs.
Regarding cost containment measures, Olin Antone, C.A., a partner at Deloitte Touche says, “A big initiative taken on by employers is the development of training programs employees can take at their own leisure rather than have them take their training in a room with a trainer”. E-learning is a good example of such new training programs. Ensuring that critical knowledge is transferred up front, some food service companies have adopted measures to contain human capital costs by mandating courses on food handling and customer service prior to employees commencing work.
Most training in many organizations occurs on the job and provides the new employee with experience. Unfortunately, this can result in poor work habits and improper techniques leading to costly consequences. Proper training with standardized procedures such as mandatory programs and courses for new employees can ensure that employees develop good work habits and use proper techniques, thereby improving productivity, safety and morale while reduceing turnover and absenteeism, and significantly improving the organization’s financial bottom line.
While change within a workforce is inevitable, an ideal level of turnover necessary for the business model of the organization must be determined. This level can be reviewed against actual performance data that may indicate the turnover is too high. Having reviewed these issues, HR and finance practitioners can assist by providing recommendations, action plans and timelines for consideration and implementation into the organization’s overall business plan.
HR focuses on identifying issues rather than auditing costs
HR’s traditional role focuses more on identifying issues rather than auditing costs. Investigating issues through analysing data from people surveys, turnover, absenteeism, compensation and other sources allows HR and financial practitioners to prioritize issues and concentrate efforts and resources in areas that have the most impact on managing human capital costs.
The overarching costs, particularly hidden costs, and their impact associated with employees who leave or absent can be quite high. Developing a successful program of recruiting, selecting, training, and retaining employees can be significantly more important than organizations realize. Further exploration into key areas of human capital cost can help organizations direct their energies towards those areas which have the greatest impact on their finances. This research can help organizations to develop more effective hiring-retention programs thereby significantly increasing the financial bottom line.
Lindsay Macintosh (lindsma@shaw.ca) works as Accounting/Payroll & Benefits Manager for a retail/tourist company.
Reprinted from PeopleTalk Magazine, Fall 2008