Key takeaways:

Encourage HR and Finance to work together to establish true staff costs.

Identify, compile and map existing data and processes that determine performance.

Work with stakeholders to identify and quantify material hidden costs.

Set up real-time access to data and create benchmarks across business units.

CFOs typically lay off staff to cut costs. But they should first calculate the hidden costs of a poorly managed workforce, says Paul Lalovich.

Any Chief Financial Officer worth her abacus can recall the average salary of staff or the intricacies of the senior management incentive scheme. But can they put a figure on low employee morale, a poor hiring decision or other, less tangible workforce costs that set a company back?

How much does it really cost when a highly trained and experienced employee leaves because he doesn’t feel he fits in—and then recounts his unhappy experiences to the media? Too few CFOs, Human Resources managers and board members recognize—let alone measure—these factors. But they should and they can. They are as significant as anything that appears in the company accounts.

Most CFOs have a handle on employees’ primary costs: base pay, overtime, bonuses, health benefits, training, payroll taxes, relocation expenses, and more. The total cost of a workforce (TCOW) as a percentage of operating expenses can range from 20% to as much as 75% in sectors such as healthcare, professional services and software development. So it may seem reasonable to cut headcount as way to reduce overall expenses. Who would fault Coca-Cola, for example, after it responded to a 20% revenue decline in 2017 with a six-year, $3.6 billion cost-cutting program, that involves 1,200 job losses?

‘Too few CFOs, Human Resources managers and board members recognize—let alone measure—hidden employee costs, even though these are as significant as anything that appears in the company accounts.’

But TCOW includes much more than recruitment and payroll costs. Companies need to get smarter about reducing the staggering waste of resources associated with disengaged employees and other causes of poor workforce performance.

Consider the following:

  • Voluntary turnover (the cost of losing an employee) ranges from 25% to 200% of base pay.
  • Underperformance (the difference between an employee in the top 5% versus one in the bottom 5%) can be equivalent to double annual base salary.
  • Time to proficiency (the time taken for an average employee to reach optimum proficiency) takes around 28 weeks, and it can take much longer to reach ‘world-class expertise.’ Do companies consider this when a good employee leaves?
  • Disengagement infects engaged employees too. The latter is 54% more likely to quit when they work with a disengaged colleague.
  • The average cost of employee absences amounts to 35% of base pay.

Actions for managers

How can companies stop the wasteful cycle of bloated workforces and mass layoffs? We visit a doctor when we feel ill. We consult tax professionals before filing our returns. So why not apply the same care and attention to a company’s biggest cost? After all, if, as most employers claim, success depends on having the right people to execute the right strategy, they also need the right tools and information to be able to recruit, retain, engage and motivate those people.

HR and Finance departments need to work more closely together to get the facts. They can start by doing the following:

Map the processes. Identify, compile and map all existing data, processes, and other factors that undermine talent performance, and then produce a formal cost analysis.

Quantify hidden costs. Work with key stakeholders to identify and quantify material hidden costs (invisibility is itself a sign of poor talent management). Start with Human Resource Information Systems and partner with Finance, which probably maintains the organisation’s Enterprise Resource Planning system, to obtain the remaining data.

Manage your data. Combine HR and Finance data in a cloud-based workforce analytics platform to allow simple, real-time access to the data required for effective analysis, management, and control of TCOW. Cloud-based platforms support a variety of technologies, such as mobile commerce and big data analysis, thus enabling an efficient flow of information and communication regarding TCOW.

Establish key benchmarks. Analyse TCOW as a percentage of expenses or revenue across different business units, job groups, tenure, and other categories that might be relevant to the specific industry or enterprise.

Paul Lalovich is a change agent helping organizations to understand and actively manage their headcount, employee productivity and total cost of the workforce (TCOW). He is currently Organizational Effectiveness Advisor working at Emirates Nuclear Energy Corporation in Abu Dhabi.

This article was written for FT|IE Corporate Learning Alliance.
© 2018 Corporate Learning Alliance