Capital H Blog Series – Blog #1 Cost Reduction Strategies: A Needed Paradigm Shift
Posted by Kecia Bingham, Doug Tapp, Jose Molina, Yon-Loon Chen, Mike Fuchs on July 14, 2020.
While cost management and cost reduction are common business terms even in the best of economic times, the COVID-19 crisis has propelled them to the forefront of business discussions. Typical cost management efforts center on reducing overall costs by cutting labor costs. Initial responses to the COVID-19 crisis have largely followed suit. The speed and magnitude of the disruption caused by the pandemic propelled many business leaders to make quick, and at times, deep cuts to workforce spend. Preliminary COVID-19 research by Deloitte Consulting LLP indicates that business leaders’ early response to the pandemic was to trim costs through pay cuts, elimination of bonuses, furloughs, and layoffs. These actions largely impacted traditional full-time/part-time employees, who comprise a subset of total labor costs. It is difficult to evaluate the prudence of these cost reduction decisions without understanding whether other types of labor costs (e.g., alternative workers, real estate, technology) were considered for reduction and how each supports the bottom line.
Related links Follow us @DeloitteHCStay connected.Under normal circumstances, most companies struggle with identifying the total cost of their workforce and more importantly understanding if the large investments and likewise cost reductions, in their workforce, drive the value they need to maximize and sustain profitable performance. The COVID-19 epidemic heightens the need for an organization’s business leaders to have accessible, shared line of sight and understanding of total workforce spend. As companies begin to look toward recovering from the health crisis, it will be increasingly important for business leaders to shift their thinking from immediate response to prioritizing workforce engagement and understanding workforce preferences to decide what to eliminate to reduce costs and drive value in the short and long-term.
The Return on Investment ConundrumEffective strategic planning requires understanding what elements of labor costs yield the greatest return. On average, labor costs account for 40-60 percent of operating expense for a company, which easily represents the #1 category of operating expense for most businesses.1 Yet, the return on labor costs is typically unknown. For many organizations data resides in disparate systems and there is rarely a single source of truth from which to understand how trade-offs between cost savings and employee preferences / practices are linked. Without these insights, business leaders regularly make workforce decisions with little to no understanding of the return on investment (ROI) for their company’s largest expense.
Misguided “Labor Costs” ThinkingThe Deloitte 2019 Global Cost Survey found that while cost reduction continues to be a standard global practice, the vast majority of respondents (81 percent) indicated they were unable to fully meet their cost reduction targets.2 We contend that cost reduction strategies are often inadvertently designed to result in less than optimal outcomes because their primary focus, “labor costs”, is a loaded phrase that steers solutioning in a very narrow and short-sighted manner. “Labor costs” lends to the tendency to look at dollars spent without considering ROI. It is relatively easy to determine the cost of people expenses like base pay, bonuses, and benefits as well as ways to reduce these types of costs—simply cut or eliminate them. However, when labor is viewed as an “investment” it expands thinking to consideration of both cost and value. Investment emphasizes the need to consider value of dollars spent against the value created when expending these resources. Consequently, rethinking labor as an investment vs. cost requires addressing who drives value, how, and where. A focus on labor costs and even labor investment, narrows the scope of cost reduction strategies because the term, “labor” invokes an outdated and incomplete picture of work. In contrast, “workforce” captures the current digital age of work, which is inclusive of both traditional employees and alternative workers (i.e., contractors, contingent, and gig workers). This is an important distinction since who does work has implications for how and where work is performed. All of these factors comprise workforce investments. According to the 2019 Deloitte HC Trends Survey3, the alternative workforce is expected to continue to grow well into the tens of millions in the US alone. Cost management efforts that fail to recognize alternative workers miss a substantial population and hence limit their opportunity to identify investment risks and opportunities for driving business strategy.
The Human Capital Balance Sheet & Workforce Investments
The Deloitte Human Capital Balance Sheet provides a company’s business leaders with a single source of truth for all workforce investments. In responding to COVID-19 and determining a new normal, it will be important for C-suite teams to align on total workforce investment and a strategy to obtain optimal allocation in the short and long-term. By focusing on workforce investments, the Human Capital Balance Sheet helps business leaders gain insights into the cost and value of where each dollar is spent at the program, functional,and operational level. These insights allow business leaders to make informed, strategic decisions on which programs to stop, continue, and revise to maximize return.
Kecia Bingham – Kecia Bingham is a senior consultant in the Human Capital practice of Deloitte Consulting LLP and leads marketing and eminence for the Optimizing the Human Capital Balance Sheet signature issue.Doug Tapp – Doug Tapp is a senior manager at Deloitte Consulting LLP and is a leader in the Rewards Well-Being practice.Jose Molina – Jose Molina is a senior consultant in the Human Capital practice of Deloitte Consulting LLP and specializes in actuarial consulting for pensions and other employee benefits.Yon-Loon Chen – Yon-Loon Chen is a senior manager in Human Capital Workforce Transformation at Deloitte Consulting LLP and leads diagnostic development for the Optimizing the Human Capital Balance Sheet signature issue. Mike Fuchs – Mike Fuchs is a principal in the M&A practice at Deloitte Consulting LLP and co-leads the Optimizing the Human Capital Balance Sheet signature issue.1Deloitte, Labor spending or overspending: Where workforce cost are hiding, 2017.
2Deloitte, Save-to-transform as a catalyst for embracing digital disruption. Deloitte’s second biennial global cost survey, 2020.
3Deloitte, Leading the social enterprise: Reinvent with a human focus. Deloitte global human capital trend survey, 2019.
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Date/time: 15th July 2020, 01:02
Talent Scout, Human Resource Management, Talent Management , Learning & Development, Organisational Development, Change Management, Psychology, Neuropsychology.