Experience suggests that, when faced with a need to cut costs, chief financial officers (CFOs) tend to respond by laying off workers.

Initially, that might keep HR professionals busy – but such a strategy hints at longer-term organizational problems.

Indeed, Paul Lalovich argues that, before getting rid of workers, CFOs should calculate the cost of a poorly managed workforce. Lalovich is a change agent helping organizations to understand and actively manage their headcount, employee productivity and total cost of the workforce (TCOW). Currently, he’s Organizational Effectiveness Advisor working at Emirates Nuclear Energy Corporation in Abu Dhabi.

Writing for FT|IE Corporate Learning Alliance, Lalovich says, “Any CFO 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?

The Real Cost of Worker Turnover

“How much does it really cost when a highly-trained and experienced worker leaves because he doesn’t feel he fits in – and then recounts his unhappy experiences to the media?

“Too few CFOs, HR managers and Board members recognize – let alone measure – these factors,” argues Lalovich. “But they should – and they can. They’re as significant as anything that appears in the company accounts.”

Lalovich believes that CFOs should know – or, at least, be able to find – such primary costs as base pay, overtime, bonuses, health benefits, training, payroll taxes and relocation expenses, among other things.

The Rationale for Cutting Headcount

He says that the TCOW, as a percentage of operating expenses, can range from 20 percent to as much as 75 percent in sectors such as healthcare, professional services and software development. So, it could seem reasonable to cut headcount as way to reduce overall expenses.

“Who’d fault Coca-Cola, for example, after it responded to a 20 percent revenue decline in 2017 with a six-year, $3.6bn cost-cutting program that involves 1,200 job losses?” says Lalovich.

But there’s more to TCOW than merely recruitment and payroll costs. Organizations should become smarter about reducing the waste of resources associated with disengaged workers, along with the other causes of poor workforce performance.

Five Key Statistics

Typically:

• Voluntary turnover – the cost of losing an employee – ranges from 25 percent to 200 percent of that person’s base pay.
• Underperformance – the difference between an employee in the top five percent versus one in the bottom five percent – can be equivalent to double annual base salary.
• Time to proficiency – the time taken for an average employee to reach optimum proficiency – takes some 28 weeks. It can take much longer to reach ‘world-class expertise’. Lalovich asks, “Do organizations consider this when a good employee leaves?”
• Disengagement infects engaged employees too. According to Lalovich’s figures, engaged employees are 54 percent more likely to quit when they work with a disengaged colleague.
• The average cost of employee absences amounts to 35 percent of base pay.

Stopping the Cycle

Focusing on TCOW in preference to the short-term, knee-jerk reaction of cutting costs by cutting staff, how can organizations stop the perpetually 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 an organization’s biggest cost?” asks Lalovich, arguing for allying HR and Finance departments in addressing this issue.

He adds, “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.”

Four Collaborative Tasks

One way of achieving this could be by HR and Finance departments collaborating more closely to get the facts. They could:

• Map the processes. Identify, compile and map all existing data, processes, and other factors that undermine talent performance. Then produce a formal cost analysis.
• Quantify hidden costs. Work with key stakeholders to identify and quantify material hidden costs – and, importantly, invisibility is a sign of poor talent management. Start with HR Information Systems. Partner with Finance, which probably maintains the organization’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. This should enable an efficient flow of information and communication relating to TCOW.
• Establish key benchmarks. Analyse TCOW as a percentage of expenses or revenue across different business units, job groups, tenure, and other categories that could be relevant to the specific industry or enterprise.