Cost cutting strategy in HRM during economic slowdown

Introduction

The reduction of the amount of money spent on the operations of an organization or on the provision of products and services. Cost-cutting measures such as budget reductions, salary freezes, and staff redundancies may be taken by an organization at a time of recession or financial difficulty or in situations where inefficiency has been identified. Alternative approaches to cost-cutting include modifying organizational structures and redesigning organizational processes for greater efficiency. Excessive cost-cutting may affect productivity and quality or the organization’s ability to add value cost cutting strategy or cost reduction both are same. It is broad program where everyone is focused on reducing cost from each areas of manufacturing activity. cost reduction can be achieved through reduction, elimination, modification, substitution or innovation. All cost drivers are taken into account and with thorough analysis the best and least cost path is adopted for each activity. The best method to achieve results are to bench mark operating parameters to world class companies .This rives every One to match or even surpass these figures.

Why cost reduction

• profits
• waste reduction
• increase productivity
• competition
• resource conservation
• image enhancement

Where to implement cost reduction

Areas for cost reduction are

• raw material procurement
• logistics – inbound and outbound
• production department
• energy
• human resource ( out sourcing )
• sales & marketing
• finance

HUMAN RESOURCE MANAGEMENT IN ECONOMIC SLOWDOWN:

HRM is the process of acquiring, training appraising and compensating employee and of attending to their labour relation, health and safety, and fairness concerns.

Business is done for the people, by the people and of the people .HR is the most strategic field in the organization. It perform the activities like hiring training, compensation, appraising & developing employee which is the part of every manager’s job. By performing these activities is the organization achieves it objectives and fulfills the needs of the individual working in the organization and society.

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Change is the rule of present environment for any business to grow change is like a religion. This happens with the change in the environment like boom and recession. In both time periods HR acts a profit center for the organization. In the boom period the economy, it hires more number of people, creates new opportunity in the market, provides best talent to the organization etc. but in the period of recession also it act as a profit center. This we have discussed in detail below:-

If we analyses the current market situation it is the recession period. Most of the organization is following the various strategies to face this period of difficulty. This can be clearly seen in recent happening JET AIRWAYS-1800 EMPLOYS RETRENCHMENT. The aviation industry is the worst hit industry in this period. Jet airways retrenched its 1800 employees but later on due to political pressure it took back its employees to ease the situation. By doing this the HR department is trying to balance the situation with the current situation. At the time of recession HR mainly reduce its operations in hiring the new employees, compensation given is less, trains the employee to cut down the costs etc. Through these measures it tries to maintain the profitability in the organization in term of cost of employees, the production, working, etc.

HR make change in the existing policy of the organization which copes up with the situation in the market and can be able to make profit with the best utilization of available resources.

Moreover, HR priorities the activity in the organization according the most important and essential resources are planned and implemented properly in the organization.

So these are some of the step which are taken by HR department in the time of recession.

BEST HR PRACTICES AT THE TIME OF RECESSION

There are various HR practices which the organization can follow at the time of recession. These are discussed below:-

Most of the time, economic downturns are short-lived so keep the bigger picture of the long-term growth in sight. It’s easier to invest training time for new recruits during slower growth period. It’s also worth remembering at if you dismiss employ during a recession, not only their a cost, you will have to appoint someone to take their places when time gets better- and that can cost a lot more money in the long run.

Don’t recruit a problem

In the first instances, it’s essential, in tough times, to ensure that you’ve got the right people working for you. The recruitment process should be conducted with rigorous thoroughness.

These are three key areas to note:

• legal requirements
• best practice
• collect facts

do make sure that you ask questions that are relevant to the job bing recruited for and don’t be afraid to build in some testing. Some excellent CVs don’t hold up under scrutiny. Once the candidate was tested and evidence collected to see if he/she could deliver the skills claimed, the result were both surprising and disappointing.

Apportioning the resource wisely

Limit activities with limited business purposes. Instead, organize a sales or other company meeting with a clearly defined profit purpose. You can make it fun, for example, using a stable speaker. Create specific individual performance requirements from the meeting.

Reduce expanses that don’t add value. Instead include low-cost but high-impact benefits at a time when the rest of the business world is cutting back.

Be honest with the employees about difficult times. Let them know how you are doing so that they understand true financial picture. Often employees are willing to make cuts and changes when they understand the facts. There are no winners if the business goes down. Talking clearly and honestly with our employees also helps to place reduce the rumors flying around the work place.

See the silver lining

Give employees positive fed back whenever you can acknowledge when a job is well-done, and consider non cash incentives. It can make a big difference to employee’s motivation.

Irrespective of the financial climate it’s reasonable to ask the employees to do their best. If they’re not performing to their full potential, a suitable performances appraisal, encouraging input for both parties, can be useful.

Look for cost-effectives away to keeping up-to-date -sign up for free newsletter and subscribe to great value products and services which cut your costs, but still keep you up-to-date with practical information and advice, keeping you abreast of the ever changing employment law.

Keep on training your people

All the research shows that the companies who weather the storm best perform better because they keep up their training. It doesn’t have to be expensive class room training. There are so many cost-effective-alternatives- buy a book(of series of books), arrange virtual classroom andonline training, encourage employees to be seconded on to other projects of work outside their usual sphere of activity.

POINT FOCUSED BY HR DURING ECONOMIC SLOWDOWN:

The recession is an opportunity for HR professionals to step and contribute strategically. In the classical strategy paradigm, we begin by looking at the macro-economic environment. Then we look at the micro-environment – what affects us and our competitors. Next, we establish which strategic factors HR influences directly. Finally, we drop down to our tactics- The recession is about the creative Human Resources Management. The HRM Function is asked to bring new ideas, to change the HRM Processes and to develop or change the procedures. And this effort has to be cheap or it has to cut the costs of the organization. The HRM Innovation is easy in times of the business growth, but the recession is not good for big innovative HRM Initiatives.

The HR Management has to focus on unpopular innovations during the recession as the role of HR during the recession is to save money to the organization. The senior management expects all the support functions to bring innovative ideas and solutions which will lead to stronger organization, when the next growth era comes.

The point has to be focused by HR management during recession are as follows:

• To optimize the manpower strength.
• To take strategic initiatives to increase the productivity and efficiency of the entire organization.
• To work on compensation benefits.
• Redesign training and development programs.
• Ensure your organization’s policies and handbooks are up to date. Remember that an annual review of your employee handbook for compliance by an experienced professional is highly recommended. Also, each employee having a copy of the employee handbook is not enough. They have to be able to read and understand the content. Be sure that you provide employees a handbook in a language they can read and understand.
• Layoffs are never easy. Ensure you are familiar with your legal responsibilities in a lay off to minimize your organization’s risk. Be sure that you have properly defined the criteria you are using to determine who will be let go.
• Alternative Workweek Schedules and Flexible Scheduling can maximize production and cut-back on overhead costs for organizations. Be sure you follow all of the DLSE rules when deciding if an Alternative Workweek Schedule or Flexible Scheduling is right for your organization.
• Cutting Pay may be an option to consider to save on today’s costs. Is this really an option for your organization? How are your pay scales as related to the market? Are you willing to risk losing key employees whose talents may be needed by other organizations, because you chose to reduce their pay at this time? Remember, you should not cut pay without a recovering strategy of how you will re-adjust when the economy has turned.
• Downsizing does require internal document maintenance for your organization. As jobs are modified and responsibilities are increased changes also must be made to your job descriptions.
• On the other hand the HR Management has to find some innovative solutions during the recession like,
• To identify the real key employees and to intact them in the organization.
• To identify the real top potentials and to strengthen their development program. The HR Management has to have priorities in mind and the strategic impact of the HRM Innovations in the recession time. The role of the HR Management is not to minimize the costs for the time being, but to make the organization stronger and ready for the future growth.

FUNCTION OF HRM DURING ECONOMIC SLOWDOWN:

The HRM Function is asked to bring new ideas, to change the HRM Processes and to develop or change the procedures. And this effort has to be cheap or it has to cut the costs of the organization. The HRM Innovation is easy in times of the business growth, but the recession is not good for big innovative HRM Initiatives.

On the other hand, the top management understands the effort to innovate the HRM Processes better. The top management is in the search for the potential cost savings and they count every single penny brought by the line management. The HRM Costs are usually a very significant cost to the organization and the HRM Function has to be proactive.

The HRM Function has to focus on unpopular innovations during the recession as the role of Human Resources during the recession is to save money to the organization. The top management expects all the support functions to bring innovative solutions, which will have to make the organization stronger, when the next growth era comes.

The HRM Innovation during the recession has to focus on the following topics:

• Reduce the number of employees in the organization
• Strategic initiatives to increase the productivity and efficiency of the whole organization
• Redesign of the compensation scheme
• Cancellation of several benefit schemes

On the other hand the HRM Function has to find innovative solutions for the following topics:

• Identifying the real key employees and to keep them in the organization
• Identifying the real top potentials and to strengthen their development program

The second two topics have to be done with the minimum additional costs and it is a really hard task to accomplish. The HRM Function has to have priorities in mind and the strategic impact of the HRM Innovations in the recession time. The role of the HRM Function is not to cut the costs for the time being, but to make the organization stronger and ready for the future growth.

As a leader and strategic partner in your organization, you have the tools to assist your company in surviving and thriving through these difficult times. First you need to start thinking strategically…

• How can the organization make effective and economical changes that will help through these difficult times?
• What can I do to minimize our organization’s risk for fines, violations and/or unnecessary legal proceedings?

Following area should be looked upon:

• Ensure your organization’s policies and handbooks are up to date. Remember that an annual review of your employee handbook for compliance by an experienced professional is highly recommended. Also, each employee having a copy of the employee handbook is not enough. They have to be able to read and understand the content. Be sure that you provide employees a handbook in a language they can read and understand.
• Layoffs are never easy. Ensure you are familiar with your legal responsibilities in a lay off to minimize your organization’s risk. Be sure that you have properly defined the criteria you are using to determine who will be let go.
• Alternative Workweek Schedules and Flexible Scheduling can maximize production and cut-back on overhead costs for organizations
• Cutting Pay may be an option to consider saving on today’s costs. Is this really an option for your organization? How are your pay scales as related to the market? Are you willing to risk losing key employees whose talents may be needed by other organizations, because you chose to reduce their pay at this time? Remember, you should not cut pay without a recovering strategy of how you will re-adjust when the economy has turned.
• Offer Professional Development as a reward or incentive to employees for performance and hitting goals. Professional Development courses are an economical way to reward employees with the gift of education and skills they will use throughout their lifetime.
• Downsizing does require internal document maintenance for your organization. As jobs are modified and responsibilities are increased changes also must be made to your job descriptions.
• Remember that the law is very specific on what positions can be considered Salaried – Exempt and what constitutes an Independent Contractor. Looking at adjusting your staff to fit into one of these two categories is NEVER the answer when trying to save money.

OBJECTIVES OF COST CUTTING STRATEGY:

In the current economic climate, cost cutting measures are still at the top of the agenda for many firms, so I thought it might be good to revisit this topic from a few blogs back.

Previously, I wrote about cutting costs through services volume reductions, as well as service scope reductions.

Recent presses as well as industry players are talking about demands for pricing concessions on a fairly consistent basis now. At TPI, we know of several cases in which clients are calling for a 5 percent to 15 percent reduction in the rates they pay for offshore labor.

Such cost cutting leads to pressure in the entire service delivery value chain. If I’m being paid less, then I need to find a way to reduce my costs as well as my risks (which have a cost because some of those risks will eventuate).

So, one action we can expect to see is service providers reducing their costs. On way to do that is by employing more junior (i.e. lower paid) staff for work that is labor-intensive. Now, if those people are less productive because they are less experienced or less well-trained, then the result could actually be an increase in the number of units (i.e. more hours)–thus, potentially increasing the total cost for the client.

And it’s not just the number of hours the service provider staff put in, it can also be service buyers who have to invest more hours into managing a relationship with more junior people, thus, giving a double hit.

And that is the key. The focus needs to be on total cost, not necessarily unit costs. Don’t get me wrong, in many cases there is a strong link between unit costs, volumes and total costs, but the end-game is to reduce total costs–with anything else a distraction.

With a focus on total cost reduction, the entire spectrum of options becomes available. Some may require harder work, some may take longer, some may work in the short term but cause significant longer-term issues.

Being clear about both short- and longer-term needs and consequences helps guide you through options such as volume reductions, unit price reductions, scope reductions, redistribution of work between service provider and client to improve efficiency and effectiveness, re-balancing of risk to the party best-placed to manage it, and numerous others.

METHODS OF COST CUTTING STRATEGY IN HRM:

Most Popular Cost-Cutting Move in HR: Streamlining

Streamlining is the most popular and effective approach to controlling HR costs, according to a survey conducted by the Institute of Management and Administration.

IOMA, in its just-released HR Management and Cost Control Survey, asked respondents to pinpoint the five categories in which they were most successful in controlling costs. Topping the voting, at 62.8 percent, was streamlining HR processes.

The most popular choice after that, at 54.7 percent, was using the Internet to recruit.

Streamlining occurred on a number of fronts, individual comments from respondents revealed. While one medical company with 56 employees put together packets of all required HR information and made a checklist so nothing gets overlooked, another company, with 949 employees, implemented People soft.

“Headcount reports passed through five different people seven different times,” the HRIS/project manager admitted. “We removed five steps in implementing People soft, saving us two work days.”

Another company melded its training and development functions into the employment function and uses one manager – rather than two – to oversee both functions. A nonprofit association with 1,095 employees, meanwhile, moved a number of processes and related paperwork onto its Internet. “We are more productive because employees can access an on-line policy manual instead of calling HR staff,” the group’s compensation manager reported.

Internet for hiring/retention

HR managers also focused on the Internet this past year to find and hire employees, IOMA’s survey found. Whether mid-sized or large, companies reported saving tremendous money by relying on the Internet rather than recruiters or newspaper ads to hire new employees for their firms.

“Using the Internet for recruiting rather than [using] recruiters has saved hundreds of thousands of dollars,” a director of compensation from a Midwest company with 14,000 employees told us.

Added the director of HR at a midsize consulting firm in the Southeast, “Using Internet-based recruiting has saved approximately $30,000 in recruiting costs in 2001. Implementation involved posting vacancies on Monster.com at about $350 each. Each posting generated about 10 usable resumes.”

Other cost-control strategies

Other strategies that garnered high marks were automating HR functions via HR Internet or Web-based HR applications (41.9 percent overall) and asking staff to take on more responsibilities (39.2 percent).

For the former approach, employers reported moving all time card processes, benefits information, benefits and training enrollment, 401(k) administration, employee data changes and performance evaluations to a Web-based format, saving anywhere from $10,000 to $2.5 million.

Approaches by size

Smaller size companies, those with up to 200 and 251 to 1,000 employees) relied more heavily on the use of the Internet for hiring/recruitment to cut costs. Larger companies with more than 1,000 employees, however, relied on streamlining HR processes and procedures.

Companies with 251 to 1,000 employees are more inclined than other size firms to adopt or change HRIS systems/software to manage their HR department costs (48.6 percent).

Smaller firms with 250 or fewer employees, in turn, favored setting HR staff performance goals/increasing HR staff accountability (39.0 percent), rather than asking staff to take on more responsibilities.

Approaches by industry

Across all industries, firms cited either streamlining HR processes and procedures or using the Internet for hiring/recruitment as the most successful means to controlling HR department costs.

Interestingly, 100 percent of the transportation firms queried cited streamlining, whereas 100 percent of private practice firms cited Internet hiring/recruitment as their most effective technique.

Other interesting variances that occurred:

• 57.1 percent of wholesale/retail companies cited a cutback on staff travel and conferences,
• 66.7 percent of transportation employers noted a reduction in internal HR staff;
• 66.7 percent of transportation employers also cited outsourcing one or several HR functions;
• 47.1 percent of service companies said the adoption or change of HRIS systems or software was one of the most efficient cost-control techniques.

Conclusion:

The time of recession most of the companies follow the various strategies to keep edge in the market. In many organizations the HR strategies are changed to cope up with the situation. At the time of the boom in the economy most of the organization hires the new employees, train them with objective of growth and maximization of the wealth and resources of the organization.

But opposite is what happens at the time of recession. Their focus changes towards the flatter and narrow management. The most common strategy is the COST CUTTING STRATEGY. They cut down upon their cost of recruitment, training, compensation etc. Moreover they retrench some of their employees. It is mainly done with the employees who are in the probation period.

In these period companies focus remain towards increasing the productivity more efficiency in the organization. They try to retain the best talented and most productive employee in the organization.

At the time of boom, company adds new products acquire new company in the order to get edge over the competitors. But in Recession Company instead of expansion or addition to new products, focuses on the performance of their existing product.

So by following some of these strategies, organization achieves their objective in the era of recession by cost cutting and effectiveness.

Reference:

• www.shumoonline.com
• www.blogcatolog.com
• www.blog.siliconindia.com
• www.scribd.com
• www.hr.blr.com