Due to the economic uncertainty across most industries and markets, 92% of HR leaders are prioritizing budgeting and cost optimization initiatives, according to a benchmarking survey by Gartner, Inc. While HR leaders face increasing pressure to drive business value and manage costs, only 20% consider how HR cost optimization efforts can contribute to the organizations’ cost savings overall.
While there is growing pressure for HR leaders to reduce budgets and improve productivity, many CHROs and their teams struggle to monitor the economic business cycle and anticipate times of economic uncertainty and volatility.
Leaders who fail to forecast uncertainty and prepare accordingly are forced to cut costs in real time, once their organization is impacted. This lack of preparation can have severe short- and long-term consequences such as reduced productivity, aborting strategic HR programs prematurely, or a shortage in skill sets required for future growth.
To avoid this situation, HR and business leaders must address emerging uncertainty as early as possible by evaluating cost optimization through function-specific and organizational programs.
“HR leaders can quickly find themselves in a position of making last-minute budget cuts instead of being prepared to respond to potential economic volatility,” said Daniel Dirks, managing vice president in the Gartner HR practice.
“To ensure continuity of core and strategic HR programs, and continue supporting business outcomes, it is imperative to look beyond simple cost cutting and proactively put a sure-fire cost optimization plan in place in the event of a decline.”
Monitor economic indicators to identify the best cost-optimization opportunities
HR leaders should monitor early warning indicators from internal and external data sources in order to prepare for potential economic uncertainty.
“Instead of monitoring individual HR indicators, HR leaders should partner with other functional leaders to establish a cross-functional dashboard. Utilizing aggregated data from different organizational functions, such as strategy or finance, provides a more accurate forecast about the economy and potential issues,” said Mr. Dirks. “Otherwise, they risk being caught by surprise.”
Create transparency on cost-saving efforts
Business leaders must work closely to prepare for economic volatility by maintaining an overview of all short- and long-term investments across the organization. During all phases of the economic market cycle, HR functions should regularly benchmark their internal data regarding their talent base (e.g., ratio of contingent labor employed), their HR services provided and HR-related technology deployed, against relevant peers to enable sound decisions about cost optimization opportunities.
To further identify the biggest opportunities for combined cost optimization across functions, HR leaders should encourage other organization leaders to benchmark cost drivers in their respective functions as well.
Structure the workforce to align short-term business needs with long-term effectiveness
In order to act quickly when necessary, HR leaders must coordinate with other functional leaders to identify and agree on cost-saving initiatives prior to economic volatility. Cost-optimization efforts fall under at least one of these major categories:
- Implementation of dedicated activities directly aimed at immediate cost savings
- Reprioritization of current services across the function
- Reallocation of current capacities across the function to drive short-term cost optimization while accounting for long-term growth
“Once cost optimization strategies are in place, it is key that organizations communicate transparently with employees to provide updates on cost-saving progress,” said Mr. Dirks. “Our research found that 61% of employees who have experienced cost-saving measures in the last five years were confident in the future success of their organization.”