Penny-wise Pound-foolish approach in H R M
H R function in most organizations is a cost center. In different industry verticals, HR costs are metered in terms of:
1. HR staff per 100 employees
2. employees wages as a % of total expenditure
3. hiring costs per employee
4. total HRM costs as a % of company revenue, and similar other statistics.
Are these metrics also used for setting the Goals & targets for the HR team? Does the Head HR have powers to approve initiatives which can curtail HR costs? Are the budgets provided to support these initiatives? If all this is happening in your organization, you are making your HR as a strategic partner in business. They will assume responsibility to cut HR costs without compromising on efficiency. In fact, any investment in providing state of the art tools to HR will increment their operational efficiency.
Hidden costs in managing human resources
The following situations create hidden costs:
1. Ghost Employees. They exist on your payroll, but not on employee data base. They generally belong to the categories
such as temporary/ part-time/ seasonal/ contract workers. You can track them if the payroll has an integration with your
HRIS. They exist in medium to large organizations & often account for 1 to 2 % of the employee cost. They can not be
2. Attendance Records. Unless your attendance system is on-line, your salary administration is a casualty. Many
organizations make payment to employees based on faulty attendance records, prepared manually by work- place supervisors
& submitted on a weekly basis. In such work places, either there is no concept of time booking or the same is seldom
validated against attendance. In shift based environment, attendance reconciliation is a much bigger problem. Over-
payments on account of faulty attendance are sometimes 2 to 5 % of the employee cost.
3. Leave management. How many employees in your organization are shown on leave without pay every month? How often the
leave gets sanctioned even if there is no leave to an employee's credit? Does the leave approving authority know how many
employees have already been sanctioned leave during the next week? How soon the information about leave approvals reach
HR? How often are the attendance records cross- checked with leave approval records? If some of these questions evade an
answer, you probably do not know its impact on employee costs. An on-line leave management system integrated with
Attendance & Payroll can probably save you these costs.
4. Expenses Reimbursement. Needs continuous tracking if your organization permits employees to incur expenses & claim
reimbursements. Reimbursements made through pay-roll help in realistic capture of these indirect HR costs which may be
related to travel, communications, boarding, lodging, etc.
5. Refunds of loans/Advances. Timely recovery of both the principal & interest through the pay roll ensures efficient
working of the loan management system. Tracking these recoveries may improve your cash flows.
Costs connected with Employee Data base
1. Data search & missed opportunity costs: Maintaining employee records in a manual file is surely a low cost method,
but completely out- dated. Heavy in terms of cost, in a manual system, is the cost of ‘data search'. Let us take an
example: A CEO wanted names of four employees with 3 to 4 years experience, with Masters qualification in technology & an
above average record of performance during the last two years. The manual search took an HR executive 5 hours to locate
four such employees in a company of 1000 people. There may have been five more employees meeting all these requirements,
who were never searched for. Surely they missed out the opportunity that the CEO had to offer. Can someone assess the
cost of a missed opportunity in terms of its impact on employee morale and motivation? Can the management visualize the
cost of low loyalty that an employee may offer if not extended equal opportunity? These are some of the intangible costs
which occasionally contribute to attrition.
2. Data update & maintenance costs: Now consider that you do have a proper data base of employees which was created
five years back. HR was responsible to update it. I know of a case of 4 members of HR team in a company of about 1000
employees engaged in data update only. They had to collect inputs from the employees pertaining to changes in their
personal data, get details from the training department about the programs attended by employees & capture the
performance inputs from the half yearly manual appraisal system used by the organization. For entering salary details of
employees in the data base, they were picking up inputs from the payroll. So many different templates were used for
collecting data from different sources. If it was an integrated HR platform, data from all sources would have
automatically transacted to the employee data base. And if the system was on line & providing facility to each employee
to update personal details, not more than one HR Administrator could have managed the entire process efficiently.
3. Costs related to HR processes.
Can we think of any aspect in the management of human resources which is not data based? Let us discuss:
1. Cost of half done performance appraisals: I know of an organization which was using a manual system for
performance appraisals. Interestingly, the management was satisfied with only 70% of the employees submitting their
appraisal forms to their managers. Three years back this status used to be even less than 50%. Two executives from HR
were spending 50% of their time in chasing & expediting, often complaining that the appraisal forms were not traceable.
The appraisal process had commenced in April and was short closed by the management in September so that HR could do some
analysis of the appraisal data. Two executives worked for about a month using their Excel sheets to extract information
pertaining only to the competency frame work. The training calendar was to be planned based on this analysis. The
training cycle in the company was July to next June, but training could only commence in November and that too on half
baked inputs. Can we estimate the costs associated with this half done work & the manual labor utilized for the same?
Surprisingly, no one questions these costs at any level in the organization!
2. Cost of Retaining best talent. Examine your basis of identifying talent. What all inputs do you need to
manage talent? How much does it cost to collect these inputs? How do you know that someone with requisite talent has not
been overlooked? You call it as an important function, but you are not prepared to invest in tools to identify talent.
3. Cost of managing non-performers. What data helps you in labeling employees as non-performers? How is this
data collected and analyzed? Who made them non-performers & what development opportunity did you provide over the years?
Can your HR help in getting all this information from employees manual files? What will be the cost of this manual search
4. Cost of Managing Promotions. How many employees have been promoted during last 5 years in your organization?
Can your HR provide the years wise statistics to your new CEO? What was the basis of promotions? How much time was taken
by HR to prepare the profiles of employees so as to screen the eligible candidates? To promote people, how did you
predict the availability of vacant/ likely- to- be vacant slots? How did your HR search for the right potential in terms
of skills, competencies, qualifications, relevant experience, training profile & other important requirements? How many
HR man-hours were consumed for this purpose & what is the cost of that effort?
5. Cost of whim-based transformation initiatives. Forget about the employee satisfaction survey conducted by you
last year. Only 25% of employees had filled in the forms & submitted to your HR. And the HR has yet to evaluate their
responses. All your HR team members claim to be terribly overloaded & have no time. You, too, are not chasing them since
you claim to know the pulse of the organization, even without the survey results. And you have already launched some high
cost ‘Change management initiatives' without basing the same on any feedback. Possibly the cost of conducting an external
survey was a deterrent. Why not utilize your annual appraisal system to collect feed back & then launch employee
Penny-wise Pound-foolish Approach
We keep hearing the following types of statements in business review meetings of some organizations:
* Cost of my HR team is 10% of the total employees cost? Let us cut down the size of HR team & hire, in lieu, additional staff for operations.
* My HR team is doing well and is providing adequate support to my organization. We shall hire a few more members when we grow in size. Why should we invest in HR technology?
* Technology is another white elephant. Who will manage the same? We won't like to create an IT department. It is too expensive a proposition.
* We invested half a million dollars in SAP, but our HR is unable to align their processes & utilize the system. They are now asking for some SAP-trained HR executives to be hired.
* Managing talent is not our problem, enough talent is available in the market. We shall hire when needed.
* How does it matter if employee appraisals are not completed in time? It helps, in fact, since employees will raise issues related to increments & performance- linked bonus.
* Individual performance does not really affect the overall performance of the company; it is a myth created by the HR folks.
* We are passing through a phase of recession. Employee retention & talent management are hardly our problems. Where is the need to search for HR solutions?
* Let us get rid of non-performers. They are a big drain on our resources.
What needs to be done?
Read the rest at my Talent Junction Blog