Published: 25 March 2020
Analyst(s): Matthias Graf
When planning and implementing cost-cutting measures, leaders often neglect or underestimate their negative impact on employee experience and talent outcomes. CHROs need to take these into account in order to drive successful cost-cutting initiatives.
Adverse consequences of internal cost-cutting measures on employee experience, engagement and productivity require new ways of projecting and calculating cost-saving effects.
To address the hidden costs associated with employee experience and talent outcomes and maximize the value of planning and implementing cost-cutting initiatives, CHROs should:
Change how they calculate the effects of cost-saving initiatives by taking their potentially adverse impact on employee experience and talent outcomes into account.
Drive direction, precision and success in planning and implementing cost-cutting initiatives by enabling a more holistic, yet focused management of their risks and mitigations.
Although nine out of 10 organizations are either planning, running or completing cost-cutting initiatives, less than 30% view themselves as cost-efficient. As key barriers to successful cost cutting, most executives cite internal politics, a siloed approach and organizational resistance to change. However, data also shows many cost-cutting initiatives either center around eliminating expense items from a cost pool (such as ceasing to perform low-value activities) or reducing the use of services and associated costs (such as removing duplications and redundancies). In most cases, these ad hoc, unidimensional activities fall short and do not achieve the desired value.
In addition, the hidden costs of cost cuts have growingly adverse impact on businesses. By “hidden costs,” we mean often unforeseen, negative consequences following cost-cutting initiatives. While hidden costs usually describe expenses excluded from the purchase price for a piece of equipment or machine (such as maintenance, support or upgrades), in this case we focus on the impact of cost cutting on employees’ experience, engagement and productivity.
The effects on employees are either direct, because people might be losing their jobs or have to use fewer resources in their work, or indirect, because employees might now regard their employer more negatively or become less engaged and productive. In each case, these consequences put the overall achievements of cost-cutting initiatives into question, as they can drive additional costs.
Over the last decade, organizations made significant investments in creating a positive employee experience. However, when there is increased pressure to cut costs, many of these investments are at risk of not paying off. Organizations are especially eager to maintain and grow their employee engagement and productivity during uncertain economic times.
Overall, organizations cannot plan cost-cutting initiatives without taking their impact on critical employee variables, such as experience, engagement and productivity, into account.
The more frequently organizations find themselves in a cost-cutting mode, the more important it is to understand the impact of individual cost-cutting initiatives on the organizational environment. We view the impact of cost-cutting measures as a function of three components:
Investments needed to plan and implement an initiative
Direct cost savings achieved by that initiative
Indirect costs related to that initiative
The indirect costs ensuing from cost cutting are often hidden costs. Gartner sees hidden costs as expenses that need to be factored into the calculation of investments and savings associated with a cost-cutting initiative. Due to their nature, however, they are often unforeseen and can only be indirectly linked to a measure. Nevertheless, these hidden costs can severely affect your balance sheet and have a trickle-down effect in that your organization needs to spend more money than foreseen.In this report, we focus on hidden costs caused by the impact of cost-cutting measures on the employees of an organization, namely employee experience, engagement and productivity.
Employee experience is of critical importance, as it is recognized as a main driver of both employee engagement and productivity. According to our research, employees who are largely satisfied with their experience are 52% more likely to report high discretionary effort and 69% more likely to be a high performer. In addition, organizations whose employees are largely satisfied with their experience are 48% more likely to meet organizational customer satisfaction goals, 89% more likely to meet organizational innovation goals and 56% more likely to meet organizational reputation goals.
Given how important and expansive employee experience is, organizations are devoting significant time and financial investment to it. Many organizations take a so-called “investment-focused” approach to improving employee experience by expanding available programs and improving them to a “consumer-grade” standard. A consumer-grade standard means improving the quality of an employee’s experience at work to align with their experience as a consumer. This is often described as making the experience easy, personalized, seamless, consistent and empowering.
Despite the improvements resulting from an investment-focused approach, organizations must continue to increase their level of investment to achieve the same satisfaction with the employee experience over time. Data from a recent Gartner study shows organizations on average need to spend almost $4,000 more per employee per year to see a 6% increase of employee experience satisfaction in two years. Accordingly, companies using an investment-focused approach will need to spend 82% more to achieve the same level of improvement in employee experience satisfaction by 2022 they achieve today. In short, organizations must spend a lot more to get the same return over time.
A positive employee experience is critical for engagement and productivity. It does not only require significant investments to grow and maintain, but can also be harmed by organizational disinvestments. In that sense, every cost-cutting measure has the potential to harm the employee experience.
Indeed, our data shows that across a broad variety of initiatives, cost cutting almost always has a negative impact on individuals’ employee experience. It also negatively affects critical talent outcomes, such as employee engagement and productivity (see Figure 2). These results are robust and consistent across different regions, industries and employee segments.
Across all cost-cutting measures, the results for employee experience, engagement and productivity are highly correlated and thus follow a similar pattern. Those measures with a more direct, personal impact, such as reductions in compensation and benefits (e.g., via freezes in promotions/compensation or reductions in perks/social occasions) or changes in the workforce structure (e.g., by replacing full-time headcount with part-time or contingent labor or closing production sites) tend to have a more adverse impact on employees’ experience, engagement and productivity.
Interestingly, these results are less adverse for cost-cutting measures with a more indirect impact on individuals, such as reductions in organizational spending and investments (e.g., by renegotiating supplier contracts or outsourcing noncore activities). All in all, the findings reveal two things: first, almost every potential cost-cutting measure has at least some adverse impact on employees and their perceptions. Second, the more direct and personal the measure’s impact on employees, the more adverse their reactions.
These results demonstrate organizations need to start treating the impact of cost-cutting measures on employee perceptions as hidden costs and including them in their broader calculations of any planned cost-cutting initiatives across the enterprise.
While general investments in employee experience activities are growing, only HR cost optimization leaders have recognized that the potential impact of cost-cutting initiatives on the experience of employees is a critical prioritization lever. While all organizations responding to our 2019 Gartner HR Cost Optimization Survey were planning cost-cutting measures based on the estimated impact on their business and its finances, only those seeing themselves as very cost-efficient aligned those measures with their potential impact on the employee experience (see Figure 3). This demonstrates that employee experience is not only worth investing in during times of economic growth, but also worth considering and protecting during times of business decline.
In general, employee experience does make a difference. The better the experience of employees with their organization, the more satisfied, engaged and productive they are. Companies are making huge efforts to create a positive employee experience in their environment and invest to improve employee satisfaction. However, organizations are just starting to realize these efforts are severely jeopardized when they have to go from investing to cost cutting. The better companies can find ways to align their cost-cutting initiatives with protecting employee experience, the more likely they are to find a way to overcome a business decline and get back into growth.
Employee experience is a people-centered activity. Thus, CHROs need to take the lead when it comes to aligning functional and enterprisewide cost-cutting measures with maintaining a positive employee experience throughout the organization. The likely impact of every cost-cutting initiative on employees needs to be taken into account when calculating the potential cost savings. HR must demonstrate the hidden costs associated with cost cutting and find ways to level cost reductions with impact on employees to drive efficiency and effectiveness in cost cutting both in the short- and the long-term. The key is to establish a continuous project and risk management system that monitors all cost-cutting measures.
2019 Gartner Modern Employee Experience HR Leader Survey.
Guiding Principles on Independence and Objectivity.