10 Ways to Optimize HR Costs

Cost optimization continues to be a critical concern for many HR leaders. The key is to find the right balance between cutting costs and maximizing business value.

Your new high-potential development program is about to launch, but then comes news that it’s time — yet again — for HR to report its contribution to enterprisewide cost-optimization efforts. Some HR leaders will be tempted to scrap the program to cut costs, but that’s a knee-jerk reaction that prematurely and unwisely moves good, strategy-driven ideas to the back burner.

“Successful HR leaders focus on cost optimization as an ongoing discipline, not as a one-off exercise,” says Gartner senior executive advisor Matthias Graf. “Cost optimization strategies should look beyond cost-cutting and proactively promote options for immediate efficiency gains while not compromising on long-term impact on business performance..”

A more effective approach is for HR to focus cost optimization strategies around three areas:

  1. HR service delivery: Optimize the HR service delivery model, governance structure, processes and roles
  2. HR spend: Rationalize spend for shared services, HR information system (HRIS) technology and outsourced vs. insourced services
  3. Workforce costs: Optimize via smart total rewards models, workforce structure and layoff management

The first two areas focus on cost-saving efforts within the HR department, while the third is aimed at HR’s contribution to cost optimization across the organization.

These 10 recommended ideas around these three areas will help initiate cost optimization efforts within the HR function and the enterprise.

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HR service delivery

1. Redesign global service delivery and account for local customization needs. Global operations make it difficult for HR leaders to gain insight into key process activities and timelines, frameworks and tools, and external vendors. Too many processes across different regions can lead to duplication of efforts, higher costs and low-quality results. Successful organizations agree on global vs local degrees of standardization for core HR processes and establish a clear decision-making process for resource allocation.

2. Build flexibility into HR structures to ensure targeted utilization of capacities. For large-scale changes, organizations have to build a level of flexibility into their functional structures, such as hybrid roles (e.g., HR business partners provided to other units for assignments) or pooling HR resources (e.g., to support increased regional demand). This enables HR functions to respond to ad hoc customer requests while also providing core services.

3. Redesign processes to balance service delivery efficiency and effectiveness. Successful HR teams benchmark their processes to identify wasted or duplicated efforts, split responsibilities among key HR and stakeholder roles and integrate customers into the process to improve quality and increase engagement.

4. Develop the “right” capabilities to optimize HR service delivery. One reason HR functions fail to reach cost optimization targets is a lack of requisite skills. The new work environment requires new types of capabilities from businesses and employees. Specific training can improve employee performance, but a long-term strategy requires organizations to define cross-functional roles (i.e., behavioral traits, technical skills, relevant experience) that help the enterprise respond to complex business challenges.

HR spend

5. Re-examine cost optimization effects from HR shared service delivery. In more mature organizations, the potential cost savings from shared services are hard to identify. In response, organizations should further standardize the shared service delivery to reveal hidden savings. For example, companies often provide multiple customized versions of the same process, hampering integration and increasing costs.

6. Review investments in HRIS technology to identify cost optimization opportunities. Despite the large investment and complexity of HR technology implementation, few HR leaders take the time later to monitor its efficiency and effectiveness. However, smart organizations review their HRIS investments periodically, eliminate underutilized systems and direct resources elsewhere to improve cost savings.

7. Re-examine cost optimization effects from outsourced services and external providers. Typically, organizations look at outsourcing and insourcing as a way to achieve cost targets, but they also need to assess service delivery risks to business-critical HR activities. One way to get the most from outsourced services is to mandate the monitoring of efficiency, which usually leads to additional standardization and harmonization efforts, both globally and locally. These integration efforts — which should be led in close partnership with outsourcing providers — potentially create immediate cost savings.

Workforce costs

8. Balance elements of the total rewards model for better cost optimization. Complicated compensation and benefits structure within organizations undercut cost optimization goals. Successful companies build rewards models with the flexibility to undertake cost optimization initiatives while still tracking employee performance. These models should evaluate reward plans based on metrics and allocate resources based on the return on investment.

9. Structure the workforce to align short-term business needs with long-term value. Many organizations struggle with the realities of the new work environment; however, the best companies flexibly respond to market pressures in the short term and adapt their employees to new work realities in the long term. They do this by creating cross-functional teams, employing a mix of permanent and temporary workers, and maximizing the effectiveness of both the current and future workforce in light of these changes.

10. Achieve cost optimization effects through “smart” layoff planning and execution. Any workforce optimization initiative may require HR teams to execute layoffs for service units or employees unable to achieve strategic business priorities. During this time, organizations should follow a systematic management approach to the layoff process, communicate consistently with the workforce and engage employees critical to business success.

This article has been updated from the original, published on August 29, 2018, to reflect new events, conditions or research.