The goal of HR managers, like that of all other functional heads, is to optimise costs. With prices rising and a recession around the corner, getting the most out of every dollar spent becomes even more pressing. Here are eight strategies for reducing HR costs in today’s inflationary environment. 

A) Cut administrative expenses

Administrative overheads accumulate over time. HR managers often do not pay attention to such costs, as they always have higher priorities. A looming recession is the right time to audit administrative costs and eliminate redundancies. 

1. Set up robust information systems

There is no substitute for accurate information. Access to the correct data at the right time makes the enterprise resilient and flexible. Enterprises that respond fast to changing conditions survive inflation and recessionary storms better. Insightful decisions have a calming effect. Knee-jerk reactions based on hunches may make things worse.

• Track important statistics that affect profitability and growth. Key HR metrics relate to pay, productivity, and training. Making decisions without insights into such critical metrics is like shooting in the dark. 
• Use data to review the allocation of scarce resources. Given the altered economic climate, many projects may have become unnecessary. For projects still viable, prioritise the ones that offer the most returns. Use SWOT analysis to determine the most profitable initiatives. 

2. Reduce hiring, onboarding, and training costs

Some companies freeze hires to control costs. A looming recession is hardly the time to indulge in large-scale recruitment. But some recruitment activity remains unavoidable, to replace leaving employees. 

The expenses to deploy recruitment consultants, conduct interviews, and onboard recruits add up. 

• Use free sites, and social media handles to attract candidates for open positions. With most companies freezing recruitment, getting good candidates through free or low-cost channels is easier. 
• Promote referrals. Offering a finder’s fee is almost always cheaper and more effective than external consultants. Payments for employee referrals also foster goodwill at a time when employees struggle financially. 
• Large companies spread out over multiple locations may still need professional recruitment consultants. When unavoidable, centralise the process and seek volume discounts from consultants. Schedule interviews online to save on administrative costs. 
• Apply technology to onboard employees, again to save on administrative costs. 
• Enlist senior staff to share their knowledge and skills through informal training sessions. For formal training, use more affordable e-learning-based programs. 

3. Promote work from home

Both employers and employees save money through remote work. Employees avoid the hassles of commuting. Businesses save on real estate and energy costs. 

• Have clarity on the work eligible for work-from-home. Some work, even when viable for remote work, may need doing from the office for security, regulatory, or other reasons. 
• Collaborate with the IT team and line managers to set up the needed systems and infrastructure.

4. Review HR service delivery

Optimise the HR service delivery models and governance structure to cut costs. HR leaders often find it difficult to gain insight into key process activities. Multiple processes across regions duplicate efforts, increase costs and degrade output quality. Also, rigid work structures inflate the headcount to more than optimal.

• Benchmark processes to identify waste and duplications. Redesigning service structures to cut duplication of efforts, and ensure employees spend less time accessing information. 
• Develop hybrid roles, such as assigning HR business partners to other units for assignments. Equip such cross-functional teams to respond to complex business challenges. 
• Make HR structures flexible. For instance, pool HR resources to support increased regional demand or respond to ad hoc internal customer requests.
• Review the costs incurred for HR information system (HRIS) technology. Eliminate underutilised systems.
• Reduce software licence fees by switching to free “open source” alternatives wherever possible.

B. Reduce the wage bill

The single biggest item in the expenditure list is wages. Reducing the wage bill reduces overall expenses and often enables enterprises to find their feet again. The ways to reduce the wage bill are outsourcing, hiring temporary workers, reducing benefits, and layoffs.

5. Outsource work

Many enterprises hesitate to outsource due to potential disruption and security issues. Also, managing independent contractors requires different skill sets to manage the in-house workforce. The tough inflationary time is the best time to take such challenges head-on and commit to outsourcing.

• Distinguish the work for internal employees and the work fit for outsourcing. A flexible outsourcing strategy enables quick pullback when necessary. 
• Review the cost optimization effects of outsourced service providers. Monitor the arrangement for efficiency and further harmonisation of costs. 
• Resist the temptation to go overboard with outsourcing for cost savings. But such savings may come at delivery risks to business-critical HR activities. Make sure to integrate the efforts of outsourcing providers for immediate cost savings.
• Develop strong contracts that ensure vendors keep deadlines and ensure data security. 

6. Co-opt temporary workers

Outsourcing does not suit all jobs. When outsourcing is not an option, co-opt temporary workers who cost less.

But a knee-jerk approach of replacing permanent employees with temporary workers may backfire. Hiring temporary workers makes the bottom line look better in the short term. But it impedes the enterprise’s competitiveness and profitability in the long term.

Many temporary employees work for multiple clients, creating commitment and confidentiality issues. They may go through the training, familiarising, and then go elsewhere. Temporary or outsourced employees do not have value alignment with the company either.

• Use a combination of temporary and permanent employees to strike a balance. Employ contract or temporary workers to fill open roles. 
• Consider work arrangements, such as 30-hour workweeks, to cut expenses while maintaining continuity. Establish cross-functional teams to assemble knowledge from various streams and improve output. 
• Strengthen background checks to ensure temporary workers do not become rogue insiders. Rogue insiders may steal confidential data or trade secrets. 

7. Review benefits

Many employers freeze or cut employee benefits to tide over tough times. Such cuts may create morale and commitment issues but are still preferable to layoffs or the company going bankrupt. Communicate the need to cut benefits to the staff to prevent a decline in morale and resentment. 

• Make compensation and benefit structures simple. Complex systems bring in opacity and impede cost optimization. Simplicity also enables flexibility, with HR able to link benefits to performance.
• Review insurance premiums. Renegotiations or scouting for a different vendor often reduce the insurance bill. Audit plans to catch duplicate payments. If insurers try to increase premiums beyond reasonable levels, challenge the risk assessments to fend off the hike. 
• Review the insurance benefits for employees’ spouses and partners. Stop coverage for those covered under their own employers’ plans. 
• Limit paid leave accruals. For instance, most companies allow employees to encash unused paid leave. Narrow down the “use or lose” window for such leaves. 
• Review wellness benefits and scrap programs that do not deliver. 
• Reduce merit-based pay increases and bonuses. Negotiate perks that won’t have a major negative impact on the bottom line, to make up for the reduction in such benefits. Examples include discounts on movie tickets, club memberships, and fitness centre passes.

8. Layoff employees the smart way

The direct and easiest way to reduce the wage bill is through layoffs. 

Business realities change, making certain positions obsolete and untenable. No amount of re-skilling or job profile changes can save such positions. Also, some employees remain deadwood, and enterprises remain better off letting them go. 

But layoffs are morale destructors and should be the last resort. As news of layoffs spread, skilled employees not in the layoff list may also quit, leaving the enterprise in the lurch.

• Follow a systematic approach to the layoff process with complete transparency.
• Document performance issues. Make sure evaluations reflect the work of employees correctly. Wrong information may result in culling performing employees and retaining incompetents. 
• Engage with employees critical to business success. Make the survivors know they are not under the Damocles sword of dismissal.

HR cost optimization success depends on a systematic approach integrated into the broader corporate cost-cutting policy. A knee-jerk one-off approach, which cuts only the biggest or most visible expenditure, rarely succeeds. For successful HR leaders, cost optimisation is an ongoing discipline, not a one-off exercise. They also strike the right balance between cutting costs and maximising business value. Also, they need to align their cost-cutting efforts with future trends, and make sure the cuts do not impact the competitiveness of the enterprise.