Managing Costs through Workforce Planning

Brian Wilkerson

Cost-cutting is a reality of organization life. Whether caused by the economy, industry dynamics, or company actions, it is something that almost all organizations face at some point. Recent concerns about a recession have brought this topic back to the forefront for many. Too often, cost-cutting decisions are still made in very qualitative or across-the-board ways that have a long-term detrimental impact on the organization. With the evolution of workforce planning, this is both unnecessary and unwise. Workforce planning provides a platform by which cost-cutting can be a quantitative precision exercise where outcomes are more certain and the ability of the organization to remain effective can be preserved. In most cases, workforce planning can be used to effectively manage costs in a way that reduces or eliminates the need for this type of massive cost-cutting exercise.

Let’s start with how workforce planning can help an organization avoid large-scale cost cutting. People costs are one of the most significant costs for most businesses. Many organizations develop a headcount budget and simply manage to that plan throughout the year. If you have the headcount in your budget, you can hire. If someone leaves, you can replace them. Companies with effective workforce planning have a more dynamic process. The right workforce planning process continuously monitors market conditions, sales & demand patterns, headcount actions, and a host of other factors to ensure the headcount plan is reacting real-time. Proactive workforce planning can utilize a number of levers to make sure workforce supply and demand is matched and trending in the right direction. Advanced workforce planning functions adjust strategies associated with compensation, talent acquisition, and retention management to keep that balance. They help ensure you don’t end up overstaffed, or at the very least, that the surplus is minimized.

Assuming you do end up in a cost-cutting scenario, workforce planning is a critical capability to help ensure it happens effectively. It is important to start any process of cost-cutting with a look at the key success metrics of the business. What metrics are most critical to the success of the organization? What should not be compromised in the cost-cutting process? How do we ensure we can still achieve our mission? Ideally, these business factors are well understood before a cost-cutting process is ever initiated.

When an organization faces cost pressure, it must first re-prioritize activities and determine what is most important. Maybe it’s emphasizing certain product lines or retaining staff with critical knowledge. Obviously, the organization can’t do exactly what it has done in the past. This step is critical, but too many organizations choose to employ approaches like “we will cut 10% across the board” underpinned by an idea that somehow that is fairer. This is not a good strategy. To assume that the entire organization has an equal level of efficiency, productivity, and importance is almost never a reality. Across the board cuts tend to have negative outcomes for the organization and disproportionately impact its ability to function effectively.

Instead, once priorities are determined, workforce planning can be used to make surgical and appropriate cuts as required. In our experience, most organizations have some ability (and in many cases a need) to critically look at their cost structure and drive efficiency. Especially in large organizations, things often evolve over time and some amount of inefficiency or ineffectiveness is introduced. Cost-cutting exercises can help drive that out. It is important to first identify these pockets and focus on them, rather than across the board strategies. This is also a time when organizations can weed out poor performance that may have been tolerated in an organization.

These focus areas are very straightforward, and while workforce planning helps, it is not necessarily required to find pockets of inefficiency and poor performance. Where workforce planning can be very powerful is when those obvious cuts have been exhausted and you must dig deeper. Going back to the priorities that the organization has established, workforce planning can help align cuts to priorities and ensure that critical functions are not cut. If you want to go it alone, below is a multi-step process that organizations should follow. We don’t recommend that, though.

organizational design - 7 step cost cutting process

1)      Identify and Protect Critical Talent: this data should be readily available to workforce planners. Organizations must protect their critical talent and if that talent sits in an area that is eventually targeted for cuts, the organization should look at where that critical talent could be better used.

2)     Look at Overstaffed and Understaffed Functions: again this is data that good workforce planning should be able to rather quickly identify. By correlating staffing to outputs over time, workforce planners can develop efficiency / effectiveness ratios that will identify where functions are overstaffed and understaffed.

3)      Determine Changes to Outputs: companies must identify where they are willing to scale back, whether that be producing less of a certain product, serving less of a particular customer, slowing down processes / response, etc. Workforce planners can then identify the impact to staffing that comes from those changes.

4)      Determine Changes to Service Levels: similar to changes in outputs, the organization must determine where internal or external service levels must be cut back. This could be responsiveness to internal requests, turnaround on accounts payable, or any number of impacts. Workforce planners can then identify the associated impacts to staffing.

5)      Look at Productivity: workforce planners should also be able to identify productivity issues in the organization and pinpoint opportunities to improve productivity. For example, if there is an area where there are significant differences in productivity among staff members, the company can decide to trim some of the less productive workforce and bring the remainder up to a more consistent level of productivity.

6)      Determine Cuts: through the previous steps, organizations should be able to identify a series of cuts that meet their goals and don’t compromise their ability to perform. This package of cuts should be identified and quantified.

7)      Model Impacts: once cuts are determined, workforce planners should model the overall impacts to the organization in terms of true cost, capability impacts, long-term talent pool, outputs, and service levels. This check ensures that the organization does not experience any unintended consequences from the cuts.

This process allows organizations to determine where cuts make the most sense, and what their specific impacts will be. This can help the organization make the most of what is never an easy process and minimize the long-term detrimental impacts to performance. All of this is dependent on having the right workforce planning foundation in place and is yet another argument for robust, ongoing workforce planning analysis.

To learn more about how workforce planning can help both your cost management and your business efficiency overall, start the conversation by contacting hrQ!

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