For years organizations have struggled with the complex nature of the relationship between the human resource functions and running a successful business. Granted, companies understand that human resources is necessary and in many ways vital to creating the organizational and administrative tools for crafting a successful business. However, the value is usually viewed through the lens of the human resources cost center microscope. How does the ever raising cost of staffing, managing and integrating traditional internal human resource functions into the day to day business operations, get justified by the benefits they bring to the organization? Is there a creative method of decreasing, or at least stabilizing HR costs while enhancing the benefit of the function within an organization?
As a member of executive and senior human resource staff for over 20 years I found myself addressing those questions and justifying my position constantly. A major problem for many organizations is truly understanding the value/cost of running an effective human resources department. More often than not, for many small businesses the issue of HR costs does not get discussed until there is a specific need for HR to hire, promote, terminate or deal with regulatory compliance. The difficulty in assessing the risk /reward formula relating to human resources is that many of the tasks are viewed as “soft-costs”. These used to be viewed as cost that were difficult and time consuming to accurately calculate or track.
In my experience many companies don’t accurately track many of these costs and therefore expend too much time and money on the tasks. Traditional HR internal staffing for many HR related tasks no longer create a fair return on the dollars spent. Since HR is not a revenue generating function or considered part of their core business, companies, where possible, should be seeking opportunities to outsource HR functions. Actually, one of the best cost control methods available to small to mid-size businesses today is outsourcing many or most of HR services.
Professor Peter Cappelli of University of Pennsylvania’s Wharton Business School explains, “I’m usually not a fan of these things, but this is one of those rare instances that is both cheaper and better”. He says. “It’s a big burden on a local HR manager to know everything.” In addition, a recent Society For Human Resource Management article said this, “Most companies with fewer than 100 full-time employees have no need for more than one person on staff in their HR departments. “Tactical” HR employees like HR generalists, payroll, and benefits coordinators can be very expensive solutions and have almost become luxuries in today’s economic climate. Companies should only staff “strategic” HR professionals and outsource everything that is tactical.” In this explanation, the word “strategic” means those tasks that demand regular person to person contact (employee relations, performance management, disciplinary actions, etc.).
Although most companies keep track of outgoing expenses, bills and operational costs, most small businesses have little or no idea what the cost of human resources functions actually are. Specifically, they have little understanding that the cost of Human Resources is directly related to a number of critical yet measurable activities. For instance, Company A understands that it must hire a new marketing director. They set out on the task and begin preparing to advertise for the position, then post the ad, gather the resumes, review each one, sort, copy and send to hiring manager, select interviewing panel, bring in qualified candidates, notify non-qualified candidates, bring in candidate for interviews (hopefully only one), then construct hire letters, possible relocation and on-boarding. This does not take into account the training and acclamation process. Now all those tasks are only to hire a new employee. Obviously, in addition, we have employee development, benefits administration, payroll, performance management, regulatory compliance and employee relations. Each of these tasks requires time and specific expertise as well as administrative and technical support. However, each of those tasks and functions can and should be measured and financially accounted for.
The True Cost of HR
Calculating each of these tasks and relating them to a cost factor in relation to a company operating budget is how we should determine the cost of HR. However, what is more difficult to determine are the costs related to answering employee questions, handling management issues and establishing viable strategic partnerships with managers and employees. The real problem lies in the fact that none of these activities actually makes a dime for the company. Therefore if not understood and regulated the cost of the Human Resource function can spiral out of control, while seemingly having little perceived revenue generating potential. From a business perspective it is an expense item not a revenue generator and must be controlled.
Please don’t misunderstand my thought process here. I want to be very clear that I strongly believe the human resource functions are critical to organizing, administering and operating a successful business. The issue is not one of value. It is more a question of organizing and managing the function efficiently to control cost. In this analysis it is simply one of measuring and calculating cost then figuring out how to manage it. What we do know is this; internal human Resource staffing costs continue to rise, benefit premiums increase every year, regulatory compliance pose more risk than ever and traditional Human Resource administration demands higher levels of expertise than ever before.
In addition, organizations especially small businesses continue to seek ways to cut non-revenue generating functions. Tasks like HR Administration, Training and Benefits are always likely targets. However, my recommendation is that before cutting critical tasks or services businesses need to understand the actual cost and seek alternative methods of accomplishing the same tasks at reduced expense. The best and most viable option is human resource outsourcing.
Calculating Return on Investment (ROI) for HR
How does one calculate ROI for HR? This is a question that thousands of companies (especially small to medium sized companies), human resource professionals and accountants continue to struggle with. According to the Society for Human Resource Management the following are several key indicators in understanding ROI for HR. Just because the human resource function does not actually generate income it doesn’t mean that the function is expendable. It does contribute to both the revenue input and the expense output calculation. Therefore it is extremely important to understand and manage the financial impact and cost of human resources.
Areas To Calculate
- Outline specifically what your small or medium sized company needs HR to accomplish.
- Figure out specific goals and how to measure success or failure.
- Analyze and understand the cost and determine its impact on the budget.
- Seek methods to accomplish the task and lower expenses.
- Keep track of high cost items like turnover and benefits.
- Absenteeism rate and days of sick leave taken.
- Eliminate legal liability.
Controlling Your HR Costs
Once you understand the actual cost calculate that cost against overall operational expenses and revenue. This is a critical process if an organization has any real hope of controlling human resource related expenses. According to Blogging4Jobs, only 14% of companies do a statistical analysis of employee and employment data. My question is, “How can you control cost if you really don’t understand what they are?”
Companies have to continue to find ways of recruiting the right staff, managing employees, dealing with employee relations, tracking employment trends and keeping up with all the employment related regulations and laws. Accomplishing that takes understanding the costs, keeping up with the technology and streamlining the tasks. These are operational necessities that can negatively affect the bottom line if not managed effectively.
More and more organizations are turning to Human Resource Outsourcing as the premier operational alternative of choice. Since HR is a necessary component of any successful business, eliminating Human Resource related tasks is NOT the answer. Cutting staff, increasing workload and expecting the same level of service are also not good business decisions. The logical answer is to find ways to reduce HR costs while maintaining the same or higher level of service. Utilizing HR outsourcing for many administrative and expertise specific tasks (Information Technology/HRIS, Regulatory Compliance, Payroll, Benefits, and Training) can dramatically reduce Human Resource expenses. Moreover, Human Resource Outsourcing provides management and executive expertise at the cost of an administrative level internal staff person.
If small or medium sized businesses are seeking ways to respond to the Human Resource challenges, there are options. However, there is no magic bullet when seeking methods of controlling expense, reducing risk, hiring and training staff or maintaining the proper employee environment. It takes careful analysis, sound planning and a willingness to seek practical alternatives to traditional internal staffing. The most cost effective and best alternative is HR outsourcing. Companies like Back Office Support Solutions (BOSS) are here to help you find the right solution to your human resource needs.
Contact us today for a free, no-obligation consultation on all your human resources, accounting & bookkeeping, tax prep, and back office needs. We provide highly skilled HR professionals who focus on providing the right products and services to help you grow and succeed. Back Office Support Solutions (BOSS) is a leading Human Resource Outsourcing company. “Let us do the work… so you don’t have to.”
Call BOSS at 619-363-3009 or visit us at: backofficesupportsolutions.com
This article was written by: Ricardo H. Correia, Human Resource Manager for Back Office Support Solutions.