Advanced Diploma in HRM by SkillCity

Reading One

THE BUSINESS CASE FOR HR –

Proving HR Budget Cuts Are Penny-Wise & Pound-Foolish

In today’s business world, all parts of an organization must justify their existence in terms of the economic
value they bring to the table. HR is no exception. How do you as HR director prove that your staff and
programs directly contribute to the company’s bottom line? Warm and fuzzy rhetoric about the fundamental
importance of human assets isn’t enough. Tough times demand hard dollars-and-cents arguments. Here
are a few you can use.

Proving the ROI of HR Programs

The traditional perception of HR as a cost center has long made the HR program a tempting target for
budget cuts, especially in times of financial distress. “The perception of HR as nonproductive staff is one
HR people are forever battling,” notes BC employment lawyer Robert Smithson.

What kind of arguments can HR directors use to justify HR activities in terms of return on investment
(ROI)? There are 2 basic approaches:

1. Demonstrating the cost savings attributable to HR programs; and

1. Showing how HR programs actually make money.

1. HOW HR PROGRAMS SAVE MONEY

Although most of the countries and parts of the world are emerging from recession, companies are still
looking to save money. Programs that have a demonstrated capacity to enable the company to achieve
long-term cost savings are among those most likely to survive.

And this is precisely what HR does. HR programs enable companies to avoid potentially devastating costs,
Smithson explains. Some of the costs HR activities save companies are direct costs—for example the cost
of hiring outside consultants to perform HR tasks such as recruiting, likely at a higher rate and without
inside knowledge of the company’s workforce, he adds.

But direct costs are just the tip of the iceberg. Most of the savings HR generates result from enabling
companies to avoid indirect costs and liabilities down the road. For example, every dollar spent on HR
salary enables a company to avoid having to spend $10—or more—in litigation costs and wrongful
dismissal liabilities in the months or even years ahead. Similarly, money spent on programs to retain and
educate staff is an investment that yields major dividends later by enabling the company to retain key talent
and avoid the considerable costs of recruiting and retraining new staff.

These indirect cost savings more than offset any short-term savings achieved by cutting or outsourcing HR
staff, programs and functions. But those savings may be harder for CEOs to see on the financial

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statements and attribute directly to HR investments. So it’s essential for HR directors to educate their CEOs
about the impact of HR cuts on indirect costs.

Cost Savings of HR during Downsizing and Restructuring

The equation: HR investment = long-term cost avoidance applies in any and all business climates. But it
takes on a special significance in down times. Explanation: When companies engage in downsizing and
restructuring, they think they’re saving money. But the price tag for these activities is often greater than
anticipated. The hidden costs associated with downsizing and restructuring are precisely those that HR is
best suited to help the company avoid. But it’s imperative for HR directors to understand these costs and
demonstrate how the HR function enables the company to minimize or even avoid those costs altogether.
Here are 4 key indirect costs to point to in making your case:

Cost # 1: Legal Liabilities Resulting from Downsizing. Downsizing and restructuring aren’t just business
challenges but liability risks. Affected employees are desperate and apt to fight back with grievances and
lawsuits. This is just when companies most need experienced HR staff to navigate the legal minefields. In
countries like Pakistan, India etc this is not much applicable but in countries where the labor and
employment laws are enforced in true sense, this cost can hit any company like anything.

Cost #2: Administrative Costs of Downsizing: HR is essential not just to carrying out terminations but
helping the company make financially sound termination decisions in the first place. The HR staff’s
understanding of notice requirements is particularly crucial for companies to consider in their business
plans. The costs in notice that a company incurs in terminating large numbers of employees can be
substantially more than management realizes and offset the financial gains of layoffs, Smithson explains.

Cost #3: Losses of Morale and Productivity. Another significant indirect cost of layoffs and restructuring
that HR helps avoid are the adverse impact on productivity and morale. How you let staff go or handle other
changes sends a message to employees who survive the layoffs and affects their productivity, efficiency
and loyalty. If you let employees go in the most economical way possible, you’ll scare the remaining
employees you’re counting on to keep the company afloat and competitive. HR is in the best position to
anticipate and smooth out the disruptive effects of layoffs and restructuring and keep remaining
employees committed, loyal and productive.

Cost # 4: Loss of Competitiveness in Labour Market. The fundamental importance of attracting and
retaining talent will remain a key factor of business success as it always has. So cutting recruitment and
retention resources is one of those penny-wise, pound-foolish decisions that companies may come to rue
later when the economic recovery turns robust.

In fact, the costs of neglecting recruitment and retention might come home to roost much sooner than
anticipated. Struggling companies could end up losing key talent to organizations that have actually been
growing during this economic downturn such as radio and cell phone businesses. By the same token,
economic downturns create recruitment opportunities. “It’s during volatile times that opportunities to sign up
key employees can arise sometimes at a fraction of the normal costs,” explains Smithson. Cutting the
recruitment budgets is thus an opportunity lost.

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2. HOW HR PROGRAMS MAKE COMPANIES MONEY

HR activities, in other words, contribute to both the top and bottom line. There are 2 study-based
arguments you can use to show how HR programs help companies grow revenue and company value.

HR Activities Improve Performance. One of the best studies linking HR activities to a company’s financial
performance comes from Cornell University. The study found that 323 small companies (between 8 and
600 employees) improved financial performance by investing in the following 3 HR activities:

Selective hiring, searching for employees who fit the company culture rather than just people who
fit the job description;
Promoting employee involvement and self-management rather than tight control and monitoring of
employee activity; and
Creating a family-like environment through social events and offering challenging jobs that foster
employee growth.

The results were eye-popping. Companies that invested resources in all three of these HR practices had:

22% higher sales growth;

23% faster profit growth; and
67% lower employee turnover.

Even focusing on just one of the 3 practices resulted in improved financial performance. For example,
hiring employees based on how well they “fit” into the company culture raised revenue growth 7.5%, and
profit growth 6.1% and reduced employee turnover 17.1%. Encouraging employees to manage themselves
rather than be micro-managed yielded 11.5% higher revenue growth, 3.9% faster profit growth and 15.1%
lower turnover. Companies that created a family-like atmosphere had 13.3% faster profit growth and
reduced turnover by 19.1%.

Higher Shareholder Value. Watson Wyatt, a consulting firm, surveyed companies in the US and Canada
and found that companies with the best HR management practices such as pay, development,
communications and staffing services also had the best returns for their shareholders. The survey looked at
the effectiveness of these HR programs and scored them. It then compared the scores to the company’s
financial performance and found that companies with the highest HR scores returned the most value—an
average of 64% return over 5 years—to their shareholders. While those with the lowest scores had a 21%
return.

Conclusion

Maintaining your HR programs gets your company a double benefit in terms of ROI. That’s because HR
programs and staff help your company avoid potentially devastating costs that can lower your bottom line—
in the form of lost productivity, litigation costs and liabilities for mishandled terminations. At the same time,
HR efforts increase the top line on your financial statements by improving financial performance and
shareholder returns. So use this article to help build the case that will persuade your CEO that the HR
department isn’t just a cost center but a sound business investment that yields measurable results.

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 Advanced Diploma in HRM by SkillCity

Reading Two

Working Within An HR Budget

Any top executive of considerable worth knows and understands clearly the value of an effective HR team
that not only handles the administrative details and recruitment, interviewing, and hiring of new staff but
also consults with senior management about strategically planning important company tactical policies.
Regardless of the size of the business every HR department has a budget that must be adhered to in spite
of any increased profitability and may even experience serious cutbacks in an economic downturn. How do
you manage an HR budget effectively? With great care is an immediate response that springs to mind!

As the workplace is a dynamic, fluid environment it means that on-the-job training and development needs
can suddenly change. A HR budget that allows some flexibility in delivery being both pro-active and
reactive to changing circumstances is vital today.

In-House Training Is Definitely Beneficial

In-house training gives opportunity for immediate correction regarding employee errors, immediate review
and any additional training that may be required. This usually results in better outcomes with employees
displaying a greater sense of ownership as well as pride in their work. In turn; improved productivity and
efficiency result along with superior job satisfaction. Your HR budget is being well spent if you see staff that
is happy in their work, as they are more likely to work harder and be a more valuable asset which creates a
winning environment for everyone.

Slipping Under The Radar!

An area of the HR budget that often slips under the radar is the cost of replacing staff that leave for various
reasons, leaving a huge financial gaping mess behind when they jump ship. What does it cost to really find
a replacement high profile worker? Lots and lots is the answer!

Perhaps more energy and funds should be allocated to preventing turnover in highly skilled or senior staff.
The true costs of having to rehire an employee remains mostly hidden, as recruiting and interviewing falls
directly within the HR budget, but the cost of lost productivity doesn’t necessarily show up as easily,
meaning that the loss of a key employee is deemed as not costing real money although this is a far cry
from reality.

No doubt efficiently run human resources management is deemed vitally important to the success of any
organization, both large and small. As changes to the employment sector continue to be implemented; the
responsibilities of this role will continue to increase. The future sees countless HR job openings arising due
to the need to replace workers who transfer to other occupations, retire, or leave the labor force for various
reasons. No matter how great an asset the HR department is to the firm; the time ultimately comes around
for those dreaded budget cuts!

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Keeping Your HR Ship Afloat: How do you defend your HR budget so that it doesn’t suddenly get the C-
Suite rubber-stamp spread across the top of it? Hopefully your unrivaled knack of skillfully negotiating with
senior management that enjoy going through budgets line by line cutting here and there to firm up the
bottom line will suffice to save your budget from the proverbial axe! This is the time to ensure that your ROI
calculations are water-tight or your HR ship will definitely sink!

Top Tips To Renegotiate Your New Budget

1. Spell Everything Out Clearly!Couple the company’s goals with your HR budget and explain how HR
spending is directly connected to the organization’s success.
2. Make The Income Link Really ObviousShow the link between the ROI and the cash effectiveness of your
HR initiatives. Use spreadsheets that reveal just how the dollars spent in HR translate into lots of other
areas. Be confident and pick the brains of functional heads during the budget development process.
3. Expenditure That Saves Plenty In The Long Run! Validate the expenses incurred to implement employee
assistance programs that encourage a high performance workplace through reward strategies and
remuneration practices. Remind management that these are a vital necessity for increased productivity and
a positive work environment.
4. Offer One ‘Scapegoat’ Non-Essential Initiative!Show that you are a team player by offering to scrap one
project in order to save the company some money. This will be the non-essential project which is your
scapegoat!
5. It’s All About Profitability!Everyone loves good employee relations and efficiency, but the bottom line
these days is still profits! Be certain to deliver your pitch in these terms and your team will definitely be
included in the upcoming budget inclusions.
6. Get In Early! It stands without reason that having the Finance Department’s support, or at least having
some knowledge of your requirements early on is a smart move. Ensure that they understand how HR can
help move the organization grow. Encourage their challenges to your assumptions in readiness for when the
budget axe comes out! You will already be aware of any head hunting cuts that may come up!
7. Do Your Homework!Be forthright in voicing your impeccable knowledge about where the organization is as
well as its future; as this will show that you know your stuff really well. It also means that you understand the
authentic overall terms of your proposals.
8. Don’t Stand At The Back Of The Line!Position yourself so that you are not left holding a bag with
absolutely no money available. Get in early and beat the deadline!
9. Be Prepared And Know Your Stuff Inside-Out!When the head honchos start hurling questions that are
meant to intimidate you into submission so that you back down on your HR budget needs; it’s imperative
that you know your plan backwards and inside out! You are on your own for this one, and if you have to
shuffle through papers to find answers, well you need to prepare more thoroughly next time.
10. Practice And Keep On Practicing!No matter how many budgets you’ve presented, practice makes perfect.
Well not really; but it helps anyway! You can never be too prepared although just like any interview, it’s best
to keep it real!

At the end of the day, successful CEOs and businesses utilize effective HR departments whether they are
a single handed operation or group effort of an entire HR team. HR people generally focus on building
people with whatever tools or funds they are allocated, and always use the HR budget wisely and
effectively to make a difference.

NOTE: Although HR Budgeting and Recruitment Planning are the areas where a very little awareness is
available in the local HR practice’s context. However you as a participant in ADHRM, will be fortunate
enough to get the practical understanding of these tools in Week 3. Good Luck!

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Pre-Session Reading Material for ADHRM – Week 3