Cut the Cost Center Mentality!

When business earnings fall, the typical reaction is to cut headcount. This is a metric that shows up on a balance sheet and cutting costs is appreciated by shareholders in the short term. But, a knee jerk cost-cutting response jeopardizes other key performance indicators like retention rate and eventually an organization’s net promotor score (NPS), which can diminish shareholder value over time.

An indirect cost cutting measure would be the refusal to fill open positions, allowing incumbents to ‘do more with less’. We’ve been doing more with less since 2008. It doesn’t always work. For example, an increase of 1 standard deviation beyond the typical length of time a position remains open is related to a decrease of 5-6% on the quarterly return on assets. 1 Employees burn out and leave for better jobs, taking their valuable institutional knowledge and customer lists with them. Direct employee related cost cutting measures include reducing expenditures on headcount, healthcare costs and training investments. These all have a negative impact on engagement as well as the ability to recruit new workers later, which also impacts productivity and shareholder value. The massive job cuts at Meta in 2022 and 2023, totaling nearly 25% of the workforce were shocking to some. Maybe not so shocking was the rehiring of a bunch of the laid off workers, and some new ones, a few months later. 2

Meanwhile in 2022, PwC research showed that 77% of C-suite executives agreed that the most critical factor affecting business is the ability to acquire necessary talent. But, according to a McKinsey survey, 82% of the CEOs surveyed did not believe their companies recruited the right people. 93% did not believe they could retain top talent. 40% of HR leaders could not build skills in employees quickly enough to meet company needs. Simultaneously, there was a 25% increase in turnover during this time period compared to pre-pandemic levels. With companies so desperate for top talent, why is it so easy for the top talent to leave for a better job somewhere else? How do we stop this problem?It feels like we keep going around in circles! By now, it isn’t surprising to hear that a recent McKinsey survey shows that CEOs currently rank employees above shareholders in terms of priority. Companies that place employees and talent in the core of their business strategy tend to see higher returns for shareholders, so it makes sense. But, while executives typically voice a commitment to employee financial health and opportunities for advancement, 45% percent of workers do not believe they are financial healthy and their concern is serious enough to distract them from their work 3 . Many don’t see opportunities for advancement within their organization. These are the driving forces behind turnover.

Cost cutting measures effecting employees are a major impetus for turnover. Top talent is always in demand. Talented people know who they are and they want to be compensated in an equitable manner, according to the value they bring to the organization. High performing employees enjoy learning. Companies at the bottom 25% percentile offer 4 days or less of learning to employees per year. And, it’s usually for mandatory compliance training. Companies at the 75% percentile offer 7 days or more per year for learning. 4 CFOs, who are typically known as the leaders of the cost cutting movement, are acknowledging the importance of learning for retention. According to CFO.com “the pursuit of better development opportunities is one of the leading reasons why people leave their jobs.”

Organizations excel when their workers are on the cutting edge of technology. According to Korn Ferry research, the financial impact of the talent shortage created by technological changes will reach $8.5 trillion by 2030. So as technology is able to share more actionable insights with us, we will not be able to capitalize on these insights due to a shortage of workers. This brings us back to the importance of cutting the cost center mentality. People are not a cost center. They should be viewed as valuable and worthy of investment. Here are some areas to focus on:

Compensation

Stay fresh with market data on competitive wages for roles. If you are embracing work from home, determine what compensation approach you will use. Will pay be based on the employee’s location, headquarters location or a national average? Be transparent about your philosophy and share details about whether pay rates will change if employees relocate.

Talent Marketplace

Understand the core functions and critical work of your business. Consider redesigning work assignments to leverage talent from other departments in a “gig” context. Embrace rotation programs, internships and mentoring programs at your organization. Keep track of who participates in training, programs and rotations. In some instances, you may even be able to track networks and relationships and leverage this information to access new talent. Most HRIS systems have a lot of functionality that isn’t always used. Use it and request business insights from your provider to enable you to determine what skills are trending or changing in your business. Your tools should be able to help you identify who within your workforce would either be an ideal fit or help you to find the right fit for a particular assignment. Get very comfortable making and displaying dashboards!

Training and Development

Again and again, we’ve heard executives attest to the value of training and development when it comes to retaining top talent. As we’ve already seen, the highest performing organizations make the largest investment in their training and development initiatives. Needs vary from business to business, but what is clear is that highly talented people thrive on learning, especially when it relates to leveling up on their leadership skills and embracing new technologies. When deciding what training to offer, it’s important to tap into the needs of your business.

• Identify new technologies or product offerings that can enhance value to your customers. Ensure your workforce remains up to date.
• Assess productivity team by team. Analyze why otherwise competent and ethical underperformers are struggling and provide training to fill that gap.
• Give thought to succession planning for your organization and identify the key leadership skills necessary for success.

Ensure you have a qualified trainer who is experienced and credentialed in the training sessions you plan to offer in your organization.

If you have any questions about how Susan Russo HR can help you or your organization with Coaching, Consulting or Training, don’ t hesitate to reach out!