The first step to controlling human resources (HR) costs is to identify the functions covered by your HR department. Generally, they include:
- Recruiting, sourcing, selection and hiring.
- Onboarding, training and development.
- Guiding employees through their employment life cycle.
- Developing HR strategies based on existing and projected needs.
- Establishing, implementing and maintaining workplace policies.
- Developing performance management systems and procedures.
- Monitoring and complying with labor laws.
- Planning and implementing attraction and retention strategies.
- Managing employee relations.
The second step is to evaluate what you’re currently spending on HR activities.
This information will help you:
- Monitor current HR costs.
- Gauge the overall success of your HR department.
- Predict future HR expenses.
- Determine return on investment (ROI).
To accurately measure each of these areas, you’ll need to use the right metrics. For example, the cost-per-hire metric can help you understand how much you’re spending to recruit and employ top talent.
Your evaluation should comprise both direct and indirect costs. For instance, what is the total dollar value (direct and indirect) of an employee who quits without warning?
The third step is to detect areas to invest in and cut back on. This will depend on the results of step two and your projected future needs. Below are some general statistics on HR spending, according to a 2018 report by Bloomberg Law:
- At the time of the survey, the HR–employee ratio was at an all-time high of 1.5 HR staff to every 100 employees.
- HR specialists at smaller organizations tended to assume multiple responsibilities.
- Benefits and recruitment were the most common HR specialty areas.
- The median HR budget across all employers was $1,140 per employee in 2018, jumping from $1,087 in 2017.
- Benefits, training and development, recruiting and hiring, and compensation accounted for 60% of total HR spending.
Notably, a different report by the global professional services firm Alvarez and Marsal says that HR costs typically “comprise between 4 and 5 percent of total” Selling, General and Administrative (SG&A) expenses. They found that in a typical company, “there is a $70 million SG&A savings opportunity for every $1 billion in revenue a company earns.”
Deciding where to scale back spending means identifying areas of financial waste. For example, you might need to eliminate benefits programs that are underutilized — or, if they’re worth keeping, find ways to improve participation. It is equally critical to review your human resource technology to identify system deficiencies and optimization opportunities.
The fourth step is to assess outsourcing options. Per the Bloomberg Law report, HR departments’ workloads tend to increase rather than decrease. Perhaps this is why 62% of HR departments depend on an external service provider to handle at least one HR activity or program. Once outsourced, the program or activity is rarely ever moved back in-house. So if you’re managing your entire HR function in-house, see if outsourcing can help you better reach your cost targets.