Monday, April 06, 2009


One area that is important to address when defining the strategic role of HR is HR’s historic emphasis on cutting costs. While cutting costs are important there are several reasons why it is essential that HR shift its focus away from cost cutting and towards increasing output and revenues.

Every major corporation strives to increase its profits; however in striving to meet that goal it is important to realize that there are two distinct parts of any profit loss equation, revenue and costs. A business can increase profits into basic ways: first, by reducing costs and second, by increasing revenue (either by charging more or selling more). HR has traditionally focused almost exclusively on the cost cutting portion of the equation, quite possibly because cutting people cost is relatively easy.

Unfortunately, cutting people costs can have some disastrous consequences. HR’s long-standing practice of “undercounting costs” is one of the prime reasons that HR fails to increase worker productivity. “Undercounting” is the process of omitting the additional costs caused by a bad practice or process because these “unintended consequences” are not directly connected to the initial action by HR. Some obvious examples of dubious cost cutting and the “undercounting” might include:

1. Hiring workers with fewer skills in critical positions is certainly cheaper than hiring individuals with superior skills but it may negatively impact product quality and innovation
2. When top performing workers demand more money, they can be replaced with cheaper, albeit less effective workers that in the long run creates the need to hire significantly more workers just to maintain the same level of production
3. Ignoring market compensation rates and underpaying in salary and benefits that ultimately hinders the ability to hire and retain top people
4. The substitution of low cost training for average cost training that results in increases in error and safety rates

As you can see, there are some potential negative consequences of arbitrarily cutting costs without simultaneously looking at the impact of cost cutting on revenues and productivity. In fact, any accountant can blindly cut costs but it takes a true productivity expert to understand that cutting costs and “undercounting” can actually have a significant negative impact on the firm.

The strategic target for HR should be to increase revenues and productivity while simultaneously maintaining or reducing your relative labor costs. If you give any CEO a choice as to whether they would prefer increasing revenues or cutting costs, they invariably pick the option to increase revenues. This is because whenever you increase revenue in a competitive marketplace it's obvious that you are improving your products and services, which are long-term competitive advantages. Short-term cost cutting might actually improve short-term profits but in the long-term, profits may go down and careless cost cutting may permanently harm our competitive position and image among customers.

Strategic HR presents a new challenge that few HR departments universally accept today, the challenge of managing workforce productivity. For some the reluctance to accept accountability for managing productivity is an issue of control, while for others it is the lack of a clearly defined customer the muddles their existing efforts. Regardless, becoming strategic requires that all HR efforts become coordinated and united under a uniform set of goals and objectives.