On reducing staff costs

Contributors: Lesley Dewhurst, Steve Donnelly, Dr. Jerald L. Feinstein, Benjamin Greig, Milind Kher, Dr. Ravi Kumar Sharma, Sally Thomas, Dr. Ross Woods. 2017

If an organization stretches all its employees to reduce costs, will it get diminishing returns rather than productivity gain? Probably. Somebody once said, "You can only whip things so many times before it runs away, dies or bites you."

I think it might depend on several factors:

• The culture. The strategy seems to work better in some very hierarchical cultures, although productivity is sometimes high anyway.
• Do workers have any other positive motivators to stay in the job?
• Teamwork and motivational levels. People can be more productive when the team ethic is strong or they have other good motivators for working. If teamwork is poor and motivation is low, people feel they are working harder although productivity is lower.
• How long is the "busy" season? Some organizations push staff during a busy season, realizing that other seasons are quieter.

Otherwise, I'd generally agree. Pushing employees to reduce costs only works for a while. Eventually most people become physically tired. Oddly enough, however, people don't realize how tired they’ve become until they stop. Fatigue has significant effects:

• In industries that require precision, fatigue tends to result in more errors, and fixing them can be expensive.
• By reducing alertness, fatigue tends to result in high risk of accidents, especially in dangerous industries.
• Fatigue seriously inhibits competitive creativity, which is essential in some industries. Staff default back to safe routines rather than fresh ideas.
• Some kinds of errors can cost much more by exposing the firm to liability, especially in highly regulated industries such as, banking, insurance, medicine, and education. We have already seen that in the airline, trucking, and rail industries that the system eventually breaks when management try to overwork staff.

The organization pays a heavy price if employees feel undervalued, that their remuneration is inadequate, and that their career opportunities are minimal. These can put a large dent in profitability and a gradual downturn in fortune:

• low productivity
• lower overall organizational performance
• damaged reputation in the market as a player, employer and seller.
• low motivation and brownout
• minimal job satisfaction
• sickness and absenteeism increase
• high staff turnover. A major consulting firm had "overwork" down to a fine art. But there was about a 25% turnover rate in the company, so the steady stream of new people nicely disguised the "exhaustion" factor.

In some circumstances, better remuneration can result in lower overall costs. That's counter-intuitive. (Admittedly, of course, there have been cases where workers are paid too much and this puts financial strain on the business.)

It is never a good idea to stretch all resources to the limit. Organizations always need to maintain a certain buffer to be ready for emergencies. Building slack into the system makes it robust.

It is a mistake to target human resources first for improving profitability rather than focussing on other areas. The easiest way to increase profitability is to keep labor costs down, but sometimes it might be the lazy way.

Stretching human resources needs to be delicately balanced with other aspects of the business. In some cases, the organization needs to be more creative drawing out the best of its workforce. In other cases, it is not that costs are too high, but that income is too low. Look for problems elsewhere in the business, such as product design, sales, distribution.