Reduce Labor Costs | 3 mins read

How to Manage and Reduce Labor Costs

how to manage and reduce labor costs
Michelle Jaco

By Michelle Jaco

Industry studies maintain that the average Fortune 500 companies typically overspend in labor costs to the tune of $30 million annually. Considering that wages and salaries comprise around 70% of most companies' total compensation, this overspend is obviously a figure that most organizations can ill-afford.

Labor costs are continuing to rise, and the recent implementation of new minimum wage standards in many states is compounding the difficulty many organizations already have in staying profitable.

There are, however, sound strategies and solutions available to businesses that can aid in maximizing (or maintaining) efficiency and reduce cost.

First, Identify the Lingering Problem

Be Aware of Your Real RPE (Revenue Per Employee)
Knowing your revenue per employee (RPE) is a key metric for determining how productive your employees actually are, and provides data on whether your labor costs are becoming a liability.

Simplified, the equation would be the Time Period divided by the Number of Employees.

Labor demand can fluctuate depending on the industry, so the best way to arrive at this figure is by determining the average RPE for your industry, then comparing it to competitors of similar size. If your RPE is higher than your competitors' (or other companies of similar size in your industry), then your organization is doing well in terms of profitability and productivity.

If you find that your numbers fall below the average for your industry, then it's time to do some research into precisely what is depleting your labor costs. This doesn't necessarily mean implementing an austerity program (such as mass layoffs or reducing pay); it might mean examining related wage and salary costs and determining whether these can be reduced, thereby increasing revenue.

Online employee scheduling software that makes shift planning effortless.
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How to Manage Labor Costs

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1. Maintain Stability in Your Workforce
The composition of your workforce, as it relates to continuity over time is something of which your accounting department will be aware, but until there's a crisis or significant financial shortfall, it's something to which day-to-day managers seldom pay attention to.
Anecdotally, we know that it takes a lot of money to train up new personnel, but until we see the actual hiring expenditures for a department or organization on paper, this often doesn't have the impact that it should.

High turnover rates translate into higher labor costs; if the objective is cutting labor costs, then employee turnover must first be addressed.

Determining the cause of high turnover is the first step toward reducing turnover in your organization. An aggregate of industry studies, expert testimony and exit interview research identifies the major causes of high turnover as

  • Pay (or lack thereof)
  • Stagnation (employees who get bored in their positions)
  • A negative or toxic workplace culture
A well-structured exit interview process can be very valuable in amassing this sort of information. The data can then be evaluated to establish patterns or specific issues that may be driving your turnover rates up.
These can then be addressed remedially, whether this means adopting measures to improve corporate culture, cross-training workers to alleviate monotony, or tackling parity issues that have to do with compensation.

Studies have stressed that workers in manufacturing should be trained to keep pace with changing consumer expectations. Such training gives employees a better understanding of their role, as well as the objectives of the organization.

2. Avoid Excessive Overtime
This is another item that is perceived very differently between managers and accountants. When pressed with deadlines or unexpected absences, managers are happy to enroll workers who are willing to stay for a few extra hours on a moment's notice. We don't have to tell you that all of those few extra hours do add up, and the larger your workforce, the heavier a toll this will take on your bottom line.

One way of reducing overtime is to identify part-time workers who could use some extra income and are able to come in at crunch time without going over 40 hours within a given week. This way, you can bring in extra staff who are already trained without incurring the expense of onboarding new employees or temporary workers.

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3. Engage Automation
No, we're not going to suggest that you replace your employees with robots, but some organizations could still benefit from modernization.

Whether it's simply habit or apprehension over the perceived expense of upgrading to technological practices, some businesses are still relying on manual methods of employee time tracking. Industry studies have shown that human error from manual logging either on paper or in Excel spreadsheets introduces added costs, equating to 8% of your payroll on an annual basis.

Automating your time and attendance tracking through HR management software can improve efficiency, accountability (by cutting down on things like buddy punching) and eliminate the human error factor entirely.

These are intuitive platforms that are tailored to address the very problems organizations are met with when it comes to time tracking, errors, and efficiency.

Online employee scheduling software that makes shift planning effortless.
Try it free for 14 days.

4. Anticipate Your Workforce Requirements
Coordinating workforce needs with the ebb and flow of production or seasonal schedules can be the bane of a business owner or manager's work life. Unless naturally adept at scheduling while also expecting the unexpected (which so very few of us are), this can lead to overscheduling, under scheduling, scheduling conflicts, and ultimately, stress and frustration all around. Need we mention that all of the above drives up payroll costs?

Once again, HR management platforms can be indispensable in overcoming these problems and establishing continuity in scheduling. Forecasting can be achieved far more effectively, and managers can more easily recognize patterns and identify deficiencies, thereby allocating labor optimally and avoiding conflicts and payroll cost overruns.

Ultimately, the increase in efficiency can allow managers in manufacturing (for example) to increase production without the risk of being short-staffed. Labor costs in manufacturing can run very high, which is why these are typically scrutinized by managers in manufacturing.

Time for a Time Clock?

A recent survey of hourly workers by a leading research group showed that nearly 70% of these workers clock out early but not early enough to impact their pay, given that hours are typically rounded up. While this doesn't directly impact the payroll outlay, the loss in efficiency definitely does, once you aggregate the lost hours of all employees who are in the habit of clocking out early.

While traditional time clocks (with an actual clock and punch cards) still leave lots of room for error and subterfuge, HR management platforms have the capacity to clock individual employees and only those employees in and out, thereby improving accountability and streamlining hours spent in managing payroll.

Having accurate data relative to attendance patterns can also help you improve labor allocation and employee review practices.

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