Personnel Cost Reductions: Debunking Four Common Myths

A set of intense and growing business forces—including globalization, digitization, and evolving customer preferences—is pressuring companies in virtually all industries of the developed markets to reduce costs. In many cases, organizations have already lowered their material and other nonpersonnel costs and optimized prices. Yet if they are to preserve margins and remain competitive in the long term, they will also need to scrutinize their personnel costs.

Large-scale personnel initiatives, including reduction programs, can be difficult to implement for a number of reasons. Management often faces potential negative publicity, as well as resistance from decision-making committees within the company. Another worry is that HR leaders may not have the knowledge or experience to tailor the right cost-reduction program, and the company could be left short of critical skills. Hamstrung by these concerns, company leaders focus more on existing problems than potential solutions—particularly during the planning phase—resulting in partial solutions that are poorly implemented and do not address all of the company’s true needs.

This need not be the case. In fact, the aforementioned challenges are based more on perceptions and myths than facts. In this article, we debunk the four most common myths regarding personnel cost reductions:

  • Reductions affect the wrong employees by discouraging those who remain, hurting us in the long run.
  • Our compensation components are contractually fixed; reducing wages or cost per head would either be exorbitantly expensive or take too long.
  • We have a strong works council and an active trade union, so we don’t have any leeway for negotiation.
  • Our HR department can’t take on that kind of project; they already have far too much to do.

Myth 1. Reductions affect the wrong employees by discouraging those who remain, hurting us in the long run. This myth results from the assumption that companies can only reduce personnel costs through layoffs and that no employees will voluntarily leave. Redundancies can be challenging, particularly in more regulated labor markets such as Europe’s—where social-criteria rules stipulate the order in which employees should be let go. These criteria put a heavy emphasis on employee tenure, along with issues such as age, marital status, and whether employees have children. Many think that the criteria lead to layoffs of the “wrong”—that is, younger—employees, resulting in structural issues such as an unbalanced workforce. Early-retirement offers can help, but such initiatives are expensive and can leave the company short of know-how and experience.

These concerns are understandable, but they are only relevant when companies stick with an overly simplistic—and increasingly outdated—approach to personnel reduction. A more holistic strategy allows for additional measures, such as transitioning employees from full-time to temporary work, using limited contracts, offering qualification measures, and even specifically designing and coordinating voluntary programs. In fact, a voluntary program, if orchestrated well, can be one of the most effective reduction instruments. All of these measures should be used in conjunction with traditional strategic workforce planning—that is, targeted, cross-area HR management.

It’s also important to note that these approaches will only succeed if the company implements them effectively. The fear of hurting the morale of remaining employees and weakening the organization is understandable, but such concerns can be allayed by communicating in a targeted, open, and fair manner. It is equally critical that the reduction should take place quickly and professionally, so that employees do not become distracted or lose motivation because of lingering uncertainty. Early in the process, business leaders should approach proven top performers personally. Recognition and appreciation—not financial incentives—are often the most successful retention measures.

When leaders implement a reduction measure correctly, the company should emerge stronger and with a more aligned workforce—one that understands the company’s situation and objectives and believes management is taking the right steps to reach those objectives. Structure and processes will be more efficient and professional, creating an improved work environment.

In our experience, companies can achieve staff reductions of 10 to 20 percent within 12 to 18 months at a significantly lower cost than they could in the past, and they can do so while ensuring that the organization retains the right profile of skills and qualifications.

The following core HR topics are essential to dispelling myth 1:

  • Identification of and communication with all key employees and top performers
  • Active monitoring of employee morale
  • Implementation of a detailed and overarching reduction process

Myth 2. Our compensation components are contractually fixed; reducing wages or cost per head would either be exorbitantly expensive or take too long. This myth is the result of existing compensation structures within a company, such as a high number of monthly salaries and bonuses that are regulated on an individual or collective basis. Some organizations may have so-called permanent employees and contract workers, as well as special employment contracts from the public or semi- public sectors, which contain comprehensive protective mechanisms.

In all these situations, however, companies can keep the same number of workers and still cut costs. Short-term approaches include eliminating optional benefits, such as commuter tax breaks, or revisiting contract components based on operational agreements that may no longer be appropriate in difficult times. Companies can also look into altering work time components, such as overtime, flexible scheduling, days off, and break times. These measures effectively reduce costs for the company without directly reducing an employee’s contracted monthly salary—a less onerous shift for workers.

On a structural level, companies can employ more innovative solutions. Employee representatives are invariably aware of economic trends, and executives can make the company’s situation more clear by conducting a structured analysis and evaluation of possible options. It’s important not to focus purely on legal boundaries. Companies need a clear analysis of contracts, regulatory constraints, and other factors, but they must also identify and assess options from the employees’ point of view. Creative solutions may put the company on a more secure financial footing while not threatening the livelihood of employees, leading to an agreement in which the positives outweigh the negatives for both sides.

The following core HR topics are essential to dispelling myth 2:

  • Strategic and legal assessment of the feasibility of contract adjustment options
  • Accurate HR business-case calculations for the options identified
  • Detailed stakeholder analysis and identification of measures that benefit both sides

Myth 3. We have a strong works council and an active trade union, so we don’t have any leeway for negotiation. Strong organized-labor participation within a company is not necessarily a drawback; in fact, it can be quite the opposite. It provides a solid foundation for dialogue between management and employee representatives. Strained relationships and misunderstandings between both parties are frequently responsible for this myth. An atmosphere of mistrust can prevent some issues—such as employee reduction and outsourcing—from being openly discussed and addressed.

During the financial crisis, for example, many banks implemented comprehensive reduction programs that focused on speed and not thoroughness. Bank executives did not often consider other solutions that may have been more effective—such as adapting collective-bargaining agreements that would match required skill sets with compensation levels—because collective protective rights made such ideas seem unfeasible. Organizations in the public sector have faced similar constraints.

Initial pessimism is understandable, but companies can make improvements in their workforce in even the most complex situations. That is why open and honest communication is absolutely essential from the earliest phases of the effort. Management must sit down with employee representatives and chart a clear course. Success hinges on an objective assessment of the situation in coordination with relevant committees in both the negotiation and implementation phases. Precise and reasonable simulations of specific collective-agreement components can ensure that the discussion takes place on a level playing field.

In addition, a codetermination process—when representatives from management and the workforce make decisions together—helps to clarify how planned changes will be received by employees and may identify less invasive cost-reduction measures as well. With sufficient transparency and clarity, even “sacred cows” may become legitimate options in workforce improvements. Worth noting is that this process can have a positive secondary effect by creating a more pragmatic and trusting relationship among the participating committees and by giving the company a stronger foundation for the future.

The following core HR topics are essential to dispelling myth 3:

  • Complete transparency in HR regulatory issues, such as contractual protection mechanisms
  • A clear course and communication plan for employees and employee representatives
  • A dialogue between the works council and trade union that takes place on equal footing

Myth 4. Our HR department can’t take on that kind of project; they already have far too much to do. Business units and HR typically have different priorities, and it can feel as if representatives from each are speaking different languages. The focus of business leaders is to get the job done. They describe their needs in terms that only vaguely translate into specific personnel requests, and they believe that many HR processes are too complicated and that HR employees are too problem-oriented. Conversely, the HR department believes that management will not simply accept an answer of “no”—rather, it wants to live in a world of exceptions. The result is a persistent misunderstanding, which gets exacerbated during complex projects such as a reduction program. However, these perceptions are simplistic, and companies can overcome them.

The renewable-energy industry is a good example. Many companies in the sector have grown significantly in recent decades. HR departments have had to recruit employees and implement basic HR processes such as payroll and onboarding during periods of rapid expansion. As growth has slowed, these companies now need to adapt their organization structures accordingly. Many HR departments have already taken on new tasks and greater responsibilities, becoming a true partner to the business.

Other industries can adopt a similar approach—one in which HR assumes more of a strategic and management function in the company and expands its knowledge in the areas of realignment, codetermination, and collective labor law, while maintaining expertise in the baseline HR functions.

With a structured process, consolidated expertise, and a cooperative work mode, a company can improve not merely the quality of its human-capital management but also the collaboration between HR and the business units. In fact, a reduction program is often an opportunity to forge a better working relationship.

The following core HR topics are essential to dispelling myth 4:

  • Clarity about the company’s relevant HR skill set and areas in which it can potentially improve its expertise
  • Precise coordination of reduction planning, data sovereignty, negotiations, and implementation within one central team
  • Adequately enabling and coaching HR employees—in particular HR business partners—about how to implement the changes and make adjustments

A multipronged approach leads to success. One industrial-goods company we worked with restructured its entire organization from a regional to a global model. Part of the reorganization was a significant cost-reduction program, including targeted full-time-employee reductions. To achieve this objective, the company used a range of solutions, including the following:

  • It implemented a comprehensive HR-management system to determine the optimal staffing of the employees.
  • It attempted soft measures first, such as reducing external employees and setting up a voluntary program—resulting in a reduction of about 15 percent in one year without any dismissals.
  • It negotiated with works councils in a professional and transparent manner, which helped complete the globalization effort three months ahead of schedule and led to improved labor relations.
  • It developed HR into a true business partner that is now more closely involved in management discussions and strategic planning.

Personnel cost-reduction initiatives are difficult, yet companies can limit potential disruptions and achieve their objectives by debunking the myths surrounding these programs. It is essential for management and HR to clearly identify and prioritize the challenges and to tailor a structured process that focuses on root causes. The result will be a company that is not only more financially fit but one that more effectively communicates and collaborates, leaving it better equipped to meet the challenges of the future.