Earlier on we wrote about the importance of having “the right people on the bus”. It is crucial to reduce Staff Cost to boost your Profit.
At this point in the project you have decided:
- What products and what locations you want to retain
- What products and locations that you no longer need.
There are staff attached, either directly or indirectly, to producing and selling these products and staffing the services that run out of your soon-to-be redundant locations.
Staff are typically 50% – 70% of a businesses Overhead Costs.
You have decided to reduce the cost of products and/or locations.
Now it is time to reduce staff costs and get the benefit of the savings.
Savings are not limited to very large companies.
Staff Cost Example:
A small company has a 10% Profit margin and staff representing 12% of the total company costs.
- A 25% (1/4) reduction in staff, gives an extra 3% (12% * 25%) Profit to the existing 10%.
- This is an improvement of 30% in profits.
Parkinson’s Law
Parkinson’s Law tells us that “work will expand to fill the time available”.
See the article: What Parkinson’s Law Tells Us About Wasted Work
Work is done by staff that doesn’t add a great deal of value to the business.
Reduce the number of staff and take out some of this hidden surplus capacity. Also, the remaining staff do not need to work harder; just smarter by selecting what work really does need to be done.
People experienced in rationalising staff numbers say that in most white-collar organisations up to 1 person in 4 can be made redundant without any reduction in worthwhile output. Sometimes this can be as high as 1 in 3 or 1 in 2.
The reason for this is:
- Much of the work is unnecessary (Parkinson’s Law).
- Much of the necessary work is done inefficiently.
See the article: Why Multitasking is Not Your Friend - In almost any organisation the poorest performing 25% of people simply aren’t very good at what they do and are not adding much value.
Prune these people early and save their salaries. Typically, these are 60% of a services businesses costs.
The remaining employees know the ones going are loafers and/or pests and so are heartened by the fact that they no longer carry these poor contributors.
Nevertheless, manage the downsizing process carefully. People will assume the worst and will quickly start to worry that they are “next for the axe”.
Redundancy Planning
Down-sizing staff is a very emotionally charged activity and requires a good understanding of the relevant legislation so that you do not find yourself in hot water.
Do you have several people to be made redundant, consider hiring specialist talent to do this.
The specialist will be:
- Better at it than you are because they do it for a living.
- Able to save the distraction of your other management resources in a one-off exercise.
- Able to reduce the psychic damage on the managers that you are saving from having to let people go.
- Aware of the necessary legislation and follow that correctly.
For greater detail go to the article: Redundancy Planning
Also, additional savings will be achieved through HR by studying the amount of overtime being paid.
Is this number high and/or creeping up? Then look for new inefficiencies (Waste) in the system.
Look to see if staff have slowed down; either due to increased complexity or in order to earn more.
Do you pay bonuses? It is a good time to re-calibrate them to the present reality.
Because over time, some systems improve, so it check to see that bonus staff have higher thresholds to compensate for an easing of their work conditions.
