WFM in tough economic times

It is impossible these days to escape the ravages of the current global economic crisis. As economies all over the world enter a difficult and likely prolonged recession, organisations of all types and sizes are taking steps to protect their businesses. Mass layoffs, suspension of expansion plans, and store or plant closings are the typical responses to protect the balance sheet and bottom line earnings.

However, if economic history has taught us anything, it is that cutting costs and capital spending in a recession is not necessarily a recipe for success in the post-recession world. Precipitous cuts to spending tend to deepen, and lengthen, recessions. In fact, the organisations that survived, and even thrived, during past recessions were able to resist wholesale layoffs and cost cutting, choosing instead to change business practices to focus on innovation and improved productivity.

The challenge is to launch an agenda for change while facing a volatile economy where crisis management may be the order of the day. Leading employers will look to non-traditional approaches to reducing labour costs, including reduced hours and job sharing. Still others will go a step further, and look for ways to employ Workforce Management (WFM) tools to automate and rationalise the processes involved in forecasting, budgeting, scheduling and tracking labor.

In fact, a recession can create a unique opportunity to investigate a whole world of efficiencies and cost savings that might otherwise be overlooked in more prosperous economic conditions.

Let’s say an organisation needs to find a 10 percent reduction in its labour costs. Many organisations immediately begin to calculate the reduction in head count needed to achieve that goal. But what if you could achieve half or more of the 10 per cent target without terminating a single employee?

While a full-blown WFM automation initiative may be difficult to initiate during a period of cost cutting, a more focused, surgical analysis of labour costs can produce remarkable results. In particular, a thorough analysis of an organisation’s WFM infrastructure – payroll practices, policies and rules – can identify opportunities to significantly drive down labour costs without reducing head count. 

In Axsium’s experience, very few organisations truly understand the extent of “labor cost leakage” which takes place each and every day as a result of inefficient WFM policies, practices and processes. This leakage takes the form of undetected overpayments, inconsistent application of corporate policies, inefficient pay and paid leave policies, undetected (or even permitted) time theft and a host of other factors that can be resolved with relatively little time and cost. 

And finding a way to avoid layoffs may be the most important task a company undertakes during the current economic crisis.

Recessionary economics: Appearances may be deceiving
Mention the word “recession” and most people will almost automatically think “layoff.” But is that the only way to deal with a downturn? Traditional theories about the benefits of downsizing during a recession are being challenged like never before.

First, let’s consider the conventional wisdom. When customers disappear, and earnings decline, it’s natural that a company would look to its workforce as the first and most fertile area of cost savings. Although it is difficult to lose workers, there is actually a well-worn assumption that those employees left behind will automatically boost their productivity, perhaps out of gratitude at still having a job. The theory is that this boost in productivity will help soften the blow of having fewer hands to do the work. And there is some evidence to support this theory.

Statistics from the US Department of Labour published in November 2008 showed that although total output from American businesses was falling, it was not falling as fast as the number of hours being worked. This means employees who were left behind after layoffs were producing more output on a per hour basis. However, the experience from past recessions indicates this is likely a blip in the productivity trend; most economic data shows that productivity ultimately suffers during recessions.

In fact, recessionary economics tells us that layoffs and deep cost cutting almost always have a dampening effect on productivity. Those left behind may still be thankful to have a job, but morale is generally much lower as the workload on those left behind can become unmanageable and lead to higher rates of absenteeism and voluntary turnover.

The negative impact of sudden, deep downsizing or cost cutting cannot be underestimated. Academic studies of recessionary layoffs show that sudden and severe downsizing often provokes a wave of voluntary departures within a year of the initial layoffs. The simple fact is that rapid, profound downsizing often convinces employees they do not have a future with that company.

The full impact of a precipitous downsizing will not be felt until the economy picks up again, and organisations that engaged in mass layoffs find out how difficult it is to attract top talent. In fact, many economists believe the rapid escalation of pay and benefits after the last continental recession in the early 1990s was triggered by the war to re-hire top talent lost to downsizing. In short, it became a seller’s market for workers, and many employers paid the price.

But if not lay offs, then what will a company do to save money?  Since your WFM infrastructure is responsible for tracking and managing labor costs, a good place to start saving labor dollars (i.e. the “low hanging fruit”) would be to find ways to improve on that existing infrastructure.  While wholesale, enterprise automation of time and attendance, scheduling, leave management, etc. may be a desired long-term goal, often significant gains can be realised by tightening up what is in place today. 

The same concept applies to energy conservation. While many homeowners would love to replace outdated furnaces and air conditioners with solar, wind and/or geothermal systems, it’s important first to make sure the home is properly sealed and insulated.  With that infrastructure in place, the payback when alternative sources of energy or more efficient furnaces and air conditioners are introduced will be even more impressive.  

The rules are the rules, unless they’re not followed
In January 2009, the Canada Revenue Agency, the federal taxman, was forced to admit it had paid out millions of dollars in compensation to employees who were no longer in its employ or who had not worked the hours reported.

An audit last year found that from 1999 to 2008, as many as 2,000 current and former employees were overpaid on an annual basis. Although some of the money was returned, the amount that had not been reclaimed had risen to more than $3 million. The CRA blamed its own sloppy, manual payroll systems for the error.

As the Canada Revenue Agency demonstrated, having rules around time and attendance does not ensure the rules are followed. In fact, the larger an organisation gets, the less likely these rules, policies and practices will be followed in a uniform fashion. Organisations with many employees and multiple offices or plants will find that what started out as a level playing field has evolved into dog’s breakfast of practices created by regional labour market proclivities, unique labour-management relationship quirks, and varying interpretations of collective bargaining agreements and corporate policy.  The result is that people get paid money they are not entitled to.

In the simplest terms possible, a large organisation has a tendency to overpay some of its employees because of a combination of lax oversight, conflicting interpretation of rules and practices, and the use of antiquated, highly inaccurate manual systems. Like any great personality flaw, the secret to solving this problem – and reaping cost savings that do not require layoffs – is to acknowledge that there is in fact a problem.

Consider the case of Company A, a large national grocery retailer that boasts hundreds of outlets and thousands of employees. The company must also maintain more than 300 collective bargaining agreements (CBAs) for its unionised workers. Even with the most modern WFM solutions, it would be an enormous task to ensure pay policies and rules are followed precisely. In the case of Company A, the task is complicated by antiquated, manual time, attendance and payroll systems that breed inaccuracy and waste.

Company A’s problems are typical of those faced by large, highly dispersed companies. Despite having corporate policies and CBA’s in place, the interpretation of rules for regular and premium pay varies significantly from store to store, region to region. In one store located in a tight regional labour market, a manager who has trouble filling shifts becomes very generous when interpreting rules around overtime and paid leave. For example, although existing policy stipulates that a worker must put in at least three regular hours before the OT rate begins, the manager offers to start a worker who covers additional hours the OT rate from the beginning of the shift.

This variation on the hard and fast rules for OT accomplishes two things. First, it helps the local manager deal with the immediate need to fill shifts. But it also adds significantly to labour costs. In a time of great economic stress, when cutting labour costs is not a ‘want’ but a ‘need’, that sweetened OT package may solve one problem, while actually costing someone else a full or part-time job.

What is Company A to do? A full-scale WFM automation of all time, attendance and pay practices could certainly generate more than enough cost savings for Company A to justify the up-front investment. However, at a time of great economic stress, when many people understand that less is more, Company A could proceed with a surgical analysis of its WFM infrastructure to see how much money it is wasting by not adhering to existing rules and policies that govern time and attendance.  In addition, for the non-unionised workforce, Company A can examine ways to consolidate and standardise its corporate pay policies and practices in order to capture additional, immediate savings.

Start with a well defined strategy
For those organisations that suspect there are savings to be had in analysing the policies and practices that comprise the WFM infrastructure, the first question is:  Where do we start?

The first step in addressing this challenge is to develop a WFM strategy that encompasses the organisation’s short, medium and long-term goals.  While short-term goals may focus exclusively on eliminating waste and implementing tighter controls over labor costs through policy and process re-engineering, it is important to understand the longer-term goals as well.  Achieving the short-term goals should not come at the expense of long-term objectives, which can ultimately result in greater savings and value to the organisation as a whole. Long-term goals may include the complete, end-to-end automation of processes around labor forecasting, budgeting, scheduling, time and attendance and absence management. If so, the actions taken in the short-term to transform WFM business practices and operations will have a profound impact on the organisation’s longer-term automation goals.

Once the goals are clearly stated and communicated to the relevant stakeholders, the next step in the process is to perform a detailed gap analysis. This typically involves cataloging the current policies and practices as defined by corporate policy and collective bargaining agreements. With that information in-hand, the organisation can then perform an “audit” of current practices with the goal of identifying incidents of non-compliance. Closing compliance gaps can be accomplished through a combination of education, minor modifications to existing systems, reporting and disciplinary action.

In addition to addressing compliance issues, the organisation can also search for ways to consolidate, standardise and simplify the policies and practices not covered by CBAs. For many organisations that have grown through acquisition and/or are highly dispersed geographically, the existing WFM infrastructure is typically marked by a high degree of ineffective, legacy policies and practices. Consolidating these practices under a single corporate umbrella can result in significant savings opportunities. The key to standardising disparate practices is to understand first how each individual change will impact both employees and the company. For example, while standardising shift premium pay may disadvantage some employees, it could benefit others – quantifying the extent to which employees are impacted across the entire organisation will help management determine how to implement the changes.

The time is now for introducing change
Implementing changes that impact the WFM infrastructure can often be viewed as a very painful and risky undertaking. That’s because the policies, processes and practices under consideration can impact every single employee in a very personal way: how much they are paid. Given this, it’s not entirely surprising to know that many organisations, even after it has been shown that rules and policies are not being followed consistently, or that millions of dollars per year in labor costs are being wasted, refuse to lay down the law and require uniform enforcement. In some instances, it is feared that enforcing the hard letter of the rules will drive away employees from locations located in tight labour markets. Others fear an enforcement campaign will be interpreted as an act of provocation in CBA negotiations.

On the other side of the equation, these organizations may also fear making a decision to formalize a practice that has crept casually into company operations, out of fear it will lead ultimately to higher overall labour costs.

Regardless of the underlying reasons, the first step in addressing this challenge is to forge the will to enforce existing rules, policies and practices. The key to effectively implementing WFM changes during the best of times is to communicate exactly why and how the changes are taking place. During recessionary times, the negative impact of such changes can be muted or even eliminated if it is shown that the net result will help to save jobs and position the organization to emerge from the recession even stronger than before.

Industry-leading organisations know that making tough decisions is especially important in tough times. These organizations understand that, at the very least, the lack of compliance with existing rules and policies must be identified to quantify the size of the problem. Only then will an organization be able to make an informed decision about which is the best path to cost reduction.

The consolidation, standardisation and, ultimately, automation of pay and entitlement rules can drive as many, or more, savings as clumsy, traditional tactics such as layoffs. However, embracing these strategies in the eye of an economic hurricane will not be easy. Organizations will need to demonstrate intestinal fortitude, imagination and vision to see the value of this kind of thoughtful, comprehensive analysis. Those organizations that embrace this bold approach will find that they not only survive the economic crisis, but thrive in the post crisis world.