For most business owners, labor cost control is a top priority. If you’re looking to reduce labor costs, you’re not alone – the average business owner spends 50 to 60% of their budget on labor costs.
There are countless ways to reduce labor costs and manpower, and in this article I’ll be covering 19 ways you can do it in your business.
Analyzing each strategy can help you determine what measures work best for your business and budget.
What is Labor Cost Control?
Labor cost control is the process of measuring, monitoring, and managing labor costs to maximize efficiency. It’s a way for employers to identify areas where they can reduce direct labor costs without sacrificing quality or service. It also helps employers understand how their costs are changing over time and make decisions about how to allocate resources in order to maximize efficiency.
The process involves analyzing labor trends, understanding the impact of changes in labor regulations, managing overtime costs and business schedules, measuring worker productivity, and ensuring that wages are competitive with those of other employers. It also requires setting clear goals for labor efficiency and tracking performance against those goals.
Why Is it Important to Control the Cost of Labor?
Controlling labor costs is important for many reasons. It can help businesses remain competitive, reduce expenses, and improve customer service. It also helps employers attract and retain top talent by providing wages that are comparable to those of other employers in the industry.
By finding ways to reduce your labor costs you can ensure you’re operating efficiently while still providing a quality product or service. This allows them to remain profitable and continue to grow, which is essential for any business to be sustainable.
Benefits of Reducing Labor Costs
Implementing an effective system of labor cost control can create a wide range of benefits for your company. Here are just a handful:
- Financial savings by reducing overhead costs (i.e. employee pay, benefits, or taxes)
- Improve employee morale and engagement by providing fair pay and incentives
- Reduce employee turnover
- Increased productivity, efficiency, and customer service quality
To illustrate the tangible impact this can have, let’s assume your company currently has 15% profit margins.
Each 1% reduction in expenses you can create will increase your profits by 15X.
How Can Employers Control Labor Costs?
Before getting into the strategies, step one is to analyze your current labor expenses.
- How much money are you currently spending on labor?
- How do your company’s labor costs compare to other similar businesses in the industry?
Once you have a good understanding of your current costs and how they compare to others, you can start looking at strategies to reduce labor costs.
Cutting labor costs can be done through these 19 ways:
Cut Overtime
Make sure employees only work overtime when absolutely necessary.
Determine when overtime is beneficial and necessary, and monitor overtime hours to ensure that pay rates are not getting out out of control.
A few ideas:
- Offer incentives for each employee to complete tasks in regular working hours
- Think about more efficient ways to organize employee scheduling
- If possible, try to use part time employees or hourly workers instead of full-time workers who work more than 40 hours per week
Streamline and Automate Processes
Analyze current processes to identify areas where they could be improved or streamlined to increase efficiency and save money.
Evaluate your current operations to identify redundancies, unnecessary or outdated processes and areas of waste.
This freed up time can allow more capacity for high value activities (i.e. focusing on how to get future sales).
One tactical way to do this: make your team justify why they need each and every existing process. This exercise alone should likely eliminate 50%+ of time spent on current processes.
Automating certain tasks and using emerging technology can eliminate the need for manual labor. Consider using automated scheduling programs or online systems that streamline processes such as inventory management, software development, payroll processing, and customer service inquiries.
Invest in Hiring and Onboarding
Investing in the right people is essential.
Your recruitment and onboarding process should be designed to attract and retain talented individuals who can help you operate efficiently and achieve your goals.
Look for candidates who have skills and experience relevant to the job, and make sure you provide adequate training for new employees so they can be successful in their roles.
Adopt Flexible Working Practices
Consider offering flexible working practices that allow each employee to work remotely or set their own hours. This can help reduce overhead costs while also providing employees with the flexibility they need.
By offering flexible work practices, you could help reduce turnover and encourage staff to stay with your business for longer periods of time, reducing recruitment spend over the long run.
Track Performance to Reduce Labor Costs
Make sure to track employee performance data so you can identify areas where spend is increasing or productivity is lagging behind.
Are there ways to optimize employee scheduling or employee hours?
Can you improve forecasting and limit surprises and unforeseen costs?
This can help you adjust processes or personnel if necessary, to ensure your labor burden remains within budget.
Hiring Freeze: No More Hires, Outside Contractors, or Temps Without Your Consent
Implement a policy that requires all new hires and temporary workers to be approved by senior management before they can join the team. This will help minimize payroll creep and ensure only essential personnel are hired.
I recommend not creating forms for this – make your team ask you personally. This requires people to justify and make a strong case for any potential new hires.
Keep your staff lean and hire only when absolutely necessary (or else you’ll likely end up with unnecessary and redundant positions). If you can keep your business running smoothly without it.
Utilize Technology
Look for ways to use technology such as cloud computing, artificial intelligence or robotics to improve efficiency without sacrificing quality or customer service.
Can you reduce pay overages and spend less money by optimizing schedules?
Have advance notice around customer traffic support spikes and schedule changes?
Technology solutions such as automated scheduling software, time tracking, and online payroll can help employers reduce human error and labor burden.
Review Benefits
Evaluate the benefits package you offer employees to ensure it is competitive and cost-effective.
Are your hourly wages and benefits in line with your competitors and industry?
Aim to provide only what each employee values, nothing more. I’d recommend keeping a pulse on what your team wants the most when you craft your benefits packages and other perks (i.e. health insurance, pension plans, PTO).
Reduce or Eliminate Off-Site Events
Cancel or reduce off-site events such as company retreats, conventions and conferences. These events can be expensive and time consuming for both your team and the organization.
Most of your employees likely would prefer not to travel away from their families, so this is a win-win.
Invest in Training to Increase Productivity
Make sure your full time employees are working efficiently and effectively by providing them with the necessary resources, training and motivation to do their jobs well. This can help you create a smarter workforce and maximize output without having to hire additional staff.
Providing employees with additional training can improve their efficiency and boost productivity, reducing the need for extra staff.
Outsource Non-Essential Tasks
Outsourcing tasks such as IT support, bookkeeping or customer service is likely low-hanging fruit to reduce labor spend. Make sure to partner with reliable providers who can provide quality work in a timely manner.
Offer Incentives for Employees who Suggest Cost Saving Ideas
Encourage your employees to come up with creative ways to maximize efficiency. Offer rewards or incentives for ideas that are implemented, as this will help foster an environment of innovation and cost-savings.
Reduce Number of Managers
Reduce the number of managers in your organization. As a rule of thumb, you can likely get away with eliminating 2 out of every 3 existing managers.
If you think this is too much, test this at a smaller level (eliminate 10% of managers) and see if it results in any negative impact to the business. You could consider assigning multi-functional roles to existing staff, expanding span of control for your best managers, or even outsourcing managerial functions.
As the Harvard Business Review says, “management is the least efficient activity in your organization.”
No Automatic Bonuses or Raises
Provide a performance-based incentive system that rewards employees for meeting or exceeding goals. These performance bonuses should be tied to clearly defined expectations and outcomes, so employees are motivated to work efficiently.
Instead of giving bonuses or raises annually, I recommend moving towards periodic and unpredictable merit bonuses. This will remove entitlements and will be valued more by your staff.
One way you can recognize hard work and effort is to give titles in lieu of bonuses.
Negotiate Rates
Wherever possible, negotiate rates with vendors or contractors who provide services that are essential for running your business.
This can help you improve cash flow while still getting the quality of service that you need.
Cross-Train Employees
Cross training staff can allow folks to perform multiple tasks and eliminate the need for specialized workers.
Can one employee take on the job of what many are currently doing?
This can help you save a significant amount of money and increase effectiveness by allowing employees to take on a variety of roles.
Annual Headcount Reductions
Aim to eliminate 10% of your lowest performing employees each year and replace them with higher-performing staff. Jack Welch was famous for doing this during his years running GE.
The truth is you likely have too many employees, and you should make cuts while focusing on retaining those with the most valuable skill set.
You can likely get rid of admins or managers that don’t contribute to profit or customer experience (or increase productivity). This can extend to functional areas such as accounting, IT, finance, and legal.
The goal is to upgrade your staff continuously and create a high-performance culture.
Reduce Employee Turnover
I’ve written a detailed post on how to retain great people and increase employee morale.
A handful of takeaways:
- High performers are an astounding 800% more productive than other employees
- Pay your best folks 30% over market (those contributing to profits)
- A strong onboarding process is vital for retention
- The cost of retraining employees that are lost is extremely high
Monitor and Improve Labor Costs Regularly
Make sure to monitor costs regularly to ensure that you are staying within budget and making efficient use of your resources. Regularly review your data and make adjustments as needed.
A few recommendations:
- Establish efficiency goals within your business (i.e. reduce spend by 5% each year)
- Measure worker productivity and performance: utilize metrics to measure the productivity of individual workers so that you can identify areas where performance can be improved.
- Track labor patterns over time, understand the impact of changes in labor regulations and assess how your company workforce is changing.
Conclusion
These are just a few ideas to get you started around reducing manpower and improving efficiency to scale your business operations.
By carefully analyzing costs, setting clear goals, and tracking performance, businesses can develop a system that will help gain control of spend while providing top notch service and a quality product.
By thinking creatively and outside the box, you can come up with even more ways to save money while still maintaining a high level of productivity within your company.
