Unfortunately, 2021 could be the year of layoffs at many businesses, large and small, in the U.S. and throughout the world. For those businesses that managed to hang on to employees in 2020, this year might pose even more challenges.
If you own a business and your goal is to reduce labor costs without necessarily laying people off, there are strategies you can try.
Labor costs are usually a significant portion of the total costs for a small business, and you might be able to reduce your costs in the short-term by downsizing your workforce, but this isn’t necessarily a sustainable strategy. For example, once the dust settles and the COVID-19 vaccine is more accessible, you may once again need to ramp up your business, and you’ll need the personnel that will allow you to do that.
With that in mind, the following are ways to reduce your labor costs without cutting your workforce.
Introduce Automation
Automation is something big and small businesses can benefit from. For example, if you were to utilize automation in your AP department or other areas of finance within your business, you can save money in a variety of ways, including on labor costs.
First, you’re reducing tedious, repetitive administrative work that needs to be done. This means you can be more efficient in other areas of your business, and your employees can contribute more value in terms of strategic thinking. That doesn’t necessarily reduce labor costs, but it does help you become more profitable and perhaps more innovative, so driving revenue might offset some of your other labor costs.
You’re also reducing human error, so you can spend less on having employees go back and fix mistakes.
Automation is something we think of as a job-killer, but in small businesses and outside of manufacturing that doesn’t hold true. Instead, automation can improve your workflows so you save money in different ways and maximize what you are spending in labor costs and other areas.
When you use automation in key areas, you are optimizing the workforce you have, rather than simply slashing it.
Another way to use software and automation to reduce labor costs is to make it a way to track your workforce. You want to have a high-level view as well as a granular view of factors like employee efficiency and attendance.
When you have data, you’re able to make reduction decisions, if it comes to that, based on facts and analytics rather than emotions or feelings.
You’re making decisions to cut employees based on their lack of contribution, and then you can let other employees know why you made that decision, which is better for morale and culture as opposed to indiscriminately laying employees off.
Reduce Turnover
Turnover might seem like the last thing you’re concerned with when you’re trying to cut labor costs, but something a lot of small businesses fail to understand is how expensive employee turnover is. When you have a high turnover rate among employees, you’re going to be spending more operationally because you have to pay employees to recruit, hire and train new employees.
You’re going to see more costs related to inefficiency and waste, and you might even be more prone to fraud because employees see their time working for your business as temporary.
Having a stable core workforce is a good way to be prepared for both lean and high-volume times and to reduce your overall workforce costs.
Review Compensation
Going over compensation levels isn’t necessarily something you’re going to enjoy doing, and it’s certainly not something your employees are going to be excited about, but it has to be done at regular intervals.
In general, compensation, including salaries and wages moves upward, despite shifts in financial conditions.
You want to make sure that how you’re currently paying employees is in line with what’s going on financially and economically. For example, you might do a compensation review and find that your employees are earning more currently than they would be if you were to hire them today.
You might not cut their wages or salary necessarily, but you might freeze any future raises for the foreseeable future.
Another option that could be available is to turn wages or salaries into commissions and fees. This means that your employees are earning when you’re earning.
Cross-Train Employees
One of the best ways to reduce waste when it comes to workforce costs is to ensure you have the most efficient, well-trained, and generally productive core workforce. Cross-training can be a big part of this.
When you’re too dependent on any one employees’ skills, you’re going to pay a premium. If you have a workforce that’s robustly trained in different areas of operation, you’re better prepared to weather possible headwinds, and you’re more agile. You can make changes to your business more easily without your customers seeing the effects on your products or services.
If needed, this can also give you the opportunity to have employees share jobs with one another. You might have part-time employees rather than full-time when possible.
Finally, if you can, outsource some tasks. You want your onsite employees to focus on the most critical things that need to be done each day. If you have administrative tasks or things that can just as easily be done offsite by a freelancer or contract employee, then you should make that happen.
Then you can have people there on an as-needed basis, so you can easily ramp up or down based on where you are at any current moment.
The idea of reducing your workforce costs is a difficult one to swallow. For you as a business owner, you feel a responsibility to your employees, but there are steps you can take to keep your business afloat before you start big cuts to your staff.
For your employees, while they might not want to face some of these changes, it’s important that you explain to them the whys of everything you’re doing.
