Human resources is a cost centre, not a profit centre. Have you ever heard this? I hate this statement. It is one of the most idiotic and short-sighted observations ever made by a leader. It is a fundamental fact that a business is only as good as the people it hires, develops, and retains. Without its people there is no business. Fact. It is also a fact that a proper strategic HR function improves a company’s ability to hire better talent, improve the capability of that talent and keep that talent for longer. If you think that costs the business money, instead of making the business more money, you should not be a leader.
The cost of hiring
Hiring is expensive, it has been proven by various pieces of research including the US Governments own Department of Labour that hiring someone new costs on average one third of that person’s salary. The cost is not just as simple as paying a recruitment agency fee, it will include things such as having to do employment checks, job adverts, lost productivity of the manager and team members who have to take time out from doing their job to interview, and potential sign on bonuses or pay increases to bring someone new on.
So, if you have 100 people in your business and the average salary is $45,000 and you must replace 15 employees a year. That costs you $225,000 and that is before we even consider the cost of onboarding or training, and we have not even begun to talk about the cost of lost productivity. If you are a large multi-national corporation with 10,000 employees, these same figures mean that the cost of hiring is $22.5m. Does having a HR team that is able to increase the speed of hire, and reduce the costs involved cost the business money? Of course not!
In addition to the specific costs related to hiring, there are also wider productivity costs caused by employee turnover. Research has shown that the productivity lost because of employee turnover is of significant value. A conservative estimate on the cost would be 50% of the employee’s salary, most research puts the figure at closer to 75% of annual salary. This figure factors in the average time from when an employee quits or resigns, the vacancy being open with no one doing the job, and then even when a new hire starts, the time it takes for them to get fully up to speed.
So, if we return to our example above, the same small business of 100 employees are not only having to pay $225,000 to hire 15 replacement employees. They are also losing an additional $337,500 in productivity because of the employee turnover. That means the total cost of employee turnover for them is $562,500. The large multi-national with 10,000 employees is losing an additional $33,750,000 in productivity incurring the hiring cost of $22.5m which means their total cost of turnover is $56,250,000.
With the cost of hiring in mind, now imagine that your HR team puts in place programs to reduce company attrition from 15% down to 10%. For that small business of 100 employees, that saves the company $75,000 a year by not having to absorb the cost of as many hires. The company would also ensure the workforce is more productive and an extra $112,500 in gained in productivity. This means a strategic HR team, just in these two areas would save the organisation $187,500. For that multi-national corporation with 10,000 employees, that is a saving of $7.5m just on hiring costs plus an additional $11,250,000 in productivity, resulting in a saving of over $18m dollars.
In what world, could any competent business leader consider such an impact by a department as a cost to the organisation. This is just at a surface level of the huge variety of benefits to the bottom line an effective strategic HR function brings. There are also the added benefits of various learning and development programs. For example, if HR train sales staff to make more sales, there is another financial benefit to the organisation. If they are training leaders to drive better results, even more financial benefit. If they train operations people to be more efficient, again the organisation reaps financial gain.