HOW CAN AN HR DEPARTMENT REDUCE COSTS? 11 Paths To HR Cost Optimization

December 4, 2024

By Shelley Brown, CHRE, FHRPA

Looking for ideas to reduce HR department costs? You’ve come to the right place.

In our blog post last month, we provided a collection of HR Cost Benchmarks both by Employee and a % of Revenue. Naturally, most companies probably want to find a way to reduce their HR costs and improve budget efficiency. In fact, 61% of HR professionals cited reducing costs and improving efficiency as a priority.

So, in this post, we’ll use our 20+ years of experience as HR consultants and leaders to share 11 ways HR departments can reduce costs. Here we go…

1. Implement HR Technology and Automation

Implementing HR software: for tasks like payroll, benefits management, attendance tracking, and leave management can save time and reduce errors, minimizing the need for manual work. This leads to fewer administrative costs and improved efficiency.

Self-Service Portals: Allow employees to manage their own information, benefits, and time-off requests, reducing HR's administrative burden.

Recruitment Automation: Use AI-driven platforms to handle initial candidate screenings, saving time and resources in the hiring process. Are you wondering about the pitfalls of implementing HR AI?: check out our post on 6 Challenges HR Professionals Will Face With AI

2. Improve Employee Retention

Reduce Turnover Costs: High turnover can be costly due to recruitment, training, and onboarding expenses. By improving employee engagement and satisfaction, HR can lower turnover rates, saving the company significant costs.

Career Development Programs: Invest in internal mobility by creating clear career paths and promoting from within. Development programs can reduce the need for external hires, which are generally more expensive.

Recognition Programs: Acknowledging and rewarding employees for their contributions can enhance retention. Recognition programs don’t need to be costly—simple gestures of appreciation can go a long way.

For the causes of Low Employee Retention & ways to fix them, click on the image below:

An image of a blog post on Causes of Employee Retention

3. Review & Optimize Benefits Programs:

Periodically reviewing the benefits package can identify opportunities to cut costs such as:

Review Benefits Providers and Plans: Negotiate with benefits providers to secure better rates. Grouping plans, increasing deductibles, or introducing flexible options like health spending accounts can lower costs without sacrificing coverage.

Wellness Programs: Promote preventative health and wellness programs that encourage employees to maintain a healthy lifestyle. This can lead to fewer health-related absences and potentially reduce claims, impacting future premiums positively.

Modifying Retirement Plan Contributions: without compromising employee satisfaction.

Flexible Work Options: Offer remote or hybrid work options if applicable, which can reduce costs associated with office space, utilities, and commuter benefits.

4. Leverage Remote Work

Encouraging or adopting a remote work model can reduce the need for office space and associated costs, such as utilities and maintenance. HR can support this transition by creating flexible work policies.

5. Refine Recruitment Strategies

Hire Internally When Possible: Internal candidates are already familiar with company culture and operations, saving on training and onboarding costs.

Use Data for Targeted Hiring: Leverage data analytics to identify the most successful recruitment sources and channels. Focus recruitment efforts on channels that yield high-quality candidates at a lower cost.

Referral Programs: Employee referral programs often result in better hires and have lower costs than external recruiting. They also lead to faster hires and employees who stay longer.

6. Optimize Your Training and Development

Cross-Training: Cross-train employees to cover multiple roles, allowing the company to be more flexible in staffing and potentially reduce the need for additional hires or temporary workers.

Use E-Learning Options: E-learning platforms are cost-effective compared to in-person training and allow employees to learn at their own pace, reducing productivity loss.

Leadership Development Programs: Building leadership skills within the organization can help develop future managers internally, which reduces the cost of external hires for key roles.

7. Introduce Flexible Compensation Models

Performance-Based Pay: Implement variable compensation structures that align employee pay with performance. This model encourages productivity while giving the business greater control over fixed salary expenses.

Flexible Working Hours: Instead of hiring full-time employees for roles that may not require 40 hours per week, offer part-time, contract, or project-based roles as needed.

Review Pay Structures Annually: Benchmark salaries to ensure the company is not overpaying relative to the market. Ensure that benefits and perks are competitive but cost-efficient.

8. Encourage Employee Self-Service:

Implementing self-service portals for tasks like updating personal information, applying for time off, and viewing payroll reduces the administrative burden on HR staff.

9. Reduce Absenteeism and Improve Productivity

Employee Assistance Programs (EAPs): EAPs provide support services for employees dealing with personal challenges, which can reduce absenteeism and boost productivity.

Mental Health Support: Mental health programs can improve employee well-being and reduce absences related to mental health issues. This may include counselling services or online mental health resources.

Flexible Sick Leave Policies: For companies able to offer remote work, flexibility in sick leave can help employees work from home when they are under the weather, reducing the need for extended absences.

10. Leverage Government Grants and Subsidies

Training Grants: Look into available federal and provincial grants for employee training, like the Canada Job Grant, which can help cover costs for skills development. If you missed our Leadership Training Programs for Less Webinarwith grant advisor Sarah Hipson you can still catch a replay on our webinars page.

Employment Subsidies: Some Canadian provinces offer hiring subsidies for specific groups, like youth and recent graduates. Leveraging these programs can reduce overall hiring costs.

11. Outsource Where It Makes Sense

Ok, as an HR Outsourcing Company, we are admittedly a little favourable to outsourcing as an HR cost optimization strategy but it remains one of the most effective ways for HR departments to reduce costs. Options include but are not limited to:

Outsource Non-Core HR Functions: Functions like payroll, compliance, and benefits administration can be outsourced, saving on the cost of specialized HR staff.

Seasonal Hiring Outsourcing: Outsource temporary hiring or use staffing agencies to manage seasonal or project-based workforce needs without the long-term costs associated with full-time employees.

HR Outsourcing Company Augment HR Consulting

When Does Outsourcing HR Make Financial Sense?

The decision to outsource HR comes down to improved operational effectiveness and finances. Many companies question whether outsourcing HR makes sense and in what situations. In a past article, When should your company outsource HR? we addressed the question of when it's cheaper to outsource HR.

When evaluating whether outsourcing HR is beneficial for your organization, two primary considerations come into play:

1. The Cost of In-House HR: Employing an in-house HR manager typically involves a significant investment. The average salary for an HR manager ranges from $75,000 to $105,000 annually. Beyond base salary, the cost of hiring includes mandatory expenses such as employment taxes and benefits, which usually add an extra 18-26% to the total compensation. In addition to salary and benefits, there are often other indirect expenses, such as recruitment costs, ongoing training, and overhead for the HR department.

2. The Cost and Flexibility of Outsourced HR Services: Outsourcing HR can provide flexibility and potentially lower costs. Many HR outsourcing firms offer scalable solutions tailored to your company’s size and specific needs, allowing you to pay only for the services you need, whether that’s payroll processing, benefits administration, compliance management, or employee relations. If you can access these essential HR functions through outsourcing at a lower cost than maintaining a full-time, in-house HR team, it may be a more practical solution, especially for smaller or growing companies.

In essence, if outsourcing allows you to manage your HR needs effectively at a lower cost than employing full-time HR staff, it can be a smart move.

Whether outsourcing or using any of the other 10 approaches we outline here, the HR department can play a strategically valuable role in reducing costs while maintaining or even enhancing employee engagement and productivity.

Ready to lower your HR costs per employee? AugmentHR is a Toronto HR consulting firm that delivers expert guidance and hands-on HR. Reach out today to explore your custom HR solution options.

Shelley Brown is a senior HR Consultant who has been granted the Human Resources Professional Association’s Fellow Award. She’s a sought-after speaker for her experience as an HR leader and Executive Coach. In her last executive role as HR leader at a global healthcare organization, she used her knowledge and leadership to help them become a top employer of choice in Canada.