Every company out there needs a capable HR team. Why? Well, because their performance is determined by the performance of their staff, which is directly affected by how well they are managed by HR. Sure, HR is indispensable but good HR doesn’t come cheap.

Therefore, a lot of entrepreneurs are asking the question: what is the real cost of human resources? Other than this, what they’re also wondering is whether it’s possible to lower these expenses without diminishing the effectiveness of their HR. Let’s find out!

1. The benefit of Human Resources

The first major task of your HR is to improve the employee turnover that you’re facing. You see, once you hire an employee, you’re investing in them. Hiring alone is an expensive investment but your investment path doesn’t end there. You first need to train them and keep up with the period in which they’re not productive (until they get enough knowledge and experience). Only then will they start yielding the return. From that moment, until they finally leave you, you will get to profit from your employee. It is the job of your HR department to ensure that you get from them as much as you can.

Another role of your HR is to resolve the conflict in question. Conflict creates a hostile work environment and may result in a major confrontation (major or minor) if left to the members of your team to resolve on their own. Sometimes, the conflict is between someone in the management position and a subordinate, in which case, the balance of power may lean heavily towards one side, thus making the scenario even more difficult and complex. All in all, it is the job of your HR to help mitigate the damage and mediate in this situation. Without them, a lot of conflicts would result in either talent abandonment or a harassment lawsuit. 

One of the biggest responsibilities of your HR department is to Increase employee satisfaction. This directly affects three things. First, it affects employee productivity, seeing as how it directly impacts the amount of effort that they’re motivated to invest in the workplace. Second, it affects the talent retention, due to the fact that your employees are bound to leave if they feel dissatisfied. Several passages ago, we’ve discussed the investment that you make in each of your employees. Well, them prematurely leaving puts you in a significant deficit. Lastly, it improves the way in which your employees talk about you, which is a direct hit to your reputation.

The next thing worth keeping in mind is the active role that your HR takes in processes of hiring, training and development of your staff. The members of your HR are there to evaluate your staff members and make a plan that will get them from point A (where they are now) and point B (where they should be) in the shortest time-span. Seeing as to how hiring, training and development are all quite expensive, a good HR team can help you mitigate these costs and get the most value for your money. Overall, it’s a task that’s more than worth your interest.

2. The HR cost

Another thing you need to take into consideration is how to measure the HR costs? Before we even start discussing this, it’s important to mention that there are four major reasons why this is so important. First of all, it helps you monitor departmental costs, which, in the end, helps you monitor all the expenses of your company. Second, it helps you measure the active impact of your department and the overall success that you’re facing. Third and perhaps most importantly, it allows you to predict future costs. This helps you with projection and planning. Lastly, we’ve already mentioned the benefits of a good HR, however, now, you’ll be able to see an ROI of it all.

The thing about costs is the fact that they’re already an umbrella term. For instance, once you decide to start classifying costs, you’ll find that there’s a great discrepancy between fixed and variable costs, opportunity costs, the value of money over time and an estimated value of employee time. This latter will help you figure out whether you’re overpaying or underpaying your employees. Then, there’s the sensitivity and break-even analysis, which helps you figure out the profitability ratio of your enterprise.

It is your job to figure out where your HR fits into this picture and one of the ways to do so is to focus on the efficiency metrics. These are, for instance, cost-per-hire of your employee, the time that it takes your HR department to make a hire, the overall training expenditure, etc. The reason why these metrics are so relevant is due to the fact that they reveal the comparable amount of value that you’re getting for pouring all those resources into your HR.

3. HR budgeting

The next thing you need to consider is a budget allocation in the field of HR. You see, there are a lot of ways for you to do so. For instance, you can allocate costs according to the tasks, instead of just trying to figure out what your HR activities cost you, in total. For instance, you can take the amount of money that your HR is supposed to use for the supervision of each department. Second, you have the amount of money that goes for recruitment, training and development, etc. This way, you have a more accurate image of what’s going on.

Other than this, in order for all of it to work, you need to start taking a closer look at the financial aspect of your HR, as a whole. For instance, there are your HR goals (both short- and long-term). Then, there’s reviewing the strategy, preparing for unexpected occurrences, etc. Remember that planning and budgeting aren’t the only tasks that will determine the efficiency of your HR activity. There’s also fundraising and when in need of a quick capital injection, you need to have a prearranged plan. One such plan is to look for online lending platforms like OurMoneyMarket and check out the short-term loan terms that you can get there.

4. Outsourcing vs. in-house

Perhaps the most important question regarding the costs of your HR is whether you’re outsourcing or handling this situation in-house. Each of these methods has its own set of perks and downsides. For instance, when outsourcing, you’re cutting the time until your HR team gets to a certain level of efficiency. You’re also cutting immediate costs, due to the fact that you’re just paying for the services of the HR agency. What you’re not doing is investing in the hiring, training and equipment of the HR team. In time, outsourcing often turns out to be a more expensive solution but when it’s the efficiency that counts, things are not so clear-cut.

As far as the in-house HR department goes, it’s questionable whether a small business and a startup can justify this cost. Having three employees (which is a common staff number for a small business) and one of them being in charge of HR is not that cost-effective. On the other hand, by handling your HR in-house you’re maintaining more control. Other than this, you stand to save money in the long run and you get to keep all the information regarding your enterprise as private as possible. All in all, both methods have their perks and downsides.

5. Optimizing the costs

In order to optimize the costs of your HR department, there are several things that you need to do. the first tasks are to re-examining the cost of operations as it is. Remember, in order to fix the problem, you must first figure out where the problem is. So, start with some basic budgeting – put everything on paper and make sure to see where all the HR money is getting funneled towards. With this issue resolved, you’ll get a basic idea of how to optimize the costs.

In this day and age, there are so many amazing HR management tools out there. By investing in a new tool you can increase the efficiency of your team without having to hire more people. This alone is a major boost, that you simply can’t ignore. Other than this, you can allow your smaller HR team to outperform a much larger HR department of your competitor. Sure, a premium HR tool is not inexpensive, however, when compared to the cost of expanding your HR department, you’ll see that the investment in question is more than justified.

Another thing worth keeping in mind when it comes to cost optimization is the concept of balancing short-term business needs and long-term value. On the one hand, there are some investments that would be quite good for your business in the long run, however, making them right now would compromise the well-being of your business. This is why, when it comes to the long-term strategy, you need to take baby steps. Also, for this to work, you need to figure out exactly where you want your enterprise to be in five or ten years, however, you should never put this ahead of where your business should be in a month or two.

Lastly, you need to learn how to build a flexible HR structure. Relying on freelancers is not a sustainable business model but it can be useful at times. Outsourcing, on the other hand, is quite sustainable, seeing as how you can just expand the services that you’re currently receiving, once you figure out that it’s necessary. For instance, hiring is one of the core tasks of your HR and there are a lot of enterprises that use services of hiring agencies once they find themselves in this position.

6. Efficiency rather than size

Lastly, you need to understand that, when it comes to your HR, the size of the department isn’t everything. As we’ve already hinted, a much larger department can easily be outperformed by a smaller team with more experience, better tools, more efficient training and a more suitable business model. So, the first thing you need to do in order to make things right is to start hiring experts and people with experience. Sure, this will end up costing you more but it’s not about the cost. It’s about the cost-to-performance ratio.

The next thing you need to do is to invest in their education. You see, the field of HR is constantly changing and your staff needs to be able to keep up. Nonetheless, this is a field that’s heavily regulated, which means that you can’t just expect your staff to automatically know what to do. They need to be constantly educated on the subject matter by having access to the latest materials and attending courses and industry events. Needless to say, this is something that your enterprise needs to pay for (unless, of course, you’re outsourcing your HR, altogether).

Lastly, regardless of how great your HR team is, on paper, in practice, their performance will depend on several factors. First, they need to be properly equipped, which falls on you. Second, at the end of the day, you’re the person in charge when it comes to decision-making, especially decision-making regarding your HR. What this means is that when your HR comes to you with a complaint or a suggestion, it would be best for you to listen closely to what they have to say. After all, they’re the ones in-the-field and their view of the situation, as well as their experience, are invaluable assets to your enterprise.

In conclusion

All in all, in order to start working on this, you need to properly review the situation at hand. Therefore, start by making two evaluations. First, what is the state of your HR at the moment? Second, what state of HR does your company require? Remember, these are quite delicate issues, which is why it would be unwise to start making any plans without having a seasoned HR professional as a consultant. This is a basic concept that you would do well to abide by.

Emily Wilson is a business psychologist based in Sydney, Australia. She has a passion for marketing and design, researching, exploring and writing.