The ‘cost’ of HR

16 December 2016

The focus on HR costs seemingly does not go away. Most organisations regularly track or review the cost of their HR function in one way or another and it is often scrutinised further in times of economic recession or as the organisation begins to look to amalgamate the support function landscape.  
Measure up!

So how do you best measure HR cost and compare it? You probably already have in mind the 'classic' measure, HR cost per employee (or FTE) as most favoured. But it is equally recognised that the cost of an HR function is influenced by many things - industry sector, level of functional maturity, locations, high-touch v. low touch service and the type and level of technology. Understanding cost performance maybe isn't as simple as it first appears.

Our benchmarking data shows multinationals can have an HR cost up to 50% higher than non-multinational operators in the same sector due to country and regional complexities and the requirement for more levels of management. And then there are the effects of centralised versus decentralised HR models - a highly decentralised HR function typically has a one third cost premium to an equivalent organisations’ centralised HR model.

So what is the best way to measure the cost of HR?

Well, there are a number of options available. The previously mentioned 'HR cost per employee' is certainly a solid measure; its real strength is its clear link to the number of employees which of course drive the demand for HR services. This measure loses applicability however if comparing internationally between higher and lower cost countries or regions, and also between industry sectors. So, there are also percentage-based measures (like 'HR costs as a percentage of organisation costs') which remove these wage/price differentials and are therefore preferable to use when making cross-sectoral and international comparisons of cost performance, especially if you are a multinational. Much less common, but increasingly seen is 'HR costs as a percentage of revenue'. Often we find there is a finance function influence behind this measure, but while revenue is the main driver of finance function activity this is not true of HR services. Two organisations of equal workforce size and equal HR cost could look very different on this measure if workforce productivity in one organisation is better than the other.

Of course any of these measures can be used, but the key lesson is that none should be used in isolation. For good reason, the cost of HR ‘per employee’ should remain part of any cost assessment, and is often cited by HR teams as a KPI, but other measures might be needed in parallel to qualify other factors influencing the cost environment. We advocate a balanced approach - well there wasn’t going to be a single definitive answer, right?

None of this helps you to answer the question of what the cost of HR should be. It might be argued that the current cost of an HR function is much less important than its direction of travel and whether this fits with organisation’s cost focus, growth objectives and the people/HR strategy. And as we talk increasingly about those tangible value-add services that are finally coming to the fore in the HR world, together with a growing focus on customer measures, perhaps the language of HR cost will be replaced by one of workforce ‘investment’. Never mind the cost, feel the quality!

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