What is HR for most companies? First of all, it’s one or more people who need to be paid salaries for reasons unrelated to the business, provided with computers, given office space, and, even worse, have business processes wrapped around them and managerial resources allocated from the perpetually busy company director. It’s a nightmare. A tumor on the body of the business that threatens uncontrolled growth.
From this perspective, it is clear that companies:
- They try to manage without an HR department for as long as possible, envisioning HR as just an internal service for recruitment and maintaining personnel records. The company director handles the recruitment themselves, while the secretary or accountant takes care of the paperwork and also calculates everyone’s salaries. Moreover, it’s the accountant who is aware of the fines for improper personnel policies and who remembers, for instance, how many disabled individuals need to be employed by the company.
- They can be divided into companies that have grown to establish an HR department and those that have not yet reached that stage. In the statistics on the distribution of companies by the number of employees, this boundary should be clearly visible, as such a transition represents a potential barrier that requires additional resources to overcome – a classic example of hysteresis.
- The creation of an HR department is often seen as a necessary measure when the accountant and the secretary can no longer handle the personnel documentation. In such cases, they hire another secretary and assign the previous one the responsibility for managing the personnel records. Doesn’t this sound like a familiar career path for HR professionals in our country?
The title of this article and the first paragraphs were merely a distraction. This article is intended to assist HR managers, allowing them to share it with decision-makers in their company, ensuring that these individuals do not immediately dismiss its content as contrary to their beliefs and business practices. experience. and would at least read the next paragraph out of habit.
In fact, this article is not about how to save on HR, but about how to transform a costly structure into a profit-generating one. Defense is always the strategy of the defeated. To survive, one must attack. To run a successful business, it’s not about cutting costs, but about generating profit from investments. This is why management finds it easier to accept expenses for fuel for the company’s fleet than, say, expenses for the HR department. After all, fuel pumped into the vehicles promises either direct profit if you are a transportation company, or indirect profit or cost savings compared to alternative options, such as hiring third-party carriers.
From this perspective, specifically the perspective of marginal costs, it’s worth looking at HR. It turns out that a company can, with the right organization of its HR department, not only avoid costs associated with its operation but actually make money from it in a literal sense.
Of course, this won’t be cash on the company’s account coming from outside. It will be a figure that shows not an increase in the company’s overall costs due to the existence of HR, but a figure that indicates their reduction. Moreover, this reduction is often critical for the survival of the business. In other words, expenses on HR of 100 hryvnias should lead to a reduction in costs of at least 101 hryvnias. Even better if it’s 200 hryvnias. After all, it is from “these two percent” that most companies survive. The key lies in the proper organization of the HR department. So, decision-makers, are you ready to read on?
Table of Contents
Search and selection
The most interesting thing is that searching and selecting candidates is not an HR function. I mean, not at all. An HR manager or department simply cannot handle this properly and professionally. Can the capabilities of professional recruiters be compared to those of an individual or a department? It can be compared, but the comparison will not favor the in-house HR team.
| HR department | Recruiter |
|---|---|
| • Search and selection is one of the functions. Time is only devoted to it after all “personnel accounting activities” have been completed. |
• Search and selection is the main function, and it occupies all the working time of a professional recruiter. |
| In a small company, the search and selection process is either handled by “everyone a little bit” or by one person on the side. The number of interviews is limited. |
In a recruiting company, several people are involved in the search and selection process. The number of interviews can differ by an order of magnitude (up to 10 times). |
| In a large company, there is a dedicated recruiter who handles the search and selection process as applications come in. |
The company is free to hire as many recruiters as there are job openings. |
| • Recruiting in-house is more expensive because it requires constant fixed costs for salaries and workspaces. Even if the director handles recruitment themselves, the cost to the company and the business is exactly proportional to the amount of time the director spends on recruitment, multiplied by the company’s expenses for maintaining the director or the owner’s profit margin. |
• Recruiting through an external service does not require ongoing expenses. Often, the costs of recruiting “in-house” are hidden from accounting; however, it is important to consider the time that all employees spend on searching and selecting candidates and multiply it by the expenses the company incurs related to having these employees (salaries, office rent, transportation, internal client costs, management resources, etc.). |
| • No one guarantees the timely filling of vacancies. Businesses often “adjust” to the missing link before the vacancy is closed. This leads to an inability to grow and expand. In companies with around 100 employees, naturally and under normal business operations, there tends to be about one vacancy per month. If this vacancy is not filled in time or goes unnoticed, it becomes a critical issue for the survival of the business in a competitive environment, hindering development, growth, and increasing efficiency. A simple illustration: a vacancy for the first sales manager in the company that is closed a month late results in a lack of a suitable candidate for the head of the department when a competitor is already establishing that department a year later. Sales volumes, compared to the competitor, differ by exactly one department, and what’s even more concerning is that it only gets worse from there. The lack of one employee at the beginning leads to a loss in the end. |
• Recruiters guarantee the fulfillment of their obligations. The payment structure for recruitment services consists of a fee for the search services, which is paid separately and is not tied to the outcome, and a bonus for finding a candidate that meets the search criteria within the promised timeframe. Additionally, companies are not legally bound to recruiters, and the recruiter’s reputation is essentially the only thing they sell. With a large and developed recruitment market, companies are free to attract as many resources as they need at any given moment, thereby filling vacancies as quickly as possible. Any business depends on the resources at its disposal. There is always an optimal combination of resources that ensures the maximum return on investment. If a production facility has 10 machines but only 8 operators, it means that two machines are idle and not generating profit. Should they sell the machines? No. However, the absent worker, who is not generating profit, prevents the company from using the “next turnover” to buy a new machine and expand production. |
| • The labor market, especially concerning specific complex vacancies, is quite limited. The speed of finding the right candidate affects not only one’s own performance metrics but also deprives competitors of essential human resources. It’s also important to understand the limitations of an internal recruiter’s capabilities in searching and selecting candidates, as well as scheduling interviews, when candidates for a position are sought among competitors, clients, and suppliers of the same company. This is especially true when it comes to filling positions with specific requirements. |
• The capabilities of an external recruiter are much greater. Firstly, as mentioned earlier, the task of filling a vacancy is handled by an entire company, not just one person. This eliminates the issue of interruptions in the candidate search caused by the recruiter being on sick leave or vacation. Secondly, the recruiter has a larger, proportional search database due to their longer existence in the field. They are able to conduct direct searches without hesitation, reaching out to the human resources of competitors, clients, and suppliers. Additionally, a professional recruiter can find the right candidate faster than competitors. And speed in the search is important, as we have already understood, for at least three reasons. |
| • Companies often create candidate requirements based on the principle of the “magic prince on a white horse.” Of course, want to to ensure that the candidate was. “Jack of all trades, master of none.” Such a candidate will always be much more expensive than a specialized expert, and the search results will either be unsuccessful or inadequate. Conversely, there are times when the “dream candidate” turns out to be an overly narrow specialist who has… unjustifiably extensive experience Working in a specific position. A recruiter, of course, is not able to see the candidate requirements from the outside and compare them with the successful experience of filling similar vacancies in a dozen other companies. |
• External recruiters, especially those who specialize in optimization and business process reengineering, will help the company define the job requirements in a way that aligns closely with the role’s functions and eliminates any unnecessary elements, and then they will find the ideal candidate. It is professional recruiters who can grasp the essence of template phrases like “ Experience. “work in the market” and understand what exactly is required – knowledge of the product, knowledge of the production process and its specifics, knowledge of suppliers, or knowledge of consumers. After all, often, under the words “ three years of experience It simply reflects the employer’s lack of confidence in any candidate, regardless of their actual abilities and skills. |
| • An internal recruiter is not a generalist and simply cannot accurately and adequately assess a candidate’s professional and interpersonal skills. This leads to an internal fear within the company regarding candidates who are “auditioning” during interviews. As a result, candidates who know how to impress rather than those who know how to work are often hired. | External recruiters not only have the tools of professional expertise—such as having a finance professional interview a candidate for the position of Chief Financial Officer—but they also possess various techniques for objectively assessing both personal traits and professional competencies. Additionally, recruiters can utilize the latest methodologies to evaluate the personal characteristics desired for a specific vacancy and then find and select the appropriate specialist. |
The comparison above is enough to understand that the very idea of assigning the task of searching for and selecting personnel to internal recruiters, or even worse, to people who won’t dedicate all their working time to this process, is flawed. This is why the emergence of a dedicated HR department often does not improve a company’s performance; instead, it can worsen it and lead to additional costs. Interestingly, the HR manager tasked with recruitment, who is constantly asked, “Where’s the candidate?”, tends to be extremely protective of their role and views external recruiters as competitors. They often do everything possible to either exclude external recruiters from the recruitment process or ensure their lack of success by unreasonably raising the requirements for candidates, thinking, “Well, since they are being paid, let them find us a ‘golden fish’.”
It is up to decision-makers to understand and accept the simple idea that the function of recruiting and selecting personnel is not the responsibility of an HR manager. Implementing this function with internal resources is not only ineffective but also harmful to the business—catastrophically harmful. It turns out that filling vacancies “on our own” leads to a decline in the company’s performance and, in a vicious cycle, a lack of funds for organizing external recruitment. As the saying goes, “poor because foolish, and foolish because poor.” HR managers have other, more important tasks—tasks that will help the company earn money rather than spend it.
Based on the above, the functions of search and selection should be entrusted to external recruiters who have a good reputation, extensive experience in the market, an understanding of business process implementation, and the ability to assess personnel using the best modern methodologies. The last point serves as an excellent tool for company management, allowing them to filter out from the abundant selection those recruiters who lack the specified characteristics, regardless of the price difference in services. It doesn’t matter how cheap the service is if it is, in fact, not being provided. After all, searching for candidates “on a whim,” even without requiring an advance payment from the employer, is not business; it is charlatanism or, at best, a gamble.
Personnel management documentation
Personnel record management is also purely a cost function. However, unlike the function of recruitment and selection, it can be implemented effectively without additional accompanying harm to the company.
Of course, well-organized personnel management makes a company more efficient. Properly prepared job descriptions, personnel records, handling of vacations, sick leaves, terminations, and hiring, as well as tracking probation periods – all of this is important and helps prevent financial losses for the company.
At the same time, personnel management is taken seriously when a Chinese person gets a fierce dog and builds a fence in the yard. The decision point for the Chinese person regarding the fence and the dog corresponds to the situation where the potential costs of extortion and losses from theft exceed the expenses for feeding the dog and installing the fence. The dog and the fence do not bring in money for the Chinese person.
A dog and a fence serve as alternatives to the costs of extortion. The same goes for personnel management. It is necessary to avoid expenses and risks. Different companies realize the need to allocate personnel management to a dedicated employee at different times. Some come to this conclusion after paying a fine, others after losing a lawsuit to a dismissed employee, and some after recognizing the losses associated with non-compliance with workplace discipline. At the same time, in small companies, this person won’t be fully occupied, and they are often tasked with… yes, searching and recruiting, which is a strategic mistake for the business and practically slows down or even halts the company’s development.
So, how exactly does the HR department help generate revenue?
HR department as a profit center
The philosophy of the HR management problem in our country lies in the fact that we have:
- It is believed that an HR manager is just a trendy term for a personnel officer. Similarly, people think that a financial director is just a fashionable title for an accountant. HR management encompasses everything but recruitment and personnel record-keeping. All of this is the work of a personnel officer. None of this generates revenue or, as mentioned earlier, can even lead to additional costs.
- continue to believe that people they work for money No, of course, no one will work for free for long, despite previous examples of unimaginable salary delays at domestic enterprises. However, it is also clear that there is a fairly balanced labor market where the same work is compensated with the same pay. This means that people work for a particular manager or company for reasons that are not related to money. At first glance, one can assume that there are no significant barriers for people when it comes to changing jobs. (Yes, there are mono-cities where employers have a practical monopoly on providing certain jobs. In other words, changing jobs is a material issue, but of a different nature, and we are not considering that right now.)
So, globally and strategically, the HR department… answers It is precisely this question – why people not only come to work but also put in effort and deliver results while working for the company.
From a financial perspective, it may seem less romantic but clearer for business: Human resources are just as much a resource for a business as raw materials, time, and energy. The essence of business is always to buy low and sell high. Therefore, the cheaper a resource can be obtained while maintaining quality, or if a resource has better quality at the same price, the more profitable the business will be. Effective management of human resources should positively impact profits. Thus, simple and clear principles that business owners can understand apply to the work of the HR department. The main question that an HR manager should always be able to answer is how effective the human resources within the company are.
A simple example: to poach a specialist – ineffective, like any other blunt solution. An effective approach would be to create conditions within the company that foster the development of in-house specialists, where professionals from other companies would want to work for yours without considering the difference in salary. Thus, the role of HR is even about formation стиля. management in the company and its culture.
It turns out that office tidiness is an HR function, as is addressing training issues, particularly ensuring that it is appropriate and effective compared to alternative solutions. Talent management is an HR function. Implementing the right compensation policies, introducing grades, employee evaluation systems, goal management systems, and calculating and implementing key performance indicators are all HR functions. Motivation ,. stimulation , provision enthusiasm and the joy of work – the function of HR, building client-oriented approach in the company – HR function. Compliance — the HR function. Even PR is part of the HR function. Organizational development, restructuring – that’s the HR function. Organizing business processes – also the HR function. And, importantly, participation in strategic Planning is also a function of HR. Interestingly, all these functions are somehow carried out by someone in the company or should be performed by someone. If they are not being executed by the right people, we return to the question of how well the business processes are organized.
Here is an example of a simple financial approach to evaluating the value of human resources.
Compare the expenses on human resources (recruitment and selection, payroll, social packages, the cost of “downtime” for unfilled vacancies, training, motivational programs, and the actual costs of running the HR department) with the company’s revenues, both in your own company and in a competitor’s company.
Comments:
1.Hypothesis of greater turnover.
2.The hypothesis of a higher value of a job in a “good” company.
3.“The wicked save and seek on their own.”
4.12% of the average salary of open vacancies.
5.In the “good” company, the average salary is 60% higher.
6.The hypothesis of indirect costs arising from longer vacancy closure times and a higher number of open positions, caused by greater turnover, poor labor market offerings, and ineffective self-directed job searches.
7.The budget is the same, but the “evil” company has higher expenses per person.
8.More people, higher average salary, higher cost of a job at a “good” company.
9.The hypothesis is that in a “good” company, the output from each employee is only 10% higher, due to both the quality of the staff (+5%) and the right motivation (+5%).
Low salaries + high turnover (costs of recruitment and selection) + constant training + costs of “downtime” for vacancies should be compared with high salaries, low turnover, targeted training, and the positive effects of timely and consistently filled positions. Who knows, maybe the first option is more profitable in a specific case (for us, the second option turned out to be more advantageous). But this needs to be calculated. One must be able to calculate it. Can an HR manager calculate the indirect costs, say, of one day of a vacancy being open for a chief technologist? What methodologies do they use? Is an HR manager capable of calculating the cost of “free” recruitment and selection done “in-house”?
It turns out that without the tools of business analysis and management accounting, the HR department cannot engage in a proper and meaningful dialogue with the company’s financial division. The HR department needs to be able to demonstrate exactly how it contributes to the company’s revenue. It must be capable of defending itself against budget allocation based on a “leftover” principle.
The inability of an HR manager to operate financial tools for assessing the effectiveness of their own work not only leads to the company deeming it unnecessary to increase spending on human resources, based on the idea that “salaries are sufficient,” but also results in the company’s leadership and decision-makers being unable to evaluate the quality of their HR manager, consider alternative HR management scenarios, or recognize the hidden costs that the company incurs.
In our age, when the main added value is created not through the processing of raw materials but through the effective application of employees’ skills and abilities, people have become the most important resource for every company. Cutting costs in this area can lead to catastrophic consequences. Reckless spending on this, the most sought-after resource, is also not a solution. The solution lies in the ability to comprehensively assess expenses on human resources as investments rather than costs. And, as is clear from the above, it’s not just about motivation and training.