Many of your organizations may looking for ways to trim, cut, or in some cases chop your budgets, and may consider a headcount reduction as an answer. Yes, eliminating a job or position is a way of reducing your budget, but it has some negative by-products. There is a much less disruptive way to reduce your labor budget. You can accomplish this through enhanced management of your workforce, more commonly referred to as "Labor Management". What is "Labor Management"?
Labor Management is making the most efficient and cost effective use of the people resources in all areas of the organization that such that they will yield the best overall results at the lowest expense.
As an example, labor management is looking at the overtime of employees, and asking "is this overtime really necessary?" "Why did we incur this overtime?", and "Could we have planned better? "
I recall a situation about 8 years ago where I was calling on a manufacturing company, I will refrain from using their name in this posting, they ran a 24-hour 7 day a week operation and were unionized. I explained to this company that one of the largest benefits of a labor management system is a drastic reduction in overtime. The General Manager stated that he didn't think that they had an overtime issue. According to him they ran 24/7 and overtime was just part of the business, and he did not think that their overtime expenditure was out of alignment.
The GM changed his point of view when his Human Resources Director and Payroll Manager approached him about a situation that they uncovered. It seemed that their employees had figured out that this company did not have a way of managing a clause in their contract where if a employee's relief from one shift to another was late, they received a premium until the relieve arrived. What they found was happening was that employees would write on their timecards that their relief was late and in effect gain unauthorized or excess pay. The Supervisors were so busy they really didn't notice that an employee was working an extra 30- 45 minutes. To identify how wide spread the issue was they asked the the departments to submit their employees work schedule denoting everyones relief. The HR department performed a comparison with the time cards. They found that not only were there other employees who were a part of the scheme, they had other employees whose time cards varied 10-30 minutes from their schedule with no explanations or approvals. Long story short, the GM realized very quickly that they needed a way to quickly and effectively compare schedules, and manage the terms of their contract. They acquired a labor management system from me and saw a 40% reduction in their overtime & premium expenses before the complete rollout.
I tell that story because they are not the only nor the first organization where senior managment assumed that they did not have an overtime issue, or excessive labor expenses. This situation is easy to happen as most people look historically to make to determinations, or talk with their peers. Either way can lead to this type of an oversight. You have to examine each aspect of your operations, and ask the tough question of, "How can we do this better, let's find a way?" Some of common areas to examine are:
- Overtime
- Electronic & Paper Timesheets
- Paid time off
If you are looking for an area that tends to have a high rate of what I call "Fat" or "excessive spending" target the use of paper and/or electronic timesheets for non-exempt employees. The use of these types of data collection methods, commonly referred to as "The Honor System", gives employees every opportunity to beat the system, and they will. Let's face it, employees are human, and will find a way to justify fudging their timesheets. Not everyone is looking steal time, some report false time on their timesheets to mask the fact they they are late to work. Then you have those who just want the extra pay.
Don't fall prey to the "We trust our employee's" syndrome. If you fully trusted all of your employees, you wouldn't have passwords on you computers, security for your applications, and locks on your desk. The hard facts are, that as much as we would like to trust our employees, they are not perfect, and passing a background check doesn't mean they are trustworthy. They just may not have been caught or convicted yet.
For non-exempt employees, those who are entitled to overtime, I recommend data collection methods that capture the exact time that the employee reports to and from work. This can be an automated system with badge readers, biometrics, or PC entry. Whichever method is most appropriate.
Employees will try to beat this system, but as long as the organization is disciplined at all levels, they will not successed. What I mean by disciplined, is that you create policies and stick to them regarding employees forgetting to report their time. The best illustration of this occurred as I worked with an organization whose President and CFO asked for an audit report from the system to see how many "added punches or exceptions" were reported. They then would have their management staff hold the Managers and Supervisors accountable. The President and CFO both knew that too many edits or exceptions meant excess spending.
Addressing "Paid time off" is a touchy situation, because it touches salary employees and possibly executives. I recommend that you leverage a system that requires an employee to submit their time off request to their Supervisor, and automatically populates and electronic time sheet. This prevents the exempt employee from taking the time off and forgetting to submit the time off. Or the Supervisor from forgetting to turn the time off request form in. Paying out vacation or accrued paid time off is expensive. If an employee leaves most states require by law that the employer pay out any remaining vacation or "paid time off" accrued or earned.
The last area of focus would be comparing an employees schedule to their timesheet. Doing this task manually is very time consuming. But if not done you are walking money out the door, or even worse, you may be eliminating a job or position unnecessarily.
Let' look at the financial effects of using effective labor management methods on your organization. As an example look at overtime which is paid at a .5x or in some cases 2x premium per hour. Let's say you have an employee who makes $7.50 per hour. If they worked overtime they would be paid $11.25 per hour, or a $3.75 per hour premium. There are a number of other expenses that are driven by gross payroll dollars. They are:
- Employer portion of payroll taxes
- Retirement funds
- Unemployment Insurance
- Work's Compensation Insurance
So if you reduce your overtime expense, or pay people for the actual time they work, you also reduce all the items above.
One thing to note, you can't effectively manage the labor of your organization with paper and a pencil. Just like you have a financial management system, you have to invest in a labor management system. There is a difference between a Time and Attendance system and a Labor Management system. Unfortunately this is one area that ERP solutions fall short. You need to look at a best of breed solution. The two top Labor Management vendors in the industry are ADP and Kronos.
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