Reducing costs is a main focus for all business owners and Director these days. The most obvious cost to tackle are the “people costs” but these also happens to be the most problematical.

The problems
The first problem is that, even in difficult economic times, there’s an inbuilt process in most firms that increases people costs. Once a person is hired increases in pay to keep up with inflation, promotions, increases in employment taxes and so on all add to increased costs. If salaries are frozen or small then there will be increased pressure from staff who claim that they are “Unvalued” and continually justify increased bonuses and promotions. Then there is the hidden future pension costs, often not included in company accounts, but which increase staff cost significantly.

Reducing people costs is an issue that Directors talk to me about almost daily. The problem is that getting rid of staff is often a problem. In some countries it’s almost impossible and even in the UK and the USA the process takes time and substantial management time, which is all cost!

Reducing costs by shedding under-performers
Many Directors and firms find it difficult to reduce staffing levels until forced to do so. Concerns over company morale, culture and team spirit all cause delays in shedding staff. However, the fact is, that often reducing dead wood actually improves the morale of those that remain.

A main flaw
One of the most effective ways to manage staff costs is through a robust performance appraisal system. Yet I’m still surprised at the number of companies that have a poor system of staff appraisal. This is so costly, makes change and restructure difficult. Ideally a good performance review is held every six months, is focussed on targeted results and linked to time-framed development and which actually identifies the best talent as well as the costly talent.

The final stage is to ensure that action is taken to manage the bottom end of the talent pool effectively so that it is continuously pruned.