There are obvious costs associated with HR operations, and most owners recognize these as the cost of doing business. But there also are hidden costs when HR operates inefficiently. In its annual State of the Global Workplace, Gallup calculated the worldwide cost of poor management and lost productivity from not engaged or actively disengaged employees at $8.8 trillion, or 9% of global GDP.
The greater part of that cost is concealed in myriad tiny interactions where HR touches workflow, and the resulting impact on worker enthusiasm. The good news is HR professionals can address all these costs with the right tools. And, as big as such an investment might seem for a small business, the return on that investment can be even bigger.
Quantifying HR Inefficiencies
Inefficient HR operations can affect the whole business and every employee. The primary culprits are manual processes, lack of automation, poor communication, outdated and disparate HR systems, and unclear or limited policies. Examples include:
Recruiting and hiring delays: The global time to hire is an average of 44 days per the Society for Human Resource Management (SHRM), which is up from 31 days in 2023 indicating hiring is becoming more complex. And according to the U.S. Department of Labor, short-cuts in the recruitment process can lead to bad hires, at an average cost of up to 30% of an employee’s wages for the first year. A bad hire not only hurts productivity but also requires a lot more time and attention from management.
Employee onboarding and training bottlenecks: According to a Training industry report, companies spend an average of 47 hours and $774 to train each employee. And SHRM reports the average cost to get the right person in place is nearly $4,700.
Compliance and record-keeping issues: The IRS found that 40% of small businesses incur an average of $845 in penalties each year. And the U.S. Department of Labor (DOL) reports up to 30% of audited businesses had misclassified employees.
Employee performance management struggles: Gallup’s State of the Workplace study also revealed overall employee satisfaction has sunk to a record low, and employees are seeking new job opportunities at the highest rate since 2015.
Payroll and benefits administration issues: According to a recent global payroll study, 53% of companies have been penalized for payroll noncompliance in the past five years and the primary reason is manual intervention.
While some of these costs are to be expected, some portion is due to inefficiency and could be avoided. Those costs are very real and go straight to the bottom line.
The Operational Impact of HR Inefficiencies
The hard costs cited above are not the whole story. Because HR touches every person in the business, inefficiencies can be hidden in thousands of interactions that slow productive workflow and can generate employee dissatisfaction.
Direct Costs:
- Wasted time: Online forms and links to portals aren’t enough. Unless your systems interoperate and flow back to a single source of truth, your HR team will have to do more work, and your employees may have to spend more time on HR. A lack of employee self-service means HR wastes time answering routine questions and handling administrative tasks.
- Increased turnover: Inefficient processes contribute to a poor employee experience, leading to higher turnover and associated recruitment costs.
- Compliance friction: Either you take the extra time to make sure all the i’s are dotted, and the t’s are crossed, or you spend time dealing with the consequences (hefty fines and penalties) and re-do that same work anyway.
Indirect Costs:
- Employee Productivity: Every minute an employee spends working with HR on an administrative task is a minute less devoted to generating revenue. Those tasks can even include recruiting new hires and the time it takes to get those new hires onboarded.
- Employee Experience: It can be frustrating for employees to be pulled away from their primary responsibilities to deal with administrative chores. Any sense that the company does not have its act together – like confusing benefits administration or complicated PTO approvals – erodes loyalty.
- Employee Enthusiasm: When employees have to engage with multiple administrative systems or lack self-service empowerment, the cumulative effect can be reduced performance, both in quality and quantity. These are the losses Gallup calculated to be 9%.
Long-Term Consequences for SMB Growth
Because HR inefficiencies affect the entire organization, they can impact the company’s ability to grow. Disengaged or unhappy employees influence a company’s culture and reputation, which can affect recruiting and retention. As a company does expand, problems – and costs – can multiply as HR processes and compliance become more complicated with more people to manage. This also can increase the chance of errors, which carry additional costs.
Payroll, tax filing errors and benefit mix-ups can do serious long-term damage to employee relations. The effect of scheduling or PTO tracking mistakes may not be as bad, but that too will be remembered for a long time.
All this can hurt your ability to attract top talent and keep the best people. This, in turn, puts you at a disadvantage with competitors. And if any of your people are customer-facing, this can even threaten current business.
Solutions for Improving HR Efficiency
Fortunately for today’s employers, HR technology has advanced to a point where recurring HR costs and costly inefficiencies can be reduced by a single capital expense. A Human Capital Management (HCM) system extends efficiency beyond HR operations to every aspect of employee management.
Connected workflow: An HCM system can connect every aspect of the employee’s journey, from hire to retire. Time tracking can flow directly into payroll for faster, more accurate processing. PTO can be requested and approved with just a few clicks. Performance reviews can be authored, shared, and recorded just as easily.
Automated processes: The better HCMs automate routine tasks to speed completion and minimize errors. From ensuring fulfillment of onboarding requirements to scheduling workers’ shifts, manual work can be minimized or eliminated completely while improving regulatory compliance.
AI where it counts: When it’s done right, AI is just smart automation. Whether it’s scanning resumes to identify candidate strengths and weaknesses or addressing routine questions about benefits, a full-featured HCM can manage the easy stuff, so your people don’t have to.
Self-service for better service: Since the greatest inefficiencies in HR come from the back-and-forth with employees, an HCM system can let employees find the information they need and get their questions answered by the right person, right away. Best of all, employees love the sense of control, which does wonders for their enthusiasm and productivity.
Help when you need it: Even the best technology needs a human in the loop. But small and mid-sized businesses rarely have enough people or necessarily the right ones for some tasks. Whether it’s technical support or Managed Payroll services, an HCM system lets outside resources safely and securely tap into your operations as needed, where needed, without disrupting overall workflow.
The Vast Impact of HCM Tech
Many small and mid-sized businesses have already turned to technology to ease the burden on their HR people. These tend to be point solutions: an HR Information System (HRIS) to store employee records, or a time tracking system to capture workers’ hours.
But, as detailed above, each task may not be that efficient and working with multiple systems that don’t play nice can hurt more than help. The real cost of HR inefficiency comes from all the interactions related to HR; the time they take, the time they take away from paying work, the errors they can cause, and the time spent correcting those errors.
Rather than thinking of HR as a recurring cost of doing business, SMBs would do better to address these issues with a single, more cost-effective capital expense. Rather than piece-meal point solutions, an all-in-one HCM system can dramatically reduce the cost of all those interactions while increasing the productivity of the business.
Suddenly, HR can start contributing to revenue and be seen as more than just a cost of doing business.
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