- Many organizations are cutting costs to survive the pandemic
- If your cuts hurt engagement, they'll hurt productivity too
- Use a cost optimization approach to keep employees engaged and productive
The economic downturn caused by the COVID-19 pandemic is forcing cost optimization like we haven't seen since 2008.
Companies are looking at cost-cutting as a survival strategy. But, as Gallup saw then and is seeing now, cost-cutting can affect productivity -- and undercutting productivity during a downturn slows your recovery. Or halts it.
If organizations fail to accurately quantify the impact of cuts on productivity, productivity suffers -- and leaders' cost-cutting decisions can reduce overall profitability. Gallup's global database, which analyzes the engagement and performance of 35 million workers in nearly every role imaginable, shows a causal relationship between engagement and productivity, validated over and over by independent scientific agencies. Getting cost optimization right depends on correctly assessing per-person productivity.
Backed by science, the simplest means of quantifying the impact of budget decisions on productivity is to measure the impact of investments on employee engagement. Indeed, some companies use engagement as a proxy for productivity, and the math supports that shortcut. Gallup research shows that productivity among highly engaged teams is 14% higher than that of teams with the lowest engagement -- and that employees who are not engaged cost their company the equivalent of 18% of their annual salary.
Globally, 67% of the workforce is not engaged. In a company of 10,000 employees with an average salary of $50,000 each, the cost of their disengagement is $60.3 million annually. So any budget reduction strategy that harms engagement can harm productivity -- while strategies that support engagement can encourage productivity at little to no extra cost.
Prioritize Minimum Spend for Optimal Productivity
Of course, decisions about engagement, productivity and cost-cutting should be approached by taking in the full impact on performance and using valid analytics.
So, like lean manufacturing or Six Sigma, Gallup's cost optimization approach identifies wasteful expenses within the employee experience (EX) and maps the change management necessary to implement minimum spend for optimal productivity -- preventing damage to the employee experience.
Custom graphic. Gallup's employee engagement framework highlights seven stages of the employee life cycle: attract, hire, onboard, engage, perform, develop, depart.
This approach primarily focuses on three key actions:
- conducting a holistic review of your EX investments to determine which costs are increasing or decreasing productivity
- prioritizing cost optimization efforts to those costs that are the highest but yield the lowest productivity returns and quickest cost savings realization
- reallocating EX investments to areas that yield the highest productivity returns
Employees who are not engaged cost their company the equivalent of 18% of their annual salary.
An effective cost-cutting framework focuses on prioritizing the cuts that are least likely to harm productivity while also considering the speed of cost realization and the complexity and feasibility of the cost reductions.
The Fastest Route to a Better Normal
It is important to note that customer engagement, sales and profitability are also associated with employee engagement, and those KPIs have serious financial impact. Turnover, safety and a few other metrics also correlate to employee engagement, though they may or may not be as critical to your bottom line.
But per-person productivity is.
So, when identifying the costs that cost you the most, it's vital to have a real understanding of the EX behind productivity. Working your way through this downturn can certainly be done at a profit, and the fastest route to a better normal -- as Gallup's Great Recession-era data showed -- is through a data-driven approach to increasing productivity at the lowest possible cost.