How finance leaders can tackle rising labor costs

Today’s finance leaders are facing a pressing challenge; how to continue to manage rising labor costs without compromising on worker quality, levels of service offered, productivity, compliance, and revenue.

To do these things, those finance leaders need to adapt and consider data-driven strategies that will allow them to generate cost savings, including, if necessary, the use of contingent workers.

Read on, as we explore the factors leading to these rising costs and what businesses can do to mitigate them.

Understanding the factors contributing to increased labor costs

Labor costs is an umbrella term which covers all staff-related expenditures. This includes everything from recruitment, to wages to benefits, to agency fees, to training expenses. These can account for as much as 70% of the total cost of being in business.

A variety of factors have combined to increase labor costs today:

• Economic policies: Government changes to economic policies are expected to have a profound impact on businesses across the country.
• Wage growth: Wages are growing rapidly, with the minimum wage in California alone being $16 per hour.
• Talent shortages: Shifts in the job market have resulted in a lack of candidates with industry-specific skills, prompting companies to offer higher wages to attract and retain talent.

With the cost of being an employer steadily rising, businesses are naturally looking to reduce the number of people they employ, to bring that cost down to a more comfortable level.

According to CIPD research, around a third (32%) of businesses plan to reduce their staff numbers, either through redundancy or by implementing hiring freezes.

However, with a strategic approach and the right tools, such as Flex Plus, organizations can offset rising labor costs without putting their long-term objectives at risk.

The labor cost formula: what it is and why it’s important

A key consideration for finance leaders searching for ways to carefully manage their labor costs is the labor cost formula, which is as follows:

Labor cost per employee (total compensation + benefits + taxes) ÷ total hours worked

The results of this labor cost formula can be used to:

• Identify cost savings: Separating out the individual components of labor costs, rather than viewing it as one overall expense, helps pinpoint areas where cost reduction could be made.
• Assess the impact of contingent labor: By integrating temporary or contract workers, businesses can calculate potential savings yet still boost their workforce, better positioning them to respond to seasonal demand.

The role of the Employment Cost Index

Another key measure in understanding labor expenses is the Employment Cost Index (ECI), which tracks the total compensation growth for wages and benefits across industries.

The Employment Cost Index is helpful when it comes to:

• Monitoring wage growth: Understanding industry-specific wage increases helps HR teams to make informed salary and hiring decisions.
• Benchmarking against market rates: Comparing internal labor costs with national and sector-specific Employment Cost Index data ensures competitive yet sustainable wages.

Using the Employment Cost Index ultimately means you can attract top talent, with fair wages, but ensure that you’re aligned with organizational spend overall.

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Adopting data-driven strategies to reduce costs

Workforce analysis and predictive analytics can be used to identify trends and visualize the impact of external market forces, such as regulatory changes or a spike in consumer demand.

Using data to predict and respond to these changes in demand can improve shift scheduling and reduce overtime expenses. This ensures that staffing levels align with actual business needs, reducing costs and therefore increasing profit margins.

Growing workforce flexibility

Offering flexible working arrangements, such as varying shift patterns, can bring immediate cost savings. If team members are given the option to work at a time that better suits their busy schedules, this avoids overbooking staff and also increases productivity, as staff aren’t rushing to or from other commitments.

It’s also worth noting that today’s workforce highly values flexibility and the opportunity to enjoy a better work-life balance. This consideration is often just as important as the salary, making it a more cost-efficient way to attract and retain top talent.

Develop a contingent labor strategy

Making contingent labor a central pillar of your workforce management strategy gives increased flexibility and greater control over labor costs.

Contingent workers — including freelancers, contractors, and temporary staff — offer organizations the ability to scale their workforce based on demand, without the long-term financial commitments associated with permanent hires.

Vendor management systems (VMS) simplify the process of contingent workforce management, allowing for even tighter cost control. On average, organizations that use a VMS cut their contingent workforce costs by around 10% to 15%, with many seeing those savings within the first 12 months.

Get started

While cost cutting in the current environment is no small challenge, workforce management software can help achieve your targets when it comes to reducing overall labor expenditure.

Book a demo today, to explore how features like enhanced shift scheduling can reduce your costs.