How to make HR a profitable business function

Consider this scenario: a company of 1000 employees with 8% absence level (equal to 18 days per employee per year). With little data to base management decisions on and no line management ownership, the absence problem was not being addressed. In some areas, the management teams routinely over-staffed in order to make up for the expected no-shows.

The decision was made to tackle absence across board and in 15 months, with the help of a robust absence recording system, the company absence level was reduced from 8% to 2.2%. This amounted to a 2 million pound saving for the company and certainly made HR a profitable business function.

Many companies regard HR as a loss making function, simply an overhead. The above case study is a good example of how HR teams can prove that they contribute to the company’s profit making. Absence is not the only area where HR can affect the company’s bottom line but it is an obvious one to start from.

Direct and indirect cost of absence

Absenteeism and its impact on a business are two-fold: they incur direct and indirect costs. Direct costs include the salary of the absent employee (or statutory sick pay), replacement costs and overtime costs. These direct costs can be measured simply and clearly. On the other hand you have indirect costs. The indirect costs include the effects on productivity, administration, quality of service and social security. These costs are not as easy to measure as direct costs but have noticeable effects on the running of the business. Effective absence management can improve productivity and simply by reducing the cost of absence, it will affect the company’s bottom line.

How much could your company save?

Even if you’re not starting at a whopping 8 or 10% absence level, there is room for significant savings. Let’s consider the costs per day, first of all:

Cost of a working day

  • Average length of working day: 8hrs
  • Minimum wage: £8.72 per hour
  • Cost of normal working day: £69.76

Direct cost of an absence day

  • 80% of staff must be replaced at a premium of £10.50
  • 25% of staff are paid sick pay at their standard rate
  • Cost of an absence day £83.14
  • Incremental cost of an absence day (i.e. added cost on top of what it costs to employ a person to do the job in the first place) £13.38

Next, let’s take an SME of 250 employees, paying minimum wage and tracking absence at the national average rate of 2.6% or 5.8 days (source: CIPD 2020 absence survey). At 5.8 days per employee per year, absence is costing this company nearly £80 per person in direct incremental costs alone. That’s close to £20,000 per year for the 250 strong workforce!

If the company could reduce absence by just 1 day per person, per year,  the incremental cost of absence would drop to £65 per employee – amounting to a total saving of £4,000 per year.

If you consider the fact that most companies are tracking an actual absence level much higher than that reported in the CIPD annual survey, the savings become even more interesting. In our experience, it is not unusual for a company of 250 employees to track at around 5% absence – or about 11 days. That means absence would cost nearly £150 per employee per year, and close to £40,000 for the company.

Imagine yourself as the HR Manager who is able to achieve a 1% reduction in this absence level. That’s a £25 reduction in cost per employee and an annual saving of nearly £10,000. Now there’s a number any HR Manager would like to take to the board meeting!

So, how can you achieve a 1% drop in absence?

It’s easy enough to state a 1% reduction in absence levels can reap huge financial savings but how can HR teams actually go about ensuring that reduction. There are many ways and among the best includes implementing an accurate monitoring and reporting tool which also allows HR managers to keep track of compliance with policies and procedures through alerts and the online filing of paperwork.

Honeydew Health’s ‘Engage’ platform can do all this and a great deal more for your company and has been proven to reduce absence levels in businesses as well as ensure HR teams are in control of an effective absence management platform that works.

To start making a profit in your HR team, try ‘Engage’ for free today.