Why Is the Only Labor Cost Strategy is Elimination of Labor Costs?
The next big topic, and it’s probably one of the biggest topics we’re seeing, is a question: Why is the only labor cost strategy is elimination of labor costs? In my entire career—from my time as a business analyst to manager, partner, senior partner—every executive I spoke to talked about eliminating labor costs. It is always the same four-step process: 1) Of the employees we are forced to have, we’re going to find out how to increase their productivity and get more from them. 2) To optimize as much as we can, and we can’t optimize any more, we’re going to outsource to a lower cost country. 3) Once we’ve outsourced to a lower cost country, we’re going to try to automate as much as we can—first in the high-cost country, and then the low-cost country. 4) Once we’ve automated, we’re going to digitize as much as we can. Automation and digitization are different things, but they’re used interchangeably.
COVID has obviously made this a bigger topic because companies have realized that maybe they don’t need as many employees as they thought. I’ve never heard an executive say, “Our strategy is to hire more people but increase the output.” Companies talk about investing in their employees, making them feel part of the family and developing their careers for the long term. They don’t tell you, “Of the employees we cannot eliminate—even though we want to—we’re going to figure out how to increase their productivity until we can figure out how to eliminate them. We’ll talk about investing in them, but the ultimate unsaid goal is to find an algorithm or a robot to do their job, but most likely someone in a low-cost country to replace them.” Even when the strategy is about investing in employees, the end goal is to replace them.
Here’s a deeper insight. What would happen if a company built a business model of hiring people but found a way to create incrementally greater value from their skills? We know machines can write books, produce movies and write songs, but can they do it better than the best human? There is a precedent for this. In the 1870s-1900s when the economy in the US and parts of Europe was urbanizing from an agrarian farming society, people thought machines would put humans out of work. But that was only because our educational systems and schooling systems were not preparing us to do more, and by changing educational and schooling systems, we trained people to create greater value. We’re in the same position now. Technology is not going to put us out of work because eventually we’ll respond by training humans to create more value. But there are going to be places that don’t make that shift, and it’s going to be a problem.
Certain countries have done this well. In Italy and France, for example, large portions of their economies are driven by sectors that you cannot automate, and you cannot digitize away the labor content. For example, machines can make the process of producing beautiful clothing better. Technology can make it better. Digitization is a major shift in luxury brands, but you need people.
Let’s look at financial services. I think digitization is going too far in some areas and going in the wrong direction in some areas. If you have a branch center and branch locations, you could digitize the entire experience so people can do all of their banking online. I do almost all of my banking online and don’t visit a branch for just about anything. Branch employees are only redundant and unnecessary if the app can do something better than they can. But what if a bank was smart enough to say, “What could our branch employees do that an app cannot do, which customers need and that generates a significant amount of return for the bank?” There are obviously ways to do that, and the fact that we have not figured out how to do it doesn’t mean it cannot be done, and that’s the big insight here.
In some cases, there will be an excess amount of employees because of rapid digitization and dislocations like COVID. If you have a resource that’s in excess supply, you can secure it at lower cost. If you can secure it at a lower cost but figure out how to get it to produce something of extremely high value, you’re in a very good position. But I don’t see many companies doing this. Instead, I see many companies getting on the bandwagon of digitization and automation and thinking it’s inevitable that you need to replace your employees. But that’s not true because no matter what technology and algorithms do, there must always be a human somewhere doing something of high value.
The question is, if you are in a business, can you make that mindset shift from replacing your employees to thinking, “What can I do with them so that they earn a far higher return versus the next best alternative, which is digitizing and automating them?” Digitization and automation are wonderful at lowering costs and increasing returns, but there’s lots of precedent for keeping labor on your books and doing more with them. That’s the insight: how do you rethink the way you tackle your labor costs strategy?
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #17. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.
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