Hidden Costs of Redundancies

6 01 2009

jobcentre-plusThe number of people unemployed is rising everyday due to firms going bankrupt or businesses making some of their staff redundant as part of a “cost-cutting measure”. However, the Chartered Institute of Personnel and Development (CIPD) warned yesterday that redundancies could in fact prove to be a false economy for businesses.

It estimates that the actual cost of redundancy could reach up to £16,000 for each employee made redundant. This figure takes into account the redundancy payment and the costs involved in recruiting and training replacement staff. But, redundancies can also lead to lower staff morale because when employees see some of their colleagues being made redundant, they fear about the security of their own jobs. This leads to a drop in their productivity which in some cases would lead to the business losing its competitive edge over a period of time. The CIPD’s figures doesn’t take these factors into account.

For most businesses redundancies are the most straight forward ways of cutting down costs in the short term. Less staff means less wages to be paid each month. Although analysts and bankers and politicians cannot agree on how long it will take for the economic condition to improve, they all agree that it will improve in the near future.

When the situation does improve, a business should be in a position to meet the upsurge in demand if it wants a share of the increasing market. This does not only mean having enough number of staff, but staff that are properly trained and equipped with necessary skills to help them do their jobs to the best of their abilities and be efficient. So, when employees are made redundant, they take the skills that they have acquired at the firm’s expense with them and this is another indirect cost to the business.

When the economy is booming, there is demand for staff from businesses who want to grow. For those businesses that require staff with special skills, this could prove to be a costly affair because people with those specific skills might be hard to find. Also, if people with a particular skill are in high demand, the business would have to be prepared to pay a higher salary or offer lucrative perks or else the prospective employee might end up working for the competitor.

Most businesses have a Human Resources Department which looks at the company’s long term objectives and then works out the staffing needs like the kind of staff required, the kind of skills required, etc., to achieve these objectives. Rather than just making staff redundant, businesses looking to grow in the near future should perhaps evaluate their long term goals and view the currently unemployed people as a pool of highly skilled employees and recruit them cheaply to make the best of the up turn. To help realise the true cost of redundancy, the CIPD has created a formula for employers.

Real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P – n)

• n = number of people made redundant
• R = redundancy payments
• x = number of people subsequently hired
• H = hiring costs
• T = induction/training cost
• y = percentage quitting post redundancy
• W= average monthly staff salary
• z = percentage reduction in output per worker caused by lower morale
• P = number of people employed prior to redundancies

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