The 8 Best Strategies for Reducing Labor Costs 

Labor is one of the most significant expenses a business has to deal with, so it’s important to find ways to cut costs without sacrificing quality. How do you do it?

Why Reduce Labor Costs?

Reducing costs without sacrificing productivity or quality is typically a good move for a business. It means you’ll likely preserve all your current revenue and your trajectory for growth, but you’ll be able to claim a bigger profit – which you can reinvest into the company or take for yourself.

There are countless reasonable strategies for reducing business costs, such as reducing the costs of raw materials or going remote. So why are we focusing on labor?

For starters, labor is an expense that almost every company is forced to manage. Labor is also one of the biggest expenses a company has, meaning it should be full of opportunities to reduce expenses meaningfully – and those cost savings can be massive. The advice in this guide should therefore be universal.

The Best Strategies for Reducing Labor Costs

These are some of the best strategies you can use to reduce labor costs:

1.       Reduce overtime. You’ll save much money if you can only dramatically reduce overtime in your organization. This is typically a low-hanging fruit since many of the overtime hours your staff members work are unnecessary with the proper preventative measures in place. Additionally, because overtime requires you to pay your employees more, it’s a disproportionate source of waste in most organizations. Thankfully, many individual strategies can help you reduce overtime. You can set a cap for overtime, have strict approval processes to reduce unnecessary overtime hours, and enforce better methods to ensure you have enough staff members under normal circumstances.
2.       Combine vacation and sick leave. This small move can make a meaningful difference in your labor costs: combine vacation and sick leave. There’s very little reason to go through the effort of segmenting days off based on why those days are being taken off. You can cut down on manual effort and give employees more flexibility at the same time by doing.
3.       Automate whatever you can. One of the best ways to reduce labor expenses is to employ automation. Any automation you use will reduce the number of manual hours your employees need. It also has the added benefit of improving consistency. The only catch is that investing in automation solutions typically requires an upfront expense and may have ongoing costs. Crunch these numbers carefully to see if each move makes financial sense.
4.       Consolidate roles. One strategy most leaders avoid is cutting parts since nobody wants to lay workers off. Consider combining functions if you can’t or don’t want to eliminate them strictly. Instead of having multiple people duplicating efforts or having employees with too much free time, you can create more specific, flexible positions that give you much more versatility when planning for staffing.
5.       Look for opportunities to optimize productivity. Every leap forward in your work productivity will reduce your labor expenses, allowing you to complete more in less time. Accordingly, looking for units to optimize productivity constantly would be best. Better tools, better education and training, and smoother, easier-to-follow workflows can all help you in this regard. If you feel you’ve plateaued in productivity improvements, ask your staff members to brainstorm new ways to increase productivity further – and incentivize idea generation by rewarding the best concepts introduced this way.
6.       Hire based on talent rather than experience. If you’re considering hiring new people, try to hire based on skill or ability rather than strictly on occasion. More experienced people can objectively demand more money, while more talented, less experienced people may do more good for your organization.
7.       Hire specialists instead of generalists. Similarly, it’s usually beneficial to hire specialists instead of generalists. Specialists tend to charge more than generalists for their work but are also much more efficient.
8.       Reduce turnover. Employee turnover is ridiculously expensive. You can reduce labor costs (and many other costs) by keeping turnover to an absolute minimum. Simple measures, like rewarding employee loyalty and offering more perks and benefits, can go a long way here.

The strategies you choose will depend on your current labor expenses, cost savings goals, and the nature of your organization. But every dollar you save on labor is a dollar you can spend somewhere else – or keep as profit for shareholders – so every optimization you make can be worth it.