People programs pay off: understanding workforce optimization is no longer a luxury--it is essential to attract and keep the best talent that will, in turn, improve a company's bottom line. (Workforce Optimization).

The CEO of a major company emerges from a meeting with senior management. With revenues down for the third year in a row, the stock is trading at two-thirds off its highest value. Personnel costs represent the largest expense, but are also the largest asset. After several rounds of layoffs, the company has already cut as close to the bone as it dares. Human Resources reports dismal morale among the remaining professionals due to market uncertainties and rising costs of health and other benefits.

Sound familiar? In today's uneasy economic environment, thousands of executives are facing some or all of these dynamics. The time has come for some very creative thinking.

It's been said repeatedly that competition in the 21st century will be based on the caliber of the workforce. As such, the challenge for companies is defining how to optimize their workforce to yield the greatest value by producing the required results. Be they public, private or not-for-profit, organizations can no longer rely on past practices to be competitive in the future. Executives must examine cost effectiveness, and take appropriate smart risks to find new ways to keep their best people and to drive growth.

What Is Workforce Optimization?

The key to workforce optimization is people programs that can be categorized in three general areas: 1) reward and benefits programs; 2) human resources programs -- including succession, development and performance management; and 3) infrastructure programs that manage personnel and address compliance issues.

Many companies are discovering new and innovative ways to maximize the effective yield that HR programs provide. Evaluating what contributes to a program's yield requires thinking at the organizational level. The effective yield needs to include items that don't show up on expense lines: the cost of personnel turnover and the potential expense/risk of performing a function poorly.

To determine yield, ask these kinds of questions: What are the priorities of our employees? What constitutes our 'ideal' employee, and how do we attract and keep that employee? These "soft" issues translate into hard costs and savings, and can affect how an organization manages its human capital.

New Approaches to Benefits

Defining and delivering benefits can have a major impact -- not only on a company's cost structure but also with its employees' perceptions and satisfaction. The following illustrate how some companies are dealing with the new realities:

* Prescription Benefits -- A grocery retailer, after introducing pharmacies in most of its locations (which became a commercial success), applied the concept to creating and administering a perscription benefits program for its own employees.

This resulted in reducing the cost of its program, as well as further enhancing its buying leverage with its suppliers, with whom it had already forged a bulk-buying consortium with other retailers to gain price leverage.

* Student Aid -- The demographics of a company's employee base can affect the benefits it delivers. Management at one company recognized that many of its most prized employees had children approaching secondary school and college age. So, for minimal cost, it brought in a non-profit organization to help parents identify and apply for student loans.

* Stock purchase/stock option! 401(k) plans -- Managing these types of plans has become a popular outsourcing option. The reasons to outsource are growing as compliance and reporting requirements for plans have become more complicated and the risks for non-compliance greater.

"The regulatory and technology environments are not static. A vendor will be able to keep up to date with both the latest technology and regulatory requirements," says Tracey Escherick, executive vice president for Stock Plan Services and 401(k) rollovers at Fidelity Investments. Companies such as Fidelity that have been providing outsourcing services for 401(k) and defined benefits plans for over 20 years, have, in recent years, expanded services to include compensation, stock purchase, stock option and even benefits communications.

Also, many companies are migrating their benefits programs to more "self-service" environments that require fewer personnel to administer.

* Financial Education -- In efforts to reduce current costs and long-term liabilities, many companies are making the transition from defined benefit retirement programs to defined contribution programs. This usually results in enormous savings to the company, but the financial decision-making falls to individual employees. For a tiny fraction of the savings generated from switching, companies can invest in an outside vendor to give employees the financial training to make informed and mature decisions about their own retirement plans.

Evaluation and Development

Evaluation and rewards programs are too often seen as necessary evils rather than opportunities for a company to build its brand internally and reinforce the values it prizes in its workforce. In working with a client, it was discovered that only 20 percent of its employees found its evaluation program meaningful in providing constructive feedback and guidance for career development; the other 80 percent regarded it as just another program from HR to be endured. The program was costly to develop and required weeks of HR staff time to administer.

The way evaluation programs are designed, introduced and developed can have a major effect on their cost, effectiveness and acceptance. A large retailer introduced its program through its line managers at the local level, with bottom-line results a key component. It also achieved effective "buy-in" from the workforce, provided valuable feedback on performance criteria, suggested employee rewards and development criteria that were customized to that organization and helped ingrain the program into the corporate culture. Introducing the program in stages reduced the costs and the time required of the HR staff.

Importantly, store-level performance improved, and significant reductions in waste and shrinkage (theft) that improved profitability were, in part, attributed to this program.

Communicating the Benefits

Employees only have a vague sense about the cost of the benefits provided by their company. By regularly communicating what is being provided for them, as well as the value of the programs, the choices open to them and the results they can expect, employees will be more secure, better informed, more loyal to the company and, hopefully, will perform with greater confidence in management.

Some companies supply employees with "total compensation" statements -- documents that outline the full cost to the employer of all benefits, including health care, income taxes, 401(k) matching, workman's compensation, life insurance, etc. Having awareness of the value and cost of what they are getting beyond their regular paycheck, employees can also appreciate improvements in their package -- when those occur.

HR Infrastructure

HR infrastructure exists behind the walls; it is unseen, like plumbing or electric wires. It is what makes HR operate on a minute-to-minute basis and includes the information systems that house all the employee data such as employee benefits and job history that a company is required to maintain for both regulatory and HR purposes. This data, when analyzed, becomes the information that is used for making informed decisions. Date of birth and date of hire are data used to assess potential pension liability and build a profile of the population in order to get accurate healthcare price quotes from vendors.

HR feeds the data systems that allow decision-makers to assess the quality of staff, identify turnover problems, allow for training and development and plan for the redeployment of staff. It lets the organization model many strategic decisions, such as the impacts of different equity allocation methods, the use of third-party administrators for benefits programs and how the introduction of a new sales incentive plan will alter both a salesperson's income and company revenue.

Thomas P. Flannery, Ph.D. ([e-mail]) is a Partner and Richard Sanes (rsanes@eycom) is a Senior Manager with Ernst & Young LLP. Both work in the firm's Human Capital Practice.