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How not to fail to reduce labor costs?

“I want to reduce labor costs, but I don’t know the best way to do it.

With HR tools, you can reduce labor costs with minimal risk.

In this article, in order not to fail to reduce labor costs, we will introduce specific methods along with application examples, while considering the benefits and risks of labor cost reduction.

[What is labor cost reduction in the first place? Eligible costs and scope】

In a nutshell, “reduction of labor costs”, where should we reduce?
After understanding labor costs from the overall management costs, let’s look at the elements that can be reduced.

●Overview of Expenses

 First of all, the costs related to management are divided into fixed costs and variable costs.

·Fixed cost

It is a fixed expense that occurs regardless of the increase or decrease in sales.
Labor costs are included here.

・Variable costs

 Expenses recorded in proportion to sales.
Expenses that fluctuate depending on the increase or decrease in sales, such as purchase and transportation costs.
In some cases, allowances for overtime hours may also be included.

A company’s operating profit is its sales minus these expenses.

Operating Income = Net Sales – (Fixed Costs + Variable Costs)

●Personnel expenses

Labor costs refer to all costs related to personnel.
Fixed costs Personnel costs account for a particularly large proportion of operating costs.
The average labor cost rate is about 20% to 30%, and it is over 40% in the service industry, which is a large expense among expenses.
Therefore, if we can effectively reduce labor costs, which account for a large proportion of our expenses, we can increase our profit margins, which will lead to further growth of the company.

●Breakdown of personnel expenses

  • Salary/bonus
  • Severance pay
  • executive compensation
  • Social insurance premium
  • Welfare expenses (statutory welfare expenses/non-statutory welfare expenses)
  • Recruitment fee
  • Human resources training expenses

By directly cutting these costs and reviewing the related work flow and surrounding environment, it is possible to reduce labor costs.

[Two main benefits of reduced labor costs]

●Increase operating profit

Operating Income = Net Sales – (Fixed Costs + Variable Costs)

In order to increase the company’s profit margin, it is necessary to increase sales or reduce expenses.
Therefore, if fixed labor costs can be reduced, it will lead to a reduction in operating costs and an increase in profit margins.
In addition, by reducing personnel expenses, the ratio of personnel expenses to sales will increase, leading to improved operating income.
If the company’s performance improves due to an increase in profit margins, it will gain credibility from financial institutions and evaluation from investors, which may lead to further loans and an increase in stock prices.

●Improve labor productivity

A reduction in labor costs is also expected to increase productivity.
If labor costs can be reduced by eliminating unnecessary human work, overtime work can be reduced compared to before, productivity can be expected to be higher than before even with the same hours.

[Three risks due to labor cost reduction and points to avoid]

While there are merits such as those mentioned above, there are also disadvantages if you misunderstand how to reduce labor costs.
In particular, if personnel expenses are reduced only by restructuring, salaries, bonuses, and welfare expenses, the following risks are listed.

Decreased motivation

 If you cut salaries, bonuses, and welfare expenses in personnel expenses, it will cause a decrease in employee motivation.
In particular, welfare expenses have a large impact on employee satisfaction, so a sudden drastic cut can lead to a decrease in motivation and a sense of distrust in the company.

● Labor shortage due to rising turnover rate

 Not only is there a labor shortage due to restructuring, but also a rise in the turnover rate is expected due to a decline in motivation.
This can lead to staff shortages.

● Corporate credibility decline

 Salary/bonus cuts and restructuring do not give a good impression to the public. You may end up being seen as a company that doesn’t care about its employees.
In addition, from the perspective of financial institutions and investors, there is a possibility that the company’s credibility will decline as it will be judged to be in a serious business situation to the point of restructuring or salary cuts.

● To avoid risks

The point is not to cut costs directly, but to understand the current labor costs and reduce them step by step based on the surrounding cause-and-effect relationships.
For example, there are measures such as reviewing whether there is a wasteful artificial work flow, introducing a system that leads to the productivity improvement of existing employees, and utilizing outsourcing.
The introduction of HR tools that make use of AI is effective in improving work flow and improving employee productivity.

The introduction of HR tools that make use of AI, which will be introduced in the next chapter, is effective in improving the work flow and improving employee productivity as described above.

[Specific methods and application examples of labor cost reduction using AI tools]

● Labor cost reduction using AI tools

 ・Putting the right people in the right jobs

HR tools can visualize human skills and predict performance.
By visualizing existing employees, it is possible to predict who should be assigned to which task to achieve maximum performance, improving operational efficiency and productivity.
You can improve performance with existing employees without hiring new personnel.

 ・Reduce turnover rate

HR tools can predict retirement risk.
You can visualize the reasons for leaving employees who are at high risk of quitting their jobs, and you can provide training and follow-up as necessary without waste.
In this way, tasks that were conventionally analyzed by personnel department personnel can be automated using HR tools, reducing the workload.
In addition, by revealing hidden indicators and grasping the current situation, it is possible to plan placement measures that put the right person in the right place.


In fact, there are cases where the turnover rate has been reduced by introducing a “turnover prediction service” using HR tools.

With the introduction of a “turnover prediction service”, the degree of turnover risk is calculated, the factors behind turnover are visualized, and the turnover rate is reduced.

Please contact us for more information.

[Use HR tools to effectively reduce labor costs]

So far, we have introduced the benefits and risks of reducing labor costs.
Even if you want to reduce labor costs at your company, there are cases where you do not know the specific cost reduction or expected effect.
Therefore, let’s utilize analysis and prediction using HR tools to achieve effective labor cost reductions that lead to improved business performance and operational efficiency.
AIX provides a human resource management system that uses the latest AI technology.
Please consider this opportunity.


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