Working the Clock

Where is the referee when employees are gaming your workforce management systems?

labor Cost Optimization

Posted by Lisa Disselkamp on August 12, 2014

A restaurant worker knows exactly when to punch the clock to gain an extra 15 minutes per shift. (So do his co-workers.)

Employees routinely use the time clock near the parking lot door (meant for security staff, whose office is nearby), rather than the clock near their workstations, gaining several minutes of paid time as they walk to their stations and settle in.

A nurse with a $75K salary earns a W-2 for $240K, thanks to overtime pay, shift premiums, and other incentives.

These employees haven’t technically broken any rules — they’ve simply learned to game the system, a practice made possible when workforce management policies, processes, systems, and governance are lacking integrity. Such “payroll leakage” can potentially cost employers millions each year in unnecessary labor costs. Consider that for many employers, labor costs are one of the largest expenses. In some industries, such as health care, labor typically comprises some 60% of total costs. Now consider that payroll leakage can account for up to 2 to 2.5% of total annual payroll and labor expenses.* So, for a $500 million annual payroll, that means $10–$12.5 million of waste (and potential savings).

Beyond the sheer expense, payroll leakage can also impair revenue, income, and product and service quality. Because it diverts precious dollars to a few who game the system, less money is available to hire more people or incentivize the people who are doing good work.

How can it be, in this era of modern, sophisticated management practices and technologies, that gaming can still occur? Several factors are at work. While time management and labor scheduling systems have evolved exponentially since the days of mechanical time clocks, many of the policies and processes behind them have not. Finding the misalignments among policy, practice, and technology takes deep insight across a breadth of business functions. A Labor Cost Optimization program can help.

One issue is what I call the Leakage Principle. Just as the Peter Principle suggests that people are promoted up to the level of their incompetence, the Leakage Principle refers to poorly designed systems being automated and upgraded without regard to whether they are up to the task and are providing adequate management. Managers step back and assume “the system is handling it.” With no one scrutinizing time cards and pay practices for abuses — workers getting overtime and holiday pay at the same time, chronically clocking in early, working through lunch, etc. — and without the proper controls built into the system, leakage results.

Another contributor to payroll leakage is when policies or programs meant to be as-needed incentives — weekend differential, extra-duty bonuses, and the like — become permanent premium income. Over time, these programs get used more often, and frequently become regarded as entitlements. But the details of when and how they were meant to apply get fuzzy, and may have not been clearly expressed when the policy was written. So they carry on, and employees figure out how to exploit them.

What’s the solution? Scrutinizing and optimizing labor costs as rigorously as other organizational costs. Consider modern Supply Chain Management. What was once called “Purchasing” — loosely and inconsistently managed across the organization and fraught with opportunities for errors, inflation, overspending and outright fraud and abuse — is now recognized as a critical strategic function that is purposefully structured and closely monitored. Labor Cost Optimization is the same idea. It includes the discipline of actively searching for and preventing payroll leakage. This typically involves a mix of one-time changes, such as modifications to system configuration or policy refinement, and ongoing activities such as process changes, updates to labor management guidelines, improvements in scheduling practices, and leakage checks and balances. Like Supply Chain Management, it is not a “once and done” activity. Labor Cost Optimization involves ongoing monitoring, diligence, and corrective action.

This notion of Labor Cost Optimization as an actual function and discipline is new to many organizations and leaders. Time and attendance and labor cost management are specialized fields, not generally taught at the college level or studied by CFOs or CHROs. Traditional audits look for compliance and anomalies in spending trends, not the ins and outs of embedded payroll leakage. Responsibility for oversight may be spread across several functions — payroll, operations, IT, finance, HR — with no clear ownership. Even executive dashboards tied to payroll systems and meant to provide “insight” into pay and labor practices only go so far. They might reveal that an issue exists, but don’t offer solutions, assuming the organization knows how to correct it (many do not).

Again, gaming is not necessarily a violation of a policy or an eligibility issue. And the patterns of overspending in leakage areas have been going on for a long time. We believe that a critical component of workforce management is being able to understand what is reasonable labor spending and utilization and when systematic gaming is going on. Workforce management “referees” need the ability to identify where cost can be inflated, evaluate it in context of the actual business need and situation (the rules of the game), and then blow the whistle and call a foul to prevent, avoid, influence, and improve unintended payroll leakage.

Labor Cost Optimization is instituted to manage a very valuable and expensive asset — people. And just as Project Management Offices (PMOs) were created to consolidate project oversight, a Workforce Management Office (WMO) can be established as the owner that collects and analyzes time and attendance data, understands and prioritizes leakage problems, makes recommendations, builds the business case for change, and oversees corrective actions. Technology plays a key enabling role in the WMO for monitoring pay practices, flagging issues, and guiding problem solving.

Payroll leakage and labor cost optimization are not strictly HR issues. But HR, as the organization’s workforce and talent specialists, can be the champion that brings the issue to senior leaders’ attention and unites the right parties to begin to address it. Given the potential for significant savings while reducing waste and optimizing labor performance, Labor Cost Optimization can be a valuable addition to the organization. Owning and driving the solutions that drive that business value further advances HR’s role as a partner to the business. Once you start digging into the details, you’ll likely be stunned at what you uncover and eager to change the game.

* Figures based on Deloitte Consulting LLP data and client experience.

Lisa Disselkamp, a Director in Deloitte Consulting LLP’s Human Resource Transformation service area, is a leading authority on workforce management technology and helping employers increase productivity and profits through their strategic use of workforce management technology systems. She is an author of three books focusing on workforce management and the editor of the Workforce Asset Management Book of Knowledge (John Wiley & Sons, 2013) —the recognized study guide for Workforce Asset Management Certification.

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