Increased Labor Cost: A How To Smart Spending Culture in Organization

In wake of the new minimum wage in force just recently in Malaysia, up to one-third of the Malaysian workforce would benefit from it. While it plays an important role in addressing labor market inefficiencies and improving social welfare of low-paid workers, for organizations, the 25% increase of minimum wage would see a drastic rise in cost of employing employees. Many organizations are still reeling from COVID-19 extended lockdown effect, and will be looking into alternative cost-saving measures to maintain their workforce to reduce spend. This is where a smart spending culture could play a key role in struggling organization.

Leaders often struggle and have little plans to achieve financial maturity to convert the crisis into opportunity. Without such maturity, it is difficult to link the increased cost of labor and valued business outcomes, and it cannot be realized through cost cutting nor investment to make the organization more efficient. Without a smart spending strategy, continued cost cutting by eliminating and rationalizing services or squeezing suppliers further will inevitably erode the delivery of business value by compromising business outcomes. Likewise, excessive spending will be akin to taking an organization into a nosedive to negative growth.

Creating A Smart Spending Culture : Three Steps

Instilling cultural values that rely on healthy spending habits is more important than ever as operating costs are skyrocketing in Malaysia. Most organizations have two types of spending culture: Employee either beg for permission for fund to progress important work, or they gamble without prior approval to spend on key projects, and hope to be pardoned on a later stage. In both cases, this isn’t a healthy company culture, not one geared towards sustainability. In worst cases, when there is an opportunity to keep the balance book in the green, organizations will not hesitate to implement it. Take for example, to cut down on operating costs post minimum wage order, organizations are quick to cancel off benefits (Source) in order to keep finances in check. However, many of the readers here will have known that this will contribute to retention problems (source).

Step one on moving toward a culture of smart spending is all about creating a sense of purpose. Without this sense of purpose, a culture of smart spending will never occur. It is crucial to raise awareness in team members about why they must embrace smart spending behavior, highlighting the benefits of doing it and the drawbacks of not doing it. Some questions that one can use to ponder when raising awareness are such as:

  • What would be the impact of reducing cost X by MYR xxx?
  • What would be the impact of increasing spend in Y months by 10%?
  • Which source of cost can be reduced without negatively impacting the business outcome?

When answering the questions, it is always good to challenge the answer with 5 Whys to justify the spend increase or cut. If reader need assistance with 5 Whys, a quick link is provided to an external page here. (https://www.mindtools.com/pages/article/newTMC_5W.htm

Step Two on moving toward a culture of smart spending: Separate Knee-Jerk Reaction with Well-thought Action. Rather than just to have the balance book in the green, leaders should implement a simple From/To/Because framework. Within this framework, “from” identifies the current behaviors that will be modified; “to” identifies the desired behaviors after the transformation; and “because” showcases the underlying reasons for the change. When presenting the process, be clear with your employees on what will stay the same, what will be different, and when the change will occur. Lay out the metrics that will be used to track success overall and each employees’ adherence to the process.

Step Three on implementation of smart spending culture, is to embed it into the work itself. Like any proposals, everything will have to be well documented and implemented as a standard process. Making this into a routine will undoubtedly help in ensuring everyone is engaging in a smart spending culture. For each change made, there will be lessons learned, and these lessons can help with the next change. Growth and improvement should be constant—there will always be something that can be made better. Each success provides an opportunity to build on what went right, and identify what organization can further improve. Leaders should make continuous efforts to ensure that the change is always present.

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