Many HR operations are bogged down with personnel department transaction processing activities and struggle to deliver real business value. Stan Lepeak examines the state of HR business process outsourcing across the US and reveals how HR can make the most of farming out more traditional administration duties
Many HR operations are bogged down with personnel department transaction processing activities and struggle to deliver real business value. Stan Lepeak examines the state of HR business process outsourcing across the US and reveals how HR can make the most of farming out more traditional administration duties
Organisations in North America and other developed countries are operating in an era of increasing global competition, aging workforces, ongoing skills shortages and under-performing educational systems. Their HR operations are prime weapons to address these challenges. Yet many HR functions today still struggle to define and deliver value above and beyond personnel department transaction processing activities.
HR executives face a barrage of challenges, from cost-cutting to process improvement directives. HR organisations are under increased pressure to simultaneously reduce costs while continuing to improve service levels and capabilities. This bifurcated goal is increasingly encapsulated in the somewhat vague and nebulous – but alluring – concept of HR ‘transformation’. One immediate element of pursuing transformation often includes focusing on HR information technology (HRIT) and process outsourcing.
The lure of achieving cost savings via HRIT outsourcing continues, and more recently multifunction business process outsourcing (BPO) or HR outsourcing (HRO) has increased. HRO goals, however, have also moved beyond simple cost reductions to include performance improvement, increased service levels and staff/management self-service, making HRO a potential enabler of HR transformation.
While HR transformation is conceptually an unassailable goal, and the role of HRO in furthering its achievement is theoretically sound, the proverbial devil is in the detail.
Against this backdrop, EquaTerra, an outsourcing and insourcing advisory firm, in conjunction with Human Resource Executive, launched a comprehensive study to address the following three critical issues: 1. How compelling and well understood is the concept of HR transformation? 2. What steps are organisations undertaking to transform the HR organisation? 3. What is the real or perceived role and value of HRO in enabling HR transformation?
The study was conducted by EquaTerra in March 2005. EquaTerra polled 589 qualified executive management and HR decision-makers, 75 per cent of whom were manager level or above. The respondents were primarily in the North American market and were distributed across all major vertical industries.
HR’s performance
Most respondents were generally satisfied with the current state of their HR organisation. HR people and processes fared better than HRIT applications and systems, with an average score of 3.4 vs. 2.9 for HRIT (out of a possible 5.0). HRIT dissatisfaction was attributed to both antiquated/under-performing systems as well as dissatisfaction with aggressive self-service/automation efforts. There were no significant variances in satisfaction levels across organisational size or industry.
When asked about management’s opinion of the HR organisation, 55 per cent of the respondents felt management viewed HR as a strategic asset, while only 20 per cent positioned it as a cost centre. Eighteen per cent felt management had no real opinion one way or the other about the HR organisation and 7 per cent positioned management’s view somewhere between cost centre and strategic asset.
The perception of HR as a strategic asset is critical in assessing an organisation’s commitment and desire to transform HR. HR organisations viewed purely as cost centres are more likely to focus on cost-cutting over process-improvement efforts.
Most HR organisations have already moved away from the traditional distributed model (16 per cent of respondents) toward a shared-services model (56 per cent). Only 3 per cent cited a predominately outsourced HR environment, highlighting significant growth opportunities for HRIT and BPO providers, but also the relative immaturity of the broader multi-function HRO market. Twenty-five per cent of respondents operated in a blended environment encompassing distributed, shared service and outsourced HR operations.
Respondents identified a variety of areas needing improvement in their HR organisations, reflecting some of the dissatisfaction levels expressed with their organisation’s HRIT operations as well as pressure to improve process performance. Training and employee development ranked number one and was cited by 59 per cent of respondents, though more frequently in smaller organisations as opposed to larger ones. HRIT was a close second at 53 per cent, followed by compensation, recruiting and benefits.
It is clear that greater satisfaction levels (that is, less perceived need for improvement) exist in the more transaction-intensive areas of HR such as benefits and payroll. Many organisations have already automated, streamlined, moved to a shared-services environment or outsourced these processes.
HRIT and compensation were more frequently cited by larger organisations. A greater emphasis is now forming on the more qualitative aspects of HR, such as process improvement and transformation beyond cost-cutting and process automation. Organisations have not been sitting on their collective hands, however, when it comes to improving and transforming the HR organisation.
Process improvement/re-engineering efforts and the ubiquitous HR self-service deployments are the two most common focus areas, cited by 61 per cent of respondents. Given the renewed emphasis on HR transformation, this may or may not bode well, depending on the success of prior process-improvement efforts.
Fifty-six per cent of respondents have upgraded HRIT, highlighting that between this and HR self-service efforts, many organisations have made substantial investments into supporting HRIT applications and systems. These organisations are likely to move beyond process automation toward a greater emphasis on process improvement. A smaller percentage of respondents have pursued HR BPO and HRIT outsourcing – 17 per cent and 11 per cent respectively. Some mid-sized to larger organisations have undertaken more improvement efforts overall to transform the human resource department, and those companies are also more likely to have employed HRIT outsourcing and HR BPO.
HR’s transformation
HR decision-makers were very receptive to the concept of HR transformation, according to the poll. For the purposes of the study, transformation was defined as “significant and sustainable improvement in the efficiency and effectiveness of core HR processes”. Forty-three per cent of respondents cited HR transformation as extremely important to their organisations, and the average score overall was 4.3 on a 5.0 scale, with only 1 per cent of respondents indicating transformation was extremely unimportant. There were many barriers cited, however, to successfully undertaking transformational efforts.
Lack of resources, or the cost of transformation, was clearly the leading barrier, highlighted by 66 per cent of respondents, though the response rate was somewhat lower for larger organisations. This is a forward pointer to the potential role that outsourcing can play in enabling transformation, assuming arrangements are structured so that savings gained from outsourcing are earmarked to fund transformational efforts. Forty per cent of respondents cited lack of urgency, particularly at the executive level, as a barrier to HR transformation, while 39 per cent identified weaknesses in HRIT as a prime inhibitor.
HRIT shortcomings are another impediment that successful outsourcing efforts can redress. Additionally, many organisations suffer from a lack of skills –a problem mentioned by 31 per cent of respondents –and another problem outsourcing can address.
Organisations recognised many potential benefits from HR transformation. The emphasis was on actionable and beneficial results, such as improving HR efficiency and effectiveness. Activities such as consolidations and IT investments that do not directly improve HR operations scored lower. This highlights the need to define measurable, results-driven business cases when undertaking HR transformation. While achieving cost savings was the leading perceived benefit, the emphasis on effectiveness and ROI highlights that performance and cost are equally important when it comes to defining a transformation’s benefits.
There was much less consensus, however, around the most effective means to enable HR change and transformation. Among the more common activities organisations are undertaking today to improve performance and reduce costs, there were mixed opinions as to their benefit.
Deploying a shared-services environment and pursuing HRIT outsourcing were cited as the most important means to enable HR transformation. BPO also fared well. While offshore outsourcing rated poorly, organisations seeking significant cost reductions must ultimately consider utilisation of lower cost, remote-delivery resources, even if it is not in focus currently. The deployment of global languages/services ranked low overall, but fared better in larger organisations with global operations versus smaller organisations that made up a larger slice of the study sample size.
Conclusions
HR organisations must become more efficient and effective enablers for overall organisational competitiveness. But they face many challenges in attempting to improve their performance while simultaneously managing down costs. The pursuit of the elusive “transformation” is a compelling goal to support these efforts, but still is often ill-defined and misunderstood.
Organisations have undertaken many efforts and have many tools at their disposal to pursue HR transformation. Emphasis is shifting away from just more HRIT investments. The thrust is increasingly toward a greater focus on improved process performance and organisational competencies over pure cost-cutting, although cost reduction still must be a component in any improvement effort. There is a greater focus on improving capabilities in process areas that improve qualitative aspects of HR operations, like recruiting, training/learning and employee development, above and beyond transaction-processing automation and streamlining (eg. payroll, benefits).
Both IT and business process outsourcing can and will play a strong and growing role in enabling cost-effective human resource transformation. But the emphasis for end-user organisations must remain on investing adequate resources to develop the processes and gain the competencies required to determine under what circumstances outsourcing is right for them and, when it is, ensure that it is undertaken successfully.
Stan Lepeak is a managing director at EquaTerra (www.equaterra.com) and can be reached at [email protected] article first appeared in Human Resource Executive magazine. Reprinted with permission.
