Effective HR helps keep costs down

THE WORLD’S best-performing companies spend 25 per cent less on HR than other, less successful organisations, and rely on 16 per cent fewer HR staff

Effective HR helps keep costs down

THE WORLD’S best-performing companies spend 25 per cent less on HR than other, less successful organisations, and rely on 16 per cent fewer HR staff.

Recent US research also found world-class HR organisations are achieving results superior to typical companies in both quality and the effectiveness of their operations, with lower levels of complexity and more streamlined processes that allow them to fill open positions faster, see lower voluntary termination rates and demonstrate greater alignment with their company’s business goals.

Conducted by business process advisory firm, The Hackett Group, the research found a correlation exists between increased outsourcing as a percentage of total spending and increased overall HR costs per employee at typical companies. But world-class HR organisations actually outsource more than typical companies in low value-added transactional areas, using outsourcing to drive down costs.

Top HR organisations dedicate nearly half of their overall transactional process costs to outsourcing – 26 per cent more than typical companies. As a result they are able to spend 19 per cent less per employee in this area.

“These findings appear to contradict each other. But on closer inspection, they don’t,” said Hackett senior business advisor Patty Miller.

“Typical companies often outsource for the wrong reasons, in an attempt to lower costs and fix processes they know are broken. This is almost always a mistake,” she said.

“In addition they frequently haven’t standardised and simplified their operations, and the resulting complexity drives increased outsourcing costs. Finally, they often retain redundant internal labour after outsourcing, rather than using it as an opportunity to refocus their internal staff.”

The research, provided in Hackett’s 2005 Enterprise Book of Numbers, found world-class HR companies spend US$1,422 ($1,937) per employee, compared to US$1,895 ($2,581) for other companies. World-class companies also operate with a ratio of 11.88 HR staff per 1,000 employees, versus 14.11 for other companies.

The research also found in most cases, HR outsourcing leads to higher costs at typical companies, despite the fact that world-class HR organisations rely on selective outsourcing to reduce costs in highly repetitive transaction-oriented areas.

There was a correlation between greater spending on outsourcing and increased total HR cost per employee at typical companies. This is driven, in part, by common mistakes made by these companies during the process, such as neglecting to streamline processes beforehand and retaining existing internal staff responsible for the outsourced function.

In contrast, world-class companies are able to use outsourcing effectively as part of their business process sourcing mix, to cut transactional costs and enable increased internal focus on strategic activities.

“World-class HR organisations take a very different approach toward outsourcing,” said Hackett HR practice leader Stephen Joyce.

“They understand that effective business process sourcing is about aligning their service delivery models with business processes and responsibilities,” he said.

World-class companies are also much more closely aligned with their companies’ business goals, and 67 per cent are more likely to have an explicit workforce strategy in place.

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