"Improving Human Capital Management in the Public Sector"

If you receive errors when attempting to view this white paper, please install the latest version of Adobe Reader.

"EquaTerra advisors have been involved in hundreds of human resources (HR) transformation and outsourcing initiatives, delivering sustainable value for organizations of all sizes"
Source : EquaTerra

Resources Related to Improving Human Capital Management in the Public Sector:

• Human Capital (Wikipedia)
• Human Resources (Wikipedia)

Improving Human Capital Management in the Public Sector

Executive Summary

Improving Human Capital Management in the Public Sector: HR Services Delivery Strategies for the New Millennium

EquaTerra offers its latest study, Improving Human Capital Management in the Public Sector: HR Services Delivery Strategies for the New Millennium, to help public sector Human Resources (HR) executives:

1. Identify key HR areas that are critical to their organizations’ success.
2. Identify perceived barriers to HR’s success, as well as areas for potential improvement.
3. Deine and evaluate various service delivery models to help HR achieve success.

Figure 1 shows some of the high-level results from our combined respondents that this study explores.

Public sector human resources capabilities are at a crossroads, where they are challenged to begin moving their departments from the role of ensuring administrative compliance to helping to drive strategy and larger outcomes for the entire organization.

Public sector human resources capabilities are at a crossroads, where they are challenged to begin moving their departments from the role of ensuring administrative compliance to helping to drive strategy and larger outcomes for the entire organization.

Yet, our research shows that many public sector HR organizations struggle to deine and deliver value above and beyond personnel transaction processing activities, in part, due to the ive major challenges that currently lie before them (as noted on the next page). In addition to the macro-political and economic pressures they say HR faces, respondents also identiied levers for effectiveness (and areas for improvement) inside HR itself – e.g., succession planning, performance management, and workforce recruiting.

Five Major HR Challenges

1. Inadequate resources and lack of executive management attention
2. Inability to focus on strategic issues due to competing demands and insufficient resources
3. Attrition of skilled, affordable employees capable of addressing current issues
4. Competition from the private sector for employees
5. Inadequate funding and appetite to invest adequately in IT systems for HR processes

Respondents stated that their number-one objective in HR over the next 12 months is “to make HR more strategic,” and that they believe “transforming policies and procedures is the key means to make HR more strategic.”

Implied in this desire to ‘transform’ aspects of HR, however, is the notion that policies and procedures both drive and are relected in the fundamental organization and delivery model for HR. As part of delivering services, many in HR are looking beyond the four walls of their own department to external change agents – be it a consultant (who gives advice on HR strategy and workforce alignment), sourcing advisors (who assist organizations with assessing the eficiency and effectiveness of their HR operations and help explore alternative service delivery models), systems integrators (who develop technology solutions to help implement strategies and processes), or outsourcing providers (who actually own and operate certain, non-constituent facing HR processes) – who could serve as the catalyst for transformation.

Regarding the use of outsourcing, governments report that they are, at best, lukewarm on using third-party providers to help transform their HR function. The reality on the ground as to why public sector organizations and HR departments consider outsourcing is because they are told to do so. Respondents’ reactions point to a greater likelihood of success and satisfaction when outsourcing transaction-oriented functional areas rather than more strategic areas. Yet, there are still some signiicant variations in HR organizations’ views and use of outsourcing, depending on the level of government and type of employee.

The real question, however, is not “whether to outsource or not to outsource” so much as it is to examine all of the required inputs and outputs that lead to higher HR performance. It is these same concerns that have led some HR executives to explore multiple alternatives for delivering HR services. By “alternative” we mean, in some sense, doing something different, but we also mean simply the range of options available to HR that often go unconsidered because executives may not be thinking broadly enough about all of the possibilities before them.

EquaTerra’s experience leading executives and organizational function owners (including over 50 projects related to HR) has led to a simple but robust process by which a public sector enterprise may explore its service delivery options – sourcing models, delivery models, ownership models, etc. – and select the most appropriate one among them (which sometimes means using more than just one approach). This paper describes the various approaches and models to help public sector HR executives evaluate options for their own organizations. In each case, there is a different emphasis on the most appropriate mix of speed versus deliberation, risk versus lexibility, inputs versus outputs and eficiency versus effectiveness.

Given the challenges faced by government agencies and their HR departments, it is incumbent on HR organizations to take a hard look at their existing HR operations and face the realities of what is and is not working. With shared services being the largely predominant organizational structure for delivering HR, according to our study, public sector HR executives must ask themselves if that delivery structure alone is enough. Further, with a majority of respondents only “somewhat satisied” with their HR people and processes, HR executives should ask themselves – what must be done to take their organizations to the next level…and to overcome the complacency that seems to exist when it comes to HR satisfaction?

HR organizations need to determine where they reside on the strategic spectrum of “transactional” to “transformational” or “administrative” to “strategic” (and where their parent organization thinks they should be). Once they have identiied and conirmed their relative positioning, they must act on it – thoughtfully examining, determining and implementing a more eficient and effective HR services delivery model(s) that enables them to best achieve their goals.

Read on for a detailed analysis and interpretation of the study’s indings.

I. Introduction

Today, government is asked to accomplish a list of seemingly endless and often conlicting objectives with decidedly limited resources. Governments face unfunded policy mandates (from one level of government to another), climbing healthcare costs, aging technology, retiring workers and new security challenges. Governments also face a shortfall of resources on all fronts, most notably budget deicits and a looming scarcity of skilled civil servants. For example, in the United States alone, half of the federal workforce – some 450,000 employees – will be eligible for retirement in the next four years.

Public sector HR departments share these challenges, and are in a unique position to help their organizations address them since they oversee and are responsible for the human capital that fuels government work. It is possible, and some say even required, for HR to take a leading role in helping to address many of these challenges by stepping out of the traditional role of an administrator of policies and procedures and taking on a more strategic management role on behalf of the entire agency or organization.

As those in the ield know, this is easier said than done. But, there is a forward momentum toward change among innovative HR practitioners and thought leaders in the public sector. This report is intended to reveal the fault lines for some of these shifts in government HR, as perceived by the executives and HR professionals actually doing the work. It is in this context that EquaTerra has recently completed its latest study, “Improving Human Capital Management in the Public Sector: HR Services Delivery Strategies for the New Millennium.”

This report offers some of the latest research and contributions from HR leaders in the public sector to show how HR departments view their organizations and roles today, where they are going in terms of their overall mission, and how they might get there through various strategic service delivery options. One aspect that this study will examine is the growing trend among public sector organizations to explore and adopt various models designed to increase the eficiency and effectiveness of service delivery. However, this report does not promote outsourcing per se, but rather seeks to help HR executives understand all of the sourcing options available to them.

The report is divided in three sections:

• Current HR Environment:

This section addresses the current state of HR in the public sector. It covers typical HR operating environments, IT infrastructure, and executives’ perceptions of HR’s current focus and future challenges. As one HR executive commented, “It is important to understand where we are before we can know where we want to go.” This section addresses questions such as:

How are government bodies organizing and sourcing HR services today?

What types of IT systems are in place and how well do they satisfy users?

What differences exist between state-local and federal status quos?

Are users and executives satisied with overall HR performance?

• Future Development of HR Roles and Operations:

For government organizations, improving HR means aligning HR’s goals and actions with the overall mission of the organization. This section addresses the following questions:

How well does the HR function serve as a strategic asset to the overall organization?

Which HR processes need the most improvement?

What are the barriers to success?

What are HR’s key objectives over the next 12 months?

What is the single most important measure to help HR become more strategic?

• Alternative Sourcing and Delivery Models for HR

This section addresses how HR departments are meeting their challenges and executing on improvement opportunities through the use of third parties. It also describes various approaches and models that HR executives can employ to deliver HR services. This section addresses questions such as:

To what extent do public sector HR organizations use third parties today?

What are the various sourcing and delivery models available to government HR?

What is the best service delivery model?

Scope and Methodology

EquaTerra conducted this research over a period of three months, conducting online surveys with 264 qualiied public sector executive management and HR decision makers (See Figure 2). Titles of individual respondents ranged from “Chief Human Capital Oficer,” to “Director of Personnel/Director of HR,” to persons responsible for sub-functions in HR, such as “Director of www.equaterra.com Beneits.” Among all of the respondents, 80 percent are directly involved in decisions regarding HR departments’ use of internal and external resources to achieve their missions. The respondents worked primarily in the United States (95 percent) and Canada and hailed from various major public sector categories, such as education and healthcare, in addition to federal, state and local government HR department oficials.

It is important to note that roughly 75 percent of respondents were state-local (includes city, county and state) government executives, while the remainder were from “other,” primarily the federal level. While EquaTerra recognizes that there are inherent and fundamental differences between state-local and federal government practices and requirements, our research team has calibrated for this fact, seeking to glean experience and recommendations that might be useful for each.

Finally, in addition to the quantitative survey upon which this report is based, EquaTerra has performed individual interviews with public sector HR thought leaders, many of whom chair national or global organizations aimed at helping governments improve HR strategy and operations. These organizations and associations include:

• The International City/County Management Association
• The Society for Human Resource Management
• The International Public Management Association for Human Resources
• The National Association of State Personnel Executives
• The Human Capital Institute

In each case, EquaTerra asked these executives for their thoughts on the survey results as well as their perspective on the transformation journey that is underway in public sector HR.

II. Current HR Environment

We have outlined the macro challenges facing government and understand that HR is very much a part of these same challenges, both subject to them, and, as this report contends, able to help address them. But what are the particular challenges inherent in government HR, as perceived by public sector HR executives? Before we can begin to address HR executives’ issues and their reactions to resolve them, it is critical to understand the challenges that are speciic to HR, relected, in part, by how public sector HR departments structure themselves and operate today.

Current Challenges Speciic to HR

For starters, our research shows that many public sector HR organizations struggle to deine and deliver value above and beyond personnel department transaction processing activities. Among the many challenges that exist, we found ive that are most commonly faced by HR:

1. Inadequate resources and lack of executive management attention
2. Inability to focus on strategic issues due to competing demands and insuficient resources
3. Attrition of skilled/affordable employees capable of addressing current issues
4. Competition from the private sector for employees
5. Inadequate funding and appetite to invest adequately in IT systems for HR processes

Despite these conditions, executives aim to develop their HR organizations, yet they are under increasing pressure to simultaneously reduce costs, while continuing to improve service levels and capabilities. This dilemma has resulted in a range of operational structures designed to resolve the challenges faced by HR and the organization at large.

Current Structure of HR and the Relationship to its Parent Agency

Among our respondents, the majority (67 percent) of HR organizations operate in a “shared services” environment today (See Figure 3). That is, one organizational unit deploys HR services to multiple departments/divisions/ agencies. As one state’s Director of HR quips, “This is the fun part of state governments…when ‘group beneits’ is a totally separate organization, and then there is still another separate entity doing retirement.” This quote reveals, however, that even among HR executives there may be differing views about what constitutes shared services (e.g., “distributed models,” where agencies provide different services to employees across the enterprise, and “shared services,” where a single, centralized unit provides HR services to employees across the enterprise).

Shared Services: A single, centralized unit provides HR services to employees across the enterprise

Blended: Some HR services are outsourced to third parties with the majority of HR operations still performed internally

Outsourced: Organizational in-house HR processes are contracted out to third parties who specialize in these activities

Another 17 percent of respondents work in a blended environment with some HR services outsourced to third parties but with the majority of HR operations still performed internally. Another 14 percent operate in distributed environments, with multiple departments/divisions/agencies possessing their own HR operations, and just 2 percent had outsourced a majority of HR operations to a third party. Shared services was the predominant model among all respondents (67 percent) and even more prevalent in state and local governments (76 percent).

What explains the higher incidence of shared services among state and local governments? Size alone may be a main factor. Federal agencies are extremely large and, in some cases, may employ the same number of people as an entire state government. Thus, a single federal agency that delivers services across the agency from one department may already be achieving adequate economies of scale. States, on the other hand, would need to institute shared services in order to achieve that same scale. Despite these indings, we will likely see a greater use of shared services at the federal level going forward due to the introduction of the Ofice of Management and Budget’s “Lines of Business” – an initiative that seeks to achieve greater eficiency and effectiveness across the federal government’s main business functions, commonly achieved through the use of competing internal shared services. For example, various federal agencies and departments are being strongly encouraged to use one of ive department’s (i.e., Agriculture, Defense, Interior, Health and Human Services, and Treasury) shared services units for the provision of payroll services.

Although shared services is currently the predominant organizational structure, these indings tell us that there is no one, deinitive proven model, which may relect the fact that different government levels and entities are attempting to organize around their goals and challenges in different ways, with no proven “best practice” at the present time. For a more detailed discussion of these and other organizational structures, see the last section of this report.

Current HR IT Environments

While a more modern HRIT environment is not a substitute for good people, processes, policies and procedures, or vice versa, one seems to inluence the other.

Relative to the current HR Information Technology (IT) environment:

• 40 percent of respondents overall were utilizing an integrated ERP system.
• 29 percent of respondents had multiple systems per agency/department with each one handling different functions (e.g., payroll, beneits administration, procurement).
• The International Public Management Association for Human Resources
• Just under 16 percent of respondents had legacy systems (e.g., mainframes, obsolete software platforms) or several systems per agency or department.

While a more modern HRIT environment is not a substitute for effective people, processes, policies and procedures, or vice versa, one seems to inluence the other. Investments into HRIT were often cited as a means to improve overall HR operational performance. According to several respondents, IT is a critical issue; the real question is how to organize data and inputs to achieve an improved level of understanding and knowledge, which can, in turn, be applied back to the organization.

Current Issues Affecting HR’s Effectivenes

Among the current tasks required of HR, respondents were asked to rank those “top three” issues that they believe inluence HR’s overall effectiveness. The top three choices all relate to getting the right people for the right job and include:

1. Succession planning – Ensuring that HR can ill and maintain key posts
2. Performance management – Measuring and guiding the results of employees’ work
3. Workforce recruiting – Identifying and acquiring talent in the right types/numbers (eficiently)

All of the current data underscores the overall organizational need to acquire and keep talent as well as the larger need to address the topic of workforce planning, which is on the minds of most HR executives today. These responses also show how executives believe HR can maximize its strategic role in the organization (see next section).

III. Future Development of HR Roles and Operations

Executives’ View of HR as a Strategic Asset

Among all of the respondents, 25 percent indicated that executive management viewed the HR organization as “a strategic asset” to the overall agency or organization, while 58 percent indicated HR was viewed as “a necessary support organization.” Just 5 percent cited HR as being viewed as “a cost center” (See Figure 4). Thus, one of the key goals of our research was to discover where HR executives felt themselves to be on their journey to maximize the value and impact of HR. We asked executives to “assess how their organization’s HR operations were successful in performing as a strategic asset to the overall organization,” in terms of helping their parent agency or government body achieve its key goals.

• 13 percent of respondents felt that HR operations had been “extremely effective”
• 63 percent of respondents indicated it had been “somewhat successful”
• 21 percent of respondents felt HR had been “somewhat unsuccessful”
• 3 percent of respondents indicated it had been “extremely unsuccessful”

Inside the HR function itself, respondents overwhelmingly responded that the HR process that represented HR’s “most strategic capability” was “measuring employee performance.”

Key HR Objectives over the Next 1 Months

When EquaTerra asked respondents to identify their organizations’ top three objectives for HR operations over the next 12 months, “making HR more strategic” was cited most frequently by 52 percent of respondents. “Improving services to employees” (e.g., quantity, quality, timeliness, information availability, etc.) ranked a close second (50 percent), with “gain/improve access to new technologies” (e.g., ERP, web-enabled manager and employee self-services, etc.) as third (42 percent). These rankings were the same for local/municipal/county respondents. Interestingly, the need to “reduce administrative costs” scored comparatively low (25 percent).

In regard to these indings, Glenn Davidson, EquaTerra’s lead for public sector, comments, “With 75 percent of respondents not seeing their HR function as a strategic asset, it is no surprise that making HR more strategic is a key focus over the coming year. That said, what is interesting is how the respondents’ top three identiied goals are inter-related – improving access to technology is truly an enabler to becoming more strategic and improving employee service. For example, if an HR organization were successful in deploying new technologies, streamlining processes and utilizing third-party contractors to perform the more transaction-oriented HR processes – what would be the result? In most cases, this would free up HR personnel’s time, permitting them to focus on matters of greater strategic signiicance; it would also result in better services to employees and a more strategic HR organization. Thus, no one action will enable public sector HR organizations to achieve these goals. Instead, it will take a combination of initiatives.”

In our attempt to understand what it means to be more strategic – deined broadly as aligning HR goals with the mission of the overall organization – EquaTerra sought to understand where executives were satisied (or not!) with HR’s performance and how HR sought to improve and transform itself.

Satisfaction with HR Operational Performance

In order to determine both obvious and hidden areas of need in HR, EquaTerra examined its building blocks through the eyes of the executives and HR professionals on the ground. Accordingly, we looked at their relative satisfaction with the organization, strategy, IT and all of the processes that make up the total HR function. Figure 5 shows respondents’ relative degree of satisfaction with various HR processes today.

Both federal and local/municipal/county respondents reported that they were either “extremely satisied” (18 percent) or “somewhat satisied” (63 percent) with the current performance of their HR organizations’ people and processes (federal HR professionals cited slightly higher satisfaction rates). Satisfaction levels with speciic HR processes varied signiicantly depending on the type of organization in which the respondent was employed. Local/municipal/county respondents were much more satisied with beneits administration (71 percent to 36 percent non-local/municipal/county) and recruiting (80 percent to 44 percent non-local/municipal/county) compared to all other respondents. Local/municipal/county respondents were even less satisied with HRIT (15 percent versus 27 percent non-local/municipal/county) and payroll (58 percent versus 80 percent non-local/municipal/county).

Because of long-standing budget pressures, state and local governments, with few exceptions, have not made ongoing investments in technology. This likely explains their low satisfaction with HRIT. And why are they so satisied with beneits administration and recruiting? “It is not unusual for states and localities to outsource their beneits administration; and, in this instance, some may say there is a connection between organizations’ beneits administration satisfaction levels and its outsourcing incidence. As for recruiting, we have seen more and more states and localities making low-investment enhancements to their recruiting functions that are delivering results, such as utilizing low-cost Web-enabled tools for job advertising or purchasing standalone recruiting platforms,” said Davidson.

As we will see in the next section (Figure 7), there is no direct correlation between outsourcing and process satisfaction – i.e., HR is satisied with some highly outsourced processes (pension administration) and dissatisied with other outsourced HR processes (e.g. training).

Overall, there were four areas where respondents felt HR needed the most improvement (readers will note some recurring themes):

• Succession planning
• Performance management
• HR Information Technology
• Management training

Given that IT is really another HR process unto itself, albeit an enabling one, it is worth noting that HR’s satisfaction with HRIT varied according to (a) the level of government, and (b) the age of in-house systems. Overall, just 18 percent of respondents were satisied with the status quo when it came to HRIT. Respondents employing integrated ERP systems for HRIT were the most satisied with their overall HR performance, and those with legacy systems were the least satisied. While IT operating systems are a subject unto themselves, insofar as they support and underwrite key business processes, HR departments and their parent organizations face a dizzying array of options – replacing legacy systems, installing ERP systems, building web platforms, rolling out self-service portals, or moving to ASP or managed service models.

“There is a technology lag in the public sector, HR included, and we have an opportunity to make much better use of IT, especially in areas where there is low-hanging fruit – applicant tracking systems, performance assessment tools, and knowledge management applications.”

The Executive Director of The Human Capital Institute, Allan Schweyer, acknowledges that, “There is a technology lag in the public sector, HR included, and we have an opportunity to make much better use of IT, especially in areas where there is low-hanging fruit – applicant tracking systems, performance assessment tools, and knowledge management applications.” As another HR executive pointed out, in terms of HR’s reliance on technology, “It is important to realize that the value of technology is not based on data and other inputs (although these are important) but upon how that data transfers to actionable knowledge for improved decision making – the difference between ‘bells, whistles, and buzzwords’ and real tools that enable better executive management and employee service.”

IV. Alternative Sourcing and Delivery Models for HR

Beginning with the end in mind, executives from our survey want to make HR more strategic to align HR’s operations and mission with the overall mission and goals of the larger organization. More than any other approach, respondents claimed that in order to help the overall organization achieve its goals, HR “needs to transform existing policies, procedures and methodologies.” But the questions remain – Which policies? To what degree? And how?

At the same time, some HR executives take real issue with the need to change, because they contend that many in HR have not yet determined where it is that they want to go. One executive who holds a senior HR position as a political appointee in the federal government comments that “HR is most successful when it igures out how to align everything with the strategy of the overall organization…and while it seems like it’s so obvious, some of us focus so much on making sure the ‘train runs on time’ that we do not bother to make sure that it’s actually going to the right station.”