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Source : SAP
Human Capital Management:
How Top Organizations Drive Company Profits Efficiently
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Table of Contents
- Executive Agenda
- ASUG/SAP Human Resources Benchmarking Study
- Balancing Efficiency and Effectiveness
- Driving Higher Performance
- HR Matters for Profit and Growth
- About the Sources
Human resources functions and responsibilities are changing and intensifying at a faster pace, and to a greater degree, than many other areas of the corporate organization. Once relegated to the back office and concerned mainly or even exclusively with transactional processes and functions, HR organizations are taking a greater role in strategic business activities.
Efficiency remains the foundation of HR. More transactions must be completed at lower costs, while processes are becoming increasingly complex to manage. A typical 10,000-employee company handles more than one million employee-related transactions annually, each of which costs anywhere from US$10 to US$50.
The top 10 recruiters in the United States report they are placing 35,000 to 95,000 employees annually. Managing the recruitment pipeline, the selection process, and the induction process is a complicated endeavor.
At the same time, however, leading HR organizations are looking beyond the execution of HR transactions to a more value-added and strategic focus. These organizations are aligning human resources and workforce planning functions with the overall business strategy to help increase profit margins and support long-term goals.
To understand the changes and momentum in Human Capital Management (HCM), the Americas' SAP Users' Group (ASUG®) and SAP have established an ongoing HCM Benchmarking forum. The study analyzes several dimensions ' staffing, cost, organizational model, IT deployment, and best-practices adoption. The following key conclusions demonstrate how companies are meeting today's human capital challenges:
- As a first step, HR managers strive to optimize the efficiency of transactional processes through standardizing, automating, and integrating business processes, based on best-practice process and technology models.
- Optimizing transactional processes frees up resources that allow HR organizations to invest in more strategic functions that facilitate business growth and increase employee productivity.
- Centralizing and consolidating HR operations in a shared-services environment helps increase the efficiency and effectiveness of HR processes.
- Outsourcing, while used frequently for transactional processes, does not always drive top performance, either in cost or service quality. Organizations need to carefully evaluate the value, performance, and cost trade-offs in outsourced versus in-house service delivery.
- Information technology continues to provide the basic foundation for efficiency and acts as the key driver for effectiveness and future innovation.
- Leading organizations recognize that IT supports the development of many best practices, and they continue to invest in IT to integrate systems, data, and processes across the enterprise.
In short, the study finds that the best human capital management organizations constantly reassess their processes to strike a balance in the drive to optimize efficiency, cost, and service delivery in a continually changing environment. Top performers in this area balance the traditional demands of transactional efficiency with value-added activities that drive company profits and growth and help prepare for future innovations.
ASUG/SAP HUMAN RESOURCES BENCHMARKING STUDY
Benchmarking is an important and powerful tool for companies to achieve a balance between cost- effective efficiency and contributing value-added services to support corporate strategic goals. By accurately assessing their own performance and comparing the results achieved to those of their peers, HR organizations can achieve optimal levels of efficiency and effectiveness. Moreover, if managed well, HR becomes a dynamic part of the organization that can go beyond transaction-related activities and contribute to margin growth and the long-term success of the company.
ASUG and SAP have established a benchmarking forum to understand the dynamics of human resources organizations and the challenges faced by their managers. The ASUG/SAP study examines the best-practices record of more than 200 companies ranging in size from less than $1 billion in annual revenues to more than $10 billion. The benchmarking study analyzes the HR performance of these companies in 17 key subprocesses in three categories: process and transactional support, expertise-based business support, and strategic decision support. Two questions are at the core of our study: How can companies reduce HR costs and increase HR efficiency? How can HR organizations create value for the business and optimize effectiveness?
The study includes companies with an overall number of employees ranging from 1,000 to more than 10,000 in the following industries:
- Aerospace and defense
- Consumer products
- Engineering, construction, and operations
- Financial services
- Healthcare and life sciences
- High tech
- Industrial machinery and components
- Oil and gas
- Public sector and higher education
- Service providers
The study analyzes key performance indicators (KPIs) in a number of different areas including HR staffing levels, costs, organizational model, IT deployment, and best practices. These include the following KPIs:
- Process-independent, such as HR costs per company employee, and HR full-time equivalents (FTEs) per 1,000 employees
- Process-specific, such as time to hire, cost to hire, and payroll error rate
- Degree of outsourcing and centralization
- Use of shared services
- Information technology used by HR employees
- Degree of IT automation and integration
The study also covers the level of best-practice adoption across the full range of HR functions, with companies providing self-evaluation for coverage and the perceived importance of each best practice. Best practices are winning strategies, approaches, and processes that produce superior performance. Some examples of HR best practices include the following:
- Ability of internal and external applicants to place themselves in the talent pipeline according to their own interests and goals
- Automated recruiting system analysis and reporting
- Integrated applicant tracking system
- Online access to direct-deposit and payroll data
- Single point of contact established for all payroll-related questions
- Benefits and pensions
- Benefits and retirement planning self-service
- Ability to model and analyze the impact of benefits plan changes on the overall business model
The study then uses companies' quantitative KPI results and qualitative best-practice coverage ranking to rate them against the other participants, and categorizes each company as first quartile (the most effective or efficient "top performers"), average, and fourth quartile (the least effective or efficient "bottom performers"). Analysis of both qualitative and quantitative measures allows inference of key findings and insights related to the drivers of top performance. Continuous participation in the program will allow companies to track their progress against internal and industry metrics on an ongoing basis.
BALANCING EFFICIENCY AND EFFECTIVENESS
A still common perception is that managing human resources is straightforward and transaction- oriented, and can therefore best be measured in terms of efficiency: the lower transactional costs, the better. This perception of HR is changing, however, and approaches to human capital management now cover a wide spectrum. At the opposite end of the range from traditional cost-centered, back-office organizations, many HR organizations now have the principal goals of providing the best possible business support and investing in resources and sophisticated tools ' while deprioritizing or ignoring costs altogether.
Our study shows that top-performing companies strike an optimal balance between the two extremes of this spectrum. These companies are transforming the way they look at HR, with human capital management taking a stronger role in contributing to the drive for higher profit margins and long- term growth. Top-performing HR organizations strive to optimize both efficiency and effectiveness by minimizing transactional costs through standardization, automation, and self-service, freeing up resources that can be used to align HR with the businesses to support growth.
KEY MEASURES FOR EFFICIENCY
Human resources management is in a state of dynamic change, under pressure to adapt to the realities of doing business in the 21st century. Efficiency, always a watchword for HR management, remains a highly important measure. The most commonly used HR efficiency metrics are as follows:
- Staffing levels ' employees served per full-time HR employee, or full-time HR employees per 1,000 employees
- Costs ' HR cost per company employee
Despite HR organizations' continued or renewed focus on efficiency, our research has identified significant gaps between first quartile (the companies most effective in instituting best practices) and average performers (those that are average at instituting best practices). First-quartile HR organizations had over 50% better staffing ratios, and their HR costs were 30% or more lower. A single HR FTE in a first-quartile company served 120 employees, compared with 77 employees served by one HR FTE in an average company. HR costs per employee were $1,760 on average, compared with first-quartile company costs of about $1,100 per employee. While it's true that companies with higher HR staffing levels or costs tend to have more complex organizations or more complex industry environments, the gap between first-quartile and average performers in many cases indicates an opportunity for improvement in efficiency among the lesser-performing companies.
KEY MEASURES FOR EFFECTIVENESS
Effectiveness is much harder to measure than efficiency, and many HR organizations rely on a combination of hard (quantitative) and soft (qualitative) metrics, such as:
- Hard metrics ' cycle times (such as time to hire), error rates, and employee turnover
- Soft metrics ' employee engagement, customer satisfaction, alignment with corporate goals, impact on business results, and adoption of best practices
The study shows that these effectiveness metrics do not necessarily correlate with efficiency metrics. There are study participants with strong results for effectiveness but very high costs, as well as companies with low effectiveness and low costs. The most desirable case is to achieve high effectiveness while at the same time managing costs.
DRIVING HIGHER PERFORMANCE
Top-performing companies look for competitive advantage in HR by adding capabilities to increase the effectiveness of service delivery and bring HR more in line with business processes and strategies ' while at the same time striving for the right balance with cost control. Our study finds that the best HR organizations follow three main imperatives:
- Align HR closely to the business
- Outsource wisely and with effective control
- Leverage IT
ALIGN HR CLOSELY TO THE BUSINESS
Alignment with the business has to happen on multiple levels. Centralizing transactional and certain expertise- and talent-related processes in a shared-services or center-of-excellence environment is a crucial piece of the alignment puzzle, allowing HR as an organization to operate as a service provider to individual business units and locations. The study finds significant advantages in both efficiency and effectiveness for HR functions impacted by shared services. The average cost per employee for decentralized operations is far higher than for operations using shared services or centers of excellence, producing a 15% to 40% gap for transactional activities and a 5% to 20% gap in expertise-related activities. And the average best-practice score (a measure of effectiveness) for shared services is 20% higher than for decentralized functions.
Many larger organizations choose to establish employee service centers to align closely at the employee level, catering directly to employee needs, while at the same time preserving efficiencies. Over 80% of companies with more than 5,000 employees have service centers in place, compared to 20% of companies with fewer than 5,000 employees. Employee service centers help increase efficiency and employee satisfaction, providing employees with a single point of contact for taking care of benefits, pensions, payroll, processing of life events, employee data entry, applicant questions, and data processing, as well as onboarding process and paperwork.
Top-performing companies are looking to HR business partners for direct and strategic support. HR business partners are responsible for developing employee relations, leading workforce planning, and supporting stakeholders on-site. Top- performing companies sharply define the role of the HR business partner, while average companies allow the role to blend with that of the HR generalist who is also responsible for a variety of transactional tasks.
True HR business partners spend less than 20% of their time on administrative tasks, and make change management a key responsibility. Top-performing companies even measure HR business partners by the success of such change programs. In this role, they also work with company leadership during the business planning process to identify future competency profiles and needs.
OUTSOURCE WISELY ' AND CONTROL EFFECTIVELY
The best companies take time to analyze what to centralize in-house, what to outsource, and what to decentralize, based on the demands of their unique cultures. This study calls into question some of the conventional wisdom about outsourcing. Results are inconsistent in the sense that outsourcing does not always drive first-quartile performance. In analyzing the cost per employee for in-house versus outsourced services, for example, we find significant cost gaps in payroll and benefits administration between first-quartile and average companies. Even more important, best practices are not always as prevalent in outsourced functions as they are with companies that control more of their HR functions.
A possible explanation for the inconsistency of these findings is that organizations that do not outsource may already have decent scale and standardization, and are therefore already at respectable benchmark performance levels. In payroll, for example, organizations with centralized operations in a shared-services environment ' with standardized and simplified processes based on a single-instance enterprise resource planning (ERP) solution ' have a very good chance to achieve first-quartile performance in-house.
On the other hand, companies that do outsource may have intrinsically higher cost structures to start with. Significant reductions may be made, but the impact of these results must be weighed against the higher-cost starting point. The key takeaway is that HR organizations should evaluate their outsourcing decisions carefully and establish a benefits and cost analysis up front to weigh any potential alternatives (such as an optimized in-house solution).
Our study shows that IT is a critical enabler for HR efficiency and effectiveness. Companies with a single HR system are more efficient and effective ' and more strategically focused ' than companies with fragmented system landscapes. In our study, companies with a single enterprise-wide IT system have lower staffing levels and enjoy higher levels of best-practice scores.
HR MATTERS FOR PROFITS AND GROWTH
The top performers in our study achieve an optimal balance between reducing costs and driving business results. Top-performing companies look beyond traditional HR activities to focus on expertise- based and strategic functions. By optimizing and automating transaction-oriented processes, top companies can invest more in attracting and developing talent ' an investment that brings returns across the entire enterprise.
Companies that wish to enact initiatives embraced by top performers need to define their goals specifically ' building a road map ' to achieve a balance between reducing costs and driving company growth. The best-run human capital management organizations share the following crucial practices and goals:
- Optimize process and transactional support
- Benchmark processes and performance
- Consolidate systems
- Adopt shared services
- Invest in people and talent
- Align HR with overall business strategy and goals
- Focus on value, not effort
As an initial step, top companies optimize process and transactional support ' instead of concentrating on payroll and compensation administration ' to focus more on strategic workforce planning, career planning, employee development, and recruitment and retention. And monitoring and evaluation do matter: HR organizations that establish benchmarking programs ensure that goals are mapped out and met. Standardizing, consolidating, and centralizing HR operations in a shared-services environment helps increase process efficiency and effectiveness and enables companies to raise service levels and focus on talent ' not transactions. Information technology provides the necessary foundation, facilitating efficiency and driving future innovation and growth by integrating processes and data across the enterprise.
Following this road map, HR organizations can contribute to long-term and immediate company goals by promoting and advancing employee productivity ' optimizing the operating margin per employee. While constantly assessing and improving processes, companies can enable a shift in mind-set ' to focus on value, not effort ' and make HR a true business partner to the corporation.
ABOUT THE SOURCES
SAP is the world's leading provider of business soft- ware.* Today, more than 38,000 customers in more than 120 countries run SAP® applications ' from distinct solutions addressing the needs of small businesses and midsize companies to suite offer- ings for global organizations. The SAP ERP Human Capital Management (SAP ERP HCM) solution provides a complete, integrated, and global human capital management solution for organizations of all sizes and in all industries. The world-class solu- tion, employed by more than 10,000 SAP customers, helps companies maximize the potential of their workforce while supporting innovation, growth, and flexibility. SAP ERP HCM automates talent management, workforce process management, and workforce deployment, enabling increased efficien- cy and better compliance with changing global and local regulations.
Powered by the SAP NetWeaver® platform to drive innovation and enable business change, SAP soft- ware helps enterprises around the world improve customer relationships, enhance partner col- laboration, and create efficiencies across their sup- ply chains and business operations. SAP solution portfolios support the unique business processes of more than 25 industries, including high tech, retail, financial services, healthcare, and the public sector. With subsidiaries in more than 50 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and the New York Stock Exchange under the symbol "SAP." For more information, please visit www.sap.com.
* SAP defines business software as comprising enterprise resource plan- ning and related applications such as supply chain management, cus- tomer relationship management, product life-cycle management, and supplier relationship management.
The Americas' SAP Users' Group (ASUG®) is an independent, volunteer-run organization that facilitates knowledge transfer among the com- munity of SAP customers by providing user-driven educational opportunities, professional networking, and a forum that provides insight and influence to SAP. ASUG maintains a unique position within the SAP community through its combination of highly focused education tools, access to subject matter experts and SAP executives, ability to influence SAP products and services, and personal network- ing opportunities with SAP customers. As a result, members from any sized organization continuously solve their SAP-related business problems more efficiently and cost-effectively, realizing a significant return from their membership. For more informa- tion, please visit www.asug.com.
ABOUT THIS STUDY
The ASUG/SAP Benchmarking and Best Practices program is open to participants on an ongoing basis. Companies are encouraged to participate annually to track trends, share best practices, and measure value realization. In addition to human capital management, benchmarking programs are also offered in several additional areas including: finance; supplier relationship management and procurement; governance, risk, and compliance (GRC); supply chain planning; manufacturing; new product development and introduction; customer contact centers; warehouse management; trans- portation management; business intelligence and analytics; and total cost of ownership. If you are interested in participating in any of these efforts, or if you would like additional copies, please e-mail the ASUG/SAP Benchmarking and Best Practices Program at firstname.lastname@example.org.
ABOUT THE AUTHOR
Katharina Müllers-Patel, PhD, a senior princi- pal in the SAP Value Engineering group based in Newtown Square, Pennsylvania. She manages the joint ASUG/SAP Benchmarking and Best Practices program, which covers finance; human capital management; supplier relationship management and procurement; governance, risk, and compli- ance; total cost of ownership; supply chain plan- ning; manufacturing; new product development and introduction; and customer contact centers. Prior to joining SAP, Müllers-Patel worked as a strategy consultant with A.T. Kearney, delivering operational, organization, and corporate strategy engagements at the C level for global corporations with a particular focus on shared services, business transformation, and strategic planning.