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STATE OF THE ART IN HUMAN RESOURCES
AN SAP/ASUG BENCHMARKING STUDY OF KPIs & BEST PRACTICES
Table of Contents
CEO Notes Point of View A Lean and Mean HR Forge Competitive Advantage by Jump-Starting Effectiveness Push HR to the State of the Art State of the Art HR: Never the Status Quo About This Survey Appendix 1 3 4 5 9 10 11 11
STATE OF THE ART IN HUMAN RESOURCES
by Katharina Müllers-Patel
AN ASUG/SAP BENCHMARKING STUDY OF KPIs & BEST PRACTICES
SAP/ASUG Benchmarking found a more dynamic HR function that demands an equally more dynamic corporate push toward strategic Human Capital Management. Human Capital Management may be the most evolving function within the 21st century corporation. Changes in Human Resources philosophy and technique are emerging fast and furious. To determine how far HR executives have come — and how far they have to go — ASUG/SAP Human Capital Management Benchmarking Initiative surveyed the Human Resource practices of nineteen companies, with revenues from $200 million to over $40 billion. Our findings underscored momentum. In every company, of every size, the demands on Human Capital Management are intensifying. More transactions need to be completed, at lower cost, and, at the same time, HR processes have become increasingly complex to manage. A typical 10,000 employee company runs in excess of one million employee-related transactions annually, each of which could cost the company anywhere from $1050. The top ten recruiters in the United States report they are hiring from 35,000-95,000 employees annually. Managing the recruitment pipeline, selection process, and induction process resembles war-time logistics! At the same time, pressure from employees, managers and business stakeholders for more valueadded services increases. Employees want to manage their own career path, check on their benefits, and be part of their own retirement planning. Managers want up-to-date information about their employees available at their fingertips. Business stakeholders want HR supporting and aligned with their business strategy, responding to demands of growth and innovation.
SAP/ASUG HUMAN RESOURCES BENCHMARKING PROJECT During the first quarter of 2005, ASUG and SAP conducted a benchmarking effort in Human Resources, inviting over 50 companies to participate. Of those, 21 firms completed surveys, and 19 had sufficiently consistent data to be included in this analysis. Despite the small number of firms, however, the sample provides a good snapshot of the range of Human Resource strategies and management practices. The size of the participating companies’ 2004 revenues ranged from less than $200 million to more than $40 billion. The sample included global companies, with more than 40,000 employees around the world, and medium sized companies, with less than 5000 employees. The types of companies ranged from consumer products to high tech to heavy manufacturing, utilities, consumer products, and even public institutions. We analyzed the HR performance of these companies along a number of different dimensions, especially their effectiveness in instituting "best practices" within their various functions (on a scale from 1 - no coverage to 5 - full coverage). We then used each company's score on the best practice continuum to rate them against their peers - or categorizing each as first quartile (the most effective at instituting best practice), average, and fourth quartile (the least effective).
AN SAP/ ASUG STUDY OF HR BEST PRACTICES
Through evaluation of the survey responses and follow up discussions with the survey participants, we can draw five conclusions that demonstrate how companies are meeting the 21st century challenge of Human Resources: HR executives strive to optimize the efficiency of transactional processes through the effective use of information technology and application of best practices, keeping staffing levels as lean as possible. HR organizations are determining the right level of investment in the more strategic functions, which facilitate business growth and increase employee productivity. Most companies, however, have not been able to run these strategic functions efficiently, without compromising service levels and overall effectiveness. Companies have found that centralizing and consolidating HR operations helps them increase the efficiency of HR processes. At the same time, HR organizations have difficulty determining the appropriate number of HR Business Partners/ Generalists they should allocate to each business unit to ensure strategic alignment between HR and business stakeholders.
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 tradeoffs in outsourced vs. 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. HR organizations recognize that IT helps the development of many best practices and plan to continue to invest to upgrade and reduce complexity by integrating their systems. To sum up, we found that the best HR executives constantly reassess their Human Resources management processes to optimize efficiency, cost and service delivery in a continually changing environment, and to prepare for future innovations. Driving the continual cycle of re-evaluation and renewal is a balancing act between the organization's demand for cost containment and its recognition of the need for talent management and for employee motivation and engagement, by giving them access to, and participation in, the management of their own successes and failures.
The march to Human Capital Management has begun as the best HR executives reassess HR management to optimize efficiency, cost and service delivery in a continually changing environment — and prepare for the need to unearth the right talent to push innovation and growth...
SAP/ASUG POINT OF VIEW ON HUMAN CAPITAL MANAGEMENT
The secret in management: If HR is managed well, it becomes Human Capital Management and contributes directly to a company’s growth and innovation. Companies need to benchmark and optimize Human Capital Management practices, to strike the optimal balance between cost efficiency and strategic purpose. The common corporate perception is that managing Human Resources is a straightforward process, with the real objective, achieving greater efficiency and hence lower cost for all HR transactions. If managed well, however, Human Resources is one of the most dynamic organizational processes, which can contribute to a company's growth and innovation. Understanding the dynamism of Human Resources, and the pressures on Human Capital managers, ASUG/SAP Human Capital Management Benchmarking Initiative studied the best practice track record of 19 companies ranging in size from less than $200 million in sales to more than $40 billion. We analyzed the findings in light of the prevailing opinions about Human Resources as well as several recent studies we looked directly at 16 key processes divided into: 1. Transactional activities 2. Expertise-based activities 3. Strategy/Compliance Management
A LEAN AND MEAN HR
SAP and ASUG found that the key HR measure was HR FTE/1000 employees — solid evidence of the importance of efficiency. Following the economic slow-down of the last two years, Human Resource management has been asked to become highly efficient. “Employees served per HR FTE”, as well as “HR FTEs per 1,000 Employees” and “HR Cost per Employee” are the key efficiency metrics used most commonly in the HR space to evaluate HR staffing levels. Despite the focus on efficiency, our research identified significant gaps between the first quartile (the companies found most effective in instituting best practices) and average performers (those who are average instituting best practices). First quartile HR organizations served 50% more employees than average performers: One HR FTE in a first quartile company served 130 employees in contrast with the 80 employees served by one HR FTE in an average company. While companies with higher staffing levels tend to have more complex organizations, the gap between first quartile and average performers most certainly indicates an opportunity for improvement. The drive for efficiency shows up clearly in staffing levels in everything from transactions to expertisebased functions. First quartile survey participants had three times lower staffing rates for transactional functions than average HR organizations: 2 HR FTEs per 1000 employees for first quartile companies vs. 6 HR FTEs per 1000 employees for average companies. The higher levels of investment in first quartile companies also may be a sign of a strategic decision to invest to increase overall employee productivity. And, by optimizing transactional functions, first quartile companies can afford to allocate 75% of their staff to value-added expertise-based or strategy-related activities. Of course, companies that need fewer staff also have lower staffing costs. In the transactional area, first quartile HR organizations have four times lower HR staff and external costs than average HR organizations – $200 per employee per year for a first quartile company vs. $900 per employee per year for an average company.
Trending Slowly Toward Strategy
FORGE COMPETITIVE ADVANTAGE BY JUMP-STARTING EFFECTIVENESS
While every company wants to be more efficient, those looking for a competitive edge in HR are adding capabilities and services to jump start service delivery effectiveness. To determine the precise nature of this advantage, and its source, the best HR executives proactively: 1. Align HR More Closely to the Business 2. Outsource Wisely; Control Effectively 3. Leverage IT Precisely For Competitive Advantage ALIGN HR MORE CLOSELY TO THE BUSINESS The process of aligning HR to the goals of a company’s business takes time and much thought. The precise nature of the alignment depends on a company's particular culture and strategic goals. Shared Services Increases Employee Satisfaction A global machinery manufacturer uses a Shared Services arrangement for most of its functions, except for Training and Development, Employee Relocation and Exit Management, which are all performed by an outsourcer. By using Shared Services, this company needs only 6 FTEs to administer a national compensation program for 20,000 employees. Employees can take advantage of a standardized skills and competencies valuation, and better understand the basis for their performance evaluation due to a direct link in their IT system between job description preparation and job evaluation.
First, Use Shared Services Effectively. We found centralizing certain functions in a Shared Services model is the first piece of the alignment puzzle. Shared Services clearly is more efficient: The average headcount and external cost per employee for decentralized operations was far higher than for Shared Services, producing as much as a 48% gap in Compensation Administration, and a 30% gap in Training and Development. But Shared Services positively impacts effectiveness: The average best practice score for Shared Services was 10% higher than that for decentralized functions.
Second, Put Employee Service Centers In Place. Employee Service Centers (ESC) make sense for large companies as part of a centralized HR organization. In fact, over 80% of companies with more than 5,000 employees had ESCs in place, compared to 20% of companies with less than 5,000 employees. ESCs 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 on-boarding process and paperwork.
Shared Services Can Add to Competitive Advantage
Third, Use HR Business Partners More Effectively. Companies looking for an edge also use HR Business Partners where they will be strategically effective. Business Partners are HR generalists responsible for developing Employee Relations and supporting the business unit stakeholders with HR needs within a unit. First quartile companies put a few HR Generalists in strategic locations while fourth quartile organizations had up to two-thirds of their staff out in the field. While this gap may indicate increasing complexity of the company's overall organization structure, it may also reflect an opportunity for these fourth quartile organizations to consolidate HR organizations. We've found HR Business Partners should account for about onethird of HR staff, depending on the complexity of the company's organization.
OUTSOURCE WISELY; CONTROL EFFECTIVELY The results of this survey call into question some of the conventional wisdom about outsourcing. Outsourcing did not always drive first quartile performance. In analyzing the cost per employee for in-house versus outsourced services, for example, we found significant cost gaps in Compensation Administration and Benefits Administration between the first quartile and average companies (see figure 5). Even more important, best practices were also not as prevalent in outsourced functions as in companies that controlled more of their HR functions.
Making Choices for Advantage The best companies take time to analyze what to centralize, and control, and what to de-centralize or outsource based on the demands of their company’s unique culture. One global electronics company, for example, has outsourced several of the transactional functions, including Pension Plan Administration and Benefits Administration but relies on a Shared Services center to perform Payroll Administration, Compensation Administration, as well as HR Strategy, Compensation and Benefits Planning. By way of contrast, this company decentralizes Resource Planning, in part because of its commitment to Six Sigma objectives. As an HR manager put it, “we believe Resource Planning should be the job of project and plant managers, so that they can have the resources necessary to meet their quality goals.”
LEVERAGE IT PRECISELY FOR COMPETITIVE ADVANTAGE IT, in and of itself, does not drive improvement in Human Capital Management, but can be leveraged precisely to help HR work efficiently and effectively - and add to competitive advantage. Companies with a single enterprise-wide HR system are more
Maximizing HR Business Partners
efficient and effective — and more strategically focused — than companies with a fragmented systems landscape. In our survey, companies with a single enterprise-wide IT system: Had lower staffing levels; and Enjoyed higher levels of best practice scores in transactional practices (4.0) and in their expertise/strategy practices (3.6). These results, while tentative because of the sample size, are confirmed by results from other studies that found organization achieve the highest level of savings, and the greatest potential for future innovation. Outsourcing Does Not Always Equal Best Practice In one global company, the functions that were outsourced (Training & Development and Pension Plan Administration) averaged only a 1.1 score (out of five) on the best practices identified and used by that function, while the company's processes administered through a Shared Services arrangement scored an average of 3.5 on the best practices identified for those processes. In Compensation Administration, for example, the company reported it had developed a variable compensation plan based on a combination of business and individual performance results and implemented in tandem with an employee's performance evaluation.
LEVERAGE IT PRECISELY FOR COMPETITIVE ADVANTAGE. IT, in and of itself, does not drive improvement in Human Capital Management, but can be leveraged precisely to help HR work efficiently and effectively - and add to competitive advantage. Companies with a single enterprise-wide HR system are more efficient and effective — and more strategically focused — than companies with a fragmented systems landscape. In our survey, companies with a single enterprise-wide IT system: Had lower staffing levels; and, Enjoyed higher levels of best practice scores in transactional practices (4.0) and in their expertise/strategy practices (3.6). These results, while tentative because of the sample size, are confirmed by results from other studies that found organization achieve the highest level of savings, and the greatest potential for future innovation.
Does Outsourcing Control COst?
Changing the Approach to Outsourcing A global consumer products company understood that its outsourcing of Benefits was not working to the benefit of anyone (costs were rising, employee satisfaction was declining). It brought Benefits administration in-house. Management developed a Shared Services center for Payroll and for benefits. The Benefits Administration center establish-ed one pointof-contact for all employee questions. Within the payroll system, each employee's information is maintained in a single common database that Human Re-sources and Payroll both share. Within the Pension Plan Administration, employees use the same self-service technology to enroll in pension plans, request retirement, forecast projections, change beneficiary designations and get general information on their particular plans. Despite the company's large size (with over 40,000 employees), management under-stands the importance of attracting and retaining talent in every aspect of its business. As a result, it has put a great deal of effort into the strategic process of recruitment, creating a state of the art system that integrates the whole process for potential employees. The company created a centralized sourcing directory for recruiting,
and made all information about jobs and job classifications available online. When managers create new positions, they are immediately posted on the web, and made available in-house to internal candidates, who can apply online as soon as they wish.
Greater Employee Satisfaction from IT One large equipment manufacturer developed a state of the art system that allowed web-enabled distribution of, and access to, direct deposit advises for employees. The same web-enabled tool integrates with HR/Pay systems and automatically updates balances and totals. Employee time-worked is automatically posted to labor distribution and/or project accounting systems. Employee identification is standardized and employee information maintained in a single, common database shared by Human Resources and Payroll.
PUSH HR TO STATE OF THE ART
HR managers balance the need for efficiency against the long-term demand to develop the talent necessary for organizational effectiveness. Even so, the research clearly found opportunities for real change in the approach most have been adopting. In fact, we found the companies with the best track record in strategic best practice push their HR functions to automate, as much as is possible, the transactional processes, and put their most capable HR executives on the processes considered more strategic or those requiring a great deal of expertise. As a result, our research found companies that allocated more of the HR staff to value-added, expertise-based or strategy-related activities, generated higher operating income per employee. (see figure 7) The proactive stance leads the best HR executives to question past assumptions about best practice. IT Forces Best Practices One company in our survey, a high tech organization, used its IT system to develop best-practices in its compensation program because employees in this industry placed great importance in individual motivation and rewards. Every employee can receive a bonus based on company and individual performance. Merit increase guidelines differentiate between the highest performers and all the other employees. Because each high tech employee wants to track his or her compensation in high tech, the company made the merit increase process fully selfservice with a direct feed into the payroll system. The self-service aspect of the system allows employees to update bank information, choosing from one bank or several and updating W-4 information. For the same reason, the web-enabled tool integrates with the pay system and automatically updates balances. Managers can review time reports and make weekly corrections.
The Importance of Value-Add
STATE OF THE ART HR: NEVER THE STATUS QUO
The SAP/ASUG HR Benchmarking study reinforces many of the conclusions of other best practice benchmarking efforts. A great many companies are not satisfied with HR performance in areas of great strategic importance - those that impact planning, recruitment, talent management and development. Many of the strategic innovations that have been introduced — such as e-learning — have yet to be fully implemented or optimized. As a result, the best performers: Study HR best practice. Look more carefully at their own HR functions. Decide how to make those functions more effective. Determine how to use IT more fully and effectively. Never deviate from stressing the overall importance of a strategic approach to resource development. We found the best-performing organizations systematically identify and benchmark best practices relative to their peer institutions — and continuously drive to improve performance along those dimensions that offer the greatest contribution to operating performance for HR as a function - and the organization as a whole. Over the next five years, there will be significant and ongoing evolution of the technology platforms that provide HR, and every employee, with actionable information to drive business results. The tools are within reach. The challenge for HR leadership is to put those tools to use and build a platform for the future.
A great many companies are not satisfied with HR performance in areas of great strategic importance those that impact planning, recruitment, talent management and development. Many of the strategic innovations that have been introduced — such as elearning — have yet to be fully implemented or optimized.
ABOUT THIS SURVEY
SAP and ASUG are planning to conduct this survey on an annual basis, to allow participants to track trends and share best practices. In addition, ASUG and SAP plan benchmarking efforts in TCO, and Consumer Products. If you are interested in participating in any of these efforts, or if you would like additional copies, please contact: SAP America, Inc. ASUG/SAP Benchmarking Program Attention: Marco Valencia 20 Perimeter Summit Boulevard Atlanta, GA, 30319 Tel: 404-943-6477 Fax: 404-943-4290 firstname.lastname@example.org
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