Administrivia vs workforce optimization… or both?

As businesses rely on more sophisticated computer systems and software to perform standard HR functions, the costs of internal HR administration have increased. In addition to buying and maintaining these IT assets, organizations must attract and retain highly paid professionals to use them, not to mention the added expense of complying with regulations such as Sarbanes-Oxley and the Health Insurance Portability and Accountability Act (HIPAA).

In an effort to reduce spending on HR administration, a growing number of corporations and government agencies are turning to HRO to free themselves of the administration of functions such as payroll, insurance and other benefits, employee training and testing, compliance, relocation and recruiting. HRO, in which an external provider manages HR-related processes, or in some cases the entire HR function, not only helps businesses improve HR efficiency and effectiveness, can also enable the organization to optimize its workforce.

Attracting, retaining and developing a workforce, as well as keeping current with the latest technology, is a costly challenge for many organizations. It has become increasingly important for these organizations to hire an HRO provider with the knowledge, tools and expertise to remove the burden of administrative and transactional HR activities, so that HR executives can focus on core business processes and strategic initiatives.

Knowledgeable executives at leading organizations have recognized the enormous potential business benefits of HRO, knowing, as they do, that the market value of most companies today is only partially represented by physical assets, or those assets reported in the annual report. CEOs and CFOs realize that the true differentiator in the marketplace is human capital and the ability to maximize workforce performance to achieve business objectives.

How much is human capital worth to your organization? Many experts, including HR professionals and financial and market analysts, agree that as much as 80 percent of a company’s worth is tied to its workforce. Highly successful companies understand this critical differentiator and take the necessary steps to make the most of their human assets. Strategic recruiting, hiring, training and retaining programs focus on bringing the best people into the organization, giving them the tools to ensure optimal performance, and keeping them satisfied through competitive compensation packages and career development opportunities.

According to some financial experts, while share performance is often linked more closely to broader issues of market confidence, interest rates, industry performance, and accounting practices than the business fundamentals of an organization, it is in the long-term operational interests of all businesses to trim cost structures and enhance workforce performance. In recent research, financial analysts evaluating IPOs frequently cite HR-related issues, such as quality of staff and level of incentive pay tied to performance, as key factors contributing to potential investor interest and overall longevity following the IPO. Outperforming the industry and the stock market average helps organizations attract investors, improve shareholder value and raise capital for further acquisitions or investments. The right HRO partner can work with business leaders to effectively align human capital to these core business objectives.

The different levels of HRO
With this in mind, executives should be made aware that there are different levels of HRO.

Boxout definitions:
Partial or ‘transactional’ HRO involves the outsourcing of purely administrative duties, allowing the organization to focus on meeting their business objectives.

Comprehensive or ‘transformational’ HRO is designed to increase productivity from workforce investments, dramatically increasing strategic and sustainable competitive advantage. It includes performance measurement and improvement services, hiring and training expertise, leadership, learning and human resources best practices and strategic consulting.

Executives will appreciate that, while transactional HRO addresses only those costs directly related to HR-controlled administrative tasks, transformational HRO can save an organization between 5-15 percent of overall workforce-related costs. These savings stem from a variety of sources, such as decreased capital spending on technical systems and reduced payroll due to fewer internal jobs that oversee administrative tasks. For example, a company with annual revenue of US$2 billion spends only one to two percent of that amount, or approximately US$20 million, on human resources (the function) every year. In a transactional HRO approach, the company targets a 15 to 25 percent savings of that US$20 million. The result using the most optimistic scenario – a savings of US$5 million.

This approach, popular for many years, involves the outsourcing of purely administrative duties, aiming to redirect scarce resources on meeting their business objectives. The market for these services is US$90 billion, and growing at approximately eight percent every year.

Conversely, if that same company, with revenues of US$2 billion per year leveraged transformational HRO, it could achieve greater savings, drive business value by more effectively leveraging its workforce by combining strategy, consulting, design and administration. Of the US$2 billion the company earns, 40-60 percent is channeled into total workforce costs, which is roughly US$800 million of the company’s revenue. The goal of transformational HRO is to save 5-15 percent of that amount. With a conservative estimated cost savings of five percent, the company stands to gain US$40 million in cost-efficiency, strategic value and organizational improvement, as opposed to a mere US$5 million savings.

Beyond cost savings
As impressive as the potential cost reductions are, the greatest benefits of HRO go beyond savings and added efficiencies. Many organizations today are finding that HRO delivers strategic value by transforming HR departments from cost centers to corporate resources equipped to facilitate growth and increase shareholder value.

Outsourcing frees HR executives and departments from the time-consuming tasks of administering HR functions. It enables them to focus on allocating the workforce more efficiently to achieve business objectives and to develop HR programs that are better aligned with the strategic goals of the business.

Therefore, while outsourcing can save a company a significant portion of its HR costs, the real long-term advantage is improving workforce performance, by, for example, developing employees’ skills so the organization can sell more products or service clients more efficiently, or implementing effective, well-aligned total remuneration programs.

Because the HR function maintains and manages nearly all of the organization’s employee data, including job functions, expertise, backgrounds, skills, preferences and compensation, it is in a better position than any other corporate function to understand the factors that determine and influence employee productivity. An HR function that is freed from lower-priority tasks can truly help maximize workforce performance.

From a financial perspective, money spent on HR is an expense, and therefore, HR spending affects the organization’s bottom line immediately. This is in contrast to investments in hard assets, such as property, equipment or technical systems, which are assets that can depreciate over time, resulting in a weaker short-term effect.

Executives in tune to the value of HRO realize that the opportunity to better manage their resources can be found in focusing more strongly on workforce costs. FASB, and other professional organizations, are working to improve the accounting of human assets, and several leading companies currently report on human capital in their annual reports. These trends have already begun and will continue to gain momentum in the coming year. The most strategic and successful finance professionals will understand this and lead the organization in this direction, ahead of competitors.

In an overall restricted corporate spending environment, CFOs and other senior finance executives expect managers to demonstrate measurable return on investment (ROI) for all major corporate initiatives, including outsourcing. While cost reduction is a large part of the ROI equation, it shouldn’t be the only measure. When an organization is examining the returns from HR outsourcing, it is critical that the benefits are broader than cost savings. These organizations should identify strategic objectives, and then determine if those objectives are achieved through outsourcing.

While many early HR outsourcing agreements were based solely on the projected cost savings for the client, today’s outsourcing contracts should be based on the strategic value of the outsourcing relationship. In some cases, outsourcing may not fit with strategic goals. This is why it is imperative that, before embarking on an HR outsourcing arrangement, organizations achieve a solid understanding of costs and human resources service level requirements. The first step should involve a sourcing diagnostic, which is an evaluation of the current state of HR in the organization. The sourcing diagnostic will result in a ‘snapshot’, capturing how and where the HR department is allocating it resources, in terms of people, process and technology. The second step should be an examination of the HR department’s business objectives, along with a determination of the best ways to deliver on those objectives, either by outsourcing all or some HR components, or not outsourcing anything. It is important to remember that, while outsourcing is one service delivery model, it is not the only one.

Finding an outsourcing provider
If an organization decides to pursue outsourcing, the traditional means of evaluating an HRO provider is the request for proposal (RFP). Companies, more and more frequently with the assistance of a sourcing advisor, conduct an internal assessment to identify operational and transactional needs, develop an RFP, and submit it to a large number of outsourcing providers that they perceive qualified. Once a provider is chosen and due diligence is completed, contract negotiations begin.

A more suitable process, applicable for non-commodity sourcing such as HRO, is the reverse RFP. Beginning with an RFP automatically imposes limits on providers and restricts their problem solving capability to the ‘box’ into which solutions must fit. The RFP’s predefinition often eliminates options that are the right ones for the customer. In a new and rapidly developing market, most organizations are not in a position to determine which flavor of outsourcing makes sense for them until they are well into the assessment process.

The new approach to finding the right outsourcing provider, and a way to build stronger, more strategic and effective outsourcing relationships, is by using a reverse RFP approach. In this approach, the company in search of an outsourcing provider does not send out an RFP. Instead, the company collaborates with a select number of providers, each with their own operating model and outsourcing methodology. In this approach, the company has a chance to see itself through the providers’ perspectives, thereby adopting different points of view, philosophies and styles before choosing one that fits its needs. In many cases, the company may modify its own business objectives and operating model to align with the outsourcer of its choice. In short, the reverse RFP approach can be a learning process for the company, one that should yield greater results than anticipated.

Typically, companies seek an HRO provider to merely handle back-office functions, such as payroll and benefits administration, rather than to provide a comprehensive, integrated, deep HRO strategy, which would increase productivity from workforce investments and dramatically improve sustainable competitive advantage. If a company is not looking for a deep HRO strategy, it will send out an RFP that is narrow and limiting in scope. As a result, the company will miss a significant opportunity to find an HRO partner prepared to optimize workforce value and build enterprise wide value.

The role of the sourcing advisor is central to an effective reverse RFP approach. The sourcing advisor can proactively seek out the opportunities within an organization to streamline business processes and optimize workforce value, and then craft a proposal based on these value-adding strategies.

The reverse RFP process has two key components. One is an internal feasibility study, which should be conducted jointly by the potential outsourcing providers and the company representatives. The purpose of the study is to develop a blueprint of the company’s existing business environment, including operational infrastructure, IT systems, corporate culture, market pressures, competitor analysis and strategic goals. It is critical at this early stage that the potential HRO providers are given access to the internal operating environment of the company, to gather as much information as possible and understand where improvements can be made, business processes streamlined, costs reduced and workforce value maximized. Without this perspective, the HRO provider can only give a generic recommendation for improvement, not a customized, value-adding one. The second component is proactive collaboration between the HRO provider candidates and the company. In this stage, the HRO provider will outline the company’s immediate needs, such as reducing headcount, trimming costs and reallocating HR resources. Additionally, the HRO provider can help sharpen the company’s focus on key goals and objectives, and demonstrate how strategic outsourcing solutions can help meet those objectives. The right HRO partner can guide a company to improving its competitive advantage, not only by traditional means of reducing costs and increasing production, but by nontraditional methods, for example, by enhancing employee satisfaction through a stronger commitment to professional development and advancement programs. That more and more companies are adopting the reverse RFP approach is a signal to the HRO industry that it is on the threshold of tremendous change. Savvy business leaders are recognizing that HRO providers can and should be regarded as strategic business partners, and that the stronger the relationship they build with those providers, the greater their return on outsourcing investments.

The strategic value of HR outsourcing continues to grow as more organizations hire outside experts to take over these functions. Clearly, HR outsourcing has moved beyond the point of simply being a good way to cut costs. For an increasing number of organizations, it’s a key strategy for realizing the true potential of the workforce.

HR’s ‘rising star’
Named one of the ‘Rising Stars of HR’ by Human Resource Executive and one of the ‘Superstars of HR Outsourcing’ by HRO Today, Scott Golas has 20 years of HR experience. He has contributed to business and sales strategies, developed service delivery models, and participated in sales qualification processes and key pursuits. He has defined outsourcing marketing and sales messages, led project teams to reduce spending and improve service levels across multiple functions within various client organizations.

For more information please contact Tel: 312.423.7942 scott_golas@Hotmail.com Blog: http://scottgolas.typepad.com/IQcatalyst