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 / Summer 2004 / Issue 35(originally published by Booz & Company)


HR on Top

Outsourcing routine activities can turn human resources administrators into business strategists.

Illustration by Lars Leetaru
When a company is striving to ferret out costs and promote innovative management, all parts of the enterprise should be fair game. Yet in many companies, the human resources department has avoided change and is still run much the way it was 10, or even 25, years ago when it was known by the impersonal name of “personnel.” In a typical large U.S. company, about one out of every 90 employees works in HR, a ratio that hasn’t changed in decades. Spending on HR administration, which usually runs more than $1,200 per employee annually, has increased steadily, albeit slowly, over the past 10 years.

In the past decade, the Center for Effective Organizations at the University of Southern California’s Marshall School of Business has conducted three studies (1995, 1998, and 2001) examining trends in the HR organizations of large corporations. In 1995, our survey of HR executives showed that the HR department spent 80 percent of its time managing such administrative services as payroll, benefits, relocation, record keeping, and the auditing and development of HR processes. When we resurveyed these companies in 2001, their executives’ responses were the same.

Some HR executives do feel they actively advise line executives on managing their human capital — helping them to obtain, develop, and distribute staff in order to successfully execute business strategies. But their perceptions aren’t necessarily shared. Seventy-nine percent of the HR managers participating in a 1998 survey described themselves as “business partners.” Yet only 53 percent of the line managers responding to the same survey characterized HR managers this way.

There are many reasons the HR department has been slow to change, not the least of which is the widespread belief that human resources is simply a fact of organizational life that has little or no effect on business performance. The time has come, however, to see beyond this limited view. Technology is driving a revolution in the way HR administration can be managed, giving HR executives new data-collection and analysis tools with which they can more easily demonstrate the importance of effective human capital management — to strategy and the bottom line. Furthermore, large administrative cost savings can also be realized by outsourcing activities that don’t contribute to shareholder value. Companies that hone HR’s contributions in both the human capital strategy and administrative realms can build a significant competitive advantage.

Drivers of Change
Sophisticated new information technology applications and systems, and the emergence of technology-savvy business process outsourcers specializing in human resources administration, are the most significant drivers of change in HR.

Outsourcing of HR administration is not new, of course. For years, companies have outsourced specific services (typically payroll, benefits, relocations, and the management of HR information systems) to cut costs and improve service. But more and more, to reduce HR administrative costs even further, large companies want full-service human resources outsourcers, or HROs, that can deliver and manage multiple HR processes.

With paperwork for health insurance, compensation planning, flexible benefits, and legal compliance — to name just a few tasks HR handles — becoming even more burdensome and costly, demand for HRO services has grown rapidly. In 2003, HR services topped Gartner Inc.’s list of the business processes most commonly outsourced by large corporations; Gartner is projecting that in 2004 worldwide human resources outsourcing revenues will reach $51 billion.

The 1999 decision by the global energy company BP to outsource HR administration to the startup Exult Inc. was a bold move that has triggered growth in the number of full-service HROs. Others building positions as full-service HROs include companies well known in IT outsourcing, such as Accenture, and established HR consultants, such as Hewitt Associates Inc. and Fidelity Investments. The “soup-to-nuts” HROs handle HR process design and provide a full range of HR administrative services — payroll and benefits management, compensation, planning, recruiting, training of administrators, and management relocations. By offering integrated services, these HROs eliminate the difficulties involved in coordinating and managing multiple vendors. Similar to IT outsourcers, the HROs have a level of expertise and a scale of operations that allow them to achieve efficiencies and service levels their customers cannot match.

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