How to reduce the cost of HR and continue to provide value.(Current Practices)

Shrinking HR

Many companies will make across-the-board budget cuts to respond to mandates from senior management to lower costs. This strategy achieves short-term results, but does not necessarily help a company achieve its long-term goals for greater efficiency. For example, a financial services company reduced its HR headcount by 300 or close to 30 percent over a three-year period, in response, business leaders hired their own staff to handle HR activities and the "shadow" HR organization is close to 150 strong. HR looks leaner, but in fact the overall reduction has been only 10 to 15 percent.

Although a short-term solution to reducing HR costs might be to cut "discretionary" programs like training, college relations, and health and wellness initiatives, forward-looking companies understand that these types of cuts will hurt the business in the long term. Delaying investment in HR can ultimately increase a company's people-related costs. A mid-size pharmaceutical company developed a solid business case for investing in a new HRMS and centralizing HR administration. The director of HRMS convinced senior management that the cost of not investing in HR infrastructure could potentially cost the company $3.7M in lost productivity, higher administrative processing fees, potential fines, and fees for noncompliance. From this perspective, the $4M investment no longer appeared as such a formidable cost.

Transforming HR

Thinking holistically about how HR delivers services is the most effective way to reduce costs over the long term. This means looking beyond the current costs to understand how work gets done and delivers value to the organization. It also means holding tenaciously to the goal of providing value through HR, even in a time of intense budget scrutiny. Two examples demonstrate how companies can achieve this for their businesses.

Southern Company: Grounding HR Transformation in a Solid Baseline. Robert Bell, VP of Compensation and Benefits at Southern Company, an electric utility with 25,760 employees, recently led an effort to quantify the true cost of HR as a foundation for reducing HR costs and improving quality. As Bell put it, "In the 1990s, we went through the first stages of transformation, including outsourcing of benefits. We wanted to see if there were still efficiencies we could gain and ways that we could continue to improve customer service."

Southern Company's HR baseline had three components:

1. A benchmark survey of HR costs that looked beyond the HR budget;

2. An activity-based costing survey of all HR, to quantify how HR spends its time and the efficiency of the HR function; and

3. A survey of HR's customers, to measure the effectiveness of HR today and to identify the priorities for HR products and services.

Through this assessment, Southern Company identified several ways in which the shared services approach in HR needed to be adjusted to deliver more value. For example, the company found a high degree of fragmentation in HR with a lot of people spending small amounts of time on many activities, even for services that had nominally been centralized. It also found that more than 45 percent of time was devoted to routine administration and customer service. According to Bell, "Our people are spending lots of time on HR transactions that could be better performed through an HR Service Center."

Bell and his SVP, Ellen Lindemann, are using the results from the financial baseline to have focused discussions with Southern Company's senior management on the future HR and to build a business case for ongoing transformation of the HR function. Going through this process, they found that the cost data have been extremely valuable, but that they needed to couple the data with feedback on satisfaction with HR services to get a true picture of what HR needs to do to continue to deliver value. As Bell put it, "Improvement in our HR delivery will always be in the eye of the beholder ... So it's very important to know stakeholder issues early in the process and allow them to have their input."

Verizon: Understanding True Cost Prior to Outsourcing. For Verizon, cost management in HR dates back to 2000 and the merger of GTE and Bell Atlantic. Between 2000 and 2002, HR reduced its budget by more than 30 percent. The HR leadership team believed that the next wave of HR cost reduction would require rethinking the HR model. Verizon's baseline also included benchmarking, activity-based costing survey, and input from key stakeholders in HR. Some of the headlines from the assessment pointed to a need for greater centralization of HR processes and better use of e-HR and supporting technology.

* Despite outsourcing all benefits administration, 23 percent of time was still devoted to HR administration and customer service.

* More than half of that routine work was done by the wrong people: senior specialists, managers, and directors.

* At least 11 different call centers fielded questions from employees and managers.

As HR began planning for greater centralization of HR processes and ongoing cost savings, the business made some changes that dramatically affected HR. In fall 2003, a voluntary separation program reduced the headcount of the company by over 20,000 and the staffing levels in HR by nearly 25 percent. Sara Mellinger, Vice President of Employee Services, had to make quick decisions about how to continue down the path of greatly enhancing overall service delivery while facing a significant loss in HR staff. The downsizing in HR also made it important to answer the question: Do we rebuild this capability internally, or outsource additional administrative processes?

Sara and her team performed detailed due diligence of each of 10 processes targeted for change. They examined the current costs and service levels, looked at process flows, and evaluated the current state of technology and future state needs. So far, the company has recommended changes to four high-volume processes that will produce a 21 percent saving for the company and lead to additional outsourcing of administrative processes. According to Mellinger, "In order for HR to be viewed as value-added by the business, we needed to have resources focus on real business issues and not administrative tasks. Taking a holistic view of transforming these processes has helped us do just that."

Conclusion

With the pressures today to reduce costs and continue to provide exceptional value, HR leaders need to become the experts on what HR spends, how the money is used, and why the investment adds value to the business. HR can use tools like benchmarking, activity-based costing, and employee surveys to help quantify HR's costs and processes. Establishing a solid baseline of data makes it possible to engage stakeholders in a focused discussion about how changes in the way we operate will reduce costs and increase value over the long run.

NOTES

Thanks to Michael Macleod and Bob Prezioso of Hewitt Associates for their contributions to this article.

(1) Hewitt Time Topics Survey (2004). "Strategies for Cost Management of the HR Function," February.

(2) Hewitt HRA is an activity-based costing tool that companies use to capture information about how the HR professionals within an organization spend their time. It also includes a benchmark survey to capture nonlabor costs, program costs, technology, and delivery model information.

(3) Hewitt HRA is the source of all benchmarking data.

(4) See supra n.1.

(5) See supra n.2.

Richard P. Rison, Global Content Leader for HR Effectiveness, Jennifer Tower, Consultant, Talent and Organization Consulting Practice, Hewitt Associates

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