HR functions must create value


  • Business
  • Monday, 25 Aug 2003

MOST companies today are challenged by declining revenues, increasing costs, shrinking market share and depleting shareholder value.  

What does HR do in this situation? How will HR play its role to truly bring sustainable value to the company? 

Generally, the HR function has always been managed as a fixed cost entity with perceived little or no value-add to shareholder value contribution.  

Low Choy Huat

It's often the company's biggest 'threat' with high costs of transaction processing activities and administrative work, and forever wrestling with employee and industrial relation issues. 

Little did companies realise that this internal 'threat' is their biggest opportunity for value creation.  

New hats on old shoulders 

In the future, the HR's role will no longer be constrained to warming seats in the back office.  

It will play a critical front office role to address workforce performance issues and create sustainable business value.  

What does this mean? How will HR be transformed?  

Traditionally, HR spends as much as 90% of its time, effort and costs on activities such as salary administration, medical claims processing, training coordination and employee-employer issues resolution. The remaining 10% is typically used for strategic HR work.  

In the new paradigm, HR will have to allocate as much as 60% its time, effort and costs to perform strategic work and create workforce capabilities for profitable growth. 

As you can see, HR is changing its role to the following and this allows it to focus on real business issues:- 

l Strategic Business Partner: address workforce and organisational impacts on business challenges and contribute directly to business plan 

l Change Leader: lead company-wide leadership and culture change programme, provide change management advice to guide business results 

l HR Functional Expert : manage service providers instead of doing operational work, to increase efficiency within the HR function 

So, what can HR start doing today? 

Make rain, not pain 

There are two key parts to the thinking process – a. transformation, and b. operations (see Figure 1). HR needs to tackle the questions in a holistic manner. 

HR should start by looking at better ways to manage its cost to serve.  

Lower HR operations costs translate directly into reduced operating expenses, which increases net profits and earnings per share.  

In addition, the costs savings can be used to fund the transformation journey in a larger context.  

One approach is to manage the operating costs as variable costs instead of fixed cost.  

Think about which core and non-core activities that will create a sustainable impact on the company.  

For example, non-core operational activities are payroll and benefits processing, training administration, employee information management, competency model maintenance and HR Information System (HRIS) application management. 

These non-core activities can be sourced through various sourcing options (see Figure 2):  

l Insourcing: in-house staff are used to transform, and run improved operations. 

l Co-sourcing: work closely with external party resources to transform and run improved operations. 

l Outsourcing: fully use external party resources to undertake transformation, including the running of improved operations. 

To maximise value creation, the HR outsourcing option should not be limited to a 'cost down' approach. There must be transformation themes to address current HR issues and/or build a sustainable HR model for growth. 

For example, British Telecoms outsourced its HR administration to Accenture HR Services and reduced its annual HR costs by almost 80%, worth more than £500mil (RM3bil).  

This included transaction processing for a variety of HR services for over 120,000 employees, integrating 46 different systems into one core HR system, collapsing over 90 physical sites to three shared service centres, and increasing HR full-time-equivalent (FTE) per Total FTE to the ratio of 1:200. 

Broadly, the key drivers for HR outsourcing are cost reduction, to improve HR service delivery and to maximise resource availability.  

This frees HR to focus on strategic work. A study conducted by The Conference Board (US) and Accenture showed that HR outsourcing is gaining popularity and is here to stay.  

In fact, none of the 62% of surveyed companies were preparing to bring the outsourced functions back in-house.  

But wait, does outsourcing fit every company? 

There is no silver bullet. Each company must have a compelling business case, intentions aligned with the outsourcing partner and take a long-term view. 

 

Don’t play, get real 

Let's face it – in the Malaysian context, the take-up in the HR outsourcing space is still slow. Why? Obviously, there is a sense of insecurity due to the transformational nature of such activities.  

CEOs and HR Division heads must deal with this internal change.  

This is the real 'threat' to most organisations. 

In my opinion, it is also no longer a 'ripeness' issue (“Do you think I am ready for it?”), but a deeper notion of value creation (“What value have I delivered today?”). This the biggest test for the HR function yet.  

 

l Choy Huat is a member of the Human Performance Service Line leadership group in Accenture Kuala Lumpur. He can be reached at choy.huat.low@accenture.com 

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