Future trends in delivering human resources processes in major
organisations
1. Introduction
This report summarises the main findings and conclusions of a review of the future trends in delivering human resources processes in major organisations in the UK. The FI Group (now Xansa) commissioned the review.
The study is based on a number of sources, including:
• discussions with senior HR and business managers in 22 major organisations,
• discussions with 8 outsourcing suppliers, and
• a review of published and unpublished UK and US information about the outsourcing of HR.
2. Change and the human resources function
HR function costs are a low proportion of organisation costs
The salary and bonus costs of a typical HR department represent in the order of 2% of total direct staff costs in large private sector organisations. The ratio of HR staff to employees is in the order of 1:90 in large private sector organisations and 1:80 in the public sector.
The average staff cost of an HR function is £270 per full time equivalent employee in large private sector organisations and £375 in the public sector.
Other costs incurred by HR functions are significant, including, for example, recruitment, training and technology.
HR departments spend much of their time on administration
It is estimated that HR departments spend 40% of their time on administration and
transaction processing. This figure under-estimates the amount of time that organisations spend on HR-type transaction processing because it excludes those cases where HR does not undertake payroll and pensions and line manager involvement in HR.
HR functions are having to change
Today businesses find themselves under great pressure to change as they face up to global competition and rapidly advancing technology. HR functions are being asked to contribute to strategy, to champion change and to make sure that they are delivering their operational processes as efficiently and effectively as possible.
The priorities facing HR functions are reducing costs of service delivery and improving service levels and perceived value added.
HR functions are trying to become business partners
Many HR departments are trying to shift from an administrative to a strategic emphasis. In order to be taken seriously as strategic, business partners, HR functions must demonstrate that they have well managed HR operations.
The approaches being used to streamline HR processes involve re-engineering and the more intensive use of technology, for example through the creation of ‘service centres’ for
transaction processing. The approaches being used to improve service levels and costs include the use of service level agreements and internal charging, as well as the outsourcing of some non-core processes.
3. Trends in human resources outsourcing
HR outsourcing is carried out in individual processes
Traditionally, HR processes have been outsourced individually rather than on an integrated basis. This is because organisations have concentrated on those processes with the greatest pay back and with well-established supplier markets.
Reliable information about the extent of HR outsourcing is difficult to obtain. Various
estimates suggest that pensions are outsourced in about a third of cases and payroll in about a quarter of cases.
The market of HR outsourcing suppliers is fragmented
There are many small, specialist suppliers of HR outsourcing services in the UK but they have variable quality and coverage. The most developed areas of the market are in administrative services, such as payroll and pensions. There is as yet no market leader with an integrated service, although several suppliers are moving in this direction.
HR outsourcing is going to increase
The majority of participants in our study said that, over the next 3 to 5 years, their involvement in HR outsourcing is going to increase, particularly in administrative areas such as pensions and payroll. These processes are in most cases going to be outsourced process-by-process, rather than on an integrated basis.
In general the participants in the study had a very conservative outlook and thought in terms of ‘more of the same’ rather than a more innovative approach.
For some organisations HR outsourcing is not on the agenda
A minority of the organisations spoken to have no current plans to outsource HR during the next 3 to 5 years. This is mainly because of the perceptions that HR is a core competence of the organisation and the benefits from outsourcing HR will not be great enough.
The US market is expected to experience significant growth
The outsourcing market in the US was predicted to grow by a third in 1996-97, with HR as one of the four areas expecting major growth. One of the growth areas in HR outsourcing in the US is Total Benefits Outsourcing, supported by the intensive use of technology. This is partly because benefits in the US are more complex.
In the long term businesses will outsource more non-core processes
Over the next ten years there will be a very strong trend towards further outsourcing of business processes and HR will inevitably be part of this, as more organisations outsource large parts of their corporate support services in the search for a step-change in performance.
Service suppliers will encourage the growth of the market
Outsourcing is now established outside IS/IT. The major outsourcing suppliers have significant growth aspirations because they expect that more ‘back office’ functions will be outsourced. The steady development of the capabilities of outsourcing suppliers will encourage the overall market to grow. This will include HR processes on an increasingly integrated basis.
4. Technology in human resources
Investment in technology for HR is often a low priority
Much of the current technology in HR relates to services that are viewed by line managers and HR practitioners as low value added (eg payroll, pensions, working time, and sickness absence). It can be difficult to make a compelling business case to renew HR systems on a stand-alone basis because the benefits are not seen as sufficiently important.
Technological advances offer great opportunities
The latest enterprise resource planning packages (eg Oracle, PeopleSoft, SAP) enable information to be more easily shared across business functions (eg
finance/manufacturing/HR).
The evolution of the World Wide Web is leading to the creation of company intranets and enabling the use of global e-mail. Other technologies which are being introduced into HR include kiosks, swipe cards, document image processing, workflow and Electronic Data Interchange.
Increasingly, call centre technologies are being adopted in HR. This involves Interactive Voice Response telephone systems and issues of computer-telephony integration.
5. Shared service centres
Shared service centres are growing in importance
A number of leading companies have created, or are considering the creation of, finance shared service centres. Examples include Mobil, Northern Telecom and Pearson. These centres typically include accounts receivable/payable and the general ledger.
These centres are attractive because finance systems are often poorly integrated and
enterprise resource planning packages are enabling significant improvement in the integration of processes and the quality of management information. Finally, finance transaction
processing is capable of significant savings from centralisation, and a figure of 35-45 % potential savings has been estimated.
Some, predominantly US based, organisations are also creating shared business service centres which combine many corporate support functions. These cover both transaction processing and advisory services. Examples include Amoco, Monsanto, Rhone Poulenc and Allied Signal.
Our study showed that one of the most important trends in the delivery of HR operations is the creation of shared service centres. Typically, HR transaction processing and
administration are being centralised into a single organisational unit to generate economies of scale. The service centre has common processes and service standards. Service level agreements and internal charging may be used.
Our study identified such centres at BT, Esso Petroleum UK, NatWest UK, Prudential UK and SmithKline Beecham. There is no single model.
The benefits from an HR service centre lie in the integration of technology
Employees and line managers would access the centre by a variety of means, for example an interactive voice response phone system, or a PC/kiosk. More complex enquiries could be routed through an HR advisor. The centre would run an integrated suite of software applications, which interfaced with specialist HR applications (eg career planning) and non-HR applications. The centre would also act as the gateway to third party suppliers (eg for car fleet administration or health care). Such technology-intensive service centres already exist in the US and some are developing in the UK.
Third parties may have a role in running these centres
Our study did not identify any organisation in the UK where a third party is managing a whole shared service centre on an outsourced basis, although a number were considering this. More typically, third party suppliers were being used to manage individual processes. Longer term, call centre suppliers may extend into this market.
The participants also indicated a preference for setting up the service centres themselves and only considering the involvement of a third party in their management at a later stage, when lessons had been learned.
Integrated service centres will become increasingly important
We believe that over the next 5 years functional, transaction-orientated service centres will continue to increase in importance and will evolve into integrated transaction processing and advisory service centres. This means that HR may eventually become part of broader-based finance and HR service centres or business service centres. Different organisations will tailor different solutions.
6. Conclusion
Leading companies are re-thinking the ways in which HR operations can be delivered as part of a process of transforming the HR function. Outsourcing is a well-established part of this change process and it is going to increase over the next 3 to 5 years, with individual services being outsourced to specialist suppliers.
We believe that the challenge for HR Directors is to think more radically than this and to consider the opportunities that could lead to the HR function helping the business to secure a step change in performance:
An HR shared service centre could be created using best-of-breed technology. This will create economies of scale and allow the HR function to concentrate on its strategic role. Linking HR transaction processing and advisory services to other transaction processing activities (eg finance) or to other corporate services in a single organisation would be even more radical.
Third party, outsourcing specialists could potentially add value to these approaches by bringing considerable expertise in service management and allowing a degree of risk sharing. One option might be to form a joint venture with such a supplier and to develop an in-house HR shared service centre, which could then be outsourced at a later date.
In any re-appraisal of the contribution of the HR function in an organisation, outsourcing should be one of the options to be considered. Only by improving operational efficiency and effectiveness will HR functions be able to concentrate on fulfilling their strategic role.
