Newsletter - January 2007

No More Excuses

May 1, 2006 - Executive Excellence

Learn to add value and cut costs.

For over a decade, we at the Center for Effective Organizations at USC's Marshall School of Business have examined trends in HR management. On average, HR people spend 80 percent of their time managing services such as payroll, benefits, relocation, record keeping, and auditing and developing HR processes.

Some HR executives are active advisors to line executives on managing their human capital-helping them to recruit, develop, and deploy people to execute business strategies. Yet only half of the line managers see HR managers as business partners.

Many HR managers fail to become business partners because of the perception of other managers that they can have little impact on performance. The time has come to see beyond this limited view. Technology is giving HR executives new data-collection and analysis tools for linking effective human capital management to strategy and the bottom line. Also, large cost savings can be realized by outsourcing activities that don't contribute to shareholder value. Companies that hone HR's contributions can build a competitive advantage.

Drivers of Change

Sophisticated new IT applications and systems, and the emergence of technology-savvy HR outsourcers (HROs), are driving change. Outsourcing of HR administration is not new, of course. For years, companies have outsourced specific services (payroll, benefits, relocation, and HR information systems) to cut costs and improve service. But more companies want full-service HROs who can cut HR administrative costs even more.

The new "soup-to-nuts" HROs handle HR process design and HR administrative services-payroll and benefits management, compensation, planning, recruiting, training administration, and management relocation. By offering an integrated service, HROs eliminate the difficulties of managing multiple vendors. Full- service HROs rely heavily on Web-based "eHR" software applications and systems. They use self-service tools that allow people to get routine HR-related information and submit forms through a company intranet. Self-service tools allow managers to do compensation management, employee transfers, and other HR activities.

Self-service is convenient and relieves HR staff from time- consuming paper processing and interactions. Using self-service tools, employees can research and apply for new jobs within their company, sign up for training, receive career guidance, access resources for skills development, and get current information on company performance.

In theory, outsourcing nonstrategic HR operations and giving employees self-service tools frees HR professionals to focus on being business partners. In addition, new HR information systems (HRIS) enable HR professionals to identify skill strengths and gaps, recruiting needs, and potential changes.

Another new HR IT resource, employee relationship management (ERM) tools, uses advanced data mining techniques to capture and analyze data from multiple sources. The result: insights into the costs and causes of turnover, better measures of the ROI of specific programs such as incentive plans and training offerings, and the ability to track employee's skills development and preferences.

Outsourcing Strategies

Outsourcing HR administration and using self-service eHR systems have reduced the HR administrative costs while improving the quality of HR services. Engaging with a full-service outsourcer facilitates the integration of HR systems, and liberates the HR team from administration.

But handing HR administration to an HRO and implementing self- service are radical actions that warrant close scrutiny. Ultimately, the outsourcing strategy needs to fit the role top management wants HR to play, and the readiness to adapt to changes.

Before talking with an HRO, a company needs to know its HR administrative costs and quality and assess whether outsourcing HR administration can save money. Usually there is room for process improvements and labor cost reductions. Activity-based costing models can help determine what is being spent on HR programs.

Outsourcing all HR administration is more disruptive than doing this one task at a time. The HR department that emerges will look and feel very different. The size of the HR staff will be dramatically reduced. Managers will have to go without someone in- house to answer their HR questions and do their paperwork.

Leaders can count on resistance to and fear of change from HR departments and the people they serve. For many HR administrators, working in an HR department that isn't immersed in administration is frightening. Many HR administrators enjoy helping managers and employees solve their issues. They worry about losing contact with their "customers."

A major problem is that many HR professionals lack the skills and experience to take on strategic responsibilities. If they have spent their careers in HR-or even one specialty such as training, compensation, or recruiting-they often lack knowledge of the business as well as experience in leading change.

Adjusting to an eHR self-service system can be difficult. Everyone needs time to get used to the electronic tools. At one company, managers did several administrative tasks (give raises, post jobs) on the eHR system, but they preferred to deal directly with their HR contact-until the company eliminated the HR administrators.

It's vital to select the right vendor, and manage the relationship as a close partnership. When the outsourcer steps in to run the process, many operational details can fall through the cracks and cause friction. An HRO, for example, can't instantly liberate HR managers from their administrative work. Hiring outside experts in change management, organizational design and business strategy is often necessary, but these decisions require a deeper understanding of an organization's market, operating environment, and business strategy.

Organizational Effectiveness

One way to reframe the role of HR is to utilize a new name, perhaps "organizational effectiveness," and appoint a "Chief Organizational Effectiveness Officer" who is responsible for having the right human capabilities and core competencies to meet business goals. Appointing a respected senior executive-who reports to the CEO, to provide leadership in human capital management, organization design, and effectiveness-is critical to setting a new tone and role for HR.

A business partner approach to HR has emerged at Home Depot and Washington Mutual where HR executives are highly visible and influential members of the top leadership team. They are involved in all areas of business decision making. Daryl David, senior VP of HR at WaMu, plays a pivotal role in growth by acquisition, and Linda Clark Santos serves as WaMu's senior VP for talent acquisition and organizational capability. Dennis N. Donovan, executive VP of HR at Home Depot, leads major strategy and change initiatives and tackles growth challenges. Now there is a HR manager in every Home Depot store to create a local Leadership Institute.

If HR professionals don't become strategic business partners, senior managers may think that the HR strategy is too important to be left to an internal HR function. Some executive involvement in HR strategy is needed, but it can't substitute for having HR people who know the business and can be strategic partners. Many managers lack the knowledge needed to link strategy and organizational effectiveness. Consultants can help, but they lack company knowledge and the ability to manage change. I see a need for a high-powered and talented HR staff that focuses on how human capital should be managed, developed, and organized in order to implement a business strategy.

ACTION: Become business advisors.

Edward E. Lawler III is the director of the USC Center for Effective Organizations, a Distinguished Professor at USC's Marshall School of Business, and co-author of Human Resources Business Process Outsourcing (Jossey-Bass) and Achieving Strategic Excellence (Stanford Press). elawler@marshall.usc.edu