World-class HR Organizations Spend Less, Deliver More

Hackett: Technology and outsourcing are not silver bullets

Hackett: Technology and outsourcing are not silver bullets

Atlanta, GA — June 25, 2004 — World-class human resources (HR) organizations spend 27 percent less per employee than their peers and operate with 35 percent fewer staff, according to 2004 research into world-class HR performance from The Hackett Group, a business advisory firm and an Answerthink company. At the same time, world-class companies deliver greater value through better alignment with corporate strategy and lower rates of voluntary and involuntary terminations.

Hackett's research findings also conclude that while technology and outsourcing are key factors in achieving world-class performance in HR, world-class companies succeed without spending more money in these areas. World-class companies actually spend nearly the same amount that median companies do on both technology and outsourcing.

Instead, Hackett found that world-class HR organizations achieve their improved efficiency and effectiveness through holistic efforts, including the use of technology to successfully minimize complexity, reduce upstream error rates and integrate end-to-end HR processes. World-class organizations also use outsourcing on a more selective basis, and more strategically, as a way to more efficiently scale discretionary services.

The Hackett Group's 2004 research into world-class performance is compiled in its Book of Numbers series, which provides senior executives fact-based performance metrics and insights based on Hackett's database of best practices and process metrics in HR, information technology (IT), finance, procurement and other areas.

To receive Hackett's world-class designation, an organization must score in the top 25 percent of Hackett's current database in both efficiency (cost and productivity) and effectiveness (quality and business value) output metrics in a given functional area. In this way, Hackett defines "world-class" with empirical data, isolating the characteristics shared by today's world-class organizations.

Gap Between Median, World-class Continues to Expand

World-class HR organizations spend $1,390/employee annually, 27 percent less than median companies, which spend $1,892/employee, according to Hackett. Both world-class and median companies dedicate more than half of their HR spending to labor costs, but lower spending on labor makes up the lion's share of the gap between world-class and median HR organizations. World-class companies spend 31 percent less than median companies on labor ($742/employee versus $1,075), and rely on 35 percent fewer HR staff per 1,000 employees.

HR costs per employee have increased for both world-class and median companies since 1996, Hackett found. But world-class companies have seen an increase of only 12 percent, compared to 21 percent for median companies. So the gap between world-class and median is clearly growing larger.

World-class organizations are also more effective than their median peers, according to Hackett's research. Senior HR executives at all world-class organizations tie business strategy to people strategy, compared to only 60 percent of median companies. World-class organizations are 87 percent more likely to have articulated an explicitly stated workforce strategy. World-class HR organizations also manage their workforces much more effectively, and as a result see 61 percent fewer voluntary terminations and 43 percent fewer involuntary terminations.

"The gap between world-class and median HR performance has always been there. But it's widened significantly over the years," said Hackett HR Practice Leader Stephen Joyce. "Companies that are median performers today have reason to be concerned. World-class organizations are spending less on HR, driving to significantly lower costs in both transactional and employee life cycle processes while providing higher strategic value to their companies. It's also easy to understand how basics like lower staff turnover rates can help make companies with world-class HR organizations more stable and more effective, and provide a real competitive advantage."

Holistic Approach Key to World-class Success

Hackett found that, overall, there is no single silver bullet to achieving world-class performance, and a holistic approach is needed. Hackett's research findings conclude that to reduce overall costs, and particularly labor costs, HR organizations need to implement best practices and process improvements to better leverage their technology and outsourcing investments. In fact, world-class HR organizations spend almost exactly the same amount per employee as median companies on technology, and 10 percent less per employee on outsourcing. But world-class organizations use technology and outsourcing more effectively than median companies to enable improvements in other areas.

Several factors contribute to the success of world-class HR organizations at improving their efficiency and effectiveness, Hackett found. World-class HR organizations reduce their complexity in many areas. For example, they utilize 69 percent fewer health and welfare plans and 46 percent fewer compensation plans than median companies. They also significantly cut upstream error rates in key processes such as health and welfare administration, compensation administration, and employee data management. These reduced error rates generate significant downstream benefits. For example, world-class organizations spend 42 percent less than median organizations on payroll administration.

World-class HR organizations also focus on process integration, streamlining their operations and using technology more effectively. For example, all world-class organizations integrate compensation administration with payroll, and then payroll with general accounting. Median companies are significantly less likely to integrate these areas.

While world-class organizations spend less than median companies on outsourcing, it represents a larger percentage of their overall spend. World-class organizations also use outsourcing much more strategically, as a way to execute with greater flexibility and scale discretionary services while avoiding internal disruptions. For example, Hackett found that world-class companies spend 55 percent less than median companies outsourcing staffing and workforce development, while they spend 25 percent more than median companies outsourcing total rewards administration.

"There's this misconception that to cut costs in HR you eliminate staff and replace them with technology and outsourcing support. But the numbers simply don't bear this out. The path to world-class performance is more complex," said Hackett HR Program Manager Patty Miller. "It's not how much you spend, but how you utilize technology and outsourcing that matters. Virtually across the board, world-class companies use technology as an enabler and facilitator, taking care to embed best practices into systems and design them to integrate and streamline business processes. This takes time and energy, but it pays off long-term. In outsourcing, world-class companies take a similarly thoughtful approach. They target very carefully, identifying individual processes or sub-processes where cost savings and efficiencies can be generated."

The Hackett Group conducts best practices research and process benchmarking, helping clients achieve world-class performance through continuous improvement initiatives. Hackett offers analysis backed by research at more than 2,400 client organizations, including 93 percent of the Dow Jones Industrials.