The New Mandate for HR Spending

HR costs will always be an important concern of finance. Now that companies have simplified HR systems, outsourced select processes and introduced employee role automation, CFOs are looking to HR to maximize the human assets within the organization.

Finding and attracting qualified workers in today’s tight labor market is a huge challenge for all companies. Has this problem strained HR capabilities and caused increases in its training, hiring, turnover, benefits and compensation costs? Surprisingly, no. Despite the increasing difficulty in finding qualified employees, HR departments are effectively controlling their costs through better processes and advanced technology.

HR used to be measured by how efficiently it provided services, but now it’s being measured by the value it creates and the return on investment (ROI) of human capital assets in the organization. By reducing HR clerical work and shifting HR’s focus to higher-value-added activities such as hiring and training, companies are earning a better return on their HR dollars in terms of employee productivity and retention. And that’s keeping HR costs under control. "HR expenses, as a percentage of a company’s total operating expenses, are actually going down at many companies," says Marc D. Detampel, senior manager with Arthur Andersen LLP’s business consulting group in Minneapolis.

Three Ways to Save

Companies are using three methods to control HR costs, according to Randolph Harrison, managing partner of organization effectiveness and development for the global human resources practice within PricewaterhouseCoopers LLP in Chicago. "Outsourcing low-value-added administrative chores has helped drive down costs, since outsourcing agencies can frequently handle those duties more cheaply than a company can. And outsourcing gives HR people more time to spend on finding ways to retain people," Detampel says. In particular, outsourcing health, insurance and retirement benefits administration has freed up HR staff time. "Companies have seen expenses drop by as much as 20 percent or so by moving these kinds of administrative and transactional tasks outside," says Harrison.

Coleman Technologies Inc., a small high-tech firm in Orlando, Fla., is realizing a better return on its HR dollars and streamlining HR administrative functions by using services offered by its insurance provider. "Aetna Inc. offered us a Web-based program that allows us to run the benefits and HR functions from the same database," says Holli Rodriguez, Coleman’s human resources manager. "I have everything, including enrollment functions, change of benefits, personnel information, all right online. There’s no more paperwork or faxing forms to anybody. And employees can get online and change their options or find answers to their questions about benefits. Before this system came along, we were spending about 50 percent of our time on benefits and administrative duties, and now we’re spending about 20 percent on those things." The only catch, she says, is that Coleman must use Aetna for all its benefits programs to be eligible for the service.

Re-engineering HR processes is the second type of cost control which, if used effectively, can reduce overall HR costs by another 20 percent, Harrison says. "For example, improvements in the administration and management of training programs alone could reap as much as 20 percent savings at most companies," he explains.

The third form of HR cost control involves a "total revamping of the HR delivery system using improved technology, which usually requires a multimillion-dollar investment and as much as three to five years to start seeing a return," according to Harrison. Many businesses are implementing automated employee self-service (ESS) systems that allow employees to do more of the HR clerical work themselves. "Without an ESS system, an HR worker might spend about 60 percent of his or her time on administrative issues. With an ESS system, that same worker might spend about 20 percent of his or her time on those kinds of administrative duties," says Cynthia Driskill, president and CEO of CDG & Associates, an HR systems consulting firm in Addison, Texas.

How much can a company save with an ESS system? In 1999, Cisco Systems Inc. saved approximately $55 million, according to Ray A. Zaso, senior vice president and managing director of e-work force solutions at KPMG Consulting LLC in Radnor, Pa. "With their system, any Cisco employee can go anywhere in HR to find out anything they want to know, all online, as well as having access to all business processes," he says.

Getting a Handle on Turnover

While HR departments are streamlining administrative costs, many still need to improve employee retention rates. "It’s the single area within HR where companies are most wasteful," says Detampel. "It’s a big expense, and not many companies have addressed this issue." Because a company values each employee differently, it’s difficult to estimate the expense HR incurs when an employee leaves. Costs can range between 50 percent and 150 percent of the employee’s annual salary, according to Michael Neece, former director of staffing at Fidelity Investments, and now president and CEO of Tripoint.com, a recruiting software company in Hopkinton, Mass.

Businesses try to measure the impact of employee turnover by calculating the cost per hire. But that number can be misleading. "For example, are relocation expenses, sign-on bonuses, search fees, referral fees or agency fees included in the cost-per-hire calculation?" asks Neece. "How about the amount of time it takes to get the new person up to the same skill level that the former employee was at, the cost of hiring a temporary person to fill the position, and the money lost in productivity during that time? Some companies factor in those costs and some don’t. The most important issue isn’t what your cost is, it’s getting the right person on board," he says.

Today, the ROI on human assets is considered more important than the cost of hiring someone. "In fact, the cost consideration is probably about fourth in terms of importance to the company," Neece says. "The first consideration is ‘Can the person do the job?’ Second is whether they’re willing to do the job. Third is how well they will fit into your corporate culture. And fourth is how much you pay to get this person."

Peter Ramstad, executive vice president of Personnel Decisions International, an HR consulting firm in Minneapolis, agrees that the cost-per-hire metric has flaws. "Anyone looking just at the cost per hire is not taking into account the future value of that person," says Ramstad. "If you’re developing these cost measurements, at least segment candidates according to their talent level, because some are certainly more important hires than others. The finance department tends to look at efficiency, and the HR department focuses on investment. Neither one is entirely right, and that’s why both need to work together during the hiring process."

The greatest ally an HR manager can have is the CFO, with whom he or she can build a partnership, discuss the payoffs of different HR investments and dissect costs, according to Jack J. Phillips of the Jack Phillips Center for Research, an ROI consulting firm in Birmingham, Ala., and a division of Franklin Covey Co. In some cases, these partnerships blend the finance function with the HR function. "State Street Bank, for example, has financial staff located in the company’s different HR groups, and the Canadian Imperial Bank of Commerce has accounting managers in HR to help ensure a relationship between finance and HR develops," says Phillips.

More HR departments are beginning to analyze the potential return of an employee retention initiative and then translate that analysis into monetary value. "For example, suppose HR was considering ways to reduce the turnover rate by increasing the amount of training or offering a better compensation package," says Phillips. "If they calculated that their turnover rate was running at 28 percent per year, and by initiating better training and compensation they could likely reduce their turnover to 20 percent, would those initiatives be worth saving 8 percent in turnover? And if turnover did go down, how much of it was caused by those initiatives? So rather than just throw money at a problem, there’s a greater understanding within HR that you can end up spending too much on these kinds of initiatives for what you get out of them."

The HR departments that tend to make the best use of their initiatives and maximize their ROI are the ones that best align their initiatives with their company’s strategies. These departments have simplified their systems to cut administrative costs, outsourced more selectively and taken advantage of automated ESS systems. Controlling costs will always be an HR issue. But these days, a bigger HR issue is recognizing the monetary value of the human assets within the organization.

Where HR Is Spending Its Money

Hackett Benchmarking and Research in Hudson, Ohio, conducted a study of best practices within HR departments at more than 1,400 companies ranging in size from $200 million in annual revenues to nearly $147 billion. Here is a summary of its findings:

HR costs have remained stable as the value HR adds to the organization has grown.
HR is spending less time on administrative tasks and more time on employee selection, retention and development. However, HR managers still spend about 25 percent of their time on lower-value-added administrative tasks and not enough time on decision support.
Companies that ranked in the top quartile of the study in terms of profitability spend 40 percent less time solving HR administrative problems and almost twice as much time on HR decision support as other companies in the survey.
The amount of money HR invests in finding, attracting and retaining employees has doubled in recent years, in part due to the tight labor market.
In recent years, there’s also been a threefold increase of HR investments in enterprise resource planning (ERP) systems designed to integrate employee data.
ERP systems have enhanced HR’s administrative capabilities, improved the function’s information storage and retrieval processes, and facilitated the development of employee self-service tools.
Annually, HR spends, on average, $1,584 per employee.
HR costs are significantly lower for larger organizations, due to economies of scale. Organizations with over 25,000 employees incur 30 percent lower costs per employee than those with fewer than 10,000 employees.
Outsourcing remains a major HR cost — about 21 percent of its total budget. However, outsourcing expenditures have declined 22 percent in recent years, most notably in training, development and administration. HR departments are also being more selective about what they outsource.
Approximately 80 percent of the companies in the study outsource their health and welfare plans’ administration, and nearly 70 percent outsource their pension plan’s administration.

The lesson HR can learn from this study is that increased investment in technology helps yield greater efficiencies and keeps costs under control, despite the currently sparse supply of labor.