HUMAN CAPITAL MANAGEMENT:

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1 SAP INSIGHT HUMAN CAPITAL MANAGEMENT: HOW TOP ORGANIZATIONS DRIVE COMPANY PROFITS EFFICIENTLY 2007 ASUG/SAP Benchmarking Study

2 Table of Contents Executive Agenda 1 ASUG/SAP Human Resources Benchmarking Study 2 Balancing Efficiency and Effectiveness 4 Driving Higher Performance 6 HR Matters for Profit and Growth 9 About the Sources 11

3 HUMAN CAPITAL MANAGEMENT HOW TOP ORGANIZATIONS DRIVE COMPANY PROFITS EFFICIENTLY by Katharina Müllers-Patel, PhD

4 EXECUTIVE AGENDA Human resources functions and responsibilities are changing and intensifying at a faster pace, and to a greater degree, than many other areas of the corporate organization. Once relegated to the back office and concerned mainly or even exclusively with transactional processes and functions, HR organizations are taking a greater role in strategic business activities. Efficiency remains the foundation of HR. More transactions must be completed at lower costs, while processes are becoming increasingly complex to manage. A typical 10,000-employee company handles more than one million employee-related transactions annually, each of which costs anywhere from US$10 to US$50. 1 The top 10 recruiters in the United States report they are placing 35,000 to 95,000 employees annually. Managing the recruitment pipeline, the selection process, and the induction process is a complicated endeavor. At the same time, however, leading HR organizations are looking beyond the execution of HR transactions to a more value-added and strategic focus. These organizations are aligning human resources and workforce planning functions with the overall business strategy to help increase profit margins and support long-term goals. To understand the changes and momentum in human capital management (HCM), the Americas SAP Users Group (ASUG ) and SAP have established an ongoing HCM Benchmarking forum. The study analyzes several dimensions staffing, cost, organizational model, IT deployment, and best-practices adoption. The following key conclusions demonstrate how companies are meeting today s human capital challenges: As a first step, HR managers strive to optimize the efficiency of transactional processes through standardizing, automating, and integrating business processes, based on best-practice process and technology models. Optimizing transactional processes frees up resources that allow HR organizations to invest in more strategic functions that facilitate business growth and increase employee productivity. Centralizing and consolidating HR operations in a shared-services environment helps increase the efficiency and effectiveness of HR processes. Outsourcing, while used frequently for transactional processes, does not always drive top performance, either in cost or service quality. Organizations need to carefully evaluate the value, performance, and cost trade-offs in outsourced versus in-house service delivery. Information technology continues to provide the basic foundation for efficiency and acts as the key driver for effectiveness and future innovation. Leading organizations recognize that IT supports the development of many best practices, and they continue to invest in IT to integrate systems, data, and processes across the enterprise. In short, the study finds that the best human capital management organizations constantly reassess their processes to strike a balance in the drive to optimize efficiency, cost, and service delivery in a continually changing environment. Top performers in this area balance the traditional demands of transactional efficiency with value-added activities that drive company profits and growth and help prepare for future innovations. 1. All currencies in this SAP Insight are U.S. dollars. SAP Insight 1

5 ASUG/SAP HUMAN RESOURCES BENCHMARKING STUDY Benchmarking is an important and powerful tool for companies to achieve a balance between costeffective efficiency and contributing value-added services to support corporate strategic goals. By accurately assessing their own performance and comparing the results achieved to those of their peers, HR organizations can achieve optimal levels of efficiency and effectiveness. Moreover, if managed well, HR becomes a dynamic part of the organization that can go beyond transaction-related activities and contribute to margin growth and the long-term success of the company. ASUG and SAP have established a benchmarking forum to understand the dynamics of human resources organizations and the challenges faced by their managers. The ASUG/SAP study examines the best-practices record of more than 200 companies ranging in size from less than $1 billion in annual revenues to more than $10 billion. The benchmarking study analyzes the HR performance of these companies in 17 key subprocesses in three categories: process and transactional support, expertise-based business support, and strategic decision support. Two questions are at the core of our study: How can companies reduce HR costs and increase HR efficiency? How can HR organizations create value for the business and optimize effectiveness? The study includes companies with an overall number of employees ranging from 1,000 to more than 10,000 in the following industries: Aerospace and defense Automotive Chemical Consumer products Engineering, construction, and operations Financial services Healthcare and life sciences High tech Industrial machinery and components Oil and gas Public sector and higher education Retail Service providers Telecommunications Utilities The study analyzes key performance indicators (KPIs) in a number of different areas including HR staffing levels, costs, organizational model, IT deployment, and best practices. These include the following KPIs: Process-independent, such as HR costs per company employee, and HR full-time equivalents (FTEs) per 1,000 employees Focus Methodology Figure 1 ASUG/SAP Benchmarking Framework Strategic Decision Support Expertise-Based Business Support Effectiveness Best Practices -Metrics- Organization Process and Transactional Support Efficiency 2 Human Capital Management How Top Organizations Drive Company Profits Efficiently

6 Process-specific, such as time to hire, cost to hire, and payroll error rate Degree of outsourcing and centralization Use of shared services Information technology used by HR employees Degree of IT automation and integration The study also covers the level of best-practice adoption across the full range of HR functions, with companies providing self-evaluation for coverage and the perceived importance of each best practice. Best practices are winning strategies, approaches, and processes that produce superior performance. Some examples of HR best practices include the following: Recruiting Ability of internal and external applicants to place themselves in the talent pipeline according to their own interests and goals Automated recruiting system analysis and reporting Integrated applicant tracking system Payroll Online access to direct-deposit and payroll data Single point of contact established for all payroll-related questions Benefits and pensions Benefits and retirement planning self-service Ability to model and analyze the impact of benefits plan changes on the overall business model The study then uses companies quantitative KPI results and qualitative best-practice coverage ranking to rate them against the other participants, and categorizes each company as first quartile (the most effective or efficient top performers ), average, and fourth quartile (the least effective or efficient bottom performers ). Analysis of both qualitative and quantitative measures allows inference of key findings and insights related to the drivers of top performance. Continuous participation in the program will allow companies to track their progress against internal and industry metrics on an ongoing basis. UTILITY COMPANY GENERATES HR ADVANTAGE A major North American utility company in our study faced serious challenges including inefficiencies in compensation packages and planning, ongoing government compliance audits, and an HR department focused on highly manual, paper-based transactions. In addition to these challenges, the utility s prime goals include maintaining efficient generation plants and aligning human capital management to support its brand image of low-cost power and environmental and social responsibility. To address its HR concerns, the utility implemented an IT solution with a rolebased enterprise portal that has enabled the company to realize great business value and achieve an ROI of 102% in just under five years. According to a company executive, cycle-time reductions allow HR employees to spend less time on administrative tasks and more time focusing on core strategic activities. Managers and employees now handle the majority of transactional activities, allowing HR to focus on hiring employees who are dedicated to and aligned with brand image. Employees are alerted to upcoming mandatory training, completion of certification requirements are automatically updated to the employee record, and the company has up-to-date, immediate information at hand for government compliance audits. SAP Insight 3

7 BALANCING EFFICIENCY AND EFFECTIVENESS A still common perception is that managing human resources is straightforward and transactionoriented, and can therefore best be measured in terms of efficiency: the lower transactional costs, the better. This perception of HR is changing, however, and approaches to human capital management now cover a wide spectrum. At the opposite end of the range from traditional cost-centered, back-office organizations, many HR organizations now have the principal goals of providing the best possible business support and investing in resources and sophisticated tools while deprioritizing or ignoring costs altogether. Our study shows that top-performing companies strike an optimal balance between the two extremes of this spectrum. These companies are transforming the way they look at HR, with human capital management taking a stronger role in contributing to the drive for higher profit margins and longterm growth. Top-performing HR organizations strive to optimize both efficiency and effectiveness by minimizing transactional costs through standardization, automation, and self-service, freeing up resources that can be used to align HR with the businesses to support growth. KEY MEASURES FOR EFFICIENCY Human resources management is in a state of dynamic change, under pressure to adapt to the realities of doing business in the 21st century. Efficiency, always a watchword for HR management, remains a highly important measure. The most commonly used HR efficiency metrics are as follows: Staffing levels employees served per full-time HR employee, or full-time HR employees per 1,000 employees Costs HR cost per company employee BANK IMPROVES SERVICES WITH EMPLOYEE INTERACTION CENTER Facing the daunting task of reducing staffing levels while maintaining or even improving service levels, a major bank has implemented an employee interaction center to serve more than 20,000 employees across its operations, along with enterprise-wide human capital management software. The integrated solution has enabled the bank to improve efficiency in handling large numbers of HR inquiries and orders through various channels from management and employees. As a result, the bank has increased the speed and quality of services, resulting in higher employee satisfaction and greater transparency of processes. At the same time, the implementation has enabled a significant increase in HR productivity, allowing an HR head count reduction of 20%. 4 Human Capital Management How Top Organizations Drive Company Profits Efficiently

8 Despite HR organizations continued or renewed focus on efficiency, our research has identified significant gaps between first quartile (the companies most effective in instituting best practices) and average performers (those that are average at instituting best practices). First-quartile HR organizations had over 50% better staffing ratios, and their HR costs were 30% or more lower. A single HR FTE in a first-quartile company served 120 employees, compared with 77 employees served by one HR FTE in an average company. HR costs per employee were $1,760 on average, compared with first-quartile company costs of about $1,100 per employee. While it s true that companies with higher HR staffing levels or costs tend to have more complex organizations or more complex industry environments, the gap between first-quartile and average performers in many cases indicates an opportunity for improvement in efficiency among the lesser-performing companies. KEY MEASURES FOR EFFECTIVENESS Effectiveness is much harder to measure than efficiency, and many HR organizations rely on a combination of hard (quantitative) and soft (qualitative) metrics, such as: Hard metrics cycle times (such as time to hire), error rates, and employee turnover Soft metrics employee engagement, customer satisfaction, alignment with corporate goals, impact on business results, and adoption of best practices The study shows that these effectiveness metrics do not necessarily correlate with efficiency metrics. There are study participants with strong results for effectiveness but very high costs, as well as companies with low effectiveness and low costs. The most desirable case is to achieve high effectiveness while at the same time managing costs. High Figure 2 High Effectiveness High Cost Leading Companies Balance Between Efficiency and Effectiveness EFFECTIVENESS High Cost Low Effectiveness Low Cost Low Effectiveness Low High HR Costs Low EFFICIENCY Source: ASUG/SAP HR Benchmarking Program (excluding Asian Pacific and Latin American participants) SAP Insight 5

9 DRIVING HIGHER PERFORMANCE Top-performing companies look for competitive advantage in HR by adding capabilities to increase the effectiveness of service delivery and bring HR more in line with business processes and strategies while at the same time striving for the right balance with cost control. Our study finds that the best HR organizations follow three main imperatives: Align HR closely to the business Outsource wisely and with effective control Leverage IT ALIGN HR CLOSELY TO THE BUSINESS Alignment with the business has to happen on multiple levels. Centralizing transactional and certain expertise- and talent-related processes in a shared-services or center-of-excellence environment is a crucial piece of the alignment puzzle, allowing HR as an organization to operate as a service provider to individual business units and locations. The study finds significant advantages in both efficiency and effectiveness for HR functions impacted by shared services. The average cost per employee for decentralized operations is far higher than for operations using shared services or centers of excellence, producing a 15% to 40% gap for transactional activities and a 5% to 20% gap in expertise-related activities. And the average best-practice score (a measure of effectiveness) for shared services is 20% higher than for decentralized functions. Many larger organizations choose to establish employee service centers to align closely at the employee level, catering directly to employee needs, while at the same time preserving efficiencies. Over 80% of companies with more than 5,000 employees have service centers in place, compared to 20% of companies with fewer than 5,000 employees. Employee service centers help increase efficiency and employee satisfaction, providing employees with a single point of contact for taking care of benefits, pensions, payroll, processing of life events, employee data entry, applicant questions, and data processing, as well as onboarding process and paperwork. Top-performing companies are looking to HR business partners for direct and strategic support. HR business partners are responsible for developing employee relations, leading workforce planning, and supporting stakeholders on-site. Topperforming companies sharply define the role of the HR business partner, while average companies allow the role to blend with that of the HR generalist who is also responsible for a variety of transactional tasks. Figure 3 Level 1: Low Performer Level 2: Emerging Level 3: Established Level 4: Top Performer 60% 25% 5% 10% Shared-Services Adoption and Results % of Companies Net Cost Savings % Effectiveness Improvement % 8 Source: ASUG/SAP Best Practices Survey (surveyed 250 companies) Human Capital Management How Top Organizations Drive Company Profits Efficiently

10 True HR business partners spend less than 20% of their time on administrative tasks, and make change management a key responsibility. Top-performing companies even measure HR business partners by the success of such change programs. In this role, they also work with company leadership during the business planning process to identify future competency profiles and needs. OUTSOURCE WISELY AND CONTROL EFFECTIVELY The best companies take time to analyze what to centralize in-house, what to outsource, and what to decentralize, based on the demands of their unique cultures. This study calls into question some of the conventional wisdom about outsourcing. Results are inconsistent in the sense that outsourcing does not always drive first-quartile performance. In analyzing the cost per employee for in-house versus outsourced services, for example, we find significant cost gaps in payroll and benefits administration between first-quartile and average companies. Even more important, best practices are not always as prevalent in outsourced functions as they are with companies that control more of their HR functions. A possible explanation for the inconsistency of these findings is that organizations that do not outsource may already have decent scale and standardization, and are therefore already at respectable benchmark performance levels. In payroll, for example, organizations with centralized operations in a shared-services environment with standardized and simplified processes based on a single-instance enterprise resource planning (ERP) solution have a very good chance to achieve first-quartile performance in-house. DOCUMENT MANAGEMENT COMPANY SUPPORTS TALENT MANAGEMENT AND MORE AND REDUCES COSTS A global provider of mail and document management systems has launched a shared-services initiative to meet a number of crucial targets. Overall, the company wants to support comprehensive talent management within its global workforce, reorganize HR to eliminate redundancies and duplication of effort, and leverage a new HR structure and systems to upgrade and establish quality processes that can be measured and documented. From a metrics perspective, the company s goals are to reduce the HR professional-to-employee ratio and HR service cost per employee. The foundation of the reorganized HR structure is a new global shared-services model and an integrated, enterprise-wide human capital management solution. Now, the focus on mission-critical work is enhanced, driving the hiring and retaining of top talent to contribute to strategic business goals. The company has established centers of excellence focused on strategic leadership management, talent management, workforce relations, and accelerated growth. These initiatives have enabled the company to reduce HR costs while offering a higher level of service, centralize transactional processes with an integrated database, share knowledge and processes, and leverage expertise. The company has increased transactions processed per week, shortened recruiting cycle times, and reduced its HR professional-to-employee ratio. SAP Insight 7

11 On the other hand, companies that do outsource may have intrinsically higher cost structures to start with. Significant reductions may be made, but the impact of these results must be weighed against the higher-cost starting point. The key takeaway is that HR organizations should evaluate their outsourcing decisions carefully and establish a benefits and cost analysis up front to weigh any potential alternatives (such as an optimized in-house solution). LEVERAGE IT Our study shows that IT is a critical enabler for HR efficiency and effectiveness. Companies with a single HR system are more efficient and effective and more strategically focused than companies with fragmented system landscapes. In our study, companies with a single enterprise-wide IT system have lower staffing levels and enjoy higher levels of best-practice scores. Figure 4 HR Costs per Employee, per Number of Additional HR Applications $1,470 $1,590 $1,830 $2,130 Less than 5 Between 5 and 10 Between 10 and 20 Note: Applications include Microsoft Office based tools such as spreadsheets, Access databases, etc. More than 20 TECHNOLOGY COMPANY REDUCES PAYROLL COSTS WITH IN-HOUSE HR SOLUTION A leading high-tech company that provides voice automation technology and services had high costs associated with outsourcing its payroll functions. Its HR software lacked flexibility and key features needed to support future growth and help the company attract top talent. The company needed to implement an IT solution that wouldn t disrupt current operations including an important concurrent acquisition or imperil historical employee data during the migration of HR functions to its new system. The company has implemented an enterprise-wide human capital management solution to improve HR capabilities and bring payroll operations back inhouse. With the new solution the company enjoys considerable operational benefits. Errors per payroll cycle are reduced from three to zero. Time to set up new hires is reduced from four to six hours to one hour. Benefits-reporting cycle times are reduced from two to three days to instantaneous. Personnel administration requests that once took from 10 to 15 hours a day are now performed almost entirely with self-service functionality. Moreover, the company enjoyed a rapid implementation time of only six months. 8 Human Capital Management How Top Organizations Drive Company Profits Efficiently

12 HR MATTERS FOR PROFITS AND GROWTH The top performers in our study achieve an optimal balance between reducing costs and driving business results. Top-performing companies look beyond traditional HR activities to focus on expertisebased and strategic functions. By optimizing and automating transaction-oriented processes, top companies can invest more in attracting and developing talent an investment that brings returns across the entire enterprise. Companies that wish to enact initiatives embraced by top performers need to define their goals specifically building a road map to achieve a balance between reducing costs and driving company growth. The best-run human capital management organizations share the following crucial practices and goals: Optimize process and transactional support Benchmark processes and performance Consolidate systems Adopt shared services Invest in people and talent Align HR with overall business strategy and goals Focus on value, not effort Figure 5 High Tech Consumer Products Focus on Talent Drives Company Performance HR Costs as % of Revenue Operating Income/Employee Strategic Decision Support 0.9% $79 13% 0.6% $92 13% 0.5% $36K 13% 0.4% $49K 13% Expertise-Based Business Support 44% 71% 41% 68% Process and Transactional Support 43% 16% 46% 19% Average Top Performers Average Top Performers SAP Insight 9

13 As an initial step, top companies optimize process and transactional support instead of concentrating on payroll and compensation administration to focus more on strategic workforce planning, career planning, employee development, and recruitment and retention. And monitoring and evaluation do matter: HR organizations that establish benchmarking programs ensure that goals are mapped out and met. Standardizing, consolidating, and centralizing HR operations in a shared-services environment helps increase process efficiency and effectiveness and enables companies to raise service levels and focus on talent not transactions. Information technology provides the necessary foundation, facilitating efficiency and driving future innovation and growth by integrating processes and data across the enterprise. Following this road map, HR organizations can contribute to long-term and immediate company goals by promoting and advancing employee productivity optimizing the operating margin per employee. While constantly assessing and improving processes, companies can enable a shift in mind-set to focus on value, not effort and make HR a true business partner to the corporation. OIL COMPANY ACHIEVES OPTIMAL BALANCE An oil company with a diverse workforce of some 28,000 employees in three very different lines of business needed to plan for and retain key talent, but was saddled with aging and decentralized HR systems. Management recognized the need to provide for current requirements while also preparing to meet future challenges. The company has embarked on an HR transformation effort, standardizing and simplifying processes and policies across the enterprise, and implementing a single enterprise-wide human capital management solution. A key pillar is the implementation of an employee self-service solution, which has created a nearly paperless environment: 94% of HR employee engagements are now performed with self-service functionality. Based on the success of this transformation, the company is among the top performers in our study, and ranks first quartile in most key metrics. The company realized an ROI of 158% for the implementation. Most importantly, the transformation effort has freed up the HR organization from transactional support, enabling the department to become a strategic business partner. 10 Human Capital Management How Top Organizations Drive Company Profits Efficiently

14 ABOUT THE SOURCES ABOUT SAP SAP is the world s leading provider of business software.* Today, more than 38,000 customers in more than 120 countries run SAP applications from distinct solutions addressing the needs of small businesses and midsize companies to suite offerings for global organizations. The SAP ERP Human Capital Management (SAP ERP HCM) solution provides a complete, integrated, and global human capital management solution for organizations of all sizes and in all industries. The world-class solution, employed by more than 10,000 SAP customers, helps companies maximize the potential of their workforce while supporting innovation, growth, and flexibility. SAP ERP HCM automates talent management, workforce process management, and workforce deployment, enabling increased efficiency and better compliance with changing global and local regulations. Powered by the SAP NetWeaver platform to drive innovation and enable business change, SAP software helps enterprises around the world improve customer relationships, enhance partner collaboration, and create efficiencies across their supply chains and business operations. SAP solution portfolios support the unique business processes of more than 25 industries, including high tech, retail, financial services, healthcare, and the public sector. With subsidiaries in more than 50 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and the New York Stock Exchange under the symbol SAP. For more information, please visit * SAP defines business software as comprising enterprise resource planning and related applications such as supply chain management, customer relationship management, product life-cycle management, and supplier relationship management. ABOUT ASUG The Americas SAP Users Group (ASUG ) is an independent, volunteer-run organization that facilitates knowledge transfer among the community of SAP customers by providing user-driven educational opportunities, professional networking, and a forum that provides insight and influence to SAP. ASUG maintains a unique position within the SAP community through its combination of highly focused education tools, access to subject matter experts and SAP executives, ability to influence SAP products and services, and personal networking opportunities with SAP customers. As a result, members from any sized organization continuously solve their SAP-related business problems more efficiently and cost-effectively, realizing a significant return from their membership. For more information, please visit ABOUT THIS STUDY The ASUG/SAP Benchmarking and Best Practices program is open to participants on an ongoing basis. Companies are encouraged to participate annually to track trends, share best practices, and measure value realization. In addition to human capital management, benchmarking programs are also offered in several additional areas including: finance; supplier relationship management and procurement; governance, risk, and compliance (GRC); supply chain planning; manufacturing; new product development and introduction; customer contact centers; warehouse management; transportation management; business intelligence and analytics; and total cost of ownership. If you are interested in participating in any of these efforts, or if you would like additional copies, please the ASUG/SAP Benchmarking and Best Practices Program at benchmarking@asug.com. ABOUT THE AUTHOR Katharina Müllers-Patel, PhD, a senior principal in the SAP Value Engineering group based in Newtown Square, Pennsylvania. She manages the joint ASUG/SAP Benchmarking and Best Practices program, which covers finance; human capital management; supplier relationship management and procurement; governance, risk, and compliance; total cost of ownership; supply chain planning; manufacturing; new product development and introduction; and customer contact centers. Prior to joining SAP, Müllers-Patel worked as a strategy consultant with A.T. Kearney, delivering operational, organization, and corporate strategy engagements at the C level for global corporations with a particular focus on shared services, business transformation, and strategic planning. SAP Insight 11

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