How do I create transparency in HR costs and value-added?

Transcription

1 Insights into organization How do I create transparency in HR costs and value-added? Asmus Komm Deborah Lacher Christian Winnewisser

2 How do I create transparency in HR costs and value-added? 1 Why is this important? Many Fortune 00 companies spend more than a billion dollars a year on their HR function. With expenditure on such a scale, it is all the more surprising that there is so little transparency around HR costs. Even core services like training, recruitment, and personnel administration are seldom fully costed within HR budgets. But in an environment where resources are scarce and operating units have to answer for the costs they incur, HR needs to be treated like any other business function and held responsible for its results, or else the whole system of accountability is likely to be undermined. Not until HR costs are recorded and attributed properly can HR be accepted by the organization as a full business partner. To make that happen, every HR product or service from the design and delivery of training to expat management, and from the handling of negotiations with worker councils to the operation of the HR intranet must become a customer-oriented offering that carries a predetermined price tag and yields a predetermined result. This is why the HR function needs the discipline and clarity that a P&L brings. But what is an HR P&L? Put simply, it is a comprehensive map of a company s HR portfolio that itemizes every product and service produced by every department within HR and allocates to each product or service its associated customers, costs, and revenues. Sounds like too much hassle? Then consider this: some companies have been able to achieve cost savings of up to 1 percent of their HR expenditure as a direct result of introducing P&L measures.

3 2 What do I need to know? It is tempting to assume that if your HR function seems to be doing its job and not overspending on its budgets, all is well. But can you be confident that your HR is managed in a businesslike way? Does it use resources responsibly, keep its internal customers satisfied, and deliver all the benefits you expect at a cost you have determined? These questions are hard to answer unless you have the transparency that a P&L provides. Not surprisingly, most executives believe they already have a good grip on HR costs. After all, doesn t their HR budget tell them everything they need to know? Unfortunately not. Most HR budgets drastically underestimate total spending on human resources. In fact, hidden costs can add as much as 90 percent to the official HR budget (Exhibit 1). Exhibit 1 HR costs can far exceed official budgets Percent of official HR resources at one company HR function Personnel data and payments administration Corporate center 3 30 Business unit 1 Business unit 2 Business unit 3 < < < Total < 0 < 30 Official HR costs Hidden costs of HR activities Labor relations and benefits execution Training Recruiting Total < < 7 < 40 < 2 < < < < 4 < 40 < 30 < < 40 < < 0 <9 Actual HR-related costs were about 90% higher than budget So what is the reason for this startling disparity between budgeted and actual spending? Some costs are hidden simply because they are allocated to other departments budgets. For instance, business units shoulder some recruitment and training costs, and IT budgets usually fund HR software systems. For some companies, between 0 and 70 percent of total HR-related costs are dispersed in this way.

4 How do I create transparency in HR costs and value-added? 3 Other costs such as the time and expense of performing core HR processes like talent management and benefits administration are hidden because they are not fully captured in companies ERP (enterprise resource planning) systems. And even when ERP systems do provide extensive coverage of HR costs, tracking and comparing expenditure at enterprise level can often be challenging because offices in different countries operate independent ERP systems that categorize data in different ways. It is more than likely, then, that your existing HR budget doesn t tell the full story of your HR spending. To get that, you need to compile a full HR P&L. As well as enabling you to get a better grip on your HR spending, introducing a P&L will help you to: Communicate well with internal customers. Your HR function may be doing a great job, but if people in your organization are not aware of it, the impact will be lacking. It is vital that HR develops a thorough understanding of its own product offerings and what it can (and cannot) do and then communicates this clearly to top management, line managers, and staff. Identify and address efficiency gaps and track adherence to product budgets. Unless you can drill down into the costs of individual HR services and products, you will be unable to see which activities incur which expenses. Do you know whether your company spends more on placing people or handling enquiries, for instance? With a P&L, it would be easy to find out and you and your senior HR team would be able to spot where efficiency improvements could be made, estimate the potential savings, and track success product by product. A P&L also enables internal customers to understand the costs they incur by using HR services, so making planning and forecasting more specific, accurate, and reliable. Enable HR to manage demand actively. Once your HR function has a complete understanding of its own products and what they cost to deliver, it can take the next step and plan the quality, timing, and cost of its offerings in consultation with customers. This brings many benefits. First, HR develops a clearer understanding of customers needs and is able to negotiate with them over HR packages and how they are delivered, instead of merely responding to requirements defined by others. It is in a better position to plan resource allocation and usage, and thus save money and improve your overall corporate performance. And once in-house users know exactly what is on offer and how much it costs, they become genuine customers able to exert real buying power.

5 4 Prepare for a range of strategic options. No matter what you plan to do introduce shared service centers, outsource, enter an external market an HR P&L provides much-needed data and yields valuable insights to help you make valid comparisons and reach sound judgments. Whether you are trying to work out what you might realistically save from outsourcing on the one hand, or estimate market potential and cost to serve external customers on the other, the P&L can give you a dependable basis for your decision. Equip HR to act as a partner to the business. Support functions such as HR are often viewed in terms of the costs they incur rather than the value they add in effect, as a burden on, not a benefit to, the organization as a whole. But once a P&L is in place, HR will be in a better position to demonstrate how it can contribute to the success of the business. For instance, one company had a department that kept changing its name. Once HR had a seat at the top management table, it was able to draw attention to the considerable costs involved and suggest alternatives that were less wasteful of the organization s resources.

6 How do I create transparency in HR costs and value-added? Contacts Americas Sanjay Kalavar Principal Houston office +1 (212) sanjay_kalavar@mckinsey.com Europe, Middle East, and Africa Asmus Komm Principal Hamburg office + 49 (40) asmus_komm@mckinsey.com Asia Pacific Gautam Kumra Director Delhi office +91 (124) 6612 gautam_kumra@mckinsey.com

7 Organization Practice November 11 Copyright McKinsey & Company