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Three Steps to Gain Competitive Advantage Through HCM

by Mark Lange | SAPinsider

October 1, 2006

There is no question that an organization’s operating performance relies on effective human capital management, but few understand how to measure that connection, let alone how to harness it to become a stronger player in the market. SAP’s Mark Lange, National Vice President of HCM Solutions, offers a three-step framework to help enterprises connect the effectiveness of their HCM programs to their business outcomes.
 

Mark Lange
National Vice President,
HCM Solutions,
SAP Americas

In recent years, there has been an intense focus on the prospect of reengineering the human resources (HR) function by increasing the use of technology. Everyone understands the imperative, but few are certain how to do it. In this article, SAP's Mark Lange recommends a three-part framework for HR transformation from a CFO perspective, explaining how you can apply that framework to your own SAP landscape.

CFOs have varying degrees of awareness about the consequences of the traditional "inventory" view of human capital. A recent survey by Mercer found that only 16% of CFOs say they have more than a moderate understanding of the return on investment of their organization's investments in people.1 Now that you're aware of this gap, your mission — and ours — is to make sure everyone in your organization, from the CFO and executive team to the rank and file, understands the connection between effective human capital management (HCM) practices and operating performance.

Despite the significant impact human capital has on any company, it's rare that executive leadership fully understands how to enact strategies that move the needle and improve the business.

I'm going to offer a blueprint for your consideration — a straightforward, three-step framework for reengineering your HCM function to reduce transaction costs through streamlined business processes, drive a direct line of sight into the HCM levers on operating performance, and estab- lish a platform for future planning and competitive advantage.

1. Reduce Transaction Costs

The first step is to get all of your HCM information onto a single, consolidated instance that improves your visibility into the basics, gives you the ability to ensure compliance, enables you to manage the transaction base efficiently, and wrings any excess cost out of the P&L. That's the immediate cost-value proposition for your CFO and your management team — recurring variable cost reductions through automation and self-service. For many organizations, cost reductions and efficiencies can be found through outsourcing or shared services (see sidebars).

Reducing transaction costs becomes foundational. It's difficult to get a license to do more subtle or strategic work until all the administrative machinery is humming and efficient.

2. Focus on Operating Outcomes

This second step can be summed up as "better linkage to business outcomes." The purpose of enabling technology is to create a direct connection between investments made in the workforce and specific indicators of operating and financial performance.

What kind of assessment are you driving against specific worker types when they're being recruited? And how do you tie those behavioral assessments to the outcomes those employees are associated with, and which line managers are measured against?

Where SAP goes long and deep is in the ability to manage recruiting in a way that is tightly integrated with succession planning, enabling recruitment of full-time talent, succession within the current employee base, and visibility into contractors and contingents — all through coherent visibility around a common skills catalog. The skills catalog, in turn, becomes pivotal for many elements across the business process:

  • A single skills database supports the assessment of candidates, contractors, and incumbent employees, and identifies gaps in learning and development

  • Project management resourcing is very powerful — making sure you've got the right employees with the right skills in the right place at the right time

  • Performance management can be associated with the demonstration of specific skills and competencies and, in turn, the measurement of their impact on business outcomes

Analytics that reveal the connections between investment and outcomes are the most powerful tools in your arsenal — the basis to have the kind of operating conversation with your CFO and executive leadership that changes the game. Along with predefined queries and reports, analytics delivered through SAP NetWeaver make it easier to create visibility, not only within the executive leadership, but also for the shop floor supervisor, retail store manager, or call center manager. Everyone is able to understand how their employees' level of preparedness, learning, and specific performance deliver the outcomes they care about.

3. Prepare for the Future

For most businesses, the single largest operating expense is people costs. For manufacturing firms, this expense can be as low as 25% to 32% of total operating cost, but in some services firms, it can be as much as 70% or even 80%. Despite the significant impact human capital has on any company, it's rare that executive leadership fully understands how to enact strategies that move the needle and improve the business.

Outsourcing

One of the most popular ways customers try to reduce the transaction costs of the HR function is through outsourcing. Customers generally have two options: business process outsourcing (BPO) and business technology outsourcing (BTO).

The definition for BPO has expanded over the last three years to include any HR-related service, such as benefits, payroll processing, compensation, and recruiting or training services. BPO is moving any one or more of these pieces outside the organization. At the far end of the BPO spectrum is the professional employer organization (PEO) where you outsource the entire HR function.

BTO refers to the software applications supporting an organization that are either run in-house behind a firewall, or outsourced. BTOs can include the simplest hosting services where the customer owns the license to the application, and it is their instance of the software that is configured and deployed — but it's hosted by a service bureau that owns a service and maintains connectivity and tech support.

By some estimates, if you include everything from the traditional BPOs (for example, payroll outsourcing, which has been around for decades) and wrap up all of the services I described, including PEOs, some 40% of all the Global 1000 corporations are involved in some form of outsourcing. Analysts estimate that the BPO industry exceeds $100 billion per year, which makes it bigger than the entire market for HCM software.

Last year, almost 20% of our sales were to customers who were going to a BPO or an outsourced provider. SAP can support customers either way. SAP can either outsource through nine of the strongest providers in the world, or fall behind the firewall, which is how we got started.

That being said, where I've been surprised — and this has been such a learning experience for us — is the number of customers who tell us they used cost savings to justify outsourcing, but their real motivation was to get to a more coherent, strategic, and integrated HCM platform faster than they could with their own IT shop. They justify the implementation by using step one of the three-step framework — reducing transaction costs — but the actual reason is to achieve a variant of step two, better linkage to business.

The Future Foundation now estimates that one out of eight US employees leaves a job before becoming competent.3 The costs of this are staggering. Furthermore, 1% of the total gross domestic product in the United States — that's everything that we produce as a country: goods, services — is spent to correct problems associated with poor hiring and people management. Doesn't it make sense to better manage human capital by deploying process technology that speeds onboarding and time-to-value for new employees, trains and develops them effectively, enables managers to track progress and performance, and supports the right outcomes with effective incentive management?

And then, of course, there are the demographic changes we're all dealing with. Almost 20% of the workforce holding executive, administrative, or managerial positions is going to retire in the next five years. We are seeing increasing levels of concern about this in companies in many industries, and in some it has become very acute. Succession planning will become more fast-paced and more critical in coming years, so companies should consider ways to support unified visibility into every facet of the enterprise workforce: full-time, part-time, contractors and contingents, supplier-side employees — every player that has an impact on your operating performance. The war for talent was a bit of a framing error. In fact, smart organizations don't compete for talent — they compete through talent, making every employee and contractor a competitive asset, delivering operating and financial results.

Finally — and this is something I consider an enormous opportunity — according to IBM, only half of all organizations measure the effectiveness of their human capital programs against any kind of business outcome analysis or ROI context.3 With HCM, as with every other discipline in an organization, you manage what you measure. A strong enterprise HCM platform helps organizations manage performance.

These are terrific times to be in HR. The business process technology supporting operating performance has extended far beyond the traditional, administrative domain into specific, measurable, and actionable information that changes the way organizations run. When we say SAP helps every customer become a best-run business, we believe, fundamentally, that it has to start with every employee.

Shared Services

Shared services represents a seismic shift in the way people think about HCM. More often than not, HR traditionally has been structured so that each location, line, business, or region has its own HR function, because it would be more accountable and provide better service. The problem, which became particularly evident during the last recession, was that this approach was very expensive.

CFOs and CIOs decided they needed a single organization to deliver HR services to all of these divisions, locations, and regions on a shared-services basis. By centralizing, they could reduce transaction costs by obtaining scale efficiencies for HR service delivery within an organization.

You're getting that single, consolidated platform with mySAP ERP 2005. From an organizational standpoint, you have the robust SAP NetWeaver portal capabilities for first-tier engagements (vacation schedules, lunch menus, general benefit information), an employee interaction center for second-tier support,4 and then, just like in IT, HR subject experts for third- tier support.

A side benefit of shared services is that it puts the technology behind the HR function closer to executive management, which is directly responsible for devel- oping strategy and tactics for the operating outcomes of a business. This puts the ability to oversee investments in human capital and identify the direct return from those investments right into executives' hands.

 


1 Human Capital Management: The CFO's Perspective, Mercer Human Resource Consulting (2003).

4 See "Streamline Your HCM Service Delivery with an Employee Interaction Center" by Bianka Piehl and Lisa Tinti in this issue of SAP Insider (www.SAPinsider.com).

2 Getting the Edge in the New People Economy, The Future Foundation (2004).

3 Randy McDonald and Mary Sue Rogers, The Capability Within: The Global Human Capital Study 2005, IBM Business Consulting Services (2005).


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