Why Is It a Struggle to Unlock the Potential of HR?
In the past 10 years, almost all large international companies have started to concentrate their transactional and non-client facing activities (e.g. Payroll, HR Administration and transactional recruitment activities) in HR Shared Service Centres. The two most important reasons to do are their desire to lower the costs and increase the quality of HR. Lower costs can be achieved by economies of scale, e.g. by eliminating excess capacity, rationalizing the number of experts, reducing managerial overhead and by making substantial investments in infrastructure (e.g. E-Filing). Quality can be increased as a result of the dedicated focus on specific activities HR SSCs can bring, especially to those areas that are only sporadically touched by local HR organizations (e.g. expatriate management).
Very often, though, these advantages have not yet been (fully) capitalized by the organizations that have been implementing HR SSCs. This is almost always due to ‘historical compromises’ -- compromises made at the time the HR SSCs were created, in order to deal with the resistance within the organizations in which they were created. These historical compromises were often made in one or more of the following areas: location, people and standardization.
1. The location compromise
The advantages of a Shared Service Centre in one or very limited number of central locations compared to a distribution over a number of different locations seems blatantly obvious. However despite the compelling logic for a geographic concentration, many organizations still operate from a number of different locations for one or more of the following reasons:
- An inability to see investments in real estate as sunk costs, therefore taking them into account to argue, for instance, about floor space being more expensive if used by fewer people
- Resistance from managers who do not want to give up control of their on site HR support
- The fashionable "virtual organization" argument. Proponents of this argument claim that it should not make a difference where the HR SSC staff will be based: common processes and a common ICT would eliminate the need for geographic concentration.
Tempting as these considerations may sound, decentralized HR SSCs often fail in terms of effectiveness and efficiency for the simple fact that it is more difficult and time consuming to establish common processes and realize economies of scale.
In decentralized SSCs it will be much more difficult to define, implement and maintain common processes since the staff that remains to work on site is more likely to (continue to) associate themselves with the local culture -- and thus requirements -- than those of the SSC. Economies of scale will prove to be harder to achieve since local coordination, leadership and excess capacity is required to guarantee business continuity on site.
2. The people compromise
Most companies consider the staffing of their HR SSCs as a no-brainer: obviously, the same staff that is currently performing these activities at the different locations. The logic behind this choice seems compelling: the staff already have the necessary know-how and employing them enables a faster start of the SSC activities (no need to recruit, onboard, and train new staff). Furthermore restructuring (redundancy) costs and forced lay-offs can be avoided.
Compelling as this may sound, at least two important considerations need to be taken into account:
- Working in an HR SCC requires a different skill set and mind set – Employees in local HR organizations often receive their appreciation through a combination of the quality of their work and the quality of the personal relationships they have with the people they support (customer intimacy). The performance of staff in HR SSCs is primarily rewarded on the basis of the effectiveness and efficiency with which they perform their activities.
- Customer demands increase after take-off – An HR SSC will often be perceived by the people it serves as a supplier to. What, therefore, is likely to happen is that, after a short grace period, the demands in terms of quality, speed and costs become similar to those required from external suppliers, rather than those required from colleagues. This also means that the performance of individual employees in the HR SSC is often more critically reviewed than in local HR organizations..
3. The standardization compromise
It is only through standardization that economies of scale can be achieved. In the start-up phase, policies and processes from different parts of the organization, in their current form, are often taken onboard by the HR SSCs. The standardization and harmonization of these is supposed to take place later. However, unless a conscious effort is made, it can take quite a while until this ‘later’ comes along – if ever! During this period, the SSC may have to deal with all the additional effort, costs and associated quality problems this creates. Therefore, it is much better to standardize first and migrate later, rather than the other way around.
Moving from compromises to unlocking value
In order to start undoing these historic compromises and to unlock the hidden value of SSCs, organizations can follow the process below:
- Define the ideal ("Should be") situation for the HR SSC for the organization in terms of location(s), staffing, infrastructure (technology) and standardization.
- Review the current ("as is") situation for the HR SSC for the same parameters.
- Establish the gaps between the "should be" and the "is" situation
- Create scenarios - What are the optimization choices that could be made and what are the risks, costs and benefits associated with each?
- Decide on the most optimal scenario for the organization.
- Implement the changes on the basis of a proper implementation plan.
The final frontier: Moving beyond classic customer – supplier thinking
The final obstacle to realizing the full value of an HR SSC is the lack of awareness that both the HR SSC as well as its clients are part of the same organization and should, therefore, strive to achieve an optimal solution for the organization as a whole -- instead of pursuing their own interests.
Instilling a "partner" mindset between the HR SSC and its clients is, therefore, of paramount importance. This opens up the door to look for ways to improve and enhance the cooperation and integration of the HR SSC in the organization in a much more optimized fashion than would be possible in an external customer-supplier relationship.
About the author
Dirk Verburg is the HR Director for Covidien, a global company in the Medical Devices industry with more than 40.000 employees and a turnover of more than USD 10 bn/year. Prior to Covidien, he worked for Swiss Re as HR Director Western Europe where, amongst other things, he managed Swiss Re's HR Shared Service Center for Western Europe. Before he joined Swiss Re he worked for Shell where he managed Shell's Employee Services for Western Europe. This article is based solely on his in-house experiences, and reflects his personal opinions – not the opinions of his employer.