Keeping HR on the Inside

By Martha Frase-Blunt Oct 1, 2004
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HR Magazine, October 2004 The shared services model provides an alternative to outsourcing HR that can yield the same cost savings and customer service enhancements.

Zingerman’s Deli, an Ann Arbor, Mich., institution, began life as a modest sandwich shop 22 years ago. But in the interim years, it has grown into an organization of seven separate businesses fielding 400-plus employees. Such growth recently prompted the development of an eighth business—Zingerman’s Service Network, or ZingNet.

ZingNet, under separate management, consolidates the Zingerman’s information technology (IT), financial, marketing and HR services under one roof. “ZingNet reduces the need for duplication of positions in each business” and therefore cuts costs, which was only one reason for consolidating the functions, explains HR Director Bob Sweat. “We also think this model allows us to provide our high service levels to employees while maintaining a comfort level we couldn’t get if we outsourced these services

The concept of the shared services model—in which a group of companies or business units decide to share common, typically transactional services—has provided an alternative to outsourcing since the mid-1980s. According to the global Shared Services and Outsourcing Network, a shared services association with U.S. headquarters in Little Falls, N.J., more than half of today’s Fortune 500 companies have brought shared services into their operations.

Finance and IT departments were the earliest adopters of sharing key services through a centralized administrative hub, because most of their efforts involve simple transactions that are relatively easy to consolidate and centralize.

Likewise, HR is weighted heavily with transactional services such as benefits administration, records management, payroll and training administration. “These types of services make up approximately 65 percent of HR’s work, so there is no logic to having them decentralized,” believes Barb Quinn, founding partner of the consulting group 22c Partners in Toronto and Vancouver, Canada, and co-author of Shared Services: Mining for Corporate Gold (Financial Times Prentice Hall, 2000).

Beyond consolidating transactional services, the shared services model is moving up the strategic ladder to include activities such as policy-making and strategic planning, adds Quinn.

Ron Bradley, executive director of Corporate Renaissance Group USA, a shared services consulting firm in Tulsa, Okla., argues that many higher-level services lend themselves well to centralized management. “My opinion is that if you can buy it on the outside, you can do it in-house. Recruiting, training—these are proactive tasks that can be scheduled and managed centrally.”

But other, more reactive functions will be harder to completely consolidate, he notes. “Activities like diversity management, employee and labor relations, conflict resolution—areas where you need to keep your employees out of trouble—require quick responses at the source of the problem. HR practitioners in these areas can still report to a central office, but you might want them to have a presence within individual business units where they can be close to their customers and problems can be resolved quickly. HR is still a high-touch business.”

What a company decides to consolidate and how shared services is structured depends on the size of the company, the reasons for doing it and the culture of the company. For many, shared services provides an alternative to outsourcing that realizes similar cost savings without losing control of people management and data. (For more information on outsourcing vs. insourcing, see “Better out than In?”.)

A Two-Tiered Approach

Financial services company Capital One, headquartered in McLean, Va., began consolidating its HR activities in 1999, and, in the opinion of HR Vice President Doug Krey, “There is really nothing that HR does that can’t be done through a shared services approach.”

But to maintain the crucial hands-on role of HR, the company uses a two-tiered approach—one with the centralized hub and another with an HR generalist within each business unit who sits at the table with the unit’s senior vice president. HR generalists “know the business and can make strategic decisions about talent management and productivity, and are directly accessible to employees. They focus on the consultative aspects of HR, like employee counseling and change management.”

The shared services tier is staffed by “associate relations” experts dedicated to specific business units, handling transactions as well as higher-level activities like staffing, training and performance management. “We segment by business unit because we understand that [each unit’s] HR needs are very different—the credit card business’s HR needs are significantly different from those of our auto lending business,” says Krey. Other companies may choose to dedicate experts to geographic regions, he points out. But it’s important that these experts share experiences across business unit lines so that associate questions can be addressed quickly and best practices can be consistently applied without costly process redundancies and reinvention.

Bradley reports that many of his clients ultimately adopt a hybrid model, centralizing the business of HR and its resources, as well as policies and strategies, while deploying some HR professionals directly within business units. “When it comes down to employee relations issues, the units really need someone specific assigned to them,” he believes.

For small companies, that division of labor may not be necessary. Sweat reports that he encourages employees to deal with whichever of Zingerman’s three HR practitioners they feel most comfortable with. “We insist on a lot of face time between our HR department and all our employees,” he says.

Tipping Point

When does it make the most sense to adopt a shared services model? Bottom line, says Bradley, “is that you have to be able to deliver that service at a price and quality that is competitive with what can be purchased externally. If you want to centralize payroll, you have to be sure you can produce a paycheck better and cheaper than market leaders [such as] ADP. That is the way an internal shared services organization can add value to a company.”

The shared services model includes cost management, which comes through delivering more services for the same number of people or the same level of services to fewer people. But commonly, HR professionals do not know the dollar value of what they do.

“It’s a matter of finding out the unit costs of each activity,” Bradley explains. “What does it cost the company now to deliver a unit of service? A paycheck, a job placement, a course hour or a filed claim? The goal of a shared services model should be using economies of scale to get that figure down below market costs, but a lot of organizations have not done a good job figuring out and comparing the data.”

Organizations like the Houston-based Shared Services Benchmarking Association, a network of shared services managers, can provide databases of cost information, and consultants like Bradley can offer analysis as well.

Number of employees is another good yardstick. “At a minimum, you probably need 3,000 to even think about it,” says Quinn. “To go through all the trouble and pain, you need to show a 20 percent to 30 percent cost savings from decentralizing services.” She recommends determining how many full-time employees are engaged in doing the work that could be shared and figuring out the associated costs—salaries and overheads like facilities and information systems—to see if enough can be saved to make consolidation worthwhile.

For a smaller company like Zingerman’s, the process was fairly simple because there was no painful consolidation required; the company built a formal HR department where there was none before.

But for larger companies needing to consolidate existing HR services, one of the biggest logistical headaches is the physical relocation of staff and facilities to a central location. It’s also very expensive. Bradley relates his experience at a former employer where he worked to centralize several administrative units of a large utility company. “We moved 700 people and spent almost $100 million in relocation costs.”

For this reason, it’s important for HR to take the temperature of senior management before proposing a project as large as service consolidation, and to be realistic about the accompanying hassles. “Consolidation does create upheavals and results in downsizing of HR personnel, especially generalists—that’s where most of the 20 percent to 30 percent savings comes from. Sometimes senior management can’t stomach a layoff of that size.”

A key component of consolidation is the relatively new role of the shared services vice president or manager. “This is a major-scale change project,” says Quinn. “So when implementing a shared services model, leadership is at the core. You really have to bring someone in who knows how to [manage projects]. A shared services center needs content experts, but should be led by a strong detail-oriented project manager who is comfortable with systems, process redesign and large-scale change management.”

SLAs: Keep Them Simple

The service level agreement (SLA) is the basic instrument of a shared services model. This tool spells out expectations to internal business unit leaders in terms of costs and deliverables in much the same way an external vendor would. “The SLA helps build the relationship and impose some order on what you do,” says Quinn.

Above all, it must be simple and specific. “No more than two pages,” she says, recalling one client who had gotten it very wrong: “They had e-mailed a very ‘lawyerly’ SLA to all their business units, who were already feeling resistant and neglected by the poorly communicated switch to shared services. It went over like a lead balloon.”

Nor should the SLA be discussed from afar. “It works better as a face-to-face tool for sitting down and coming to consensus on both sides’ expectations,” Quinn says. As a first step to developing SLAs, HR must determine exactly the services it is selling. “You would be amazed at how difficult that question can be when you haven’t really thought about it,” says Bradley. “You have to think in terms of your ‘product’ being a timely, accurate paycheck, a three-hour course or a new hire. Use the example of what you can buy in the external marketplace to develop a simple ‘catalog’ of services and their prices.”

Business units may receive monthly invoices showing services consumed and the amount due for that month. In some cases cash actually changes hands, in others the transaction is a “paper” entry, and in still others a report is merely generated.

Setting prices on services is always challenging, especially because HR has not usually costed out its specific deliverables. Bradley recommends using the “unit cost” methodology, determining how much it costs to deliver each unit of service. “These can usually be standardized across all business units; don’t be tempted to price services differently for different clients. This is very shaky ground unless it can be clearly justified.”

Once prices have been established, HR can begin to develop annual or quarterly SLAs for each business unit by allowing them to select the services they want within their budgets. “The onus is on HR to look at that unit’s history of service consumption and advise them on how much they need to purchase for the service period,” says Bradley. Don’t try to break down HR services into too many products, he cautions. “The biggest mistake I see companies make is offering too many options. I suggest starting out with around six or so. Start from a fairly thickly bundled array of services, for simplicity’s sake.”

Bradley also recommends not getting fancy with volume discounts, premium prices for quicker delivery or other incentives—at least not right away. “I have seen organizations try to do this and fail,” he says. “If you are competing effectively with the marketplace, why offer discounts?” The SLA itself should contain the following:

  • A full description of all the services to be provided.
  • The unit price of each service.
  • The estimated demand for the service (in units) for the service period.
  • The total cost of each service over the service period.
  • The dates of the service period.
  • The contact name of the HR service provider.

A New Paradigm: Customer Service

A shared services organization must be able to compete on quality as well as price, and this new mandate may require a mind-set adjustment for HR staff.

“HR professionals tend to think of themselves as ‘people people’ and not business people, and may need to learn to focus on selling services and delivering high-quality customer service,” says Bradley. “HR leaders and managers might need some kind of business training along the lines of ‘MBA 101,’ covering such concepts as management economics and unit costing.”

Lower-level practitioners might benefit from basic customer service training, “although HR is probably better at this than other administrative units suddenly in the position of marketing themselves,” he says.

HR professionals will also need training on how to create strategic business plans, Bradley believes. “You don’t see enough of these in shared services, unfortunately. But they should be developed by the senior HR leader in partnership with the company’s C-level executives.”

The shared services organization should also create a strategic set of performance metrics so they can determine how competitive they are in three areas—cost, quality and cycle time—and present this to business units.

For example, for recruitment, HR could establish a goal of having 50 percent of placements remain with the company for two years or more. For training, track the percentage of employees who score a certain level on an evaluation. For claims, a simple measure of time to delivery would provide useful data.

But don’t overload with too many performance metrics, Bradley cautions. “I would stick with two quality measures per service.”

Raising the Stock of HR

When HR puts a price on its services and markets them competitively, companies can’t help but gain a new awareness of its value to the enterprise, and it establishes an image and a brand for what it does.

A shared services enterprise also enhances HR’s stock by allowing it to focus on higher-level, strategic work instead of routine transactions. According to Krey, “If you have too much noise in your HR system coming from transactional problems, your focus at the executive table is about fixing transactional issues rather than focusing on the strategic HR issues that can help transform your business.”

Martha Frase-Blunt is a freelance writer based in Shepherdstown, W. Va.

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Better Out Than In?

For many years, HR departments have outsourced bits and pieces of their work, especially recruiting and transactional services like benefits administration. But larger-scale outsourcing has gained traction in the past three years. “It’s a runaway train,” says Barb Quinn, founding partner of the consulting group 22c Partners in Toronto and Vancouver, Canada.

Companies may wonder why they should undergo the headache of operating HR services themselves when they could outsource virtually all of them to Hewitt Associates, EDS or another of the growing number of highly competitive full-service vendors entering the marketplace. For many, the decision comes when they have to decide how much investment they need to make in their HR systems to centralize their processes. Many don’t want to spend their capital all in one whack, so why not just buy a vendor’s best-in-class process and be done with it?

In fact, says Quinn, she advises many of her clients to do just that, by first establishing a consolidated HR service organization as a steppingstone to full outsourcing. Indeed, insourcing gives companies a way to package HR services inside to make carving them out less disruptive.

But insourcing also gives HR an argument against outsourcing: If HR can do it just as competitively inside, there’s no reason to outsource. And there are the intangible benefits to insourcing.

“Outsourcing is still a question of philosophy,” says Quinn. “It’s not just about the black-and-white numbers. Some company cultures are committed to insourcing, believing it offers an inherent competitive advantage, as well as control and privacy.” The good relationships and institutional memory built up over the years by human resource staff typically can’t be replicated on the outside either.

Since all business units are not created equal, it’s often the case that outsourcing HR might work for one part of the company, while a shared services approach is ideal for another. “We are seeing companies make agreements with their business units that if they are not satisfied with the in-house organization after a certain period of time, they can go outside,” says Ron Bradley, executive director of Corporate Renaissance Group USA, a shared services consulting firm in Tulsa, Okla. This also ensures that the HR organization remains richly competitive.

Iowa Experiment

Sometimes organizations don’t have a choice of whether to share services or not. In the case of the State of Iowa, the mandate came down from the governor. Years of job losses and budget cuts in the state government had left the agencies that provided infrastructure, facilities and other support services struggling to do their work. So in July 2003, the state formed the Department of Administrative Services (DAS) as a single, customer-driven organization combining personnel, general services, information technology and accounting services delivered to the state’s executive branch agencies. According to DAS Director Mollie Anderson, Iowa is the first and only state government undertaking such a consolidation, but others are sure to follow. “We are writing the textbook as we go.”

The business philosophy the state used to implement shared services is a concept called “entrepreneurial management,” Anderson explains. “The term refers to a customer-focused approach to delivering services in a competitive marketplace, where business decisions are driven by the desire to meet customer needs, and achieved through rewards and consequences for financial performance.”

To this end, DAS divided HR services into three categories: “leadership,” which includes policy-making and high-level operations like labor relations; “marketplace products,” such as training and other professional HR services that are often outsourced; and “utilities,” which includes mostly the transactional services as well as recruiting.

Agencies are allowed to go outside to buy marketplace products but must purchase their crucial utilities from DAS. Therefore, its “customers”—government agencies—play a role in setting rates, says Anderson. “In exchange for their obligation to purchase from us, we have established customer councils who have a voice in determining the price of the products they need. It’s the same philosophy as a co-op.” She adds that DAS does the market and financial research to help the councils make rate-setting decisions.

Iowa’s state agencies will see significant cost savings because now they will pay only for services used; nothing is wasted. “DAS’s challenge then becomes compelling them to spend their money—and lots of it—with us,” says Anderson. “If we don’t delight our customers with the services we provide, they simply won’t purchase as many.”

She stresses, however, that “we are not selling this on cost savings; we are selling this on giving people the best customer service we can inside state government. We believe in the final analysis, the taxpayer will get better service.”

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