When Dave Ulrich articulated the HR shared services model more than a decade ago, he conceived it as a way to promote HR expertise and deliver improved services companywide through the division of tasks and expertise.
Ulrich, a professor of business administration at the University of Michigan, advocated a model in which HR departments serve as professional services or consulting units in organizations, with pockets of expertise that a client unit draws on to function effectively and profitably.
Ulrich, also a consultant and partner at the RBL Group in Provo, Utah, proposed that tasks be organized to make the best use of talent and resources. His framework led to the creation of three discrete branches of HR, all sharing technology, each ultimately reporting to HR executives in headquarters. Picture three sides of a triangle:
Centers of expertise or excellence. HR specialists in areas such as staffing, compensation, training, benefits and labor relations, all offering services companywide to executives in business units on request.
Service centers. A central unit for HR-related administrative and transactional tasks that employees, retirees and business-unit managers access through online portals and phones.
Business partners. HR staff members who work directly with business-unit managers in strategic roles. For example, they might discuss and create succession plans and compensation programs with business unit leaders.
For Nancy Barbosa, human resources manager at RR Donnelly in New York, who moved into a business partner role a decade ago, the setup was a dream come true. "I want to be close to the business leaders in the field to help them make key decisions that have an effect on the bottom line," she says.
Until recently, Barbosa—with two other HR professionals supporting 550 people at Donnelly Financial Services—has done just that. Barbosa customarily participates in business-unit managers’ top-level discussions on workforce planning, budgets, product development, compensation, succession and more.
But now, for Barbosa and many others in partner roles, the bloom is off the rose. She’s spending more time conducting the transactions she was supposed to be free of. "It’s a sad state of affairs, and I’m disappointed," she says. "Some of what was handled centrally is filtering back to me. And my business leaders are feeling it; my visibility is becoming less with them. When I get an invitation to a business meeting, I struggle between finding time to attend the meeting and completing the day-to-day transactions." Other business partners are experiencing the same pressures, she says.
HR professionals on the business-partner side of the triangle are not the only ones feeling the heat. Managers who operate service centers complain that resources are shrinking, technical and staff support is waning, and outsourcing is increasing in cost, all of which diminish the quality and level of services they can offer. Meanwhile, specialists in centers of excellence are squeezed by staff cuts and face grumbling from line managers who say these experts are mandating across-the-board solutions that don’t work optimally for all.
Still a Top Model
Despite the dissatisfaction, the shared services model continues to proliferate, perhaps spurred by the financial downturn as employers look for ways to reduce operating costs. Today, of 484 HR professionals responding to SHRM’s 2010 Shared Services Survey in May, 75 percent of the respondents said they were providing HR support through shared services. Sixty-one percent provide such services by combining the work of in-house staff members with that of outsourcing companies, 37 percent handle these transactions totally in-house, and 2 percent outsource all shared services.
There are pros and cons to outsourcing. "It’s a good way to force discipline," Ulrich says. Outsourcing will force you to consolidate and simplify and will "give you a chance to take advantage of current technology. If your competitors are outsourcing, you have parity in the market and relief from thinking about the day-to-day details of the outsourced functions."
On the other hand, companies are bringing outsourced services back in-house when they find they need tailored approaches. For example, Les Gill Sr., director of HR shared services for Gilead Sciences in Foster City, Calif., says activities with high impact on business units, such as recruiting, are being folded back into centers of excellence.
Initially viewed as an approach best suited for large- and mid-size employers, the model is becoming more popular at companies with fewer than 5,000 employees. In the SHRM survey, 62 percent of respondents with one to 99 employees and 63 percent of respondents with 100 to 499 employees said they used shared services. More than 40 percent of the 162 companies participating in the Shared Services Institute’s 2010 Shared Services Practice Survey have fewer than 5,000 employees. "The size of organizations doing this has gone down," confirms Jim Scully, a consultant and president of the Shared Services Institute, based in Atlanta.
As more executives look to shared services, there are lessons to be learned from efforts that started with optimism, only to stumble later. Here are some common problems percolating overall and on each side of the shared services triangle:
Business leaders often move to shared services for expected savings, looking to reduce expenses by taking advantage of economies of scale. That’s what happens, at least in the early stage. When asked to identify the main benefits of shared services, respondents to the SHRM survey identified reduced costs among the top positive outcomes.
But now, especially in organizations with mature shared services operations, service centers and centers of excellence have absorbed funding cuts year after year. Initially, in 2008, "We were able to take our HR headcount from 130 to 60 globally; costs of running HR declined by 40 percent," says Sean Nelson, GPHR, SPHR, vice president of HR shared services for ACCO Brands in Lincolnshire, Ill. "But you can only cut so many bodies from HR. You need people to handle compliance and other essential activities. The customers don’t care. All they know is, ‘I want to get what I need quickly, easily. And if there’s a problem, I want it resolved quickly.’ In a place where they’ve already cut costs to a minimal level, it takes a leap of faith to say you can keep on cutting. To get better, I need technology—and it’s expensive."
"If you want a well-run service, you need to invest in technology, high-quality documents and training," says David Gartside, head of the HR Consulting Practice at Accenture in New York. "These are the first to be cut. When organizations fail to concentrate on improvements, you get a negative cycle where service is not good enough."
And executives looking to outsource as a cost-cutting strategy may be disappointed, warns Harry Osle, managing director of global HR transformation at The Hackett Group in Miami. "Most companies who are using outsourcing as a silver bullet to reduce costs are not seeing it happen. Costs are the same or a little more than doing it in-house."
Osle estimates that half of the companies outsourcing HR are bringing it back in-house and that when they do, they’re saving. At Nissan North America, shared services are conducted in-house. "With the right technology, we can do it better and cheaper," says Dwaine Stevens, SPHR, Nissan’s senior manager of training and development in Smyrna, Tenn.
Meanwhile, outsourcers face a tough market as customer demands and operating costs shoot up, Osle says. They’re going through a shakeout, with large companies such as Accenture emerging as strong players, Gartside predicts.
Though counterintuitive, metrics that meet "best practice" benchmarks seem to be having a negative impact on shared services. HR professionals are looking at benchmarks from PricewaterhouseCoopers Saratoga or The Hackett Group and trying to keep their expenditures low, says Leland Forst, managing director of The Amherst Group Ltd. in Riverside, Conn.
Benchmarks for HR expenditures vary, depending on the industry and number of employees. Generally, for a large employer, either an estimate of 1 percent of overall expenditures, or one HR staff person for every 80 employees might be target goals.
Typically, leaders make budget decisions at the head-count level, Forst says. "If they cut the head count at the service center, they believe they’re saving, and the metrics bear them out. But their focus is not on customers and assuring they’re meeting their needs; instead, they’re doing it in pursuit of productivity and benchmarks." For more information on HR cost metrics, see page 99.
Customers—employees, their families, retirees, line managers and business-unit managers—look to service centers for convenient, easy-to-navigate processes with easy-to-find information; competent, HR staff who know what they’re doing; and caring staff members who share their urgency—not bureaucrats.
When the staff doesn’t meet expectations, customers could complain and seek relief from business partners. Why?
- Transactions missing in action. There’s tension between customers who need answers now and service center staff who deliver outcomes in 36 hours. People become frustrated when they don’t understand what’s happening to their inquiries, Gill says. Gilead is a biopharmaceutical company whose scientists discover, develop and commercialize medicines. It has 3,852 full-time employees. Gill’s responsibilities include a service center and centers of excellence with experts in staffing, compensation, and learning and development.
- Services cut or not offered. Costs are managed by restricting what customers get versus giving them what they want and need at the lowest possible cost. This approach distorts the original philosophy behind shared services, which is "to encourage a dialogue and partnership with the customer," Scully says.
- Too many exceptions. Of myriad transactional activities across a company, HR’s are most problematic. Many, like Family and Medical Leave Act activities, are complex and low volume with lots of variations, extending response times. Service center employees are most efficient implementing standard policies; exceptions become their bane. "Push back on the exceptions," Gartside advises, adding that history, rather than business reasons, drive some exceptions.
- Customer satisfaction off the radar. Metrics that tap into customer satisfaction are on few scorecards. In the SHRM survey, 11 percent of respondents identified employee satisfaction as a positive outcome, ranking it 11th of 14 possible positive outcomes. This is problematic for employers who value keeping employees happy. "We want service centers to help employees manage the transactions in their jobs so they can focus on other things," Ulrich says. Enrollment in health insurance, paychecks, vacation accrual—"These are hygiene factors; we go to work not for them, but expect them to be provided to us seamlessly."
Outsourcers might omit customer satisfaction metrics unless pushed by HR clients. "As an outsourcer, you want to be as efficient as possible, driving down the margin cost," says Osle. "Reports about quality are costly. Agreements with outsourcers should have these metrics included in them. But often, the client doesn’t ask for them when the contract is signed. It’s only brought up later."
In the Practices Survey, service center managers reported that their customer service performance met expectations. But when asked for metrics, important measures were conspicuously absent. "Organizations have been measuring efficiency and cost effectiveness and not customer satisfaction," Scully says. "The underlying mentality is that it’s not very important. They use transaction volumes, accuracy and turnaround times, but they don’t seek systematic feedback."
Only 8 percent of the respondents reported conducting customer satisfaction surveys. Yet "when people are dissatisfied, costs increase," Scully says. "Customer satisfaction is a prime metric for gauging how efficient you are. When employees are unhappy, they go around the system to get what they need. When that happens, costs escalate as business partners are pressed back into their former role."
Centers of Excellence
Centers of excellence allow HR leaders to provide HR services efficiently throughout the organization. They provide, for instance, staffing, management development, compensation and benefits design that adhere to standards coordinated at the top, explains Jeff Zeleny, senior vice president and chief HR officer at Sunoco Inc. in Philadelphia. Emerging problems:
- Incomplete menus. Centers of excellence are effective when specialists offer services from a menu of choices that leaders throughout the organization can select from. The experts control the menus and develop them in consultation with internal clients. They "have to be incredibly gifted consultants," Ulrich says.
- One-size-fits-all prescriptions. Sometimes, experts impose their solutions rather than develop them with clients’ contributions. "If they offer prescriptive services designed and ordered from headquarters, they are more likely to face alienation," Ulrich says. Unit leaders need the ability to design and implement solutions separately. "You can’t be robotic," Zeleny says. "Tell them to come to you if they need a different way to do something, and adjust."
- Understaffing. Resources cut during the recession are not being restored. At ACCO Brands, staffing experts were cut as new hires declined. "Now, we’re having turnover and realizing we can only provide enough staffing services for 40 new hires," Nelson says. "When we tell management we need to retain an outsourcer to handle recruitment, they say, ‘Why should we pay more for someone else when we’re already paying you?’ "
ACCO manufactures laminators and shredders as well as business products under the brands Swingline, Day-Timer and Kensington. The center of excellence and service center staffs report to Nelson. The service center operates on a tiered system so higher-level staff handle complicated processes.
Many business partners, such as Tara Shawel at Walgreens, say they’re delighted and growing with the role. Yet critics claim business partners still are not ready for prime time, either unprepared for or uninterested in the partner role. Although HR professionals in many companies such as HP and Sunoco have made the adjustment, experts estimate that a majority of business partners are spending too much time solving transactional problems arising from employee complaints. Only 19 percent of respondents to the SHRM survey said moving to shared services has led HR professionals to greater strategic functions. How come?
- Unreceptive line managers. Business-unit heads may have old-fashioned expectations of HR professionals. "They may believe it’s still HR’s primary job to help employees," Ulrich says. "They tell the business partner that helping takes precedence over a strategy role."
- Lack of need. "Business partners may be a hammer looking for a nail," Scully speculates. "How much HR strategy do you actually need? They’re in a no-man’s land, told they can’t do the transactional stuff and to be more strategic—but there’s not enough truly HR strategy activity to keep them busy."
- Call of the comfort zone. Many HR people grew up doing transactional tasks and still like them, Ulrich says.
- Inattention to staffing and development. Leaders must figure out who the business partners should be. The partner role and the competencies that it requires may be beyond the abilities or interests of some former HR generalists. "Some HR generalists naturally slide into the slot; others have skill sets that you can recycle," Gill says. "If you can’t find a good fit, however, the relationship may need to be terminated."
Many HR executives have not taken steps, through training, reassignments or terminations, to make sure business partners are not just HR generalists with a new title. "What you really want from the business partner is someone who can translate HR concepts and programs for the line person, but who also has sufficient presence and wherewithal so they don’t have to be involved in the transactional things the shared services people, with appropriate competencies, should be able to deal with," Forst says.
Outsourcers—pressed to help HR professionals make a business case for their services—see poor internal management as an obstacle. When HR leaders outsource transactions, they don’t clean house effectively, Osle complains. "If HR does not make the tough decisions about who to eliminate from the staff previously doing the administrative tasks, costs will go up."
Driving the Trend
The rationale cited by HR strategists for moving to shared services continues to be compelling. In theory, it should help control costs and improve quality and delivery of HR services. And, it should free up HR professionals for strategic roles.
But so far, the promised cost savings are proving less than advertised, say Gartside, Osle, Nelson and others. Furthermore, the scope and quality of shared services suffer for lack of funds. In some instances, HR experts in centers of excellence are moving away from the internal consultant role envisioned for them and imposing top-down solutions that frustrate internal clients. Finally, the business partner role continues to be a work in progress, with greater attention needed to put qualified HR professionals in these positions.
"The weakest link continues to be the business partner," Gartside insists. HR executives "simply are not doing enough to identify and develop first-rate talent."
And of course, no business can flourish if it only pays lip service to customers. "The measure of real value is how the customer perceives the services," Ulrich says. "You’d be nuts not to be keeping track."
The author, a contributing editor of HR Magazine, is a lawyer and professor of management studies at Marist College in Poughkeepsie, N.Y.