Human resources (HR) leaders have been counting on technology and digital transformation to accelerate performance improvement. But how high can you reasonably expect the bar to go? Now, we have a clearer idea.
In 2021, we incorporated the structural changes associated with technology innovation and digital transformation into our annual benchmarking methodology, creating a new target that we call Digital World Class. Here’s what we found:
In 2021, Digital World Class HR organizations are operating at 33% lower cost than typical HR organizations (i.e., peers), with a 40% productivity advantage. But their advantage is not just about cost. They are also able to deliver higher-quality services – for example, their organizations average 72% fewer transactional process errors. And they can deliver business value faster: they take 22% fewer days to fill management positions. It is this type of value contribution that drives the ability to be a strategic partner to the business, which happens to be the top priority of
chief human resources officers for 2021.
The bar will continue to go up from here. In this article, we highlight the performance characteristics of digital world-class HR organizations and the six key levers that they pull to get there.
Digital World Class™ HR organizations deliver superior performance on three dimensions
Understanding the sources of Digital World Class™ performance
Rationalizing the technology environment has traditionally enabled top-performing HR organizations to operate at a lower cost than peers. Digital World Class HR organizations continue to modernize the technology landscape, which explains why their technology cost is 19% higher than that of peers. But they also invest in technology architecture modernization and emerging technologies such as smart automation, advanced analytics, and collaboration tools that enable greater automation.
Their cost, productivity and technology advantages reflect their ability to substitute labor with technology; however, not all technology spending is associated with labor-eliminating automation. As the HR service portfolio shifts toward higher value-added services, leaders also invest to equip their expanding pool of knowledge workers with modern digital tools.
Because of their higher technology deployment efficiency, digital world-class HR organizations have a far more technology-intensive operating model – devoting nearly twice as much of their operating cost to technology than peers.
Furthermore, they operate with 46% fewer full-time equivalents (FTEs) in transactional processing roles than peers, but they allocate 53% more FTEs to activities like strategic workforce planning and 36% more to learning and development activities that have a greater impact on enterprise performance. This indicates a shift of resources into higher-value roles, explaining their superior value contribution, customer experience, and effectiveness.
Digital World Class™ cost advantage and resource allocation shift
Digital World Class™ HR organizations excel in six areas
Technology enablement is at the heart of the Digital World Class performance advantage. However, to fully unlock the potential of technology, your organization must also transform in five other key areas. Here’s a look at how Digital World Class HR organizations do it.
- Technology enablement
HR automation efforts have traditionally focused on transactional activities in areas such as onboarding, payroll, total rewards, staffing and training. By upping the automation quotient, the function has been able to reduce or even eliminate manual intervention, thus significantly lowering process cost.
Digital World Class HR organizations have a clear lead in transaction automation over peers and in some cases have reached maximum levels. For example, they have automated 94% of payroll transactions, versus 50% for peers. Additionally, 87% provide automated self-service capabilities for total rewards administration, versus only 53% for peers. They use 69% of human capital management (HCM) package functionality, compared to just 45% for peers.
- Data and analytics
The coronavirus outbreak and its business and economic repercussions lent new urgency to improving forecasting and analysis. Of the top 10 most important issues identified in our 2021 Key Issues Study, improving analytics, modeling and reporting capabilities was the issue designated as having the lowest ability to address. Furthermore, data complexity was cited as one of the top eight hurdles to HR transformation. Developing modern analytical capabilities is a complex process. Setting up a strong master data management program is the first step and among the most critical. Without access to extensive, trustworthy data, little can be gleaned from its analysis. HR organizations must also carefully deploy resources with strong analytical skills and provide them with modern digital tools.
Digital World Class HR organizations have a significant head start, having made substantial inroads in automating knowledge processes, freeing up staff capacity to perform value-adding work, and building a strong data architecture to enable insight generation and self-service reporting and analysis. For example, compared to peers, more than twice as many provide automated self-service capabilities for data management, reporting and compliance.
- Cloud-based modern architecture
Digital World Class HR transformation involves integrating or retiring legacy systems, adopting emerging technologies, migrating applications into the cloud, and integrating data from disparate sources. Modernizing architecture design and managing it effectively are absolutely critical for simplifying the complexity. Probably the most impactful aspect of HCM architecture modernization is the transition to the cloud. Our 2021 Key Issues Study projects 20% year-on-year growth in adoption of cloud-based core HCM application suites, and most HCM best-of-breed applications are now deployed in the cloud.
Digital World Class HR organizations are at the forefront of architecture modernization and cloud migration. They have delineated clear accountability for these activities within HR via process ownership roles and forged effective partnerships with their internal technology groups, leveraging the deep technical skills required in both HR and the technology organization.
- Operating model evolution
The transformative impact of digital technology is leaving no part of HR untouched as it radically changes the types of services offered by HR and how they are delivered.
Digital World Class organizations are evolving their operating models from primarily labor-centric to technology-centric. This transition has far-reaching implications for the future HR operating model. For instance, it will enable HR to reallocate resources across its service portfolio and shift its focus to meeting higher-value and unmet needs of the business.
There will be far fewer people doing routine transactional work because an increasing amount of this work will be moved to digitally enabled delivery mechanisms (e.g., robotic process automation, cognitive computing, chatbots/virtual assistants) managed in shared services/global business services centers. This will enable HR to direct more of its attention and resources to enabling the business through strategic human capital programs and value-added guidance coming from centers of excellence, region-focused teams and HR advisors co-located with the business. HR will also draw on a fluid network of enterprise resources and external service providers for support of digital operations, execution of transformation initiatives, and provision of specialized technology and analytical expertise.
- End-to-end process design and ownership
The expected pacing of transformation and deployment of new capabilities underscores the importance of end-to-end process design and ownership within HR. With HR being integral to organizational performance, it is critical for the function to ensure it has capabilities designed to deliver the expected outcomes. Customer-centricity must be at the forefront of these designs.
In our 2021 Key Issues Study, one of the leading impediments to HR transformation was process and technology complexity. When a process is executed in a piecemeal fashion, it is not only more expensive; it also undermines the ability to respond quickly to changes in business conditions or stakeholder demands. Dedicated global process owners oversee and govern the process, data, and technology capabilities from start to finish and, therefore, can spot bottlenecks and make changes more easily. Digital World Class HR organizations are significantly ahead of peers in this regard. For example, they are 28% more likely to have an end-to-end process owner for the hire-to-retire process.
In our 2021 Key Issues Study, HR leaders cited deficiencies in critical skills as the leading impediment to transformation. With many processes becoming more technology-enabled or migrating to digital operations centers, leading HR organizations are rebalancing their workforce – reducing head count in transactional roles and increasing head count in areas such as strategic workforce planning and analytics to improve their ability to foresee change and affect strategic business decisions. Digital World Class HR functions have 46% fewer transactional FTEs than peers, and they are 82% more likely than peers to have HR business partners who can act as strategic advisors to the business.
Highly skilled business enablement leaders are at the core of the evolving HR operating model. This role requires advanced analytical acumen to drive insight and technical IQ to deliver operational efficiencies through automation and digitization of work, as well as skills essential to business partnering such as emotional intelligence, relationship management, innovation, and change orientation. Those in digital operations roles will also require new skills. For example, they must understand process mining, intelligent automation techniques and customer-oriented service design.
Mobilizing your journey to Digital World Class™
The key to moving forward is to start by understanding where you can unlock new value:
- Create a baseline of key performance indicators for your current levels of efficiency, effectiveness and experience.
- Assess the capabilities and maturity of your current HR operating model, resource allocation, and technology effectiveness based on leading and emerging best practices.
- Identify and prioritize performance gaps that outline critical focus areas for accelerating digital progress and future business needs.
From there, you can begin to design future capabilities to advance your digital agenda and chart the road map for achieving your Digital World Class aspirations.
 HR operating cost as a percentage of revenue; for a $10 billion company, this represents HR cost savings of $17.7 million.