As companies navigate a trifecta of inflation, slowing growth and workforce trends, human resources (HR) organizations remain under intense scrutiny. Today’s top-performing HR groups help their organizations respond to this environment – in part by running at a 34% lower operational cost per employee than peers. But according to The Hackett Group’s most recent benchmarking analysis, their contribution goes far beyond that.
Let’s take a closer look at the operational cost and other advantages of HR organizations performing in the top quartile of both business value and operational excellence – what we call Digital World Class.
Digital World Class HR organizations deliver greater business value
- They have a higher degree of digital business enablement.
Digital World Class HR organizations spend 17% more per employee on technology than peers, and they are 82% more likely to have equipped their organizations with direct-access capabilities. Among other benefits, their greater digital business enablement allows better data and analytics capabilities – equipping them with insight to tackle high-value human capital management challenges such as employee engagement, experience and retention.
- This makes them more effective.
They have 14% more professional staff with expertise or certifications in key HR strategy and talent management disciplines such as hiring, onboarding, wellness and leadership development – qualifications that elevate their effectiveness. For example, they achieve 14% more internal placements per 1,000 employees than their peers. This is particularly critical in a market with unprecedented levels of turnover. Companies that can fill open positions with people who are already familiar with the culture and operations can reduce recruiting costs and boost productivity. Strong internal placement rates are also indicative of better talent management and development processes.
- As a result, they provide a better experience for stakeholders.
Their high level of expertise creates greater business impact. Digital World Class HR organizations are 63% more likely than peers to have senior leaders involved in business planning, and they are 47% more likely to be viewed as a partner by business stakeholders.
Digital World Class HR organizations are operationally excellent
- They have significantly greater process automation.
For example, these HR leaders have automated 83% more HR transactions than peers. This means fewer errors and more consistent service delivery.
- Their staff is more efficient.
Digital World Class HR organizations operate with 41% fewer full-time equivalents (FTEs) per 1,000 employees than peers – but those FTEs are far more productive. Each HR FTE serves 68% more employees. This efficiency shows in key HR operations metrics. For example, Digital World Class HR organizations require 29% fewer days to fill open positions.
- Their superior efficiency lowers operational costs.
Because of their superior efficiency, Digital World Class HR organizations can operate at a 34% lower operating cost per employee than peers. For a company with $10 billion in annual revenue, this translates to an $18 million cost advantage. This enables greater free cash flow to invest in new talent management and other capabilities they need to maintain their advantage.
Business value leaders, operational excellence leaders and Digital World Class HR organizations all deliver real impact
Any location on the yellow “arch” of the Hackett Value Grid™may be an appropriate HR transformation goal, depending on your industry and business strategy.
Business value leaders are companies in fast-changing, growth-oriented industries, such as software and technology, primarily focused on driving value through innovation and customer-centricity. Once they have achieved business value leadership, focus can shift toward improving efficiency and propelling the organization into the Digital World Class quadrant.
Operational excellence leaders have made continuous improvement opportunities their primary focus to drive operational cost-efficiency.
In some industries, there may be more variance. For example, a large life sciences company that has less new product development in its pipeline and is maximizing value of the current portfolio may focus on elevating operational excellence, while a smaller, innovation-led life sciences company may opt for a business value leadership strategy.
Our analysis found that, in some cases, HR business value and operational excellence leaders have significant performance advantages – including lower HR operations cost – even compared to Digital World Class.
Orchestrating your own Digital World Class HR operating model transformation
Most HR organizations still have a lot of work to do to move toward performance leadership. Rather than continuing to make incremental performance improvements, they need to accelerate digital transformation and build a next-generation HR operating model designed specifically to perform at a top-quartile level. This requires focus in six key areas:
- Technology enablement
Technology enablement is at the heart of the Digital World Class performance advantage. HR process automation initiatives have traditionally focused on transactional areas such as total rewards, payroll, staffing, onboarding and training. But upping the automation quotient can reduce or even eliminate manual intervention, thus significantly lowering operational cost. Digital World Class HR organizations have a clear lead in transactional process automation over peers and in some cases have reached maximum levels.
- Modern digital architecture (powered by cloud services)
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. Probably the most impactful aspect of this is the transition to the cloud. Our recent Cloud Services Study indicates that 70% of technology infrastructures will be cloud-based within two to three years.
Digital World Class HR organizations are at the forefront of cloud services migration. They have developed clear capability ownership models within HR via process ownership roles and forged effective business partnering relationships with internal technology groups.
- Customer-centric service design
The expected pace of digital transformation underscores the importance of end-to-end HR process design and ownership – with customer-centricity at the forefront of design. One of the leading impediments to HR operating model transformation is process and technology complexity. Dedicated global process owners oversee and govern the process data and technology capabilities and, therefore, can spot bottlenecks and make changes before they have significant customer impact.
- Data and analytics centricity
The coronavirus outbreak and its business and economic repercussions lent new urgency to improving forecasting and analysis. In our 2022 Key Issues Study, 53% of HR leaders reported having a major improvement initiative in 2022 related to HR advanced analytics, modeling and reporting capabilities. Developing modern data and analytics capabilities is a complex process. 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 HR strategy work, and building strong data architecture to enable insight generation and self-service reporting and analysis.
- HR operating model evolution
Digital World Class HR organizations are evolving their operating model 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 fewer people doing routine transactional work because this work will move to digitally enabled delivery mechanisms. This will enable HR to direct more of its attention and resources to enabling the business through strategic human capital management programs and value-added guidance from centers of excellence and HR advisors co-located within the business.
- Talent management
As talent management processes become more technology-enabled or migrate 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. 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 process automation and digitization, as well as skills essential to business partnering such as emotional intelligence, relationship management, innovation, and change orientation.
Digital transformation matters more than ever
Ongoing geopolitical risks, workforce challenges and high inflation threaten the return to stability, growth, and predictable performance – keeping the spotlight firmly on human capital management capabilities. In a recent analysis, The Hackett Group found that companies with a well-coordinated response have a significant profit improvement opportunity – but capitalizing on that requires digital transformation to be a critical part of the response. Without it, the margin opportunity dropped nearly in half.
This is why it is so important to accelerate the journey toward Digital World Class HR now.