Executive Summary: Achieving Digital World Class excellence
In the face of economic challenges, companies are recognizing the value of resilience and agility. Research shows that Digital World Class human resources (HR) organizations – those in the top quartile of business value and operational excellence – navigate uncertainty more adeptly. They excel in data utilization, efficient execution and talent management. These HR leaders operate 33% more cost-effectively, with 49% higher perceived value as business partners.
Their edge stems from outperformance across six dimensions:
- Talent: Investments in skilled, aligned professionals deliver business value
- Operations: Insourced work and prudent partnerships drive greater efficiency
- Data: Skilled analysis leads to accurate forecasts and informed decisions
- Customer-centricity: Improved capabilities deliver a compelling employee experience
- Technology: Automation mastery streamlines transactions and processes
- Cloud: Digital architecture enhances agile service delivery
Proactive digital leadership propels companies toward Digital World Class success, positioning them for growth and efficiency amid uncertainty.
Digital leadership drives resilience
Multiple macroeconomic factors – including inflation, geopolitical unrest, supply chain challenges and workforce labor dynamics – have created unprecedented levels of uncertainty for procurement leaders. Additionally, growing concerns about an economic slowdown have increased the focus on profitable growth. While controlling cost is always critical, we cannot underestimate the importance of agility in unlocking the full value potential of procurement. Companies that champion resilience are better able to absorb shock, navigate trials and accelerate past their peers.
Our research shows that resilience is closely tied to digital leadership. Digital World Class organizations – those in the top quartile of business value and operational excellence (see the Hackett Value Grid™) – are better at navigating uncertainty, risk and complexity than peers because they are more disciplined in maintaining strategic focus and more adaptive to rapidly changing circumstances.
Their edge over the competition lies in their ability to harness data more efficiently, provide swifter and superior insights, and use it to inform smarter decisions. They also execute more effectively, focusing on the things that matter most in times of uncertainty. These strengths are attractive to top talent, further positioning them to consistently attract the best minds in the industry.
Digital World Class HR organizations are more efficient, running at a 33% lower cost than peers – an $18 million advantage for a typical $10 billion enterprise – with 40% fewer full-time equivalent (FTE) staff and are 49% more likely to be perceived as a valued business partner within their organizations.
Why Digital World Class matters
Our analysis also shows a strong correlation between Digital World Class and superior enterprise financial performance. When we compared companies with at least one business services function operating at a Digital World Class level with their industry median, we found a five-year average performance premium across several key financial metrics. While this advantage is not solely due to the presence of Digital World Class business services, these companies do tend to display greater innovation, and operational and commercial capabilities, in part because of their higher-caliber talent, analytical capabilities, and technology architecture.
The Hackett Value Grid™
The Hackett Group defines Digital World Class organizations as those that achieve top-quartile performance in business value (a composite of stakeholder experience, digital enablement and traditional effectiveness metrics) and operational excellence (a composite of efficiency and business process automation metrics).
Built on insights from over 25,000 benchmarking engagements, involving nearly 8,800 major global companies spanning various industries – including 97% of the Dow Jones Industrials, 93% of the Fortune 100, 73% of the DAX 40 and 52% of the FTSE 100 – the Hackett Value Grid is a useful compass for charting the course toward operational excellence.
By evaluating their own benchmarking results in the context of industry peers and top-tier performers, companies can gain a unique understanding of their competitive positioning and identify opportunities for growth.
The HR Digital World Class gap remains stable
The Hackett Group annually measures the gap in cost between Digital World Class HR functions and their peers. Over time, the cost gap has narrowed gradually as top-performing HR organizations optimized their cost structure and peers began to catch up.
While most companies have seen operating costs increase likely due to inflationary impacts, Digital World Class HR organizations have been able to maintain their cost advantage. As a result, the Digital World Class HR cost advantage has held steady since 2021 at 33%.
Elements of Digital World Class HR
Top-performing human resources organizations have a 13% greater technology cost as a percentage of spend compared to the peer group, demonstrating the investment in technology that Digital World Class HR organizations are making. This investment supports a human resources strategy shift toward higher-value services and equipping knowledge workers with modern digital tools.
While overall operating costs dropped for labor, outsourcing and other costs, there is a marked 85% increase in technology costs for top-performing HR organizations from 2022 to 2023.
Digital World Class HR organizations have traditionally run with far fewer FTE staff than peers and that gap remained at 40% across all human resources FTEs in 2023. Systematic use of global business services (GBS) and extensive process automation allows Digital World Class HR organizations to free up 12% of the team’s effort from transactional activities to focus on value-added activities. Moreover, Digital World Class HR staff focus more than one-half of their functional efforts on attracting, retaining, developing and engaging employees, and 37% more effort on strategy and planning activities to prepare for the future. This shift of resources into higher-value roles explains their superior value contribution.
There is convincing evidence that peers have not embraced automation at the same level of Digital World Class HR organizations. Since 2019, peers have reduced transaction processing FTEs by 6%. Digital World Class HR organizations have seen a corresponding 20% drop in FTEs in transactional roles, while also starting from a smaller base.
The Digital World Class HR advantage
Beyond operating with a 33% cost and 40% FTE advantage, Digital World Class HR organizations excel across all facets of business value and operational excellence. Here are some highlights:
Digital World Class HR organizations deliver services and support more productively than peers. They serve 66% more employees per HR FTE at a labor cost that is 39% less than peers. Moreover, they boast 87% higher total placements/hires per recruiting and staffing FTE than peers. And their total cost per hire/placement is 45% less. As a result, they are able to deliver higher levels of operational excellence to stakeholders and business value to the enterprise.
Digital World Class HR organizations are more accurate in their work. For example, they have four times fewer health and welfare transaction processing errors, and six times fewer time and attendance transactions requiring corrections. The quality of their employee data and HR reporting is better, with four times fewer errors. This means stakeholders can have greater confidence that transactions will be flawlessly executed, and the data and analysis they receive will provide an accurate foundation on which to base key talent decisions.
More focus on business enablement
Digital World Class HR organizations spend more time focusing on value-added activities and building better capabilities for supporting the business. As an example, they do a better job of helping the enterprise recruit and retain talent, which is particularly critical amid today’s fierce competition and uncertain economic conditions. For instance, Digital World Class HR organizations fill manager positions 25 days faster than peer organizations and retain 97% of new managers after their first year, compared to 89% for peers.
Elevated stature as a business partner
Advantages in reliability, value orientation, and speed contribute directly to greater enterprise agility and resilience. It is not surprising then that Digital World Class HR organizations are 49% more likely to be viewed as a valued business partner – a perception gap that has remained consistently wide. Digital World Class HR organizations are also 62% more likely to be involved in the business planning and strategy process.
That said, both Digital World Class HR organizations and peers have significant room to continue improving their stature as a business partner. HR executives ranked this as the No. 3 priority in our 2023 Key Issues Study.
Digital World Class HR organizations get it done by focusing on six key dimensions
1. Aligned talent
Digital World Class HR organizations are ahead in ensuring the talent necessary to achieve Digital World Class performance. Sixty-four percent of their staff are skilled professionals, compared to 55% for peers. This allows them to focus more on value-added activities. For example, one-half of their FTEs focus on employee life cycle activities, compared to 48% for peers, and they deploy 33% more staff to planning and strategy tasks.
Highly skilled HR business partners and enablement leaders are at the core of this competency, which requires advanced analytical acumen to drive insight and guide decision-makers. A substantial number of staff in Digital World Class HR organizations – 31% vs. 22% in peers – focus on facilitating business change as a primary part of their job.
Digital World Class HR organizations are also 63% more likely to have HR staff performance goals/expectations linked to the company’s strategic plan.
2. Operating model evolution
Operating model success in the future involves decisions about scope, modality and placement of work that leverages organizations’ centers of excellence, customer-facing business units, the role of GBS, and strategic partnerships. Digital World Class HR organizations use more HR outsourcing services for transactional activities and embrace new ways of working. They continue to invest significantly more in technology – 85% greater cost per FTE – than peers. As a result, they spend 39% less on labor per employee and allocate 23% less to labor-performing transactional tasks.
Moreover, Digital World Class HR organizations leverage third-party providers more productively. For example, they outsource transactional activities more (45% vs. 29% for peers), but outsource employee life cycle talent management activities less (22% vs. 25% for peers). By continuously evolving their operating model, Digital World Class HR organizations can maintain their efficiency advantage while building and enhancing capabilities.
3. Data and analytics centricity
The heightened demand for insights regarding the workforce and human capital investment decisions is forcing organizations to rethink their existing data analytics approach and required tools. But data and analytics are also vital to many of HR executives’ other top priorities, including supporting growth strategies, accelerating preparedness for uncertainty, and improving talent attraction, development, and retention.
Digital World Class HR organizations have a significant lead over the peer group, especially in areas like strategic workforce planning (SWP). They invest 63% more in SWP capabilities as a part of the overall talent management cost. They are also more than two times as likely than peers to have deployed a common set of SWP analytical tools used by subject matter experts, HR business partners and business unit leaders.
4. Customer-centric service design
The expected pace of transformation and deployment of new capabilities underscores the importance of customer-centric service design. Customer-centricity must be at the forefront of end-to-end process design, and HR organizations must have the requisite skills to enable it.
Digital World Class HR organizations rely on three foundational capabilities to deliver a consistent and compelling employee experience:
- An integrated, global service delivery model. Digital World Class HR organizations are at least three times more likely than peers to have implemented one.
- Dedicated global process owners to 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 88% more likely than peers to have an end-to-end, hire-to-retire process with a dedicated owner.
- Technology-enabled direct access that ensures that all employees, managers, and HR staff have quick and reliable access to vital information and functionality. Overall, 82% of Digital World Class HR organizations have fully deployed direct access across the enterprise, compared to only 45% of peers.
5. Technology enablement
HR automation efforts have traditionally focused on transactional processes such as total rewards administration and employee data reporting and compliance. 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 automated 99% of time and attendance entries versus 71% for peers.
They process 98% of payroll administration transactions electronically versus 52% for peers. And they handle 97% of pension and savings transactions digitally.
Digital World Class HR organizations also have greater automation levels and use digital tools to a greater extent to enable key talent processes. For example, they have automated 82% of recruiting and staffing transactions and are more than twice as likely than peers to offer mobile-enabled job search and application submission. Digital World Class HR organizations have also automated 93% of training transactions.
6. Modern digital architecture
In the Digital World Class HR transformation, legacy systems integrate or retire, new tech is adopted, apps move to the cloud and data is integrated. Effective management of modern architecture is crucial to simplify complexity. Key to this is transitioning to the cloud. The Hackett Group’s 2023 Key Issues Study found widespread adoption of core human capital management (HCM) platform technologies, with 90% of the most digitally mature leaders in HR having large-scale implementations versus 62% of the peer group.
Digital World Class HR organizations are leaders in modernization and cloud migration. Not only do the most digitally mature organizations lead in adoption of new digital technologies, they also have had greater success in realizing the business benefits anticipated. For example, 100% have met or exceeded expectations for cloud-based, core HCM application suites, compared to 57% of peers.
An action plan for achieving Digital World Class
With so much uncertainty all around us, this is the time to be proactive and accelerate digital leadership. Companies that forge ahead with confidence will be best positioned to accelerate growth, gain market share and – yes – run more efficiently. Here’s how:
Are you ready to close the gap to Digital World Class HR performance?
Backed by our unparalleled benchmarking data and best practices repository, as well as experience across the full transformation life cycle, The Hackett Group is ready to support:
- Digital transformation strategy, smart automation and analytics
- Digital operations
- Performance benchmarking and best practices
- Learning and development programs
- Technology blueprint, road map, cloud migration and modern human capital management architecture
- Service delivery model design, implementation and optimization
- Master data management and architecture
- Talent management, skills and competencies, role definition, and career pathing
- Strategic workforce planning design and implementation
- Time and attendance and global payroll design
- Transformation management office, change management and communications implementation
Contact The Hackett Group to start your journey toward Digital World Class success.