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Global drivers of HR change and their impact on effective shared service models A fresh perspective for assessing HR delivery options Brief stories of organizations that have made different but right decisions Regional variations in the development and use of HR shared services
The HR function must be very good at delivering differentiation when it is essential to business success, but ruthless at driving consistency when it is not essential.
Refocusing: Taking on the strategic partner challenge. HR functions and their leaders increasingly are being asked to play the role of strategic business partner decreasing their involvement in HRs traditional administrative activities and increasing their involvement in decisions and activities that have a greater impact on business success. A primary benefit expected from shared services is that it will free up valuable time and energy of senior HR professionals to focus on business strategic needs. However, the reality is more complicated. Reshaping the HR workforce into a centralized shared function and
a residual business-centric function can present a serious challenge. New sets of skills and competencies must be defined, and talent must be upgraded by training or by purchase in a manner that extends well beyond traditional retraining programs. If the reskilling is done correctly, it will deliver a win for the organization and the individuals; if improperly managed, particularly if the HR business partners are not up to strength, it can undermine the benefits of the shared service model. (See Case in point: When expectations dont match reality.) Delivering globally: Opportunity and challenge. Many mature multinationals are grappling with the need to deliver on their global business strategies by moving key operations to lower-labor-cost countries, such as China, India or those in Eastern Europe. At the same time, emerging multinational companies are looking for ways to enter the attractive global marketplace and compete effectively. As a consequence, the HR function must redefine its policies and processes to be relevant and deliverable in countries in which these companies have little cultural or operational experience.
In this context, shared service models provide an excellent opportunity to exploit a flexible multicountry infrastructure, but the context also adds additional layers of complexity to an already challenging environment. HR shared services was originally seen as most suitable for e-enabled sectors such as technology, telecommunications and financial services. While it has certainly been deployed in these sectors, other industries are increasingly using this service model in direct response to the global shift of business operations and the impact on support services. Offshoring and outsourcing: Site selection for shared services. Offshoring and outsourcing have developed simultaneously with the evolution of shared services. The labor arbitrage available in offshoring by relocating activity from traditional locations to emerging economies particularly in Asia and Eastern Europe has proven irresistible. However, it has also introduced new challenges in terms of organizational change and culture within the HR function. Offshoring, which has changed from just a cost-reduction strategy to a strategic means of global staffing, can exist within an internally sourced or outsourced model. Total outsourcing the transfer of day-to-day responsibility for transactional tasks to a third party on a fee-for-service basis whether offshore or not, has been seen as a natural evolution of the traditional sourcing strategy and as the ultimate fate for the HR function (that is, improve or go). There are benefits and risks to outsourcing (whether offshore or locally). Some of the benefits include a shifting of responsibilities to the most efficient provider, cost reductions due to labor arbitrage, scalability and ready access to advanced technologies, and process improvements. But with outsourcing, new risks appear, including the loss of service delivery under day-to-day control, language and cultural compatibility concerns, time zone issues, labor supply and turnover, intellectual property protection and lack of acceptance by internal staff. HR technology: Reaping the benefits. Technology continues to play an increasingly critical role in managing HR business processes and delivering services. In recent years, HR technology has shifted from a focus on software to solutions, from longterm licensing to software as a service, and from stand-alone products to product suites. For example, talent management suites are becoming more popular. In particular, there is growing interest in solutions related to recruitment, talent management, learning and compensation management areas
now with significant opportunities to create virtual centers with functional expertise that can deliver consistent quality services to a global customer base. Full-service and integrated solutions have been primary enablers and critical success factors in lowering HR operating costs, whether or not HR uses a shared service model. In particular, better functionality (such as self-service and multicountry capability) and better integration (such as between HR and payroll applications, whether ERP (enterprise resource planning) or best of breed) have improved the effectiveness of multicountry shared service implementations. On the other hand, poorly deployed technology has been detrimental to many shared service centers. In particular, a failure to establish high-quality data undermines the ability to use the system and trust it as a reliable system of record. Other deficiencies have come from underutilizing employee and manager self-service and other functionalities, and failing to simplify the underlying HR processes. These challenges, however, usually relate more to implementation capability than to technology capability. Technology will continue to provide growth opportunities for shared services and for multicountry applications. For example, within the last 18 months alone, clear opportunities have developed in multicountry payroll technology. Once seen as strictly local, payroll can now be delivered regionally or globally. Technological capabilities are keeping pace with an evolving vision of a global HR service delivery model.
The forces reshaping the HR function are having an equally profound impact on the design and proliferation of shared service approaches. The increased complexity in both the business and the HR environments that surround shared services decisions presents both challenges and opportunities. The value in exploiting these opportunities is the flexibility of the solution. Again, while best practices have their place, a shared service strategy must be custom built for each organization and its customers. The remainder of this paper shares perspectives and tools to guide the reader through effective decision making around shared services.
Exhibit 1
US Labor cost
Europe
Latin America
Asia
Australia
H H H H
H M H M
L: Low
L M M M
M: Medium
L H H L
H: High
M L L H
Decentralization
Population
Consistency
Exhibit 2
Localized
Center of expertise
Shared services
driver in any shared services business case (that is, the economic opportunities on a multicountry basis for a workforce of 30,000 typically will be greater than for a workforce of 5,000). However, this is not always the case. For example, one Mercer client delivered shared services across eight countries to a workforce of 6,000 employees with a positive payback while others have been unsuccessful at creating a business case for a workforce twice that size. Success extends beyond drivers of cost and estimated ROI. For example, services can be delivered from some locations more efficiently than from others, but it is too simplistic to suggest that organizations will simply maximize their ROI by offshoring to Eastern Europe or Asia. Cost variations between specific locations suggest that economic differences must be understood and incorporated into the business case. The most appropriate HR service model design is more about the fit with business strategy, culture and operating environment than about cost alone. Cost and the business case are the baseline on which any potential model will be validated, but they should not become the sole drivers.
The degree of centralization or autonomy within the organization generally points to a service model that most closely fits the business need. In addition, the correct target position on the continuum for a particular organization should be influenced by its unique business, cultural and operating environments. The shared services point on the continuum is not an appropriate target for all organizations. The service delivery continuum offers a range of different targets. Ideally, an organization should identify its current place on the continuum and then take steps along the continuum to reach the optimum point that meets both its business and its HR needs. Many organizations move further along the continuum after first deciding whether and how to take some control over the overall HR service design. Specifically, this involves defining the breadth of support (how far the function moves beyond supporting an individual business unit or location) and consistency of delivery (how much the operating model can be driven from a single perspective). The second point on the continuum involves assumptions around standardized technology and processes. Often, the investment in integrating HR technology propels the discussion about long-term alternatives. In other cases, the desire to be global drives a focus on standardization in technology and processes. In order to secure the significant financial investment required for major HR platforms, an organization-wide view is necessary to ensure that
the appropriate benefits can be gained. This point of the continuum is the stage at which technology investment and day-to-day operations start coming together; it is the starting point for all other variable models service centers, outsourcing or offshoring. The next progression point on the continuum occurs when specific people-management activities and processes must be driven from a global perspective. Specifically, it requires identifying the HR processes that enable the people-management efforts that most create competitive differentiation, such as attracting, retaining and motivating key employees. While these choices are organization specific, it is rare to see systems that do not include talent management, employee engagement, learning and development, and senior-level rewards. Often, the drive to put specific focus on delivering and implementing these particular strategies moves the HR organization beyond common platforms and business-unit focus toward a real focus on expertise and delivery. This typically is through some form of centers of expertise, whether physical or virtual. This can easily occur without a supporting shared service model; it relies on in-country local HR services and support. The next point on the continuum is the development of some form of shared service activity. The drivers for moving to this point are primarily related to cost, cultural change and maximization of the technology input by delivering the standardization and benefits from investments. The final point on the continuum is outsourcing, which itself is simply a method of implementation and not a different delivery mechanism. It is therefore no surprise that many of the more effective models of extensive HR outsourcing implemented in the last few years have been in organizations that already had developed a shared services framework and had already delivered common investments in both technology and processes.
Although these decisions are organization specific, Exhibit 3 sets forth the primary drivers that most influence the decision. The financial drivers suggest whether or not to start; the service requirements tell how far one could go. But it is the organizational context and the cultural/people issues that tell how far an organization should (and perhaps could) go. Financial drivers The factors of scale, labor cost and scoping are critical drivers in determining the effectiveness and size of the business case and the ongoing cost opportunity. One interesting nuance to the ROI and cost-reduction issue has evolved the past few years: The development of shared services provides greater financial transparency within HR. Some of the HR cost has previously been spread across the business units, not allocated to HR. The extra visibility that arises in the first year of a shared service setup has often led to the assumption that the cost of delivering HR is increasing. In reality, through shared services, organizations usually identify previously hidden costs that they did not know existed. This nuance, however, needs to be managed. HR service requirements To progress on the continuum, there must be an understanding of the priorities for HR and the global HR agenda. If there is limited need for globally driven activities to support the HR strategy and HR performance, then there is little need to move beyond the left side or middle of this continuum.
Centers of expertise become relevant when there are corporate activities that require focus, common standards and a corporate-wide view (for example, executive succession planning). These are activities that, if done consistently, will improve the organizations competitive advantage, controls and efficiency. To move further toward shared services on the continuum, the key requirement is that services will be provided predominately the same way to most populations, allowing only for business-critical variability. Cultural and organizational fit The cultural and organizational fit are by far the most critical criteria. They are essential to understanding the governance and culture of an organization in the context of centrally corporate-driven activities before taking any view about the application of shared services. Any positioning to the right on this continuum infers that the center has, at a minimum, an influencing role within a corporate governance framework and an HR governance framework. Indeed, it may have a directive role. However, it will not work to try to move toward the right side of this continuum when the corporate governance role is simply advisory. Some form of clear influencing from the center which is acknowledged within the center and the business is vital to make centers of
expertise and shared services effective. Without this, there will be friction between the move to the shared services organization and the organizational culture within which business leaders and local HR leaders attempt to operate. Creating a common infrastructure Progress against any of the delivery models requires careful evaluation of the degree to which the organization is willing to invest and operate within a common framework. HR shared services will require shared investment and will produce different rewards for different business units in financial and service terms. Shared services is about the sharing of infrastructure, the sharing of service culture, the sharing of resources and expertise, and the sharing of costs. The move to shared services will come with significant financial and ROI expectations, but these cant be viewed in isolation. An organization also must consider cultural fit and service requirements as well as the broader perspective of political context and organizational focus and governance. When all of these factors are included in the decision-making process, the organization is more likely to make the right decision for its unique situation and goals.
Exhibit 3
Common process
Center of expertise
Financial drivers
Reactive steps taken in response to business needs A loose organizational structure that does not require any structure around HR issues
Service requirements
Organizational context
Supports business unit or local geography governance structure Reinforces devolved local cultures
HR is a difficult place to start if outsourcing is not part of organizational model Can be seen as outsourcing of people management if outsourcing is unfamiliar to the culture
Example #3: US manufacturing company employing 20,000 people across 12 countries in Europe
The third organization also is a manufacturer developed in Europe through acquisition. It had invested significantly in a new HR system but had achieved neither service nor cost benefits. As a result, the HR functional leadership needed to achieve three things: a real standardization process; a culture change within the organization to move it from an entrenched preacquisition mindset into a clear global organization; and a focus on key business drivers that would deliver substantial cost reduction to meet business needs and to secure the business case for the implementation of technology. These factors required the organization to move quickly through the continuum point to the delivery of a multicountry shared service arrangement, which it has now achieved. The outsourcing option is now firmly on the implementation agenda.
Conclusion
Regardless of where an organization positions itself on the continuum, shared services is having a notable impact on how HR functions address their operational effectiveness. HR departments are redefining themselves with new skill sets that are more focused on business objectives. In addition to providing traditional cradle to grave services to employees and dynamically changing services to business, savvy HR functions are also focusing on the opportunities that have been exposed by the demand for shared services. Following are a few findings that have become evident through Mercers consulting work in this area.
Metrics. Like other functions core to business, HR is increasingly being asked to provide in-depth analysis of its performance. Having to answer service, quality and cost questions on a pertransaction, per-head or per-business unit basis, or some combination thereof, has increased the demand for deep analytical and reporting skills in HR professionals. This requires a significant change because, historically, HR has not used such hard metrics. Mercers 2006 Global HR Transformation Study shows that HR customer satisfaction remains the top measure of the effectiveness of the HR function, used by 68 percent of the respondents. HR cost is another common measure, used by 54 percent. An equal number consider HR program effectiveness to be a measure of overall HR effectiveness. Process. The first step in determining the beginning and end on the shared services continuum begins with a look at HR processes. Leaders of shared services organizations, whether internal or outsourced, champion the need for standardization of HR processes. There is much truth to this,
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as standardization of processes typically yields efficiencies in both the cost of delivery and the service quality, owing to the increased ease with which such processes are administered. However, the degree to which centralized processes are standardized needs to be carefully weighed in light of customer requirements. These requirements can be influenced by many factors, including past practice, culture, policy and technology limitations. Striking the right balance between process standardization and custom requirements continues to provide significant challenges to HR professionals who must find just the right point on the continuum to meet customer requirements without eroding the benefits of centralized administration that shared services provide.
Technology. Many HR departments must educate their CIOs directly on the array of new technologies that can enable a shared service model. These new technologies include enterprise HR systems, along with technologies that enable components of a shared service model, such as a service center (for example, customer relationship and knowledge-management tools, telephony, agent quality and performance monitoring). The chief HR technology officer, an increasingly popular position, will continue to play an instrumental role in identifying and implementing the technology critical to the success of shared services. Policy. New policy pressures resulting from shared services continue to challenge HR leaders. Obstacles include identifying and agreeing on policies; determining whether policies should be implemented globally, locally or by business unit; and deciding when variation or consistency is necessary and appropriate. This is especially true for health and wellness, retirement, compensation and employment policies.
Governance. Governance is critical yet widely misunderstood, especially in organizations new to shared services. For example, some new to outsourcing view governance as adhering to the legal services agreement. In some cases, heads of HR spend more time talking with their contract attorneys than with their vendors. This is where shared services and outsourcing have a lot in common. In effective vendor management, the contractual service provisions are obviously important, but a successful governance model must balance partnership and accountability. The goal is to work closely with vendors but hold them to their promises just like the organization should do with the HR function. This applies whether service provision is internal, external or a combination of both. The management skills required to lead a successful, broad shared services governance model are not unique, but may be new to many in HR.
HR shared services is a model that will continue to evolve, and the ongoing demands of global organizational change will provide increasing opportunities to develop and extend the models usage and the differing environments in which it operates. There is no single best-practice example; this is too complex of an issue to have just one solution. Successful deployment of a shared service model requires careful, thorough planning based first and foremost on understanding the organizational and environmental context of the change and the consequent success factors. Careful and realistic appraisal of these factors will lead to an effective choice of an HR service model that fits the specific demands of each HR function and organization.
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The Americas
In the US The US has been a leader in the use of HR service delivery models, and advances in technology continue to produce more choices for establishing efficient models.
Exhibit 4
US
Center of scale
Training admin Inquiry handling Staffing analysis and reporting Transfer processing HRIS strategy Labor relations strategy Training design Comp admin Labor negotiation Career program design Benefits design Comp design OD consulting Succession management
Center of expertise
Feasibility to centralize
Internal staffing
Employee grievance
Employee counseling
HR management
Face-to-face delivery
Business partner
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counseling is not restricted to employees; HR partners and managers increasingly are becoming customers of these expanding services. Recruiting operations. Activities such as job posting, sourcing and screening may now take place centrally and even offshore in some cases. Once tied very closely to recruiters conducting interviews, these remote administrative recruiting activities are increasingly being centralized. HR business partner. While the role of HR partner typically requires some local presence, regional models of support are growing in popularity, and some organizations are migrating the HR partner role to their shared services organization. A few firms have even outsourced some of this function to their HR outsourcing provider. For such outsourced strategic functions to be successful, a company would need to have the right business model and environment, a strong partnership with their HR outsourcing vendor, and a proven governance structure and process in place. In Latin America While shared service models are not as prevalent in Latin America as in many other parts of the world, Latin American organizations increasingly are exploring them as key HR delivery models particularly in the Caribbean basin (for example, Costa Rica and Jamaica), Brazil, Mexico and Argentina. With globalization of companies in this region on the rise, consideration of regional shared service centers also has risen. However, the region still presents challenges to organizations not based there. The socioeconomic, taxation, cultural and bureaucratic environments vary significantly. A blanket strategy for operating in Latin America typically fails, and for this reason multinationals often find it difficult to navigate local concerns. Latin America also is growing as a sought-after destination for offshored HR outsourcing including Central America and the Caribbean basin. Despite the regions relatively underdeveloped technological infrastructure, the growing Hispanic footprint in the US is dramatically increasing the need for Spanishspeaking HR services. Again, though, there are challenges. While English has become a primary language of business, fluency in American culture and the ability to deliver customer service in English to US customers is still in its infancy in this region. In addition, although the economies of many Latin American countries
have steadily stabilized, the currency remains vulnerable to fluctuation. Although this risk is typically embedded into vendor pricing models, it can present a risk for service providers.
Asia
Due to Asias size and diversity, this paper will focus on three key countries. In China China is a country whose profile is rich with stateowned enterprises (SOEs), large domestic conglomerates and key regional operations for many highly recognized multinational companies (MNCs). Each of these business structures combined with varying and rapidly changing governmental structures, cultures and the desire/capability to adopt the advances of the Western world has implications concerning whether a shared services approach would not only succeed, but would also become a viable alternative.
SOEs are domestic, have strong legacy cultures and are often resistant to change. However, they are under significant pressure to function like the private sector and would benefit, at least in theory, from the components of the shared services proposition, especially process efficiency, customer orientation and automation. Although there is a drive to change the status quo, current decision making within SOE environments is often laborious taking significant time and steps to make progress. Much work is required to update and ready data, technology and internal talent required for shared services success, due to the slower pace of change and hesitancy to update processes. In many of Chinas foreign-owned MNCs, the key decisions about HR infrastructure (such as shared services) are often made in headquarters, probably in another region thousands of miles away. Therefore, even if the local leadership wants to implement large-scale change, it may not have the mandate. Decisions about process consistency, data cleanup and technology enablement, however, can be made locally. These steps will help the HR function to better support the business and may eventually be a precursor to traditional shared services. Other organizations face the opposite challenge: The parent company may want to establish a shared service center that includes its Chinese operations, but the local leaders are not in favor of this move. Either way, its important for local and corporate leaders to be in agreement regarding shared services, or the likelihood of success diminishes.
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The large domestic, privately held companies in China (often referred to as conglomerates) may present the best opportunities for shared services. Their decision making is not constrained by owners that are governments or foreign multinationals. They are, by definition, younger, entrepreneurial companies that are emerging with the opening of markets in China. They exist in competitive markets where the business value of a solution is paramount, so they are both willing and flexible enough to adopt best practices to secure a competitive edge. Additionally, their leadership often consists of repatriates who have brought a blend of Western lets do it and Eastern understanding. So while willing and able to take on business process improvements such as shared services, these organizations must cope with the varying regulatory environments across the country.
and entitlements, employee data records and other reports generation. Most technology-savvy organizations have invested heavily in technology and processes, defining key performance measures for critical areas that help build higher predictability on quality of delivery. India is significant for another reason in discussions of shared services. Employers around the world are looking to India as a key source for their outsourced or offshored operations. According to some studies, business process outsourcing in India (and associated offshoring of shared service centers) is projected to grow by about 25 percent per year over the next five years. However, a talent shortage, infrastructural deficiencies, increasing salaries, and European and American resistance to offshoring pose significant challenges. At the same time, many of Indias largest service providers are developing more sophisticated approaches to outsourcing, mirroring the evolution with shared services itself. Indias offshoring industries are dealing with hurdles ranging from power to cafeteria services, with many large Indian cities including Bangalore, New Delhi and Mumbai reaching a point of IT saturation. India also confronts a potential shortage of skilled workers in the next decade. An estimated 10 percent to 25 percent of the countrys current college graduates are suitable for employment only in the offshore IT and BPO industries. India also lacks large numbers of workers who are fluent in French, German, Japanese or Spanish often making China and Eastern Europe more attractive offshoring destinations.
In Japan Despite barriers often associated with differences in language, there is a definite trend within Japan to establish shared service centers particularly in low-cost regions outside Tokyo. Companies there can expect to save up to 10 percent to 20 percent by setting up shared service centers in places like Okinawa or Kyushu, with the added attraction of local development grants. And, while many Japanese companies claim to have set up shared service centers, in fact they have really centralized processes. They have not yet proceeded to the next step of establishing common platforms to deliver a shared service across the organization. In India The changing business environment in India is placing new demands on the HR function. Top management would like HR to lead change by providing new ideas and concepts that add value. The new role involves managing a globally aligned workforce and winning the competition for talent. This requirement has fueled the need to restructure the HR function into centers of expertise and shared services. The increasing need to transition from firefighting to a more business-focused approach has led to streamlining of HR processes at the operational and tactical level. One of the top priorities for organizations in India remains generating increases in total productivity through effective HR service management. The main areas of HR shared services include payroll processing, administration of employee benefits
Europe
Shared services in the European landscape continue to evolve at a steady and encouraging pace, with the UK most frequently deploying shared services. Historically, European organizations (particularly those in France, Germany and the Netherlands) have found the multiregulatory environments and data protection issues difficult challenges to surmount in undertaking effective shared services initiatives. Today, however, due in large part to advances in global HR technology platforms, things once seemingly impossible are becoming possible, including pan-European payroll and regionally acceptable processes to accommodate data-protection requirements.
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Indeed, the major change in recent years is the move of two activities from local delivery to shared services: payroll and recruitment administration. In both cases, the evolving capacity of technology has been the main driver of the change. There are now a few organizations delivering payroll for up to 15 European countries from one location. Technology has enabled this, and the future suggests the possibilities in this area will only increase the potential for shared service development and deployment. (See Exhibit 5.) Despite these and other key advances, the pace of change in Europe will continue to evolve at a slow and deliberate pace keeping in lockstep with the
HR functions ability to create and sell the business case through its strengthening strategic partnership with business leadership. The growing capability of infrastructure in Central and Eastern Europe has driven the gradual increase of shared services across the continent. This provides the opportunity to offshore centers for significant labor cost savings. The region is used by large organizations as the home for shared services, not just in HR but in other support processes such as finance. This trend will continue as long as the region provides effective capability, languages and cost structure.
Exhibit 5
Europe
Center of scale
Staffing analysis and reporting Training admin Inquiry handling Transfer processing Recruitment admin HRIS strategy
Center of expertise
Labor relations strategy Succession management OD consulting
Feasibility to centralize
Comp admin
Internal staffing
Benefit admin
Face-to-face delivery
Business partner
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About Mercer
Mercer is a leading global provider of consulting, outsourcing and investment services, with more than 25,000 clients worldwide. Mercer consultants help clients design and manage health, retirement and other benefits, and optimize human capital. The firm also provides customized administration, technology and total benefit outsourcing solutions. Mercers investment services include global leadership in investment consulting and multimanager investment management. Mercers global network of 17,000 employees, based in more than 40 countries, ensures integrated, worldwide solutions. Our consultants work with clients to develop solutions that address global and country-specific challenges and opportunities. Mercer is experienced in assisting both major and growing, mid-size companies. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges.
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