By Dirk Verburg
A number of organizations have not yet unlocked the full value of their HR Shared Service centres due to compromises made at the time they were created. By reviewing and undoing these compromises, companies can unlock the full value of their SSC’s, thereby achieving lower costs and a higher quality level.
A proven concept
In the past decade, almost all Fortune 500 companies have started to transform a large part of their Human Resources activities from local support organizations to so-called ‘Shared Service Centres’ (SSC’s). In practice this means that the HR staff which supports transactional (non-strategic) activities, like payroll and administration, are taken out of the different parts and/or locations of the organization where they are based and transferred to a new separate organization (the HR Shared Service Center). The same thing tends to happen with HR specialists, e.g. in the area of labour law and Learning & Development. These specialists are often transferred to so-called ‘Centres of Expertise’ (CoE’s) within the HR SSC.
The role and position in the organization of HR Advisors or Business Partners who provide strategic advice in the area of HR (e.g. in areas like Talent Management, recruitment for senior positions and culture change) usually does not change. They often remain to be strongly linked to the organizations (e.g. business units or functions) they serve. This strong linkage manifests itself both from a location point of view (they are usually co-located with their clients), as well as from a reporting point of view (direct or dotted reporting lines to the leader of the business they support).
The rationale for Shared Service Centres
The most important reasons why organizations decide to concentrate operational HR activities in Shared Service Centres is the desire to lower the costs and to increase the quality of HR.
Lower costs through economies of scale
The most important reason to move to an SSC is to realize lower costs through economies of scale. It is far more efficient to service 5.000 employees out of one centrally managed organization based in one location (or a very limited number of locations), than serving the same population by a number of different (small) HR organizations operating from geographically dispersed locations. This difference in efficiency is due to the potential to:
- Eliminate excess capacity – ‘Stand alone’ HR departments often need excess capacity for business continuity purposes (ensuring that somehow HR is always present in a particular location and having contingency plans in place so that illnesses, holidays, etc. can be dealt with).
- Rationalize the number of experts – By creating HR SSC’s, staff working in specialist HR roles (e.g. in areas like Compensation & Benefits and Industrial relations) can be concentrated in so called Centers of Expertise (CoE’s) and shared across the enterprise. This will lead to better utilization and offers the possibility to rationalize the number of (specialist) roles.
- Reduce managerial overhead – The average span of control of managers in the HR SSC will be higher given the possibility to create larger homogeneous teams. It is not unusual that a payroll team of three employees is managed by one supervisor. However, from a managerial perspective the same supervisor could probably manage at least six employees.
- Increase flexibility – Allocate staff in a more flexible manner to meet changes in the demand of customers through enhanced training on the job and job rotation possibilities
- Invest in infrastructure – The possibility to staff, finance and implement large scale (ICT) projects which can have a step-change impact on the performance of the HR SCC. Examples of this are the implementation of centralized HR information systems like SAP and PeopleSoft and Call center technologies like Auto Call Distribution. For small local HR organizations it is almost always impossible to staff, finance and implement these projects by themselves.
A classic example of such an infrastructure project is E-Filing.
If an organization is geographically dispersed in a specific country and it wants to centralize its administrative HR activities in one location, the eternal question is where the paper personnel files should be kept. On the one hand, the HR advisors on site need to have access to have an informed discussion with their business leaders, for instance when disciplinary actions needed to be considered. On the other hand the administrative staff on the central location needs access to the files as well, e.g. to check for instance the employment history in order to address pension and social security issues. In a traditional ‘paper based’ environment this creates the need to maintain identical files in two locations (increasing the chances of errors and inconsistencies) or the need to send paper files between the location where the local HR advisor is based and the central location where the central HR administration is based (resulting in delays in decision making processes or lost files).
Nowadays these issues can be solved by E-Filing (scanning paper files and storing them in IT-systems) which makes it possible to have the personnel files available on a 24/7 basis, independent of location.
A (not always observed) boundary condition is of course that the overhead should be contained. Efficiency gains in line management and specialist roles should not be compensated by creating a number of non-essential roles dedicated to internal SSC activities or account management types of roles to increase the acceptance of the SSC by the organization.
Increase the quality of HR
Quality is expected to increase as a result of the dedicated focus on specific activities HR SSC’s can bring. This is especially the case with activities that are only sporadically touched by local HR organizations. Examples include International Mobility (Expatriates), Talent Development, Recruitment of senior staff, etc. Once these activities are transferred to an SSC, they can be performed by a specialized department with a dedicated leadership team accountable for managing these activities. This specialization offers the potential to increase both the degree of professionalism as well as the efficiency of these activities.
Why are the advantages of SSC’s often not fully exploited?
Very often these advantages have not yet been (fully) capitalized by the organizations who have been implementing HR SSC’s. It is interesting to observe that a number of organizations also seem to lack a sense of urgency to do so, despite the fact that the importance to unlock this hidden value is now more important than ever given the challenging economic environment of today.
The reason for not capturing the full value of their HR SSC’s is often due to ‘historical compromises’: decisions taken at the time the HR SSC’s were created in order to deal with the resistance within the organizations in which they were created. These historical compromises were often made in one or more of the following areas: location, people and standardization.
The location compromise
The advantages of a Shared Service Centre in one or very limited number of central locations compared to a distribution over a number of different locations seems blatantly obvious. However despite the compelling logic for a geographic concentration, a number of organizations still operate from a number of different locations. Quite often this is due to the following reasons:
- Costs – The cost arguments can play out in several areas. One of the areas is real estate. Quite often office space may become available on those locations where the local activities will be rationalized or discontinued, whilst additional space will need to be arranged on the central location(s) where the activities will be transferred to. Another area are the costs that need to be paid in certain countries to staff that cannot, or are not prepared to, move to the locations where the activities will be transferred to (this is especially the case in cross border centralizations) and hence become redundant.
- Resistance – Management in the locations where the activities will be rationalized or discontinued often display a preference to hold on to their internal ‘on site’ HR organizations. This mainly originates from the fear of losing control over these activities and the possible negative consequences for the service provision for their local operation in terms of speed, flexibility and quality.
- Fashion – In discussions around the location of the HR SSC, often the fashionable ‘virtual organization’ argument is used. Proponents of this argument claim that it should not make a difference where the HR SSC staff will be based: common processes and a common ICT infrastructure enable HR SSC staff to perform their activities with the same degree of efficiency and effectiveness, irrespective of their physical location. Based on this argument there would be no need to move to a central location.
Tempting as these considerations may sound, decentralized HR SSC’s (e.g. in the form of hub and satellites) often fail in terms of effectiveness and efficiency for the following reasons
- Economies of scale – As stated before, the reason HR SSC’s have the potential to achieve economies of scale is concerned with the very fact that resources are shared in an HR SSC. Sharing human resources is infinitely less complex when staff is concentrated in the same location. Reasons for this are the absence of the needs for local coordination, leadership and excess capacity in order to guarantee business continuity on a location.
- Affiliation & Identity – Human beings are not for nothing often described as ‘social animals’; they have a need to build relationships with other human beings. In the working environment these relationships form the basis for building a common identity and a common culture. Since cultures tend to develop through natural processes, it is much easier to manage the development of a culture if people work together in one location as opposed to a situation where a handful number of people work together in different locations. In the absence of an SSC culture, the staff that remains to work on a specific location is more likely to (continue to) associate themselves with the local culture than with the SSC culture. In such a context it will be much more difficult to define, implement and maintain common processes and other standardization measures, given the proximity of local customers and their ‘pull’ towards customized services.
- Process discipline – One of the keys to achieve efficiency through an HR SSC is the use of common processes for different internal client groups. Examples include common performance management processes for all parts of the organization across all locations the HR SSC organization covers.
Quite often different functions and/or geographies belonging to the same organization will have different policies and processes, which need to be standardized before the economies of scale through an HR SCC can be fully realized. This can be a time consuming and difficult process. However, once these processes are standardized and successfully integrated in an HR SSC, it will often be relatively easy to preserve this standardization.
The reason is that requests to introduce variations and exceptions to standardized processes are likely to meet resistance from the leadership of the HR SSC to which these processes have been transferred. These variations and exceptions would confront them with additional complexities in their operation which could potentially result in a need for more resources, higher costs and quality issues. For these reasons the management of the SSC would therefore probably insist on a solid business case and senior management buy-in before agreeing to make such a change.
Because of this, it is easy to understand why it will be more difficult to maintain this harmonization if the SSC activities are spread across different locations, especially if they are executed at the same location as where the client group is based.
The people compromise
Most companies consider the staffing of their HR SSC’s as a non-brainer: the same staff that is currently performing these activities at the different locations. The logic behind the reason for this choice seems to be compelling:
- Know how – The current staff has the proven skill set and experience to execute the activities.
- Time – Staffing the HR SSC with employees that are familiar with the organization and its policies and processes enables the HR SSC to start its operations relatively quickly, since there would be no need to recruit, onboard and train new staff.
- Costs – Not using existing staff will result in higher costs in the short term (redundancy packages for the existing staff that will not be transferred to the HR SSC, lower efficiency level due to the time needed to bring the new staff across the experience curve).
- Social considerations – In the current economic climate letting people go is not something that a number of people (rightfully) feel should be done ‘lightly’.
Compelling as this may sound, there are however at least two important considerations that should be taken into account:
- Working in an HR SCC requires a different skill set and mindset – Employees in local HR organizations often receive their appreciation through a combination of the quality of their work and the quality of the personal relationships they have with the people they support. An HR SSC is often created in order to save costs or enhance operational excellence. Performance of individual employees in HR SSC’s is and should therefore be rewarded on the basis of the effectiveness and efficiency with which they perform their activities, rather than on the basis of customer intimacy.
- Customer demands increase after take-off – An HR SSC will be often perceived by the people it serves as a supplier. What therefore is likely to happen is that, after a short grace period, the demands in terms of quality, speed and costs become similar than those required from external suppliers, rather than required from colleagues. This also means that the performance of individual employees in the HR SSC is often more critically reviewed than in local HR organizations. The consequence of this is that employees working in the SSC will have to start to see their colleagues in the organization they are servicing as clients. Clients who are entitled to a professional service, rather than colleagues for whom they do a favour.
Therefore the assumption that all employees working in a ‘classic support department‘ will be effective SSC employees from day one may turn out to be a very naïve one. At the very least these employees should be informed about the differences between their old and new roles, especially in the context of the changes in the expectations of their stakeholders (the leadership of a company, their internal customers and the management of the HR SSC). In addition to this, a special training program (including simulations), might be highly desirable.
Finally, assessment centers can be considered in those situations where there are more candidates than roles available and where the existing appraisal systems do not provide a solid and sufficient basis for the selection process.
HR Shared Service Centres and High Potential Graduates
HR SSC’s provide opportunities to hire HR and non-HR talent despite the financial crisis. If an organization cannot place high potentials graduates in roles where they would normally land, it can put them in an HR SSC for a start. This could lead to a ‘triple win’ situation. The high potential graduates could secure a starting position in the labour market despite the current financial crisis. The HR SSC would be equipped with talented people and finally the organization could still build a talent pool for the future, despite the difficult economic environment of today.
A regional HR SSC of a large Oil & Gas company needed to raise its game: the cost were too high, customer satisfaction was low, and all innovation initiatives came and had to be driven from and by the top management of the HR SSC. The leader of the HR SSC decided to fill vacancies in the SSC exclusively with high potentials who could not find a role elsewhere due to the difficult labour market. These high potentials learned to do these jobs extremely fast, performed them efficiently and came up with numerous improvement proposals. As a result efficiency went up, cost went down and customer satisfaction increased. When the economy picked up and the business expanded again, these graduates moved out of the HR SSC and landed in key (HR and non-HR) roles in the company – having learned the basics of HR and understanding the organization.
The standardization compromise
The performance of local HR organizations is often evaluated on the basis of the customer satisfaction of the local line organization they support. Therefore they will have the tendency to take the demand of these local clients as starting points for their activities and respond to those as extensive and flexible as possible, often in the form of ‘tailor made solutions’. HR SSC’s on the other hand should be focused at providing a value for money service which satisfies the most important demands of all clients (‘mass production’).
In this context standardization is the key word. It is only through standardization that economies of scale can be achieved. Only when HR processes are standardized can they be shared by different parts of the organization; and only when HR processes are shared by different parts of the organization an optimal cost structure can be achieved. An additional advantage of standardized HR processes is that it is much easier to reengineer them in such a way that they can be optimally supported by ICT tools (e.g. workflow tools, Automatic Call Distribution and E-Filing), thereby increasing their efficiency even more.
In the start-up phase often processes are taken onboard by the HR SSC’s from different parts of the organization in their current form. The standardization and harmonization of these processes are supposed to take place later. However, unless a conscious effort is made, it can take a long time before this ‘later’ comes along. During this period the SSC may have to support non-harmonized HR policies and non-standardized HR processes with all the additional effort, costs and associated quality problems this creates.
A good way is to address this with HR and business leaders is to show what the benefits of standardization are for them in the form of cost savings and speed of delivery. One HR SSC manager promised each of the business units served by the HR SSC a concrete amount of cost savings, provided they could all agree on a set of common processes. During the meeting where this was discussed the SSC leader literally said that he did not care which process was chosen in a particular area, as long as there was one and only one process selected.
Measuring customer satisfaction in a HR SSC
Top management in organizations should realize that less customer intimacy and tailor made solutions, especially when coupled with the move to a different location, may (temporarily) lead to a lower customer satisfaction. This should be taken into account when measuring the customer satisfaction of HR SSC’s through surveys. In order to remove the negative bias to standardization, these surveys will have to measure the performance of their SSC’s on a factual basis through clear Key Performance Indicators (‘I received my work permit within the promised period’, ’All salary increases are correctly processed’, ‘The time to hire external staff met the norm of 95% within 75 days’, etc). These KPI’s should be agreed upon with the business and codified in a Service Level Agreement (SLA) which should describe the services delivered by the HR SSC to the organization as well as the criteria used to measure the quality of these services.
Subjective measurements like ‘They understand my business’ and ‘I am always treated in a friendly manner’ will only invite criticism and will not provide enough of a basis to identify and address areas for improvement.
Moving from compromises to unlocking value
In order to start undoing these historic compromises and to unlock the hidden value of SSC’s, the following process can be followed:
- Define the ideal (‘Soll’) situation – What would the ideal HR SSC for the organization look like in terms of location(s), staffing, infrastructure (technology) and standardization?
- Review the current (‘Ist’) situation – What does the current HR SSC look like in terms of location(s), staffing, technology and standardization?
- Establish the gaps – How large are the gaps in the different areas?
- Calculate the costs of the ideal situation – Calculate the investment, as well as the operational costs of the ideal situation.
- Create scenarios – What are the optimization choices that could be made and what are the (migration and investment) costs and risks associated with them?
- Decide – On the basis of the cost analysis and scenarios, the top management of a company should decide on the most optimal scenario for the organization.
- Implement – Once the decision has been taken, a proper implementation plan needs to be made on the basis of which the migration will be managed. Needless to say is that this plan should pay prominent attention to change management (including stakeholder management) and communication.
The final frontier: Moving beyond classic customer – supplier thinking
The final obstacle to realize the full value of an HR SSC is the lack of awareness that both the HR SSC as well as its clients are part of the same organization and should therefore strive to achieve an optimal solution for the organization as a whole, instead of optimizing the interests of their respective parts of the organization. Quite often however the relationship between the SSC and its internal clients mimics the traditional customer – supplier relationship that exists in the external world.
Although such a mindset might work during the early stages of the HR SSC to raise the bar in terms of customer orientation of the staff and management of the HR SSC, on the longer term it may lead to a two-tier society in the company between the HR SSC staff and staff working in other parts of the organization, as well as to non-constructive ‘us versus them’ thinking in both constituencies.
It is therefore of paramount importance to instill a ‘partner’ mindset between the HR SSC and its clients. This opens up the way to look for ways to improve and enhance the cooperation and integration of the HR SSC in the organization in a much more optimized fashion then would be possible in an external customer-supplier relationship. This is possible because the interests of the HR SSC and the rest of the organization should, at least in theory, be fully aligned, which is not necessarily the case in external customer – supplier relationships…
Copyright © 2012 Dirk Verburg – Short version published on The Shared Services & Outsourcing Network. Full version published on Outsourcing magazine