Cover story: HR - Life support

Michael Hammer, the “father” of business process re-engineering, once wrote a groundbreaking article in the Harvard Business Review headlined “Don’t automate – obliterate!” For both good and bad reasons, the same is being said behind the backs of the HR directors in many of today’s UK organisations.

Unquestionably, there is something a bit rotten in the state of the HR industry, or at least the market for technology and consulting that serves it. The crisis has two aspects: a lack of clarity on what to do next and what the next area of growth is, and question marks over the entire future function of HR itself.

“It’s a bit of a strange industry, and has been since batch processing days – from which, in many ways, it’s still evolving,” says Andy Kellett, senior researcher with UK analyst firm Butler Group. “It’s a very traditional IT marketplace, shall we say. In some ways a backwater.”

That may be too strong a view for some, but there is a sense that we’ve reached stasis in the established market for the automation of basic HR functions. “Payroll’s been outsourced for 37 years, and I would estimate 60% of UK payroll is outsourced now,” says Philippa Goodyear, sales director for HR services at CMG Admiral.

This has an effect on what you can continue to expect to sell. “The market is reasonably flat,” admits Ann Fitzpatrick, managing director of one of the more established players, Meta4. “One of the biggest issues for HR vendors is that everyone in the UK probably now has some form of electronic HR and payroll solution.”

This has an impact on what opportunities there are for consulting. “The differences between the top tier products is really very small now. The consultant’s role is really about putting out the ‘fires’ in the business, and how to best align with business processes,” warns Jason Nicholl, principal of human resources at SAP VAR Axon.

Peter Collinson, customer service and product planning director at another established HR and payroll software player Midland Software, agrees. “The market is changing rapidly, with customers wanting far quicker implementations – and everyone wants reduced cost and as fast an ROI as they can,” he says.

“People just won’t tolerate long-term, ERP-style projects now. People are quite prepared to go with vanilla software that is fairly configurable than customise a lot of software. So I see less technical consulting in the market and more demand for business advice and guidance level consulting.”

And where traditional HR payroll automation projects are still underway, they sound like a lot less fun. “HR departments are managing their vendors better than they used to, and they don’t want to spend a lot of time doing it. HR departments are also being a lot clearer than they used to be,” says Richard Finn, director at specialist UK HR consultancy Penna Change Consulting.

Companies have either already automated the lower-level parts of what has traditionally been seen as the function of what we used to call “Personnel”, issuing wages (or as the delightful jargon has it, “wealth benefits”).

Then they bought the HR enterprise wide systems that usually came attached to an ERP rollout, such as Oracle’s, SAP’s, or indeed market leader Peoplesoft’s solution. But what next?

Hence the search for the Next Big Thing – and most observers think this comes in one reliable, welcome consulting opportunity package: outsourcing. Recent major HR outsourcing deals in the public sector included a £205m deal between Blackburn and Darwen Council and Capita, and a £300m public-private partnership between Liverpool City Council and BT; in the private sector, a £50m contract between Nortel Networks and PricewaterhouseCoopers, and £100m agreements between BAE Systems and Xchanging and BT and Accenture.

But at whose impetus? HR’s or the parent organisation’s? This, it becomes apparent, is a key question.

There are those who say the pull is from HR itself, part of a drive to drop routine tasks and go higher up the corporate value chain. “Organisations are looking to get a bang for every buck now,” says Penna’s Finn. “Training admin is a good example. HR staff don’t want to be handling that kind of low level function or payroll, but concentrating on changing the business or high quality design of those training courses.”

In the same vein but somewhat more directly comes Fran Griffiths, partner in Andersen’s Business Consulting unit. “You need to install HR systems that automate away the crap,” she says. “Line managers need to take on more responsibility for some of their own HR to enable HR to take on bigger, more strategic, responsibilities.”

But the problem is – perhaps as with all outsourcing issues? – that the line between what is tactical and strategic can become blurred. HR directors think they’re offloading routine tasks in order to shine more gloriously in the company firmament. Others see their whole existence as a problem, and a cost to be curbed – which potentially spells very bad news indeed.

“Organisations have looked everywhere else – they’ve looked at IT and all these other things for strategic advantage. Now they have to look at people and the best management of them as an asset,” says Finn. Elisabeth Wilson, HR strategy manager for Peoplesoft UK puts the sentiment another way: “People will want more outsourcing of things like HR, perhaps benefits administration, payroll, or pensions, because of the need for cost savings and ROI. (HR) outsourcing hasn’t taken off as much as it could have done because of many mixed messages about whether we’ve been talking about technology, process, function.”

Some people want to ‘clarify’ that for companies. Take e-peopleserve, the 1,600-strong joint venture between BT and Accenture with offices in London and Dallas set up in August 2000 (it has as yet no other clients than its parents). One of its account directors, Brian Dunton, sums up the value proposition he’s putting to potential clients, and it’s not about making the HR guy look like a hero: “Cost. It would be na’ve to pretend it’s anything else. We see this market growing as companies increasingly try and turn HR from a cost into a value. When people start paying for a service it tends to add value to it in their eyes. The retained HR function will be smaller and more focused.”

Or cut back to nothing? “People who may get outsourced tend to be generally opposed to outsourcing,” jokes Shaw Pittman, a US-based law firm which has specialised in many aspects of HR outsourcing and acted as legal advisers on the landmark BP Amoco-Exult $600m HR outsourcing deal of late 1999. “There are a number of HR processes that are outsourcing potential, but many times you find the HR function is very entrenched.”

“In many ways HR has failed,” says Maurice Phelps. He is a man who should know, as managing partner at EP-First: the company has just compiled a database of many thousands of HR datasets across Europe. “It’s well known in the industry that there are fewer HR directors at board level now than at the start of the ’90s.

“HR should still be outsourcing some of its services to specialist companies if they have the expertise,” he goes on. “But if HR isn’t careful, it’ll commit suicide. It wants to outsource what it sees as low-level transactional activities – tracking how many people are in the company, what they do, who’s sick today – in favour of concentrating on high-level strategic functions.

If you keep talking about soft issues they’ll end up thinking of you as a service and then as a cost centre. For Gawd’s sake, get strategic if you want to survive! The problem is it’s the transactional activities, not the high-level things, that the rest of the organisation wants them for. Outsourcing may be a very questionable idea if you’re looking for a position of influence in the company.”

There’s no doubt that there is a drive to offer HR outsourcing as a product: others are angling for this market besides Exult and e-peopleserve.

They might find it harder than they think. There may indeed be structural issues with what HR does that means it’s very hard to off-load in its entirety. “I find HR harder to outsource than something like financials,” notes Mike Upchurch, global services development manager at Cedar, another established HR software firm. Meta4’s Fitzpatrick says: “There is a potential for outsourcing, but in the main people are the biggest cost now in companies and I can’t see how you could effectively manage such a core outsourced function. It may appeal to some firms, but I have my doubts.”

So, it seems, have the customers. When Exult won that contract with BP Amoco it was seen as an exemplar win, signalling the way forward. Now BP has pulled back from the entire experiment, it seems. Speaking at the Chartered Institute of Personnel Development conference a few weeks back, John Melo, its vice president of downstream digital business, told delegates: “It has not been a challenge putting e-HR on the web – but getting people to use it was. Our IT and HR community led this project, but we needed to start with the business wanting to do it in the first place. We forgot about the people and the processes and didn’t get buy-in from unit managers.” Late last month BP said it had halted the project altogether. (Exult’s London office did not return calls for comment.)

So if the tried and tested systems are somewhat played out, and complete outsourcing isn’t for everyone, is it time to pack up the ball and leave HR consulting altogether? Some people think this is the decision at least some of the big players have already made, after all. “I don’t think this is sexy enough for the Big Five,” says Butler’s Kellett. And Penna’s Finn adds: “The Big Five haven’t exactly left this area altogether, but they’re focusing a lot more on ERP work as they think that’s more directly profitable. As a result we see good-quality HR specialist consultants leaving them and coming to companies like us.”

But it isn’t quite that stark. Andersen partner and UK head of human capital Brett Walsh claims to be offering HR directors all the services they would want to buy under one roof. They include strategic and policy design, post merger advice, compensation, employee reward, pension, international employment solutions and employment law.

Indeed, there remains much opportunity within the “people business”. First off, all that legacy software isn’t being put to its full potential.

Integration is an issue. “HR and payroll data aren’t necessarily always integrated,” says CMG Admiral’s Goodyear; Butler’s Kellett agrees. “Payroll and personnel systems have never really ever talked together properly. Some of the big players in the old days offered solutions that never really joined together. Payroll and HR have always been semi-autonomous fiefdoms.”

Meta4’s Fitzpatrick says: “The opportunity going forward I think is to better link the basic record-keeping in the HR system with the employee and recruitment information, and ask companies, Is that system you’ve got really working for you? This may be a consulting or a software opportunity.”

Legacy can include recent legacy. “We get a lot of organisations coming to us after they’ve installed a big enterprise wide HR system and asking how do we use this?” claims Penna’s Finn.

The concept of linking HR data with payroll information may seem strikingly obvious but apparently it’s never really been done, presenting an opportunity e-peopleserve thinks it can grasp with its idea of core common employee record.

Then there’s the concept of more efficient delivery of existing applications through ASP – and it turns out this is something the payroll vendors already know how to do very well. “Some of these guys have been delivering this as ‘ASP’ since the ’70s,” says Kellett. “A big SAP HR implementation will cost you £2m to £5m, so an outsourcing means of spreading that cost is going to be increasingly attractive to customers,” adds CMG Admiral’s Goodyear.

Next up is the whole idea of self-service and using the intranet to deliver HR functionality. Ian Turner, MD of content management firm Broadvision, thinks this is going to be a major focus area for companies in the next few months. “Companies aren’t going to buy any more infrastructure so they’ll look at using, and using better, what they’ve got. We see a lot of interest in employee portals from our clients.”

Another opportunity area is benchmarking and the drive to increase HR’s efficiency, which can be, again, either a straight software or consultancy sell. “We have to move away from the paper filing cabinet that is all too often what the HR database is,” says Meta4’s Fitzpatrick. “HR professionals of today are totally different from even five years ago; it’s not about How do I do pensions? But how do I work through these complex business processes. They now have to be cross-functional, not just doing hiring and firing but working with the total supply chain,” says Axon’s Nicholl.

Andersen’s Griffiths adds: “In the past there’s been too much lip service paid to change management, too much of it being bunged on the end. Now with less money to spend customers want to make sure the projects they have got underway are successes.” Finn jokes:”Customers basically want plagiarised best practice.”

This trend certainly makes sense to Nicholl. “What you see on the computer in the morning should tell you who you are in the organisation, but where is that defined? HR would be the right place. That could be the central place to effect change. How do I change my junior staff’s permissions when I am away other than through HR?”

Hence the concept of B2E – Business To Employee – in line with B2C and B2B. “HR will be the centre of that,” claims PeopleSoft’s Wilson.

Yet like the man said, there is nothing new under the sun. “Last year these projects were called e-recruitment and e-employee self-service. This year they’re called employee portals and have dropped the ‘e’,” jokes Cedar’s Upchurch.

For all the ebbing and flowing, though, a couple of fundamentals are emerging. HR is becoming, almost despite itself, more important – and yes, that’s true even in a recession.

Why? Demographics. “The end of the Baby Boom means there are less skilled people available,” Axon’s Nicholl points out.

As a result HR needs must become much more about employee retention. “HR is one of the most understated functions in terms of its strategic importance, but that’s changing,” says Rick Bacon, managing director of corporate business at Parity, a UK technology training and staffing firm. “It’s been poorly served in terms of technology, but I think that will finally start to change soon.”

So, in fact, HR may turn out to be a really good place to be in. “HR can really add to the bottom line in a way it just couldn’t five years back. In the past it was just all driven by payroll and the finance and IT departments,” says Nicholl.

Consultants can be part of that process – but the lesson is neither simple (HR payroll automation) nor fancy (web self-service or Net-driven outsourcing). Maybe that’s why HR has always been difficult to automate – and impossible to obliterate.

FACTS & FIGURES

There is a lot of activity in HR consulting. IDC (Human Resource Services Marketplace, Part 1: US Forecast and Analysis, 2000-2005) found that spending on HR services in the US alone totalled over $22.7bn in 2000. IDC estimated that service revenues are expected to reach $45.9bn by 2005, with HR business process outsourcing (HR BPO) the fastest-growing segment of that, expected to reach nearly $9.7bn by 2005, based on a projected a five-year compound annual growth rate of 31.7%. In November and December 2000 IDC surveyed 294 CEOs, VPs, and directors of HR in the US, and found:

– the most frequently outsourced areas of HR are compensation administration (68.7%), health benefit administration (50.9%) and payroll (47.8%);

– the two most influential factors in the decision to outsource HR tasks were providing access to greater expertise and improving the quality of service delivered;

– 55% of respondents said it is important that service providers offer web-enabled services, and over 48% of respondents stated that it is important to provide self-service capabilities.

IDC ALSO NOTED THAT:

– scarcity of talent and changing workforce demographics will continue to reinforce the strategic importance of HR. The ageing of the workforce will continue through the next decade, leading to increased scarcity of and the need to find and keep top talent;

– the need for organisations to focus on core competencies has led to greater interest in the outsourcing of the HR function. Internal competition for scarce resources is growing, and companies are focusing more rigidly on core competencies;

– web-based delivery of HR information and services is rapidly expanding the demand for services and the number of service providers.

IS HR STRATEGIC?

A study by Andersen’s Human Capital group, published in conjunction with Personnel Today magazine, suggests when it is done right it can be. Average increase in earnings per share of FTSE 100 companies with HR represented in the boardroom was 88% between 1996 and 2000, double the average percentage increase for all FTSE 100 companies during those four years, based on company performance figures as of the end of August this year. Only a quarter of the 60 companies which have been in the FTSE 100 since 1996 have HR represented at board level.

Gary Flood is a freelance journalist