Maximizing Your HR Spend

HR organizations have fatter wallets this year, but are they optimizing their budget dollars? A recent study of HR professionals found that the funds primarily are being used to hire additional staff and support a number of HR services.

Thursday, June 2, 2011
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After two years of spending and staffing cuts, new research conducted by Bersin & Associates and Human Resource Executive® magazine reveals that businesses are starting to reinvest in their HR organizations again.

The March study of 296 U.S. HR professionals found that the funds primarily are being used to hire additional staff and support a number of HR services. Investments differ according to the maturity of the HR function, with highly mature organizations allocating more funds to talent management and strategic HR service areas. They are also paying off in terms of lower turnover, improved productivity and higher employee engagement.

This obviously is good news for HR leaders, many of whom have lately become experts at doing more with less.

HR organizations increased their budgets an average of 1.4 percent over last year's levels, thanks to more dollars in the company coffers. (Figure 1.) Current HR spending now stands at $1,218 per employee, though it varies by company size (from $748 per employee within large companies with 10,000 or more employees to $1,500 per employee within small companies with fewer than 1,000 employees).

Larger companies typically have lower spending ratios because they can leverage their scale to spread costs over larger employee populations. (Figure 2.) These spending figures include HR staff payroll, talent systems, and HR services and programs, but exclude safety and security-related spending.

Some of these funds are being used to hire additional staff, with HR headcount up an average of 1.8 percent this year. Newly funded positions can be found in areas such as recruiting, learning and development, compensation and benefits.

HR generalists are also in demand at companies, primarily in two areas: filling business partnership roles and managing HR services in new markets as companies expand globally. 

Focusing on Fundamentals

Many HR organizations are also spending extra cash on compensation benchmarking and consulting services. 

To curb attrition, especially among those workers who felt they were underpaid and overworked during the past few years, some companies are evaluating their compensation structures and making adjustments.

For example, at Philips, HR leaders recently conducted a local compensation market analysis to ensure that the organization remained competitive at both national and regional levels. Such compensation-benchmarking efforts have become commonplace as organizations recalibrate their wage structures for a post-recession world.

On the benefits front, the relentless rise in healthcare costs continues to be a key concern for corporate America.

To combat this familiar trend, many companies are modifying their insurance plans. Some are adding high deductibles while others are now including health-savings accounts. The Patient Protection and Affordable Care Act enacted last year has added further complexity, as organizations try to understand and implement changes associated with the new law.

Compensation and benefits, along with payroll administration and employee relations, are core HR service areas, accounting for 60 percent of HR budget dollars. (Figure 3.)

Although the HR profession is often criticized as being overly administrative, there is good reason to focus on HR fundamentals. Anyone who has ever counted on receiving a paycheck understands why. Once these processes are in place, HR leaders can start to shift their attention to talent management and strategic initiatives.

Solid execution for these core HR services is critical if the function is going to demonstrate its competence and build credibility with business leaders.

Talent-Management Services

Roughly one-third of the HR budget goes to talent-management efforts such recruiting, development, succession planning and performance management. Dollars are also being used to tie these processes together so organizations can achieve a holistic view of the talent lifecycle.

Talent acquisition represents one of the areas gaining momentum this year. One Fortune 500 financial-services firm reported that its number of open job requisitions more than doubled since 2008. To meet the increased workload, the firm has added nine contractors to its recruiting staff.

Although unemployment remains high, hiring qualified candidates continues to be a challenge for many companies. Some are taking steps to improve their programs for employee referrals and university recruiting. Social media is also increasingly being used to boost candidate pools.

The shortage of talent has made retention another talent priority. Turnover rates began to inch up in 2010, with total turnover averaging 17.2 percent and voluntary turnover nearly 11 percent. (Figure 4.) This uptick is likely a harbinger of things to come and should drive companies to pay greater attention to identifying critical roles in their organizations and minimizing flight risk.

Smart companies are now creating career, compensation and development strategies to retain key employees, as well as implementing knowledge-transfer initiatives in the event of departures.

Strategic HR Services

Nearly one in 10 HR dollars is allocated to strategic HR services, which include employee engagement, workforce planning and measurement, and wellness programs.

Today, tracking employee engagement has become de rigueur across corporate America, and the vast majority of companies have a process to regularly assess employee engagement. 

Workforce planning and measurement efforts, meanwhile, are far less standardized. Few companies have a systematic way to examine future talent needs and skills gaps, and analyze them against demographic and external factors. This is unfortunate, since companies can realize strategic value from analyzing the supply and demand of talent.

For example, ATK, an aerospace- and defense-product manufacturer, used advanced workforce analytics to predict that upcoming changes in benefits packages would increase the likelihood of retirement by 20 percent in certain business units. The organization was able to take immediate action to manage knowledge-transfer efforts and prepare its workforce for these anticipated changes.

Another important strategic HR initiative involves wellness efforts, which over time can deliver large returns in the form of lower healthcare costs. To improve the health and well-being of their workforces, companies are deploying a variety of tools.

Esterline Technologies Corp., for example, offers free on-site biometric screenings and health coaching for employees interested in changing a behavior or kicking a habit. Integrys Energy Group, meanwhile, is encouraging employees to choose healthy lifestyles by offering stipends to those meeting certain health-related criteria during the year.

With healthier employees, "we'll be better able to curb the rate of increase in our healthcare costs," says Mike Hurley, director of HR services and administration for Integrys.

Evolving the HR Function

As HR organizations become more sophisticated, their priorities and spending patterns change -- and their processes and practices need to evolve in order to have a greater impact on business and talent outcomes. 

Bersin & Associates groups HR organizations into one of four stages of maturity according to their business alignment and scope of initiatives. At the lowest level of maturity is the "compliance-driven HR" organization, which delivers core HR services such as payroll and benefits.

There, the HR function is often led by an operations or finance executive and focuses its attention on meeting legal requirements. At this level, the organization has no documented HR strategy and few, if any, consistent talent processes. Instead, line managers assume many of the responsibilities for recruiting, managing and motivating employees as they see fit.

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The highest level of maturity is the "business-integrated" HR organization, which helps drive the business through workforce strategies and people data. There, the HR leader plays a strategic role in the organization and is closely connected with other business executives. HR systems are tightly linked and connected to business systems, enabling HR and business leaders to access the necessary people data to make decisions.

Major initiatives at this level involve continuous improvement of HR processes, data analysis and trending, and business guidance.

Enhancing the skills of the HR staff members is a key part of any HR continuous-improvement effort. At defense contractor L-3 Fuzing & Ordnance Systems, one of the most critical aspects of HR staff development is staying in touch with the needs of the business.

Newly hired HR professionals spend the first two weeks on the production floor learning the business processes and products through hands-on work. On an ongoing basis, each HR staff member participates in cross-functional projects that provide him or her with an understanding of other parts of the business.

"Eighty-five percent of our revenue comes from manufacturing product," says Cyril Puthoff, director of human resources for the division. "Our HR people must understand the processes and job roles within the manufacturing and support groups in order to help the business meet its goals and commitments."

Granted, these efforts require time and money. Research shows that spending increases with each successive level of maturity, so that "business-integrated" HR organizations spend $1,759 per employee, on average, compared to just $1,061 among "compliance-driven" HR functions. (Figure 5.) But while compliance-driven groups spend the majority of their budgets on core services, business-integrated groups invest nearly three times the funds on strategic initiatives that will prepare their businesses for future success.

The payoff is well worth it. Companies with business-integrated HR functions have nearly 40 percent lower turnover -- and more than twice the revenue per employee (Figure 6) -- compared with those with compliance-driven HR functions. In addition, the former have 38 percent higher employee engagement and far superior capabilities for developing and managing succession pipelines. So the payback resulting from improving HR effectiveness and strategic leadership far outweighs the additional costs.

Looking Ahead

HR organizations can't expect to change overnight. First, they need to excel at performing their core functions: payroll, compensation, benefits and employee relations. With the basics working well, they can then turn their attention to talent-management initiatives. In the coming year, recruiting and retention are likely to take center stage, as companies plan their talent needs for their next stage of growth. 

Mature HR organizations will be ahead of the game. These groups can shore up their core services and talent-management activities, freeing up more time for them to spend on strategic HR issues.

Workforce analytics is one key initiative, and many mature, business-integrated HR organizations are developing staffs with better skills in analyzing workforce data and forecasting. Similarly, wellness programs will grow in importance as companies wrestle with rising healthcare costs.

Finally, for these companies with mature HR functions, employee engagement is more than just conducting a survey. Rather, it involves talent initiatives at all stages of the employee lifecycle that influence an employee's motivation, productivity and future career with the company. 

Put simply, investing in HR matters! Companies that have spent the resources to improve their HR capabilities and business alignment will be better able to hire the right talent, expand more quickly, and recover from the recession faster than companies with less mature and effective HR teams. And this, in turn, should lead to better business outcomes.

An executive summary of the report, HR Factbook 2011: Benchmarks and Trends in HR Spending, Staffing, and Resource Allocations, is available on the Bersin & Associates website

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