SAP White Paper SAP Services
Strategic Levers to Optimize Your HR Processes STANDARDIZATION, IN-HOUSE CENTRALIZATION, AND OUTSOURCING: A PORTFOLIO APPROACH
CONTENT
^ 4 Executive Summary ^ 5 Part I: The Strategy ^ 6 Part II: The Process 6 Step 1: Determine Your Top Priority Processes 7 Step 2: Deconstruct Processes to Evaluate Scale and Cost 7 Step 3: Determine Optimization Opportunities and Risks 8 Step 4: Finalize and Take a Reality Check of the Scorecard ^ 9 Conclusion
Executive Summary
Targeting Processes for Your Alternative Delivery Strategies
HR leadership must carefully evaluate which processes are going to remain “as is” versus which should be standardized and centralized or outsourced. While this analysis requires time and effort, doing the work gives you a better line of sight on which HR service delivery strategies are best for your organization and maximizes the chance of success. This paper examines how you can decide on standardization and in-house centralization or outsourcing for your business processes. It provides not only the highlevel rationale but also the detailed steps necessary to target the right processes for your organization’s alternative service delivery strategies.
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SAP White Paper – Strategic Levers to Optimize Your HR Processes
Part I: The Strategy
Scoping Your Choices
Outsourcing peripheral activities – business process outsourcing (BPO) – to external providers is becoming an attractive, cost-effective alternative to handling them internally. By outsourcing noncore business processes such as HR and procurement, you can focus on core competencies and free up valuable resources to drive growth and innovation. But in the past, BPO pro viders and their clients sometimes made scope choices that backfired. For BPO to be successful, the processes must be suitable for outsourcing, and the provider must have the capa city to handle the complexity of the processes. Large-scale BPO deals sometimes bring way too much front line to inexperienced provider and client teams. In some instances, a provider may have to reengineer the processes in order to leverage the provider’s scale advantage – and this requires buy-in from the client team. Needless to say, the more scope included in a project, the more challenging it is to secure buy-in everywhere. The first step when considering BPO is scoping the choices – determining which processes should be kept inhouse versus outsourced. Processes that should be centralized (either internally or in an outsourcing scenario) are typically the ones that benefit most from standardization and automation. Making these determinations means figuring out which processes matter in terms of cost, which processes scale and can be optimized, which processes can benefit from a provider’s scale and performance, and which processes won’t generate an uproar when changed.
improvements? The horizontal axis maps the challenge associated with the change: how much disruption will I get when I do this?
SAP has empirical evidence that many HR processes have a clear and steep economy-of-scale behavior. But in the end, whether you can leverage this to your benefit is situational – it depends on your specific processes and their requirements and what the BPO pro vider is able to do.
Under process number 1, the internal shared services deliver insufficient gains to justify the change, while BPO with only marginal additional effort and challenge delivers a good trade-off. In process number 2, internal shared services deliver decent gains already and have substantially less negative impact than BPO would have. With process number 3, both options are viable: BPO has more gain but also results in a greater challenge for the organization. In process number 4, process harmonization and standardization are simply too challenging, and the achievable gains do not justify the effort.
Do the assessment and then summarize it: savings, qualitative improvement, and disruption. What would the gain be for each one of those subprocesses if they were harmonized inhouse or outsourced? When you have answered that question for each subprocess, you can come up with a chart that looks like the one shown in Figure 1. The blue circles depict what you can achieve in-house (internal shared services), and the gold ones show what you can get with BPO. The vertical axis represents the gain to be achieved by standardizing: What is the potential cost reduction? Are there other GAIN: High Potential cost reduction or other improvement through harmonization
Once you have determined an effective strategy, you need to select the tools for analysis and service delivery.
Candidates for standardization and one-to-many
3
3
X Shared-service center
2 1
X Business process outsourcing
2 4
1 Low
4 Should remain customer specific
Low
High
Challenge: disruption due to change management of harmonization Figure 1: Assessing Services for Standardization and Outsourcing
SAP White Paper – Strategic Levers to Optimize Your HR Processes
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Part II: The Process
Prioritizing and Deconstructing the Processes
There are many challenges and tradeoffs associated with making scope choices for your HR delivery strategy. HR leadership must carefully evaluate which processes are going to remain “as is” versus which should be standardized and centralized or outsourced. While this analysis requires time and effort, doing the work gives you a better line of sight on which HR service delivery strategies are best for your organization.
Step 1: Determine Your Top Priority Processes Any analysis must begin with a careful and realistic evaluation of current processes and associated costs. In this first step, the goal is to identify process areas of large cost where at least a part of the process can be both standardized and centralized. Begin by iden-
Outsourcing peripheral activities – business process outsourcing (BPO) – to external providers is becoming an attractive, costeffective alternative to handling them internally. tifying the relative percentage cost of each of your major processes and then consider the potential savings to be gained (or costs to be added) if those processes were standardized and centralized. For example, payroll processes today may represent 10% of your total HR costs, while benefits administration processes represent 6%. Research shows the effects of scale can reduce those expenses by 60% and 20% respectively (see Figure 2 below). Evaluating the current costs and potential savings from volume processing provides a view into those process areas for immediate focus. Called your “Priority 1” items, these are the pro-
Proportion of total HR cost 40%
0%
2%
Observed economies of scale
Pension plan administration 20%
4%
6%
8%
10%
Employee relocation Compliance
0%
-20%
-40%
-60%
Employee relations
Benefits planning
Workforce data management Benefits administration Labor relations Compensation Strategic resource planning planning Strategy Exit Time and attendance management Compensation administration
-80%
Strategic processes
about the possibility of gaining efficiency Priority 2: smaller targets or relative lower observed economies of scale
Training and development
Recruitment and staffing
Payroll administration
Transactional processes
Source: ASUG data (200 U.S. respondents, 90 full questionnaires), SAP BPO analysis
Figure 2: Prioritizing Your Processes
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Questionable area:
12% data inconclusive
SAP White Paper – Strategic Levers to Optimize Your HR Processes
Priority 1: large cost targets that present objective potential for scaling up
cesses that are typically higher cost in your organization but would yield the greatest savings when centralized and able to leverage the effects of scale.
Country 1
Scale
Country 2
Country 3
Country 4
Step 3: Determine Optimization Opportunities and Risks
...
Payroll distribution
60%
Tax payment and filing
65%
Payroll accounting
70%
70% 10%
20% 5%
75% 15%
25% 7%
85% 10%
3% 40%
3% 50%
5% 80%
5%
30% 2%
5% 60%
2% 40%
2%
...
3% 50%
1%
2%
For each delivery model
B) Business process outsourcing
50%
A) Internal shared services
Payroll calculation
Current “as is” model
Cost
Once you have gathered scale and cost information for a process, you are ready to evaluate the optimization opportunities and risks. For each process evaluated in Step 1, examine the qualitative service improvements you could expect through internal shared services, and again through BPO. To what extent would quality or timeliness be improved in each model? Are you going to retain certain process designs or allow optimization within the shared-services or BPO model?
Figure 3: Evaluating the Scale and Costs of Subprocesses
Step 2: Deconstruct Processes to Evaluate Scale and Cost Starting with your Priority 1 high-cost and low-scale processes (later, you can add other processes to the analysis), deconstruct each one into its subprocesses. For each, determine the current amount of efficiency you’ve already achieved, as well as the proportion of total process cost for that subprocess. Include a country-by-country analysis of these activities (or differentiate by other criteria that drive process variations). Once you’ve completed your baseline (as is) model for scale and costs (see Figure 3), simulate the responses as they would look under an internal shared-services model, and again under BPO. Consider the differences of shared services versus BPO. While BPO introduces new cost drivers such as integration to the retained parts, governance, and the providers’ own profits, it can also deliver significant savings due to higher leverage of assets, process optimization, and labor arbitrage.
In the example in Figure 3, the Priority 1 process payroll administration has the relevant subprocesses of payroll calculation, payroll distribution, tax pay-
Shared services can generate process savings and reduce operational risks, but BPO is often able to achieve greater leverage of people, processes, and technology. Consider also the disrup-
Stronger scope choices are a necessary foundation for process reengineering. They help you focus the transformation efforts – people, processes, and related technology – on a target that is both realistic and rewarding. ment and filing, and payroll accounting. While the payroll calculation subprocess is currently at 50% efficiency in country 1 and represents about 10% of total process costs, it has achieved 70% efficiency in country 2, representing a 5% share of costs. Continue your evaluation of the remaining current subprocesses and country versions to complete the “as is” model, and then move onto the future models for shared services and BPO.
tion that can result from standardization – the organizational challenge of dealing with behavior changes of your people. Payroll is mostly a back-office activity, and so little is actually noticed by the workforce when underlying processes or technologies change. However, performance reviews, self-service functions, and other processes typically have higher visibility, and so the challenge and risk potential are greater.
SAP White Paper – Strategic Levers to Optimize Your HR Processes
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Scores for all subprocesses
Process 1
Process 3
...
Country X
Country X
...
Country 1 SSO*
Country 1 BPO
$$
$$$
$$
$$$
Medium
Medium
Low
Medium
Low
High
Medium
Low
Savings Qualitative improvement
Process 2 ...
Gain
Disruption (negative)
For each delivery model *SSO = shared-services organization
Challenge
A) Internal shared services B) Business process outsourcing
Figure 4: Evaluating the Resulting Scorecard
Step 4: Finalize and Take a Reality Check of the Scorecard Assign weightings across your scorecard to reflect the level of importance your organization places on achieving individual savings, attaining improvement levels, or managing disruption factors for each subprocess. Finally,
As you’re determining your resulting service portfolio, ask yourself, “Does this make sense?”
should be bundled to make synergies happen? Despite the results, are there processes you cannot split up too finely because the resulting integration and synchronization efforts would simply be too challenging? Following the four steps above, you can create a structured approach to evaluating your service delivery options – an important first step in a successful HR delivery strategy.
summarize your findings into a scorecard that enables you to balance potential gains and challenges across a detailed array of services. As you’re determining your resulting service portfolio, ask yourself, “Does this make sense?” Are there processes that
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SAP White Paper – Strategic Levers to Optimize Your HR Processes
Conclusion
How SAP Can Help
There are many challenges and trade-offs associated with making scope choices for your HR delivery strategy. HR leadership must carefully evaluate which processes are going to remain “as is” versus which should be standardized and centralized or outsourced. Stronger scope choices are a necessary foundation for process reengineering. They help you focus the transformation efforts – people, processes, and related technology – on a target that is both realistic and rewarding. Regardless of your delivery strategy, SAP has the software, platform, and experience necessary to support your deployment choices. SAP® solutions already support many BPO deployments, and SAP is the solution provider of choice for shared-service centers worldwide. • The right software. The SAP ERP Human Capital Management (SAP ERP HCM) solution provides you with the most comprehensive, global human capital management functionality available today. The software enables better talent management, HCM service delivery, workforce analytics, workforce process management, and global integration. • The right platform. We have optimized SAP ERP HCM for use in BPO by providing the right business process foundation powered by the SAP NetWeaver® technology platform. The robust and global platform supports multiple languages and complies with the local legal requirements of an unprecedented number of countries –
making SAP a natural choice for centralizing process delivery, including BPO. SAP NetWeaver makes it easier to move noncore business processes outside the enterprise while retaining full control of information and workflow in a tightly integrated fashion. • The right choice. SAP’s sustained power of innovation, coupled with its clear road map for upgrades, protects your investment by enabling BPO providers to continuously leverage technological advances for your business processes. More than 12,000 customers in over 110 countries worldwide use SAP ERP HCM to manage more than 60 million employees. SAP leverages this experience to continually improve functionality – enabling BPO providers to continuously leverage technological advances for your business processes – so you continually realize greater business results. To learn how SAP can help you transform and optimize processes for your organization’s alternative service delivery strategies, call your SAP representative today or visit us on the Web at www.sap.com/services/bpo.
SAP White Paper – Strategic Levers to Optimize Your HR Processes
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