Eight out of ten large companies are currently running a program to reduce the cost of their HR function and improve its effectiveness at the same time. But when we asked the Heads of HR of leading companies how their transformation program was going, their responses were very rarely on the positive side: “It’s cumbersome”, said one. “Takes longer than we thought”, replied the other. Others shared this pessimistic mood: “Business has lost their buy-in.” Or: “Aspired strategic role for HR business partners was overambitious.” Or else: “It’s difficult to establish a global HR model, especially in smaller regions.” “Huge investments in technology, but still lacking the integrated IT platform we need.” “Shared service interface to local HR had to be redefined twice and is still not working seamlessly.” If you sum up those individual assertions, you look at sobering numbers: Less than 20% of all HR transformation programs produce the aspired results. To put it bluntly: Everybody is doing it, but nobody is getting it right.
So why are companies spending seven, sometimes eight digit amounts on consultants and technology, put their smartest people on the task – and still fail? To arrive at reliable answers, one has to take a close look at the evolution of HR transformation programs:
The first wave: Transformation focused on economies of scale
A CEO of a consulting company specialized in HR transformation once told us: ‘We are working the McKinsey aftermarket.’ His company is aiding Heads of HR after McKinsey (or other) consultants have left the company – leaving behind a blueprint for a more efficient HR function after a big overhead cost improvement project. These projects often look at Finance functions first, then turn to HR employing similar levers for efficiency improvement. The idea is simple and compelling: Centralize transactional tasks in shared services, simplify them and eventually automate them to maximize the economies of scale.
In a next step those tasks are outsourced to external providers who contribute additional cost savings because their specific labor cost is significantly lower. Remember: This model was initially created to transform Finance and IT. It found its way into HR through big overhead cost projects, leaving the CHRO with an efficiency gap of the HR function. (Strangely enough, the efficiency gap is always proven by benchmarking-data, and is always coming out at 25-30%.) HR then typically even raises the bar by reviving an old dream of HR executives: Transfer transactional HR tasks to shared service centers and use the freed-up time for more proactive, forward-thinking, strategic work to ultimately become a true partner of business. To get there, almost each HR function in the world has started an HR transformation project to build and then – in later phases – to refine a three pillar model of HR business partners, HR shared service centers and HR centers of excellence. What sounds pretty straightforward, still often fails. Why? A research by CEB in 2015 found a pattern for failure, a so-called ‘transformation death spiral’:
Lack of joint ownership
Milestone number one on that downward spiral is the lack of joint ownership of transformation goals of HR and business. HR transformation projects that embark with a huge efficiency goal of 25% are perceived by the business as cost cutting projects of the HR function. In the best case, business simply does not care. Often however this creates adversity rather than collaboration: “HR is trying to cut their cost. We have to prevent HR from pushing their work over to us, so they can get to their goals” – this thought forms in many heads of business executives. The ‘we’ and ‘them’ relationship is diametrically opposed to the HR’s dream of a true partnership with business, in which both partners meet on an equal footing. Adding the business partner idea to the initial cost cutting goal is often not sufficiently conveyed to the business – and, consequently, not fully understood.
Complexity of the model
The second milestone on the spiral the is the complexity of the aspired model. The three-pillar-model is very complicated one: It creates a broad variety of interfaces between local business partners and shared services, many more variations than those needed in transactional Finance tasks like accounts receivable or accounts payable. Sounds logical: A model initiated in Finance needs adaptation before implementing it in HR. The complexity of the interfaces between local HR and shared services functions lead to additional interface costs: Often companies sneak in temporary workers and shift resources from other positions to make up for the broken or overly complex interfaces. Additionally, aiming at a strategic business partner model is very ambitious in itself – if one considers, that HR is transforming from an era, when HR was a local, transactional support function. Managing this transformation under the pressure of a 25% cost cutting goal is often too stretched a goal.
Strategic capability gap
The third milestone then is the capability gap of HR staff: When embarking on the originally cost-cutting focused project, HR staff has not been the greatest fan of HR transformation. For each individual within the HR function, the program is a major change. And this change is hard to manage: Cutting cost, entering into a completely new organization model and filling new and strategic roles is threatening for individuals. And many of the HR professionals in a company simply need a lot of up-skilling before they are ready for the aspired strategic role. Often, after a first wave of transformation, newly announced HR business partners find themselves in business meetings hardly capable of adding value to these – which again reduces HRs credibility in the business.
The second wave: Transformation focused on HR technology
After having experienced the difficulties and failures of the first wave of transformation, many companies are now entering a second wave. This one is technology driven. Cloud computing and new providers generate a big investment wave for HR technology: More than 90% of multinational companies have significantly increased their HR technology spend in the last two years or will do so in the coming two years.
There are two driving factors behind this new wave of technology investment: First the providers, who are pushing their customers towards new cloud technologies by simply stopping the support for the old on premise systems. And second, there is the undeniable need for HR to become a more data driven function. It is by transforming into this direction that HR tries to influence business decisions with HR data and ultimately fulfill the long aspired role of a strategic partner. The jury is still out to assess the success of this phase. But three important risk areas have already been identified by the first movers of this wave. They will need to be taken into consideration by all those companies now igniting the second wave of HR transformation.
The illusion of easiness
With new HR technology comes the hope to replace expensive, cumbersome, on premise systems with sleek, easy-to-implement and easy-to-use apps. Workday, as a comparatively new provider of HR technology is certainly a game changer that fueled this hope. The company made quickly new friends in the HR world with its ‘true mobile first’ approach, its greenfield architecture, its attractive user interface. And it forced the ‘on premise dinosaurs’ to accelerate their cloud activities: SAP and Oracle both have picked up the competition with their SuccessFactors and HCM Cloud solutions. These companies together with a handful of other players have created a new HR technology market – all of them sharing one promise: Simplicity.
Yet, simplicity in functionality and usage does not necessarily mean simplicity in implementation. The new systems do not only support global talent processes like learning, performance management, recruiting, compensation and others. In addition they also build and implement a global master data backbone for all employees of a company. A tricky enhancement: The employee master data is not only needed in HR processes, but far beyond that function. Whenever an employee enters an office building with a badge, pays with it in the company cafeteria, accesses a computer system or completes a compliance training, the global employee master data has to be accurate and the new HR system has to be connected to many such local systems. The same applies when training costs of an employee are booked in a local finance system or the company changes their multi-matrixed organization chart. What looks simple and easy from a user perspective is destined to give headaches to HR IT executives: The new global, cloud-based HR systems have to be integrated with many other local systems. They require new interfaces which in turn incur a run-rate of maintenance costs. Companies are looking at a broad and comprehensive IT infrastructure change – which cannot be paid for with petty cash. And despite modern, agile implementation techniques – this process can rarely be completed fast and easy.
The new HR technology business case
The business case of HR tech investment is another aspect that puts the second wave of transformation at risk. The traditional IT business case is based on two benefits categories: (a) Reducing total cost of ownership of the technology and (b) reducing process cost through automation. But these two have proven to be insufficient to justify the investments in new HR technology. What is required is a third category: A recent CEB research calls it ‘business benefits’ and rates it the fastest growing category of the three. Business benefits from HR technology investments could predominantly derive from better people related business decisions. Although it is yet too early to proof the value of those people related business decisions, HR as a function must understand the decision impact of employee data from the new systems. Influencing business decisions with data from new systems is a key imperative for transformation wave number two.
The end-user adoption risk
If one agrees that the second transformation wave first and foremost needs to create business value, then end-user adoption is more critical than in all previous HR technology generations. In the past, lower-than-expected end-user adoption was the most dangerous and hurtful of the three big risks for IT infrastructure investments – next to faulty project execution and missing business functionality. Wherever users did not adopt the new system as quickly, as frequently or as profoundly as expected, infrastructure investments got stranded. With the new HR technology investments, this risk is growing disproportionally. The new systems are end-user focused (employee and manager), not specifically designed for experts (HR professional) – especially considering that their ‘mobile first’ approaches and their ‘application’ architecture directly addresses managers and employees. And with new generations of computer users at work, these end-users have higher technology expectations than ever. In other words: It is more crucial than ever to deliver what more end-users than ever demand. This transformation wave will only succeed when it meets the requirements of employees and managers.
Let’s pause here for an interim conclusion: Yes, there are risk areas to consider. But companies entering transformation wave two are in for some good news, too: They have entered a new era with a real opportunity to make up for the mistakes of the previous wave. Wave number one and its death spiral have left them with an incomplete version of ‘true business partnership’. Wave number two now gives them the position and effective means to generate real business benefits. Business first is a great starting point to reverse the death spiral. But – we better get it right this time.
The next wave: Transformation focused on employees
We have seen a first version of HR transformation that has largely failed and left most companies with a transformation death spiral. We experience a second wave of transformation that should be able to reverse the spiral, but at the same time comes with increased implementation risks. Is there something else? A third and bigger transformation wave that we should be prepared to surf? We, TI people, believe: Yes.
Trend research of Accenture explores “the workforce of one”. MIT research identifies dissolving boundaries between HR and Marketing. Bersin calls it the “consumerization of HR”. TI People connects these trends with the learnings of the first two waves of HR transformation – and predicts a new evolution cycle. We have simply named it ‘employee-focused transformation’. It is built out of three elements:
Redefining employee data
As mentioned, the move from expert system made for HR professionals to end-user systems for employees and managers is one dominant indicator for transformation wave two. Now let us think another daring thought: In the near future, employees may not only enter data directly into a system and retrieve information from it – eventuelly they themselves will own and manage their master data. As of today, LinkedIn profiles often contain better and more comprehensive information than SAP or Oracle master data sets: They are more accurate. They include qualitative data on skills, wants and aspirations of employees – which even the latest technology of company-owned master data and talent systems can hardly compile and if it does, often struggles to manage it. Moreover, these semi-public profiles cover the entire employee lifecycle, not only the portion of it that has been spent with one particular employer. A not-too-distant future scenario is this: A new employee enters a company and simply grants access to his or her profile. Companies will not own employee data but rather will have permission to use it. There is a way to go until this scenario becomes reality: Often, legal restrictions require companies to store away their employee data even after they have left the company. And, on the other hand, not all employees will actively manage their LinkedIn profiles. But the vision still stands clear – and it will determine and define the next transformation wave.
Another aspect of redefined employee data is the possibility of detecting digital trails of employees in real-time. Just like consumer marketing has learned how to listen to customers’ digital trails and to predict their wants and needs, companies will learn to analyze their employees’ digital trails. They will use their analytic findings to listen to employee opinions, to measure their performance, to receive in-process feedback on employees, to predict skills and future behavior. And they will do all of that in real-time. Companies will learn to channel various data sources into a dynamic data lake, rather than storing employee data in their static – and unconnected – systems. As data management will be crucial, new HR roles will emerge: Usability engineer, information insight enabler, social media expert, etc.
Overall, we will see a less static, much broader set of data points defining “employee data”. Integrating them within HR processes through intelligent machines will be the main thrust of the next wave of HR transformation.
Robotizing & applifying ‘Beta’ and ‘Gamma’ tasks
From transformation waves one and two and the redefinition of employee data and its management above we can predict the future responsibilities of the HR function.
Let’s break all HR tasks up by their business value, with Alpha tasks being very valuable, Beta valuable and Gamma less valuable.
In the not-too-distant future Gamma tasks will be automated, even robotized. Equivalent to call centers of telephone providers or consumer electronics companies, machine-learning will enable HR service providers to deliver employee services through machines. An extreme, yet contemporary example: In an internal pilot project, Google is building a machine that mimics the actions of human recruiters, agencies and hiring managers to attract, assess and eventuelly hire an external candidate. For companies who don’t fancy – and probably don’t need – such googlish extravaganca, there are many, much simpler tasks that can be robotized for many companies: How to book a training session, for example. Or how to apply for a development program. Or provide the answer to the employees question: How do I take paternity leave? The future of HR transformation will not do away with simple employee lifecycle transactions – but many of them will be owned outside of the HR function and will be performed by machines.
Even the more complex and valuable Beta tasks may not remain fully within HR. Have you ever counted the number of apps on your mobile phone that you use for business? A reasonable and common set would be: Concur for travel bookings, Salesforce One for performance of the sales team, WebEx and Skype for Business for meetings, E-Trade for the long-term incentive plan, OneDrive for file sharing, FaxApp to send documents by fax, Microsoft Office to edit work documents, Outlook for e-mail and calendar, and Docusign to sign contracts. Many of them are HR related, some aren’t. But there is more to come: An app which enables employees to swap or even ‘trade’ their work shifts without contacting their shift manager of shift planner. Or performance management systems where a sales rep ‘likes’ the back-office team for an outstanding preparation of a client meeting in the Salesforce One app. With employees and managers using these apps, HR as a ‘middle-man’ is often left out of these tasks.
Focus on HR ‘Alpha’ tasks
If Beta and Gamma will – to a large extent – fade out of HR responsibility, which are the remaining Alpha tasks HR can bank on? TI people believes that there will be three big clusters: (a) HR will own and manage employee data and influence business decisions with data. (b) HR will create and grow the company culture towards agility. And (c) HR will act as a project manager in cross-functional one-off people related projects with business and IT. Building and implementing an HR function that is excellent at HR data, company culture and projects is very different from today’s HR function – a true transformative change.
We started by stating: “HR transformation – everybody is doing it, nobody is getting it right”. By analyzing the three different waves of HR transformation, we have found an underlying pattern of failure – the HR transformation death spiral of wave one. We established that wave two is a hopeful endeavor, yet a risky one: Transform to simplify and re-align to business outcomes with new technology. And finally we have identified a next, and even bigger wave of HR transformation, which condenses HR to a strategic data manager, business influencer and corporate culture builder. All three – the learnings from the past wave, the risk assessment of the current and the prediction of the next wave should help companies assess and re-align their HR transformation journey – and eventually be in for a huge payback.