Top HR Outfits Don't Spend their Way to Success

June 24, 2004 ( - What makes an HR unit a shining star and a standout from its peers is that it can do much more with much less.

That was a key finding of the defining characteristics of “world class” HR organizations by The Hackett Group. Specifically, the champion HR departments typically spend 27% less per employee than their peers while operating with more than a third (35%) fewer employees, Hackett’s 2004 project found.

HR costs per employee have increased for both world-class and median companies since 1996, Hackett found. But world-class companies have seen an increase of only 12%, compared to 21% for median companies. So, the gap between world-class and median is clearly growing larger.

World-class HR organizations spend $1,390/employee annually, 27% less than median companies, which spend $1,892/employee, according to Hackett. Both world-class and median companies dedicate more than half of their HR spending to labor costs, but lower spending on labor makes up the lion’s share of the gap between world-class and median HR units. World-class companies spend 31% less than median companies on labor ($742/employee versus $1075), and rely on 35% fewer HR staff per 1000 employees.

The secret, according to the research: delivering greater value through better alignment with corporate strategy and lower rates of voluntary and involuntary terminations. Senior HR executives at all world-class organizations tie business strategy to people strategy, compared to only 60% of median companies. World-class organizations are 87% more likely to have articulated an explicitly stated workforce strategy. World-class HR organizations also manage their workforces much more effectively and, as a result, see 61% fewer voluntary terminations and 43% fewer involuntary terminations.

Also part of the picture, according to Hackett, high-performing HR units achieve their performance standards using technology and outsourcing, but don’t necessary spend more in those areas than their less performing counterparts. In fact, world-class companies actually spend nearly the same amount that median companies do on both technology and outsourcing.

Instead, Hackett found that world-class HR organizations achieve their improved efficiency and effectiveness through high level efforts including the use of technology to:

  • successfully minimize complexity
  • reduce upstream error rates
  • integrate end-to-end HR processes.

World-class organizations also use outsourcing on a more selective basis, and more strategically, as a way to more efficiently scale discretionary services.

Hackett found that world-class companies spend 55% less than median companies outsourcing staffing and workforce development, while they spend 25% more than median companies outsourcing total rewards administration.

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