by Rob J. Thurston & Vince Ceriello
HR Consulting Group Inc.
The director of human resources of Amazon.com, Scott Pitasky, has stated: "We can't do human resources the traditional way. We have to blow it up and entirely reinvent the way we do human resources here."
He was referring to the application of new technology to his HR function. That sentiment has been echoed countless times over the past few years. The problem, however, is finding which bandwagon to jump on. Rightsizing, outsourcing and even using application service providers (ASPs) for self-service currently appear to be on the "cutting edge."
We propose that perhaps these trends are actually on the "bleeding edge" and may reduce the efficiency and effectiveness of HR. No doubt these trends have held considerable promise for overwhelmed, short-staffed HR departments. But is that enough to sustain them? Over the next 5-10 years newer trends will cause HR and benefits managers to reinvent the way they operate. Among them:
Outsourcing will continue to grow, and then decline. The growth in outsourcing of human resources and employee benefits has been increasing for all sizes of employers. Watson Wyatt reported that the primary reasons that companies outsource are:
- 36% want to maintain or improve service to employees.
- 29% want to reduce workload to existing staff.
- 14% want to reduce costs.
- 12% want to free up resources in order to focus on other company business.
While it appears that outsourcing can improve service and reduce costs; an employer must prove that outsourcing does both. Many managers are too concerned about the number of full-time employees (FTEs) in their units to the detriment of profitability.
Management of any size firm should be more concerned with profits and results than with "pseudo- efficiency," apparent in decreasing the number of FTEs. Managing the bottom line and increasing the profitability of human resources are what matters.
ASPs will eventually consist of a few major players. Currently, application service providers are popping up nearly every day to handle this outsourcing phenomenon. ASPs charge a monthly service fee or impose a "per life" rate for employees, dependents, annuitants and others, to host and maintain expensive software without the huge front-end investment in acquisition, development, implementation and maintenance fees. As a result, many old and new vendors are jumping on the ASP bandwagon. Some are in way over their heads.
ASPs meet the critical needs of companies needing to outsource and also keep upfront costs to a minimum. In 1998 the total market sales from ASPs was about $1 billion; Forrester Research predicts growth of this market segment to $11 billion by 2003; the Gartner Group predicts the ASP marketplace could be over $23 billion by 2003.
The problem for most employers evaluating ASPs is their stability. Approximately 95% of firms go out of business in the first five years. In the past few years, many Internet or dot-com companies have started business as ASPs. Many would like you to let them handle the self-service technology for you. But, unless their business model is airtight, many of these ASPS may be out of business in the next one to four years.
According to the Gartner Group: "Today's dot-com collapses will pale in comparison to the effect that the pending ASP meltdown will have on organizations that rely on these ASPs." Gartner predicts that only 4% of ASPs will survive to 2004; according to the firm, there are 480 retail ASPs, 60% of which will be bankrupt by 2001.
The ones that survive will be the major providers of best-in-class solutions or ERP suites of products with deep pockets and strong strategic alliances to continually update their software and technology every few years.
The Internet will continue to expand. A 1999 study, "Nothing But Net: American Workers and the Information Economy," showed that 68% of employees have a computer at work and 23% use the Internet regularly at work. In some parts of the country, those percentages are considerably higher.
This trend will continue until a more efficient method is found. Meanwhile, wireless technology will help promulgate use of the Internet.
Generation X and Generation Y users will exert influence. These two population groups create a demographic that should cause us to stop and rethink how we do business in today's environment. The forces to consider include changes in employee population demographics from baby boomers to GenX employees and growth in the number of GenY kids who increasingly use advanced technology via Web, touchtone phones and other forms of computerization. Think wireless again!
GenX members, those persons born between roughly 1965 and 1981, now include 79 million people. Their ranks can also be defined as including people who consider themselves members of GenX, such as immigrants, computer techies and foreign students with university degrees.
Members of GenX are characterized as being more likely to prefer to work alone, less suited as team players, reluctant to participate in meetings and more inclined to make up their own minds than wanting or needing others' opinions.
GenX is fairly autonomous and very individualistic. Members like to go at their own speed, get information when and where they want it, and want to make decisions on their own. They are captivated by technology - the more advanced the better. They are self-contained and self-sufficient.
But look out for the GenY emergence, those born beginning around 1982 and just reaching the legal age to enter the work force. They are almost totally computer literate. The Internet is how they communicate, gather information and interact. They will quickly adapt to the newer technologies.
TeleWork will be the norm. GenX and GenY workers value privacy and lifestyle. Spending commuting hours and money on gasoline does not make sense when data access can take place anywhere. Rising real estate costs, insurance, and office equipment will force more and more employees to telecommute. Within 10 years it is estimated that 40% to 50% of all workers will telecommute.
Data and security will rule. Data is becoming the most valuable asset of a company. We live in the Information Age, and your internal data is actually one measure of your competitive advantage.
Keeping data secure and safe from competitors will be critical. You never want to go with an ASP who has been in business fewer than five years, is not incorporated, and will not also sell or lease you their software. If they insist that they act solely as the administrator and you have no use/future access to the software, you are putting your firm and your data at risk.
Technology will level the playing field. The growth in technical advances continues to increase while the cost of technology decreases. What was unprofitable last year suddenly is very cost effective this year. We predict that it will be feasible to use fewer HR staff to handle self-service technology.
We are not suggesting that employers handle the production of videos and self-service/administration of plans. It is probably not cost effective. We are suggesting that management should demand that any additional investment in communications and systems have a quick return on their investment. At the same time, the current state of the economy is requiring cutbacks in HR budgets and, in particular, employee benefits.
Becoming a profit center will be critical. The best business management decisions for evaluating HR and employee benefit self-service options are obviously those that bring the highest rate of return to the organization. If management can buy a new machine costing $100,000 that saves the company $100,000 in cost of production, there is not a manager alive that would object to having that equipment. Why? Because it generates a 100% return on invested capital. We need to look at the investment cost of internal self-service with its return on investment (ROI) versus outsourcing.
If a change to your HR/benefits strategy increases ROI, minimizes current and future risk and guarantees delivery on time, then how much time and money you have invested in the past is irrelevant.
Nobody does it better. Except in the largest of companies, employers will return to offering internal, in-house self-service to employees.Why?
An employee's ability to deal with the people they know and trust, to interact with the system and to understand their own type of benefits will increase the average level of participation negotiated per employee. The higher the participation level, the greater potential for employee satisfaction, which can lower turnover.
Chances are HR knows the benefits plans better than anybody else. An ASP, on the other hand, would have to build a team around a few experienced personnel and hire the balance needed off the street, probably with no prior experience.
The Bottom Line
Informed and enlightened management focuses on cost- effective solutions to HR and to control of benefits costs. Looking at the bottom line really means looking at the real rate of return of internal development versus outsourcing and ASPs. Maybe it is time that we managed our HR and benefits plans like a business operation. Maybe it is time to jump off the outsourcing/ASP bandwagon. - E.B.N.
About the authors…