HR is Dead...Long Live HR

    In companies where HR has taken the reins and moved the function in a new direction, the financial results have been impressive. Research from Watson Wyatt’s WorkUSA 2002 study indicates that companies with effective HR practices deliver shareholder returns that are three times higher than those of companies without such practices.

    Despite the evidence and the firm belief in HR’s potential among executives such as Barclay, the profession’s rosy future is far from certain. In fact, the number of available HR jobs has dwindled significantly in recent years, and opportunities are not likely to increase anytime soon, says Frank Allen, president of Frank E. Allen and Associates in Florham Park, New Jersey. Allen, who has been in the HR recruitment field for more than 17 years, has placed thousands of HR professionals in jobs ranging from benefits manager to senior vice president. And right now, he’s drowning in résumés. "I’ve got a database listing 18,000 HR professionals and out of that, somewhere around 7,000 active résumés," he says. "I’m also getting 200 to 300 résumés a week." The likelihood that Allen will be able to place all these people is pretty slim.

    With the unemployment rate hovering around 6 percent, the same thing can be said of many jobs, including information technology, telecommunications, and marketing. But when the economy turns around, people in those positions are likely to find work again. That’s not necessarily true for HR professionals, because the profession is enduring a wave of changes that by all accounts are likely to significantly reduce the number of people needed. David Ulrich, co-author of The HR Scorecard: Linking People, Strategy, and Performance (Harvard Business School Press, 2001), believes that the head count in HR will eventually plummet 25 percent--or more. But wait. People like Barclay believe that HR is primed to lead knowledge-intensive companies into the future. Is she right? Is it an HR reality to become indispensable and more vital than ever? Or do the job losses signify a different trend? Could HR be on its way toward obsolescence?

    Consequently, what started in the 1980s as simple payroll outsourcing has exploded into a $32 billion a year business involving all facets of HR. In the last two years alone, the value of the business-process outsourcing industry has grown 20 percent, and analysts from Gartner estimate that it will become a $55 billion worldwide industry by 2005. In just four years, one outsource provider--Exult--has grown from a start-up with a handful of people to an established company with 1,500 employees and more than $400 million in annual revenues. Other big players include Accenture HR Services, ADP, Fidelity, Hewitt, and Convergys.

    "Right now, it is primarily large companies that outsource their HR activities," says Rebecca Scholl, senior analyst with Gartner. "But we’re definitely seeing an uptick in the number of medium-sized companies that are looking for providers to take on more HR processes."

    Outsourcing has become popular because companies are finding that external vendors--through technology and economies of scale--can provide more efficient and cost-effective HR services than in-house departments. In 1999, BP (formerly British Petroleum) contracted with Exult to take over all of its transactional activities in the United States and United Kingdom, including all payroll, recruiting, expatriation, records management, vendor management, and relocation services for its 63,000 employees. The only function that remains in-house is BP’s learning and development program in the United States.

    Over the last two years, the company has reaped many benefits from the arrangement. Payroll processing is more timely and accurate. Employees get their benefits questions answered sooner. HR processes have been standardized across the company. And for the first time, BP has measurable data on which HR activities are effective.

    Because BP is no longer handling routine transactional work in-house, a lot of its HR employees were deemed unnecessary. As a result, its core HR staff has been slashed 65 percent--from 100 to 35 people.

    This kind of staff reduction is fairly typical in outsource arrangements, says Jim Madden, chairman and president of Exult. "What usually happens when companies outsource with us is that one-half to two-thirds of the jobs in the HR department go away because the jobs are declared redundant."

    External vendors have been so successful doing routine HR work that the list of companies handing over their HR activities continues to grow. In the last few months, Sony, Prudential, AT&T, and American Express have all inked deals with outsource providers. Chances are good that in the next few months, a lot of HR people in those companies will be looking for work.

    Ed Lawler, director of the Center for Effective Organizations at the University of Southern California in Los Angeles, has been gathering data on the effectiveness of HR since 1995. In the last seven years, he’s seen very little change in how HR professionals are spending their time. "It seems that instead of responding to this period of business turbulence by playing a central strategic business partner role," Lawler says, "HR has responded by maintaining the status quo."

    His findings are supported by a recent survey of HR professionals conducted by the Society for Human Resource Management. When respondents were asked to identify two or three HR/workplace trends they believe will affect the HR profession, only 7 percent identified "HR as a strategic business partner" as a key trend. Much higher on the list were such things as managing diversity and administering health care. Clearly, HR professionals will never be able to transform the function--and hold on to their jobs--if they cannot embrace this new role.

    Part of the problem is that many HR people simply don’t understand what it means to be strategic. In a separate SHRM study entitled "The Future of the HR Profession," eight leading consulting firms shared their thoughts on the current and future state of HR. One of the themes that emerged is that few HR professionals possess both the business acumen and functional expertise necessary to move their companies and the HR profession forward.

    Frank Allen, who’s frequently given the task of finding high-level HR people for companies, estimates that of the 18,000 people in his database, "I’d say less than 1 percent of them are A players." And who are those A players? They are the people who not only have a solid understanding of HR, but also are conversant in finance, sales, marketing, and manufacturing, and know how HR can help companies meet their goals.

    The dearth of business talent within HR is causing more and more companies to look outside the profession when seeking to fill top HR slots. Today, 75 percent of top HR executives have come up through the traditional ranks of HR. Four years ago, that number was 79 percent. What this means is that today, fully one quarter of the top HR jobs are going to people with backgrounds in marketing, manufacturing, finance, and other operational areas--and the number is growing. What hope does the profession have for its future if it is increasingly being managed by people from the outside?

    To be fair, HR isn’t solely to blame. Senior leaders have to recognize the role HR can play and give its HR team the time and resources necessary to make lasting changes. Unfortunately, not all CEOs understand that strategic workforce planning and management is an ongoing effort. Allen knows of some companies that have hired strategic high-level HR people only to let them go once they think they’ve achieved their objectives. "Either that, or a new chair will come in with a different idea of HR," he says. "Instead of viewing HR as an asset, they’ll view it as an administrative function and fire the person who was trying to make strategic changes."

    Fortunately, corporate leaders who do understand the role HR can play also realize that it takes time and a lot of serious effort to make changes.

    Four years ago, when Barclay was promoted to vice president of global human resources at GM, it was the first time in the company’s history that an HR person reported directly to the CEO. Barclay launched a company-wide HR transformation effort that involved standardizing processes, creating HR centers of excellence, and outsourcing routine activities. In a company with 362,000 global workers in 58 countries, a change of this magnitude obviously takes time. Barclay has already been at it for three years and says it will take three more years to fully complete the process--but that the CEO is committed to the change.

    A key part of GM’s global HR transformation involves developing HR people so that they understand and can take on the role of internal consultants. "We have a global HR curriculum that helps our people understand what we are attempting to accomplish in HR, what the transformation means to them, and where we’re going as an HR community," Barclay says. "We have 15 to 20 courses out there now, and they are mandatory for all HR professionals." Among other things, these courses help HR professionals acquire business acumen, change-management skills, and the ability to forge relationships across the organization. As a result, in the not-too-distant future when a business unit is having trouble achieving its goals, GM’s HR people will be able to work with that unit to diagnose its problem. It might be because the talent makeup is not adequate, the incentives are wrong, or goals have not been properly communicated. By training its HR people to understand--and address--such business issues, Barclay is slowly transforming the way the function operates.

    In addition to training the HR people, her team has to train line managers to understand that HR is now there to help with strategy, not transactional work. "We have a global HR Web site that houses materials our HR people can use with their operating leaders to help those leaders understand how HR is changing, why it needs to, and why the value equation is better for the company," she says.

    As in many other companies, a key part of the HR transformation at GM involves transferring responsibility for HR activities to line unit managers with the help of technology. For example, GM recently instituted a compensation plan for 40,000 employees that was implemented by managers entirely over the Web without any intervention from HR. "This experience helped managers understand how HR is working differently now," Barclay says.

    However, this kind of change isn’t always easy for organizations to accept, Lawler notes. "Line managers typically like the close, hand-holding type of relationship they’ve always gotten from their friendly HR person," he says. "The idea that transactional work might take place in an outsource company or disappear entirely because of employee self-service technology is unattractive and anxiety-producing for many managers."

But blaming anxious line managers or noncommittal CEOs for presenting obstacles to HR’s transformation does not a strategic, fully employed HR person make. The fact remains that the HR profession itself has a long way to go in developing the skills, competencies, and focus necessary to become internal business consultants. Until that happens, the slow decline of HR jobs and stature is likely to continue.

Finally, some good news
    If you’re an optimist who sees an unlimited future for HR, there’s plenty of reason to celebrate.

    Let’s revisit the idea of outsourcing. Yes, it is reducing the number of HR jobs available in companies that choose to outsource. But those jobs tend to be lower-level administrative and technical positions. The good news is that outsourcing is finally giving higher-level HR professionals the time they need to tackle strategic workforce challenges. Even better, the demand for such strategists is higher than ever, for several reasons.

    To begin with, demographic changes are making it harder and harder for companies to find and keep qualified employees. It will be up to HR to determine what kind of talent is needed to meet company goals and then devise recruitment and retention programs based on that need. Second, technology is making it possible for companies to become more and more decentralized, with employees distributed across wider geographic regions. HR people will be the ones who determine how to keep widely dispersed employees connected to corporate goals.

    Third, although outsource vendors have proven their ability to handle routine transactional work, internal HR consultants will still be needed to determine what combination of pay, benefits, and learning opportunities is necessary to keep employees engaged. Finally, even if outsourcing does remove all the transactional work, someone with a solid understanding of HR and business will be needed to manage the multimillion-dollar vendor contracts. HR will always be responsible for ensuring the speed and accuracy of employee transactions, regardless of who is doing the work.

    "Essentially, what’s happened is that the field of HR has begun to split into two parts," Ulrich says. One half consists of administrative and transactional work, which is becoming more automated and routine and is increasingly being turned over to employee self-service or outsource providers. The second half consists of transformational work, in which HR develops organizational goals, determines what capabilities are needed to meet those goals, and then creates HR practices that make those capabilities come to life.

    Put all of this together and you realize that the field is in the midst of an enormous transformation and its final form is not yet clear. However, the function is likely to be smaller and very different from what it is now. And there will be no shortage of challenging work. HR professionals can have an impact on their companies. And obviously, the need is there.

    Is HR up to the task? In companies like General Motors, the answer is a definite yes. But as research shows, there’s still a huge chasm between desire and reality when it comes to the future of HR.

    Is HR becoming indispensable--or obsolete? Only the people currently working in the profession know the answer to that. If they are able to forge a link between HR initiatives and corporate goals, their indispensability is all but assured. If not, a lot more HR résumés may be circulating in the near future.