Enabling Business Agility - Payroll, HR and Tax Services

2015 AN EVEREST GROUP REPORT

r e s e a r c h . e v e r e s t g r p . c o m

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Rajesh Ranjan, Partner

Katrina Menzigian, Vice President

Arkadev Basak, Practice Director

Copyright © 2015, Everest Global, Inc. All rights reserved.

How HR Organizations Can Lead the Way and the Role of Outsourcing

Enabling Business Agility

https://research.everestgrp.com/


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ENABLING BUSINESS AGILITY


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Executive Summary

The concept of business agility is currently the subject of widespread discussion. It is tough to get away from the realities of today's global business climate, such as shortening product life cycles, ongoing hunt for talent, and the changing competitive landscape. These business realities require companies to operate effectively while creating impact that leads to differentiated performance. However, as with anything else of great potential, this is easier said than done.

Everest Group has observed that agile organizations tend to exhibit a common set of traits. These include faster time-to-market, ability to ramp-up or ramp-down in response to business needs, ability to provide new and quicker insights, smoother integration of acquisitions and strategic investments, and access to scarce but desirable talent. To develop these traits, organizations should consider the role of various operational areas, and also how the performance of each has a cascading impact on the others.

An important, but not always appreciated, focus area on the agility journey is the Human Resources function. While not always the obvious place to start, the HR function is linked to many areas of operations, from product development, to market entry, to talent management, and eventually to business integration. The agility of the HR function is directly tied to the agility of the overall business performance.

HR's agility comes from several specific sets of capabilities and characteristics. This study outlines in detail, the relevant impact of greater standardization and harmonization, scalable operational structure, and industry best practices and innovation, among others, on agility.

Understanding the linkage between HR and business agility is only the beginning. Determining how best to implement an agile HR function requires thoughtful consideration and investment. For an increasing number of organizations, the journey towards agile HR includes collaborating with a specialized HR outsourcing partner. In fact, the market for such HR outsourcing services has consistently grown over the past several years, as organizations first adopt and then expand their use of outsourced HR services. Many perceive HR outsourcing as a game-changing mechanism that supports their efforts towards more agile HR functionality.

This study provides HR leaders with a useful tool for taking forward their own discussions on: The current capacity for business agility in their company or organization Assessing how and to what degree their HR organization currently contributes to

the goal of business agility Identifying areas for improved HR agility Exploring how an outsourced HR delivery model can support efforts towards a

more agile HR organization Guidance on key considerations in the outsourcing of HR functionality


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Introduction

The concept of business agility has changed shapes and forms over the past several years. Shifting in the winds of global recession, financial crisis, demographic cycles, and industry metamorphosis, it almost seems that the concept of "business agility" could be paraphrased as, "creating a model that enables businesses to thrive no matter what comes down the road, responding effectively and quickly to each curve and bump".

While this may capture the desired outcome of agility, it does not adequately capture the essence of how an agile business behaves or operates. Then, what are the traits that characterize business agility?

At Everest Group we have observed distinct traits common to agile organizations: Faster time-to-market for new products/services/geographies Ability to ramp-up or ramp-down, based on business requirements Ability to provide new and quicker business insights Smoother and faster acquisition integration Access to new or scarce talent pools

For an organization to demonstrate any of these traits, there must be a clear understanding and appreciation of how the different areas of operations contribute to the realization of each trait. In fact, an additional trait of an agile organization could be "a keen understanding of the integrated nature of effective operations".

More and more organizations are raising the profile of human capital management in all areas of their operations. More importantly, managers outside the HR organization - business managers, product managers, or manufacturing managers, are looking to their HR colleagues to support the business plans for their front- or middle-office activities.

Organizations aspiring for more agile management have taken a hard look at the mandate of their HR function. How would an agile HR organization behave? How would an agile HR organization support an agile business? How can different service delivery models enable agility? This paper will strive to offer some useful answers to these questions.

To achieve the goal of agility, companies have turned to HR outsourcing as a strategic tool. As we will see, the outsourcing delivery model has acted as an enabler for many of the agility traits outlined above. This paper will help organizations identify where they can further invest to achieve better agility, and which aspects of the outsourcing delivery model can close those gaps for their HR function.


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The Case for Business Agility

Businesses, whether large or small, global or local, have come to understand that the only constant is change and they must have the flexibility to respond to this challenge.

The types of challenges today's businesses face include: Globalization - It involves either taking business to new markets, or

addressing competition from other geographies coming into the market Changing competitive landscape - The rapid rate at which companies enter

one industry and exit another means that new competitors may come in from unexpected directions and businesses will find themselves competing with new sets of market players

Shrinking product life-cycle - As we move further into an open development and consumer-driven product design process, businesses face the challenge of shorter design and development cycles. In fact, some leading manufacturers are now undertaking production in real-time based on feedback from their consumers, e.g., Inditex, the world's largest clothing retailer

Busi

nes

s ch

an

ges

dri

vin

g a

gili

tyGlobalization

1

Rapid evolution of technology4

Changing competitive landscape2

Access to labour and talent5

Shrinking product life-cycle3

Smarter decision making6

E X H I B I T 1

The Need for Agility

Source: Everest Group


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Rapid evolution of technology - The rapid evolution of technology is creating new sets of opportunities in context of market access, talent management, and operational efficiencies. However, it also poses a conflicting challenge for organizations. Adoption of a new technology too early may result in banking on something that is unproven and hence at a higher risk of failure, while adopting it too late may mean losing ground to competitors

Access to labour and talent - Another challenge that organizations face is finding the most suitable talent for their business needs. Demographic shifts in mature markets, such as North America and Western Europe, have left employers wondering as to who will replace their older workers expected to exit the labour market over the coming decades. Further, with critical skills and talent often located in distant geographies, employers around the world look to a global labour force to fulfill their needs. To recruit, manage, and retain these workers spread across geographically diverse locations is a management reality of the twenty-first century

Smarter decision-making - With shorter reaction times being a reality, the ability to make effective decisions quickly has become a competitive imperative

At the same time, companies face the additional challenge of making sense of the growing volume of information and data flowing into and around their organization. This inflow of data may be transactional in nature, such as with HR enterprise software, or more experiential, as in the case of social media. Against this backdrop, the notion of business analytics and big data has gained attention. However, organizations continue to work at identifying ways to use such data to further enhance their market competitiveness and drive differentiation.

To meet these challenges, companies have developed management and operational capabilities suitable to handle rapid change.


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Business Agility and the Role of HR

As mentioned earlier, Everest Group believes key attributes of an agile organization include: Ability to provide new and quicker business insights Faster time-to-market for new products/services/geographies Smoother and faster acquisition integration Ability to ramp-up or ramp-down based on business requirements Access to new or scarce talent pools

Each of the above traits of an agile business involves the HR organization in some way (see Exhibit 2).


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Ability to provide new and quicker business insights

In a highly competitive environment, businesses need new and quicker business insights, to understand the changing business environment and stay a step ahead of competition

Determine feasibility of a new business case and potential future risks (from a talent perspective)

Gain relevant and timely insights on― Availability of talent in the market― Cost of acquiring such talent― Company’s ability to acquire or retain

talent

Smoother and faster acquisition integration

The post-acquisition integration process is a challenge where many M&As tend to falter. The integration needs to be smooth and quick to help realize the synergistic benefits of the acquisition at the earliest

Building a sense of company culture Timely onboarding of new employees into

existing HR systems such as payroll and benefits, etc.

Restructuring of relevant or related teams / business units to obtain maximum synergies

Redesigning compensation, performance, and succession structures

Ability to ramp-up or ramp-down based on business requirements

In today’s volatile economic scenario, companies need the ability to ramp-up or ramp-down quickly and that needs proper alignment between overhead costs and access to human talent

Determination of talent structure in terms of ratio of permanent and temporary workers

Ability to accurately forecast change in costs due to ramp-up or ramp-down

Ability to hire rapidly during time of ramp-up Following proper policies during down-

sizing, including facilities such as out-placement, to minimize impact on reputation

A scalable HR technology infrastructure to minimize technology overhead

Access to new or scarce talent pools

Businesses need access to new or scarce talent pools, possibly from across the globe, at the right time, to gain a competitive edge over rivals

Develop recruitment capabilities beyond plain vanilla hiring through― Industry-focused sourcing and recruiters― Talent communities― Employer branding― Global reach― Analytics and big data

Faster time-to-market for new products/services/geographies

In a highly competitive environment, businesses need to respond quickly to the changing environment with new offerings

In case of entry into new geography, rapid setting up of complete HR structure (technology + processes) in line with regulatory requirements

Determination of talent gaps Plugging of talent gaps through

― Hiring of new talent― Training of existing talent― Relocation of existing talent

Determination of compensation, performance, and succession structures (in case of new business units)

E X H I B I T 2

Business Agility and the Role of HR


The next section explores in-depth how the ideal HR organization would behave in order to support an agile business.


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Building Agile HR Operations and the Role of HR Outsourcing

Simply stated, an agile HR organization is one that can not only effectively deliver HR operations while being relevant to changing business requirements, but also act as a strategic game-changer for the business. The interplay between operations and strategy becomes important here. Agile HR organizations strive to achieve a degree of operational acumen that enables value creation towards strategic business objectives.

Based on vast experience of engagements with many HR organizations, Everest Group has identified several attributes of agile HR. These attributes, while operational in nature, have direct impact on more strategic considerations. Some organizations may develop strength in just a few of these, while others may have a broader vision (see Exhibit 3).

Although, for many companies the concepts around HR agility are not new and have been part of their vision for quite some time, creating a mechanism to achieve the desired change can be daunting. Challenges, such as stakeholder alignment, technology strategy, organizational inertia, and capability gaps, are just a few of the hurdles many HR leaders face. Nor does it help to apply the same mechanism across different HR process areas, what may work for payroll may not work for recruitment.

In light of these challenges, many organizations with a mandate for HR transformation have chosen to partner with external HR service providers. The scope of these engagements can be quite broad, called Multi-Process HR Outsourcing (MPHRO), containing multiple HR components or specific to one HR component (payroll outsourcing, benefits administration outsourcing, or recruitment process outsourcing).


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Attributes of agile HR

Operationalattributes Strategic benefits

Challenges for organizations inachieving the attributes

Advantages of HROutsourcing (HRO)

Greater standardi-zation/ harmonization

Creation of common HR process inputs and outputs across the whole company

Attainment of cost predictability, information accuracy, and decision-making credibility on a wider scale

Organizational inertia and stakeholder alignment

Lack of knowledge on the best practices and standards

HR outsourcing breaks the inertia and acts as a catalyst for change

HRO provider brings standardization through integrated HR technology and standardized best practices

Access to local/global expertise

Support needs for both talent sourcing/ acquisition and regulatory requirements in existing and newer geographies

Be well positioned to vie for sought after or hard-to-find talent

In regulatory space, avoid unnecessary costs and optimize the investment of management time

Difficult to build advanced sourcing skills in-house

Access to talent in a new geography or for an unrelated new business line

HRO provider brings specialized hiring skills that effectively leverage offline, online, and social channels

A global HRO provider has presence and expertise across the globe as well as various industries that can be deployed quickly

Access to right tools and technologies

Increase process efficiency through more productive operations

Ability to enhance process effectiveness through access to better functionality, i.e., analytics, reporting, social media, etc.

Lack of internal capability

High cost to invest and build in-house

HRO provider brings both technology and people capability

Cost is lower since these functionalities are subsumed (and partially volume discounted) as part of the overall HRO arrangement

Lower vendor management effort

Technology investment cost can be amortized

Scalable operational structure

Ability to tackle staffing or process volume fluctuations in a responsive manner

Well-positioned to more quickly integrate acquisitions or operationalize other growth initiatives

In general, quite difficult for an organization to have a highly scalable HR operational structure of its own

An HRO provider, with many clients scaling up and down, is able to provide significant scalability to its clients

Variable spending model

Conversion to demand-driven access to technology, staffing, and processing functionality

Ability to align operational costs with actual HR service requirements and demand – typically resulting in lower overall costs

Virtually impossible if everything is kept in-house

Partially possible with a combination of piecemeal outsourcing (technology infrastructure and some processes) and hire-and-fire policy – results in high costs, employee dissatisfaction, and bad reputation

Provides a variable spending model

Cost is lower due to “volume discounts” provided by the MPHRO provider to whom everything has been outsourced and lower vendor management efforts

Industry best practices and innovation

Ability to continually enhance HR processes based on outside-in market perspective

Create HR processes that offer the overall organization tangible competitive differentiators in talent management

Difficult for an organization to continuously bring innovation to a horizontal process (HR), which is not its core capability or area of focus

HR is the core business of an HRO provider

The provider brings industry-best practices to the table and keeps on improving and bringing innovation learned through numerous clients

E X H I B I T 3

Key attributes of agile HR organizations and the role of HR outsourcing



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The adoption of HRO hos been broad-based with North America leading the way and other geographies now jumping on the bandwagon (see Exhibit 5).

MPRHO market across geographiesUS$ billion

XX% CAGR2009 2014

MPHRO market growthUS$ billion XX% CAGR

~2%

~4%

2010

3.07

2012

3.20

2011

3.12

2013

3.30

2014

3.42

~4%

~3%

~5%

~4%

North America

Asia Pacific

EMEA Latin America

1.50

1.78

0.27 0.34

1.041.18

0.09 0.11

In fact, Everest Group has seen the market for HR outsourcing continue to evolve and expand over the past several years, growing at a rate of 4% from 2013 to 2014 (see Exhibit 4).

E X H I B I T 4

HRO market growth over time


E X H I B I T 5

MPRHO Adoption by geography



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Agile HR in Action through Outsourcing – Case Study

The E. W. Scripps Company – ADP HR Outsourcing

Buyer details: Industry: Diversified media Headquarter: Cincinnati, Ohio,

United States Country of operation:

United States Revenue: US$869 million

(2014)

HR outsourcing scope Employee scope:

5,100 active employees, 300 retirees Process scope: Payroll, benefits,

preemployment processes, compensation, contact center, employee data management, and technology (core HRIS and others)

Key agility benefits from HR Outsourcing (HRO)

Ability to ramp-up or ramp-down based on business requirements― Divestiture of Scripps

Networks Interactive (SNI): Aided in transition Supported quick ramp-

down Smoother and faster acquisition

integration― Legal entity consolidation (20

to 6 legal entities) Assistance through

specialized analysis and expertise Managed complex,

expensive, and time-consuming compliance issues Prevented the need for

external consultancy― McGraw Hill Broadcasting

(MHB) acquisition Quick ramp-up /

integration time (~60 days)

Key factors aiding agility Greater standardization/harmonization

― Well defined standardized processes provided quick roadmap during MHB acquisition

― Strong foundation and confidence in base data / processes improved agility and allowed to add layers such as talent management

Access to expertise― HRO brought expertise in areas of

ongoing changes in compliance (e.g. tax changes)

Access to the right tools and technologies― HRO arrangement brought new

tools and technologies― Increased usage of self service for

HR processes Scalable operational structure,

achieved through HRO (as part of ongoing internal transformation)

Variable pricing model (with ARC/RRC structure)

Access to industry best practices

Key learnings Buyers should avoid customization if significant benefits are to be obtained

from a standardized one-to-many solution Message around change management is important – focus should be on

benefits of the new service delivery model rather than outsourcing A phased rollout (combination of product/service and location/division) is

likely to make transition smoother


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Partnering for Agile HRO - Key Considerations for Buyers

Organizations need to take into consideration a number of factors before embarking on a third-party HR outsourcing model. Everest Group has identified six key elements that support successful HRO.

The six key elements are: Creation of a business case - Instead of focusing on the traditional

business case of cost saving, it should include strategic benefits of an agile HR organization. A lack of focus on the strategic benefits, right at the beginning, will dilute the advantages to be gained later, with both the organization and the HRO provider losing the vision of building an agile HR organization. Additionally, focusing on strategic agility benefits brings in significantly greater stakeholder alignment from across the organization including the board, top management, operations, sales, and marketing

Designing of outsourcing contracts - Some of the key components of HRO contracts are appropriate pricing model, and Service Level Agreements (SLAs) / Key Performance Indicators (KPls). While the output-based pricing model, based on the number of employees served, is the most common, it needs to be appropriately designed taking into account the uniqueness of HR processes. For example, for recruitment, the appropriate resource unit is price-per-hire and for learning, it is price-per-learner. Further, organizations should also explore inclusion of outcome-based components that align the buyer's and the service provider's interest to the "agility"-oriented outcomes. For example, within benefits it is possible to develop a pricing structure with a gainsharing component around

E X H I B I T 6

Partnering for HRO - Key Considerations for Buyers


Service provider selection

Creation of business case

Key buyer considerations

Governance

Retained organization

Designations of outsourcing

contract

Implementation approach

and change management


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dependent eligibility verification or tax credit services that helps organizations save substantial cost and drive towards better business performance.

SLAs/KPls should, therefore, also reflect both efficiency/effectiveness and business outcome-focused metrics. For example, a Recruitment Process Outsourcing (RPO) deal might have a KPI regarding reduction in early hire attrition, beyond the usual ones such as time-to-hire

Implementation approach and change management - A change from in -house to outsourcing across multiple HR towers is a complex process. The complexity is increased for large multinational corporations spread across many countries. Each organization should approach implementation in consultation with their provider, keeping in mind their organization's internal readiness and circumstances. However, for the large global end-to-end MPHRO deals, organizations should adopt a phased approach by increasing the scope (either geographical or process) over time. Another important component of the change management is appropriate communication. Focus should be on the benefits of the new service delivery model rather than on outsourcing or the outsourcing provider

Governance - A collaborative governance structure and relationship management is important in any outsourcing construct. Delay in establishing the governance structure, or setting it up solely for the purpose of managing the contract are must-avoid pitfalls that limit the value of such initiatives. The governance organization can also play a lead role in maintaining an ongoing focus on transformation and innovation to ensure the capture of business value

Retained organization - It is a good practice to retain an appropriately-sized internal human resources organization after outsourcing. The structure of the retained organization must be designed to be operationally effective in receiving services delivered by the HRO provider with clarity of roles and responsibilities pertaining to both parties. The retained organization may be involved in some HR execution work (e.g., in RPO it is common practice to keep senior management hiring in-house). However, the primary focus of the retained organization should be on HR strategy, relationship management, and analytical assessment of the HRO relationship. It is important to prevent "scope creep" for the retained organization to avoid creation of shadow organizations in the future

Service provider selection - The service provider selection depends on the organization's situation and requirements, scope of outsourcing, culture, and geographies involved. A combination of operational and business management criteria are important while selecting the service provider. On the operational front, Everest Group recommends assessing the following aspects of service provider capabilities:― Scale of operations available and experience― Level of expertise across multiple HR towers (and industries)― Capabilities across multiple countries― Current technology-driven assets and capabilities to serve, along with

planned investments and vision for future technology strategies


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― Service delivery footprint (onshore-based, offshore-based, or balanced) and its alignment to the business model requirements

For business management purposes, buyers should begin a discussion with service providers around these frameworks which enable and promote a stronger focus on agility, including total cost of ownership, change management, and ongoing process improvement. The readiness and willingness of a service provider to engage in these discussions will highlight its ability to support the business' efforts towards running an agile HR organization.


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Conclusion

The global economy has turned a corner and growth strategies once again dominate business plans. While some leaders view HR outsourcing as a mechanism for cost-saving, this research shows that it can also support growth strategies. The experience of the E. W. Scripps Company serves as an example of how HR outsourcing helped that company integrate an acquisition, divest a line of business, and develop new sources of HR insight through better data management and analysis. For the E. W. Scripps Company, more robust HR functionality allowed the department to directly impact the overall business strategies emanating from the board room. While not all companies will share this experience in the early phases of their HR outsourcing journey, by considering the six key success elements outlined above, most organizations outsourcing their HR operations will take some very big steps along their own journey towards greater business agility.

This study was funded, in part, by support from ADP.



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About Everest Group

Everest Group is a consulting and research firm focused on strategic IT, business services, and sourcing. We are trusted advisors to senior executives of leading enterprises, providers, and investors. Our firm helps clients improve operational and financial performance through a hands-on process that supports them in making well-informed decisions that deliver high-impact results and achieve sustained value. Our insight and guidance empowers clients to improve organizational efficiency, effectiveness, agility, and responsiveness. What sets Everest Group apart is the integration of deep sourcing knowledge, problem-solving skills and original research. Details and in-depth content are available at www.everestgrp.com and research.everestgrp.com.

For more information about Everest Group, please contact: +1-214-451-3110 [email protected]

For more information about this topic please contact the author(s):

Rajesh Ranjan, Partner [email protected]

Katrina Menzigian, Vice President [email protected]

Arkadev Basak, Practice Director [email protected]


www.everestgrp.com


mailto:info%40everestgrp.com?subject=

mailto:rajesh.ranjan%40everestgrp.com?subject=

mailto:katrina.menzigian%40everestgrp.com?subject=

mailto:[email protected]

Enabling Business Agility - Payroll, HR and Tax Services

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