HR Costs Rebounding?

A new report on human-capital effectiveness finds HR costs for organizations are rebounding to pre-recession levels. But does that mean the war for talent is back on?

By Michael O'Brien

By almost any measure, 2009 was a tumultuous year for organizations struggling to keep their ships afloat amidst the crashing waves of a global recession.

But a new report, PricewaterhouseCoopers/Saratoga's 2010-2011 US Human Capital Effectiveness Report, finds that a key HR statistic is returning to pre-recession levels,and that organizations must position themselves to be in front when hiring begins again in earnest.

"Once the economy stabilizes, large numbers of employees -- many possessing key networks, skills and knowledge -- may choose to retire or change jobs, reversing recent retention trends," the report states.

"Employers should take steps now to manage employee engagement amid a period notable for its cost-containment and economic strife. Those that manage ahead of the curve will be better positioned to take advantage of the economic recovery," it states.

The report by the New York-based firm finds that HR costs-per-employee rose in 2009, to $1,569, up from $1,462 per-employee in 2008 and close to the pre-recession average of $1,610 in 2007.

The total internal and external costs incurred directly by HR during the calendar year include compensation and benefits, outsourcing costs and miscellaneous costs such as travel, legal and court fees, says Shebani Patel, a PwC Saratoga director based in San Jose, Calif.

"Saratoga excludes costs related to learning and development, security, safety functions, payroll, medical and childcare centers, and cafeteria from our definition of HR," she adds.

And that figure illuminates a fundamental challenge in the HR world, says one of the report's authors.

"HR, in doing its work and being the caretaker of the workforce, means they have a large role to play in the overall success of the organization in achieving their overall corporate objectives," says Scott Pollak, a director at PwC Saratoga. "We're at a new inflection point now, and the question for HR is: 'How do you drive the business forward?' It's no longer about cost containment, it's, 'How do we start selling our way out of this hole?'

"The challenge for HR is how to support top-line growth," he continues, "through focusing on pivotal roles, pay for performance, driving better performance management and supporting the build process through diversity programs."

The report includes data from nearly 300 organizations, representing 12 industry sectors, which provided information from the 2009 calendar year. The average company in the report has annual revenue of $5.7 billion and more than 19,000 employees. And while many of the participating clients are global companies, results included in the report refer only to U.S. operations.

The reason for the increase in HR costs is relatively simple: While HR budgets remained fairly stable between 2008 and 2009, the report finds the average HR headcount at organizations decreased, resulting in a per-employee increase of $107 from 2008 to 2009.

"Following a big dip in 2008 in HR investment per-employee, we're seeing a rebound back to historical levels," says Pollak. "We think this year's results represent much more of a rebound and a normal level of spending. This year's results are much more consistent with what you typically see. Last year was an aberration."

At the same time, the number of HR employees is decreasing.

The ratio of employees supported by HR has risen for the past three years, from 1:85 in 2006 to 1:97 in 2009, according to the report. That suggests an upgrade in the talent is needed for HR practitioners going forward.

"We've seen this happening for quite a period of time," says Pollak, "where HR is reducing the amount it will spend on transactional, or core activities, and increase the amount they are spending on driving the talent and the business partnership with the organization.

"We see that investment, in things like analytics, diversity programs leadership development, and the investment is funded in part by a reduction in the transactional components of HR -- and that reduction is coming about through implementation of shared services and automation of transactional processes."

To wit, the report shows that the percentage of HR costs devoted to labor costs and systems are increasing, while the percentage devoted to outsourcing and consultants is decreasing.

Chris Kearney, a partner and practice leader in the Chicago office of executive-services firm Tatum, says that companies "are leveraging their HR function to identify candidates via targeted networking and social media to avoid incurring a fee from a search firm.

"Given today's high unemployment rate and the explosive growth of social media, high-performing HR functions are finding suitable candidates on their own more frequently than in the past," Kearney says, "which requires a shift in emphasis away from external resources and towards HR departments."

Similar HR budget findings will be in the upcoming HR Book of Numbers, says Harry Osle, the global HR advisory practice leader at Miami-based consulting firm Hackett Group.

Osle says he's not surprised by the PwC/Saratoga numbers, adding that his group's report shows that, while HR costs have risen slightly for typical companies over the past few years, top performers have actually reduced the cost of HR per employee significantly.

"If you look at the past couple years, 2009-2010, HR has reduced its staff by almost 11 percent. In the same time period, HR reduced its operating budget by 15 percent.

For 2010, typical companies saw a 3-percent increase in HR costs-per-employee, while world-class companies saw costs drop by 12 percent, according to Hackett. World-class companies now spend 28 percent less per employee on HR than typical companies, and operate with 25 percent fewer HR staff.

"It's not uncommon to see, after the drastic changes we've seen in the last couple years, that peer companies that don't have the right infrastructure in place tend not to be able to turn on a dime like world-class companies can," he says, adding that world-class HR organizations typically use a common technology platform, shared services, self-service and automated workflows to reduce costs while keeping up productivity.

"HR organizations, by and large, are doing much more with less," he says, adding that strategic workforce planning -- in addition to streamlining and automation processes -- can help organizations bring down costs.

"If all you're doing is bringing warm bodies in, there's going to be a lot of churn," he says. "When organizations do a very good job of workforce planning and aligning skill sets with the right candidates, that means less churn and, therefore, less cost."