Is HR Earning its Keep?

HR organizations got a boost in investment in 2014, with budgets up an average of 4% over the prior year. Much of the extra money went to increased headcount, with HR staffing up 3%, on average. Another big area of investment was HR technology, with one-fifth organizations saying they increased their spending on HR systems during 2014. (Source: HR Factbook 2015, Bersin by Deloitte.)

So how are these investments paying off? For most organizations, not very well.

In Deloitte’s newly-released study, just 36% of organizations rated their HR team's performance as either “good” or “excellent.” And these ratings are not significantly better than in past years (see figure 1.)

So for many organizations, that additional money has not been well spent.

But some HR groups are different, and HR leaders would do well to learn some lessons from these organizations.

Bersin by Deloitte's research describes a growth model in the maturity of HR capabilities. Most HR organizations start out as “compliance-driven” functions, focused on primary services such as payroll and benefits and meeting legal requirements. Over time, HR organizations need to expand their scope of initiatives and business alignment. At the highest stage of maturity, the “business-integrated” HR organization helps drive the business through workforce strategies and people data. These business-integrated HR functions do spend more than their less mature counterparts - $4,434 per employee, on average, as compared with just $2,112 among compliance-driven HR functions.

But the difference is, their efforts are paying off.

As evidence, business-integrated HR organizations have lower involuntary turnover compared to compliance-driven HR organizations (8% vs. 11%)—and each percentage point drop in turnover can be worth millions to a large organization. In addition, companies with business-integrated HR organizations have higher promotion rates, creating solid talent pipelines that enable them to take a long-term view of roles and future needs.

So when HR organizations look at their budgets, they need to ensure their spending is helping to enhance their effectiveness. The Deloitte study recommends the following to help organizations get started:

• Design the HR organization to deliver solutions: For many businesses, it is time to redesign HR with a focus on consulting and service delivery, not just efficiency of administration. HR business partners must become trusted business advisors with the requisite skills to analyze, consult, and resolve critical business issues.
• Create business-integrated “networks of excellence.” Rather than locating HR specialists in central teams, embed them into the business—but coordinate them by building a strong network of expertise. Recruitment, development, employee relations, and coaching are all strategic programs that should be centrally coordinated but locally implemented. When specialists in these areas live and work close to the business, their impact is greatly enhanced.
• Make HR a talent and leadership magnet: How do people get HR jobs in your company? If they accidentally move into HR, this may be holding you back. Create rigorous assessments for top HR staff and rotate high performers from the business into HR to create a magnet for strong leaders.
• Invest in HR development and skills as if the business depended on it: HR professionals at all levels need continuous professional development. Create your own “HR university” and invest in professional development to make sure your HR team is constantly sharpening its own saw and developing the necessary skills to survive. Focus on capabilities such as business acumen, consulting and project management skills, organizational design and change, and HR analytical skills.

For more information, see Human Capital Trends 2015 study and HR Factbook 2015.