In a recent article in Forbes magazine online, Ron Ashkenas wrote a heartfelt piece on how essential the Human Resources function is in response to recent HR bashing. He wove a lovely story of how critical the function is, how deeply misunderstood its people are and how we should all band together to help this function succeed.
The idea that we should all club together to support a non-operational function outside both our remit and remunerative motivation is farcical. The truth is twofold: (i) Firstly, bad hires come from bad specifications. HR cannot be blamed for finding the wrong person that a business unit specified. (ii) Secondly, HR needs to force the various business units to communicate their needs proactively and pre-emptively.
There is often a lot of subtext, contextual knowledge and peripheral information which comes along with requests for a new hire. Internal HR managers need to get analytical if they are going to remain relevant and not cede their function. If they fail to grasp the cost and revenue interdependencies of various roles then external boutique consultancies will thrive. These companies will analyse, assess and source the best talent. There will be a premium on this cost and it will ultimately be funded by removing more internal HRs.
The research tells a story. In a recent survey by Mckinsey, CEOs identified the top 8 barriers to talent acquisition and management. At the top of the list was the failure of senior management to spend enough time on HR. This is not HR’s fault but that the blame lies with HR is topical. Another factor was perceived to be the failure of managers to understand that good people are good for good business. Good people execute strategy well. The secret to this is understanding (a) the structural roles which people satisfy that are vital to the effective functioning of the business, and (b) the functional knowledge which is inherent in executing those roles.
In a recent post I wrote about the likely demise of internal HR and the rise of boutique consultancies which had the skills to analyse, assess and source talent. Internal HR is better placed to deliver this role better and more cost effectively. They should know and understand the people, they should understand the dependencies, they should have a clear understanding of contextual knowledge and they should also be able to bolster the role specs with additional peripheral information. Critically, managers need to know which position which their staff play. Without this understanding businesses looks like an under-12 soccer team where everyone is chasing the ball.
In our last blog we recounted that most ICT cost reduction programs fail. More to the point, we noted how they fail in larger businesses through a vicious cycle following increased overhead from poor process analysis. All this stems from a limited view of direct and indirect ICT spend.
In summ, the answer is detailed cost modelling of ICT which analyses the firm’s technology in its place as a business capability enabler. This is vital in the current economic climate otherwise businesses will simply benchmark their costs against similar firms rather than try to pare ICT costs to the bone.
The results of traditional IT programs?
- ICT cost reduction programs usually only attack the easy and obvious. For sustained cost management in ICT the cost reduction program needs to attack: (i) soft costs (indirect spend), (ii) managerial costs and (iii) program costs as well as all the standard hard costs.
- Cost cutting reduces capability. Traditional approach is to cut applications and services as well as heads but capability will eventually suffer. Senior people are often made redundant was work is pushed from higher to lower paybands. With them also goes much of the firm knowledge capital and goodwill of the firm. If we want to quantify this cost of lost knowledge it is the difference between the market value and the book value of a business.
The problem is that IT is usually seen as a black box. Few senior executives understand the subtle dependencies which stretch from technology throughout the business. More importantly, few understand that actual capex and opex of ICT just represents the hard costs of ICT. In addition to the hard costs are the soft costs, the management costs and the program costs of ICT. In more detail:
- Soft Costs relate to all the indirect spend which flows from ICT procurement. This may include travel for non-IT personnel involved in change, training and customisation or process change etc.
- Managerial Costs is the accumulated cost of decision making from management. This is pure overhead and is not accounted for in the Cost of Goods Sold but rather shows up in bloated Sales, General & Administrative (SGA) accounts.
- Program Costs are the costs of running ICT programs beyond the costs accounted for in the various cost allocation systems. These can be the cost of running distributed teams, the cost of low development capability etc. Such cost coefficients are statistically generated.
On top of all these are the hard costs of ICT.
Borrowing diagrams from Accenture the solution is to run a 3-tiered cost reduction strategy:
After the easy stuff is done, the business must ultimately streamline its processes (and align cost structures accordingly) and then lower it non-discretionary spend. The key is to (i) see the whole process, (ii) understand the dependencies, and (iii) engage locally.
- Minimise (Hard Costs) – Tactical Cost Reduction. Grab the low hanging fruit and take out the obvious costs; the costs in plain sight. Engage locally with account managers and business unit leaders to reduce headcount but understand and model the dependencies by seeing the whole capability. The Boston Consulting Group advise that managers proceed on third of a third rule, ie 1/3 of all FTEs are non customer facing and 1/3 of those can be removed without adverse impact on the business.
- Optimise (Soft & Program Costs) – Proactive Cost Governance. This involves detailed spend analysis and process optimisation. Indirect process costs grow like barnacles on a ship. The longer they are there the more they are accepted but ultimately they increase the financial drag on a business. Remove all the invented tasks by modelling the firm’s value chain and seeing where the processes fit into larger business capabilities. Once this is done executives can optimise the key cost drivers and their inputs. This improves the delivery model for ICT and enables better demand management. Accompanying these operational actions the business should improve cost governance. It can achieve this by removing the management structures around excessive process governance. This requires a more active and dynamic GRC system but ultimately the business feels a lighter GRC touch. Most importantly, simplify processes and remove the ‘cost of complexity‘ ie vertical integration and convoluted workflows which increase process time and transactional costs.
- Re-design (Program & Managerial Costs) – Strategic Cost Management. In order to achieve significant and lasting cost reduction benefits the business must lower its discretionary spend. However, managerial cost structures (which are significant) can only be made redundant when the overall complexity is reduced. Once this happens shared services may be implemented and rationalised. The ICT offering can be standardised and the business can create re-usable technology components. Then the business can change its transfer pricing models and look towards offering the customer-facing SBUs a more sophisticated multi-channel mix of capabilities, ie give them the agility to increase their high-end customer offerings. Only once this is achieved can the business look towards modernising and streamline technical architectures.
The key is to look at ICT as a capability enabler and not as a business unit in its own right. ICT should have to justify its very existence. However, once it does and develops full cost transparency then and only then can it move forward in real partnership with the business.
If Andrew McAfee‘s book “Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges” is to be believed then:
“We are on the cusp of a management revolution that is likely to be as profound and unsettling as the one that gave birth to the modern industrial age. Driven by the emergence of powerful new collaborative technologies, this transformation will radically reshape the nature of work, the boundaries of the enterprise, and the responsibilities of business leaders.”
Most pundits believe that Enterprise 2.0 is the full adoption of Web 2.o by an organisation. In the next few years, therefore, we will see:
- Cloud technologies and better enterprise application security enable bring-your-own-device and with it the greater fragmentation of organisational information.
- Greater transparency of organisational work through social media leaks (i.e. people advertising their work and mistakes on the internet)
- The decomposition of many more business processes into micro-tasks (much of which can be outsourced or contracted out).
- The improvement of distributed working practices enabled by better collaboration tools, devices and connectivity.
- Increased pace of business through improved self-governance and, in turn, empowered by better oversight (from GRC and finance software to more pervasive CRM implementations).
- Shorter time-to-market cycles driven by improved idea generation and organisational creativity (so called – ‘ideation’).
So, is Enterprise 2.0 the social enterprise? Are the benefits of Enterprise 2.0 merely social? Simply a more hectic work schedule enabled by greater ease of using mobile devices and tighter communities of practice?
A 2010 survey by McKinsey & Company found that most executives do believe that this is the sum total of Enterprise 2.0 benefits. Most simply believe that (i) knowledge flow and management will improve. Many believe that (ii) their marketing channels will be greatly improved whilst only a few believe that (iii) revenue or margins will increase in the networked enterprise.
If this is the dawn of the new enterprise then why do so many large businesses find it difficult even to implement Microsoft SharePoint?
The most likely truth is that this is not the dawn of Enterprise 2.0. We are probably not on the cusp of a grand new age of information work. Our businesses are unlikely to change significantly, although the hype will be re-sold by IT vendors for some time. One only has to hearken back to the ’80’s to remember to cries of the ‘paperless office’ to realise the low probability of Enterprise 2.0 materialising.
Whether it will be Enterprise 2.0 is debatable but we are entering the age of The Social Entreprise. It has ushered in a new age of commercial culture but it will unlikely herald a paradigm shift in commercial structures. The truth is that human networks and communities operate in parallel to corporate reality. Networks are how humans interact – they are not how humans are paid. Ask anyone who has ever been through or performed a cost reduction exercise. In short, emerging social software platforms (ESSPs) are fun and sexy but the do not currently affect operations in most businesses. Emerging social software platforms will make a difference internally when they affect cost structures and not just when they show up in sales figures. This means that ESSPs need to be able to track and apportion innovation; they need to actively manage workflow (not just passive engines); they need to engage dynamically in governance and highlight good corporate participation and collaboration. Only once these elements are incorporated into scales of remuneration and talent sourcing will both the enterprise and the workers benefit.
Maybe then we can move to Enterprise 3.0.
What will HR look like in the future? If recent articles online are to be believed then the HR function will be more powerful and more important than ever. We do know the following:
- We do know that the standard job market will become more fragmented as better information management allows much work as we know it to become commoditised.
- We do know that in a world where executive education is highly specialised and more competitive the acquisition of top talent will become more difficult as senior executives look for a richer, more cross-functional, more multi-disciplinary skillsets in their stars.
- We do know that top execs will add complexity to HR through cross-functional skillsets (i.e. top talent will be less obvious because they will not necessarily rise in vertical portfolios. The best project manager may also be a registered psychologist, for instance).
What we do not know is just how the enterprise will react. The onset of better databasing technologies and mobile methods of capture did not ease the information management problem in organisations (rather it has just created mountains of unmanageable data).
- So, will the fragmentation of the labour market and the rise of cross-functional skill sets add too much complexity? Will the HR market be able to cope?
- Will the HR function reach an inflection point where complexity is too great and the entire function is outsourced completely? Or,
- will better information management allow line managers to integrate talent sourcing directly into operational business processes?
If a recent (27 Sep 2012) survey by KPMG is an indicator then cost pressures in businesses mean that they will have to get smarter about HR if they are to remain competitive. In boom times even with 35% of respondents arguing for greater direct collaboration with operational management, it is unlikely that even this volume of vociferous response would change the HR paradigm. However, with the cost pressures at almost unbearable levels and social media increasing the transparency and speed of operations, it is unlikely that the HR function will survive even as it stands today.
The following outcomes are likeley: (i) Commoditised work will be consumed by line management into standard operations, and (ii) top, cross-functional talent will be outsourced to ever more high-end boutique HR consultancies. Smaller HR firms will fall by the wayside but the high-end firms will demand higher margins and their clients will demand greater results. It is possible that, much like IT services of the ’90s boutique HR consultancies could take stakes in realised profit that certain new-hires make.
Whatever the answer is it will be global and there will be big money in it.