Modern Human Resources: How Consulting and Outsourcing Improve Profitability and Create US Jobs

This article discusses the difference between modern and traditional human resources and lists several real life examples about how human resource consulting and outsourcing improve profitability and create U.S. jobs.

Modern Human Resources

According to SHRM, the premier source of all HR-related information, the average HR Manager in 2011 earns $75,000 a year as an exempt employee in the U.S., and the average HR Generalist earns $55,000 per year. HR Generalists do paperwork. HR Managers lead by example, coach and manage people. How many people should your HR Manager or Director influence? HR Managers and Directors are responsible for the performance and compensation of every person in the organization except the CEO. This means goal setting and coaching throughout the organization. HR Managers and Directors also monitor the performance of other executives on a peer basis according to goals set by the CEO and make compensation recommendations.

With all the other employees it is more common for the HR Manager or Director to be assigned a percentage of revenue to compensate the organization autonomously. Although the average public firm spends 67% of revenue on employees and .9% on the HR function excluding wages, it is possible to improve efficiency and keep your employee expenses fixed at 50% of revenue in non-union companies. 55% is typical in union companies and organizations with a lot of high demand or short supply employees like RN’s or Accountants. Doing this gives your company a major competitive advantage. Initially, this may look like you’re cutting pay, but you’re actually streamlining your organization by increasing revenue, quality and customer loyalty. Once your employees adjust the company will be healthier and everyone wins.

HR Managers and Directors in modern companies report directly to the CEO and regularly attend executive meetings. The term manager itself is misleading in human resources, because it gives low and mid-level managers the impression that they have the same authority as the HR Manager. HR Managers are department heads and executives who are highly skilled in employment law, employee relations, compensation and performance management, etc. In modern companies, the HR Manager is usually referred to as the HR Director, VP of Human Resources or Executive Director of HR to avoid a difference in status between other executives and confusion from lower to mid-level managers. For example, in modern companies the HR Manager has the authority to hire or terminate any employee who is not an executive without CEO approval. Some companies view the Operations Manager or COO as having more authority than the CHRO, CFO, CMO, etc. Other companies view them as peers who report directly to the CEO. It seems to be about an equal split depending on company culture, succession planning, nepotism and seniority.

Prior to 1948, employers referred to Modern Human Resources as the Personnel Department. Personnel was only responsible for processing employee paperwork and payroll. Since the start of SHRM in 1948 as the ASPA, the role of Human Resources changed into a department with tactical, administrative and strategic functions. In small companies, it is not uncommon for one person to do everything related to Human Resources. In larger companies, HR Generalists perform the administrative and customer service work and Managers or Directors do 70% strategic and 30% tactical work (a.k.a. performance-based goal setting and coaching – often with the help of an ERP like SAP or an HRIS like Ultimate Software – to provide faster, better results).

Modern HR Managers/Directors are now spending a majority of their time in the HRIS doing performance management to improve the profitability of the company. They approach this function from two different angles: cut costs and increase revenue. Costs are split up between investments in CapX (capital expenditures) and operations costs. Quality programs like Lean and Six Sigma cut costs by increasing operational efficiency and processes, while reducing wasted materials, man hours, and rework. One person well-trained in Six Sigma saves the average company 1M per year in operations costs. Other ways to cut costs are through ongoing negotiation and contracts management.

Negotiating lower costs is one of the most overlooked functions in business. I’ve saved companies millions of dollars every year just by picking up the phone and asking for a discount or concessions based on the situation. One company was paying double for advertising with a vendor they had for 10 years. Another company was giving one of my clients junk leads they resold 3-4 times and charging us a premium price without even replacing the bad leads. Another company was paying 5-10K more for each of their new leased vehicles, because they thought they were getting a fleet discount and didn’t negotiate on price. They were also paying retail for gasoline instead of setting up a wholesale account. Negotiation is crucial in business and your CFO/Controller probably doesn’t have time to call all your vendors. If you don’t have a designated person to negotiate lower prices, its very beneficial to have an HR Manager who is a great negotiator.

Contract management is also a critical function in business. Most companies have standard rates they bill their customers unless they are doing flat rate bids. If you are giving standard rates for a prevailing wage job, then you probably already lost money or reduced your profit margin to 0%. 10% retention is also another thing to watch out for on long term contracts or short term contracts that do not have a clear expiration date. 10% retention means that your customer will hold onto 10% of all the money you bill them until the project is complete. If its never complete due to ongoing work, you will never get paid and the customer negotiated a 10% discount out of your profit margin. No annual expiration date or automatic yearly increase based on economic figures related to your industry is another potential problem. This means you will be stuck with your negotiated rates from the beginning of the contract unless the customer agrees to amend the contract. Imagine charging the same rates you did 10 years ago, while having to keep up with rising costs in wages, health insurance, rent, utilities, materials, inventory, gas, etc. If you don’t have a person assigned to contract management, your HR Manager may be able to help you.

If you want to get the most out of your employees, you need Performance Management Software or modules that automatically communicate with your employees daily. This is one area where cutting costs is not a good idea. Once you have the software, the first step is to create a quality program regardless of what you do, and link your company goals to employee goals throughout the organization. When setting goals keep in mind that even indirect employees have a direct effect on revenue and costs. Once you have clearly defined SMART goals, the next step is to link employee goals to performance and compensation.

Instead of spending a lot of management time collecting and analyzing data, ask your IT department to figure out a way to collect the information automatically and use software to analyze the data and feed it into your HRIS. Sensors can collect performance information in factories. Monitoring software does the same thing on computers. If your software is not up to par and you cannot afford a big ERP, have your IT department design a web-based program with PHP and SQL one module at a time. Start with a dashboard and then add modules or integrate with existing software by building import/export bridges. For example, you may have modules or software for CRM, Finance/Accounting, HRIS, Performance Management, Operations, Dispatch, Quality, Safety, Advertising, or Training/Certifications. The ultimate goal is to summarize the data into an easy to use and convenient location, so it will add value to your company and give you up to data information. Transparency is a very positive thing, but I would suggest putting everything you need on one or no more than five pages.

Several big companies even have mobile apps issued to all their managers, so they can make changes and get performance information from home. Password protection prevents unauthorized users from making changes. However, an approval process is not wise. It’s better to assign responsibility for making changes to key people and then follow-up on the results. This way you’re not micromanaging or making yourself a barrier to getting things done. If you’re training someone new, have them get approval from their trainer first until they are done training.

The traditional pre-1948 HR Manager a.k.a. Personnel Manager adds little or no value to profitability. The little value they do offer comes from freeing up the time of other managers who are burdened with HR-related tasks. In companies with a pre-1948 view of Human Resources (Personnel), the HR Manager position is an overpaid, low to mid-level paperwork position with no leadership function or management authority within the organization. These companies often eliminate the HR Department altogether and assign the work to supervisors, managers, administrative assistants, etc., or they place the HR Department under the Finance Department and the CFO. The old logic for doing this is that payroll processing, which is only a very small part of human resources, overlaps with accounting. However, scheduling and verification of hours is a function supervised by HR. It is also significantly less expensive to use a payroll processing service like ADP than it is to process checks in-house unless you have a large company. HR Managers usually enter all the information into ADP and submit it for payroll unless manual checks are processed by accounting. ADP pays all the taxes and garnishments automatically, which saves a lot of time and money. Worker’s Comp and UI reports are also typically handled by HR unless Accounting does payroll and HR doesn’t have access to their system.

The value of a Modern HR Manager or Director with good performance adds an average of 19% to profitability whereas the value of a Modern HR Manager or Director with great performance adds an average of 54% to profitability. What’s the difference between good and great performance from an objective outsider? HR Managers are significantly more valuable if they are experts in other disciplines like Quality (LEAN, Six Sigma, Custom.), Negotiation, Contracts, Sales Management, Pricing and Financial Analysis, Budgeting and IT. For example, how do you talk to IT, Finance or Marketing about performance if you have no clue what they do? This is why HR Managers need a broad foundation of understanding in every area of the company. Performance Management is all about setting and achieving goals within a specific timeline.

The stereotypical HR Manager is a paperwork-juggling, people person. However, strategic and technical skills have a much bigger impact on profitability than people skills with the advent of HRIS performance management systems. Performance management software is much better at communicating with employees, because it is completely objective, unbiased and encourages employees to self manage. It also communicates with every employee, every day about their performance and provides to the minute information on demand. After gathering case studies from at least 100 companies, employees who met with HR Managers or Supervisors about their performance were mentally focused on raises during annual reviews or displayed fear reactions after getting feedback about less than perfect performance ratings. Talking to employees daily about their performance often resulted in feelings of micromanagement, high stress, higher turnover and lower perceived job security. Individual performance increased slightly, but so did turnover costs and the loss of valuable employees who were top sellers and manager who claimed to find a better job, disliked their supervisor or were burnt out. Regardless of the HR Manager or Supervisor, very few employees took the criticism in a positive way over long periods of time and momentary lapses in performance led to major drops in morale. This resulted in more negative turnover, sick time, tardiness, workers compensation claims, and FMLA leave.

Prior to 1948 the CFO was viewed as a higher-level position than the HR Director or Manager. This is why many companies are renaming the position to things like Executive Director of HR, CPO, Director of HR, CHRO, VP of Human Resources, etc. The most important thing to mention is that CFO’s are rarely qualified to fill the role of an HR Manager, so they are also not qualified to manage an HR Department. CFO’s are usually not PHR certified and do not have a Master’s degree in Human Resource Management. These are the minimum qualifications you should expect from an HR Director. Unqualified experience is no substitute for minimum qualifications. What is unqualified experience? HR experience in a traditional HR department or company does not prepare an HR Manager with the knowledge or skills to improve profitability. However, according to SHRM, industry doesn’t matter in HR or Finance, because the job itself remains the same. Things like learning a new HRIS or Accounting Software are relatively easy as long as procedures are available. If not it would be a good idea to write them before you lose a key employee. Everyone has a life cycle, even your top 5 employees. Some may want to retire. Others may want to do something different, change managers, have less responsibility, or go back to school.

Domestic Outsourcing

Small businesses with 50 employees or more need a part-time HR Manager for a variety of reasons. However, many companies hire an HR Generalist to fill the role of the HR Manager to save money, even though they are often not qualified. A qualified HR Manager or Director is PHR or SPHR certified, and at the very least is an expert in the compensation, coaching and performance management of an entire organization. If your HR Manager or Director isn’t significantly improving your company’s bottom line, they need to go back to school or have an HR Consultant add some critical tools to their HR toolbox. It’s common for small and medium-sized companies to have an Office Manager, General Manager or Administrative Assistant fill the role with no education or experience in employment law, performance management, benchmarking, risk management, etc. Big mistake…

If you have a small business (0-99 employees), you can expect that your HR Manager or Generalist will be busy 2.5 hours a day for every 50 employees. Unfortunately, an HR Manager is an exempt-level position and HR Generalists are not qualified to do strategic work that adds value to your company’s bottom line. This means your HR Manager won’t be busy for the rest of the work day unless you assign them other responsibilities, and you shouldn’t expect any significant increase in employee productivity from an HR Generalist. Here is a breakdown:

50 employees = 2.5 hours of HR related work     2.5 hours / 8 hours = 31% utilization

100 employees = 5 hours of HR related work     5 hours / 8 hours = 62% utilization

Most small business owners would just assign their HR Manager more responsibilities or have their CFO attempt to fill the role of an HR Manager. Having your CFO fill the shoes of an HR Manager or having HR report to the CFO is not wise. HR and Finance are their own separate departments that report directly to the CEO. CFO’s are educated and experienced in accounting and finance; they are not usually educated in HR, nor are they PHR or SPHR certified. Hiring your own Accountants or front office personnel does not make you an HR expert. The exams for these two certifications have been compared to the Bar Exam or becoming a Series 7 Stockbroker. They prove a level of knowledge and experience in HR that is way beyond a General Manager. The exam is written in a way that makes it nearly impossible to get a passing score from the study guide without 5 years of exempt-level experience applying what you learned.

Let’s assume you hire a qualified HR Manager that’s PHR certified once you have 50 employees. You decide to assign them extra responsibilities to stay busy for the remaining 5.5 hours of the work day. Depending on the person they may do well in areas outside the HR function. If you assign them low-level responsibilities like additional paperwork, updating reports, coordinating meetings, taking calls, organizing the company picnic, etc., you are probably paying an HR Manager the equivalent of $36.06 per hour to do tasks that could be completed by an Administrative Assistant at $12-15 per hour. That’s the equivalent of throwing away $21-24 per hour X 5.5 hours per day or about $32,175 per year. If you had 100 employees, under-utilization would cost you $16,087. You cannot classify an HR Manager as a non-exempt employee, so what do you do?

The answer is using a third-party vendor for only the time you need each day, because exempt status does not apply to HR Consultants working on contract. This is called domestic outsourcing. When you outsource the position, your HR Manager or Generalist is your consultant or contractor, not your employee. You can choose to have them work on-site or off-site depending on your needs. Off-site usually costs less and allows the consultant to make the most of their time without distractions. Employees can still call with questions, and they can visit your site whenever necessary for meetings or terminations. Contracting also helps reduce your liability, because the vendor is a third-party with their own employees, management and insurance. This means you won’t have to spend time managing your consultant or answering a lot of questions. You only pay the current market rate for the hours you need offsite plus 21% burden for the company to provide the consultant with benefits, 35% for overhead and 20% for profit. Contracts over one year with a least 1 FTE qualify for a loyalty discount of 10%. Typical pricing for an on-site consultant is 2-3 times the market rate for the position. Essentially you are paying 10-20% more per hour for a consultant than an employee. However, they save you a lot of money and time, because they get more work done in less time. For example, I already have multiple employee handbooks, forms, business plans, compensation plans, job descriptions, etc. already written and approved by attorney’s who specialize in employment law. Consultants also pay their own benefits, employer taxes and an equal share of overhead. Overall this results in a net savings to the client, access to additional resources and a significant improvement in profitability. Save yourself a lot of money and time, get a consultant today! Call (818) 478-5445

You can get current salary information for Benchmarking for free at salary.com based on location and position. This data is based on the last 6 months. In most cases this information is very accurate and current, but it does not allow you to specify industry, number of employees, education, years of experience, or certifications. If this is important to you, I recommend compensation services like Payscale or SHRM’s salary reports. Depending on your company’s compensation strategy (lead, lag or market), companies typically create a salary range from 25% to 75% for each position. New employees are offered between 25% and 50%, depending on how confident the employer is in their ability to perform autonomously in the position. 50% represents the market rate. 25-35% is the typical offer range for a new employee. 65-75% is a long-term, high-performing employee. Instead of giving a yearly increase of 3-4%, your company should do benchmarking and only change your employee’s compensation percentile based on objective measures of their performance. Performance is not how much you like your employee or want to give them a raise, it’s whether they accomplish the goals assigned to them that support your company’s profitability.

Since employees don’t like pay reductions when the market changes, it’s smarter for employers to offer a combination of fixed and variable pay. Assuming a recession will only decrease profitability no more than 25%, I would recommend offering 75% fixed and 25% variable pay in most companies. However, some large companies like AT&T are changing their compensation plans by as much as 60% fixed and 40% variable pay. Variable pay can be an hourly rate, bonus, commission or profit-sharing, but it should be considered ordinary compensation and not be eliminated by the employer to cut costs. Whether it’s employees or major purchases, on the average “you get what you pay for”. Companies like Wal-Mart that lag the market are scraping the bottom of the barrel. Companies that lag the market spend more time training employees and usually have substantially higher turnover costs. Companies that lead the market like Google absorb most of the top performers from their competitors.

Companies that pay the market rate overall have less turnover and higher quality employees. Variable pay is a way to get your employees motivated and happy about making your company money and reducing costs. The best way to get them to self manage and achieve the goals you set for them is through daily feedback from an HRIS performance management system like Ultimate Software. This way managers can automate the management process and focus on leading, coaching and motivating their employees. Employees react more favorably from software feedback, because they aren’t embarrassed in front of their supervisor. They also don’t have the opportunity to blame others and not take responsibility. Stress levels also go down resulting in better overall company performance, less FMLA abuse, less accidents, less verbal and physical violence and improved company morale. Variable pay adds job security, protects the company, and compensates the employees fairly based on current market conditions and individual performance. Despite high unemployment, hiring wages are not decreasing and small raises are still being given to current employees for the extra work they are doing. Employees in America are overemployed and hiring is starting to take place to reduce the pressure on key employees. This should be done sooner rather than later to reduce overtime and avoid burning out your best people.

Offshoring

“In 2007, Matthew Slaughter, an economist at Dartmouth’s Tuck School of Business, published a comprehensive study of the hiring practices of 2,500 U.S.-based multinational companies. He found that when U.S. firms hired lower-cost labor at foreign subsidiaries overseas, their parent companies hired even more people in the U.S. to support expanded operations. Between 1991 and 2001, employment at foreign subsidiaries of U.S. multinationals rose by 2.8 million jobs; during that same period, employment at their parent firms in the U.S. rose by 5.5 million jobs. For every job “outsourced” to India and other foreign countries, nearly two new jobs were generated here in the U.S. Those new U.S. jobs were higher-skilled and better-paying.”

I hope the above quote clears up the common misunderstanding about outsourcing. When William Cohen mentions outsourcing to foreign countries like India or China, he’s talking about offshoring. Outsourcing is usually domestic, yet most people think offshoring is a more specific type of outsourcing. Offshoring has many advantages too, yet managing employees in India, China, etc. presents new challenges to executives. For instance, do you speak Mandarin, Cantonese, etc? People from India usually speak English and their own dialects, so that’s not an issue. However, there is a big culture and language gap. I’ve read numerous academic and corporate studies on offshoring and they usually agree that offshoring sales and customer service is very ineffective. From a short-term prospective, they cost significantly less, yet they also sell significantly less and customer satisfaction goes way down due to language barriers. This causes advertising costs to soar and customer loyalty to decrease.

However, offshoring in technical, non-customer interactive areas like IT have mostly positive feedback. Just last year I managing 100 software engineers in India for an online university. All of the software engineers had at least a Master’s degree in Computer Science from an accredited university. Their average pay was only $600 a month compared to $5,000 per month or more in the U.S. They all spoke English, just not as well as a native speaker. There were also big cultural differences, yet the amount we saved was well worth the effort. The increase in profitability created 230 new jobs in the U.S. and allowed the college to gain 4,000 new international students in India. The U.S. economy depends heavily on doing business and leveraging resources internationally. The old, traditional business structure of doing everything yourself is rapidly being replaced with outsourcing strategic business units and whole departments to companies that specialize in IT, HR, Finance, Manufacturing, Print Advertising, Project Management, SEO, SEM, etc.

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