SAP INSIGHT

STATE OF THE ART

IN HUMAN
RESOURCES
AN SAP/ASUG
BENCHMARKING STUDY OF
KPIs & BEST PRACTICES
Table of Contents
CEO Notes 1
Point of View 3
A Lean and Mean HR 4
Forge Competitive Advantage by Jump-Starting Effectiveness 5
Push HR to the State of the Art 9
State of the Art HR: Never the Status Quo 10
About This Survey 11
Appendix 11
STATE OF THE ART IN
HUMAN RESOURCES
AN ASUG/SAP BENCHMARKING STUDY
OF KPIs & BEST PRACTICES

by Katharina Müllers-Patel
 CEO NOTES

SAP/ASUG Benchmarking found a more dynamic
HR function that demands an equally more
dynamic corporate push toward strategic Human
Capital Management.
Human Capital Management may be the most
evolving function within the 21st century
corporation. Changes in Human Resources
philosophy and technique are emerging fast and
furious. To determine how far HR executives have
come — and how far they have to go — ASUG/SAP
Human Capital Management Benchmarking
Initiative surveyed the Human Resource practices of
nineteen companies, with revenues from $200
million to over $40 billion.
Our findings underscored momentum. In every
company, of every size, the demands on Human
Capital Management are intensifying. More
transactions need to be completed, at lower cost,
and, at the same time, HR processes have become
increasingly complex to manage. A typical 10,000
employee company runs in excess of one million
employee-related transactions annually, each of
which could cost the company anywhere from $10-
50. The top ten recruiters in the United States
report they are hiring from 35,000-95,000 employees
annually. Managing the recruitment pipeline,
selection process, and induction process resembles
war-time logistics!
At the same time, pressure from employees,
managers and business stakeholders for more value-
added services increases. Employees want to manage
their own career path, check on their benefits, and
be part of their own retirement planning. Managers
want up-to-date information about their employees
available at their fingertips. Business stakeholders
want HR supporting and aligned with their business
strategy, responding to demands of growth and
innovation.

SAP/ASUG HUMAN RESOURCES BENCHMARKING PROJECT

During the first quarter of 2005, ASUG and SAP conducted a benchmarking effort
in Human Resources, inviting over 50 companies to participate. Of those, 21 firms
completed surveys, and 19 had sufficiently consistent data to be included in this
analysis. Despite the small number of firms, however, the sample provides a good
snapshot of the range of Human Resource strategies and management practices.
The size of the participating companies’ 2004 revenues ranged from less than
$200 million to more than $40 billion. The sample included global companies, with
more than 40,000 employees around the world, and medium sized companies, with
less than 5000 employees. The types of companies ranged from consumer
products to high tech to heavy manufacturing, utilities, consumer products, and
even public institutions.

We analyzed the HR performance of these companies along a number of different

dimensions, especially their effectiveness in instituting "best practices" within their
various functions (on a scale from 1 - no coverage to 5 - full coverage). We then
used each company's score on the best practice continuum to rate them against
their peers - or categorizing each as first quartile (the most effective at instituting
best practice), average, and fourth quartile (the least effective).

AN SAP/ ASUG STUDY OF HR BEST PRACTICES

1
 Through evaluation of the survey responses and
follow up discussions with the survey participants,
we can draw five conclusions that demonstrate how
companies are meeting the 21st century challenge of
Human Resources:

HR executives strive to optimize the efficiency
of transactional processes through the effective
use of information technology and application
of best practices, keeping staffing levels as lean as
possible.

HR organizations are determining the right
level of investment in the more strategic
functions, which facilitate business growth and
increase employee productivity. Most
companies, however, have not been able to run
these strategic functions efficiently, without
compromising service levels and overall
effectiveness.

Companies have found that centralizing and
consolidating HR operations helps them
increase the efficiency of HR processes. At the
same time, HR organizations have difficulty
determining the appropriate number of HR
Business Partners/ Generalists they should
allocate to each business unit to ensure strategic
alignment between HR and business
stakeholders.

Outsourcing, while used frequently for
transactional processes, does not always drive
top performance, either in cost or service
quality. Organizations need to carefully
evaluate the value, performance and cost trade-
offs in outsourced vs. in-house service delivery.

Information technology continues to provide
the basic foundation for efficiency and acts as
the key driver for effectiveness and future
innovation. HR organizations recognize that IT
helps the development of many best practices
and plan to continue to invest to upgrade and
reduce complexity by integrating their systems.
To sum up, we found that the best HR executives
constantly reassess their Human Resources
management processes to optimize efficiency, cost
and service delivery in a continually changing
environment, and to prepare for future innovations.
Driving the continual cycle of re-evaluation and
renewal is a balancing act between the
organization's demand for cost containment and its
recognition of the need for talent management and
for employee motivation and engagement, by giving
them access to, and participation in, the
management of their own successes and failures.

The march to Human Capital Management has begun

as the best HR executives reassess HR management
to optimize efficiency, cost and service delivery in a
continually changing environment — and prepare for
the need to unearth the right talent to push
innovation and growth...

2
SAP/ASUG POINT OF VIEW ON HUMAN
CAPITAL MANAGEMENT

The secret in management: If HR is managed Understanding the dynamism of Human Resources,

well, it becomes Human Capital Management and the pressures on Human Capital managers,
and contributes directly to a company’s growth ASUG/SAP Human Capital Management
and innovation. Benchmarking Initiative studied the best practice
track record of 19 companies ranging in size from
Companies need to benchmark and optimize
less than $200 million in sales to more than $40
Human Capital Management practices, to strike the
billion. We analyzed the findings in light of the
optimal balance between cost efficiency and
prevailing opinions about Human Resources as well
strategic purpose. The common corporate
as several recent studies we looked directly at 16 key
perception is that managing Human Resources is a
processes divided into:
straightforward process, with the real objective,
achieving greater efficiency and hence lower cost for 1. Transactional activities
all HR transactions. If managed well, however,
2. Expertise-based activities
Human Resources is one of the most dynamic
organizational processes, which can contribute to a 3. Strategy/Compliance Management
company's growth and innovation.

Real Dynamism

Figure 1

3
 A LEAN AND MEAN HR
SAP and ASUG found that the key HR measure The drive for efficiency shows up clearly in staffing
was HR FTE/1000 employees — solid evidence levels in everything from transactions to expertise-
of the based functions. First quartile survey participants
importance of efficiency. had three times lower staffing rates for transactional
functions than average HR organizations: 2 HR FTEs
Following the economic slow-down of the last two
per 1000 employees for first quartile companies vs. 6
years, Human Resource management has been
HR FTEs per 1000 employees for average companies.
asked to become highly efficient. “Employees served
The higher levels of investment in first quartile
per HR FTE”, as well as “HR FTEs per 1,000
companies also may be a sign of a strategic decision
Employees” and “HR Cost per Employee” are the
to invest to increase overall employee productivity.
key efficiency metrics used most commonly in the
And, by optimizing transactional functions, first
HR space to evaluate HR staffing levels.
quartile companies can afford to allocate 75% of
Despite the focus on efficiency, our research their staff to value-added expertise-based or
identified significant gaps between the first quartile strategy-related activities.
(the companies found most effective in instituting
Of course, companies that need fewer staff also have
best practices) and average performers (those who
lower staffing costs. In the transactional area, first
are average instituting best practices). First quartile
quartile HR organizations have four times lower HR
HR organizations served 50% more employees than
staff and external costs than average HR
average performers: One HR FTE in a first quartile
organizations – $200 per employee per year for a
company served 130 employees in contrast with the
first quartile company vs. $900 per employee per
80 employees served by one HR FTE in an average
year for an average company.
company. While companies with higher staffing
levels tend to have more complex organizations, the
gap between first quartile and average performers
most certainly indicates an opportunity for
improvement.

Trending
Slowly
Toward
Strategy

Figure 2

4
FORGE COMPETITIVE ADVANTAGE BY
JUMP-STARTING EFFECTIVENESS
While every company wants to be more efficient,
those looking for a competitive edge in HR are
adding capabilities and services to jump start service
delivery effectiveness. To determine the precise
nature of this advantage, and its source, the best HR
executives proactively:
1. Align HR More Closely to the Business
2. Outsource Wisely; Control Effectively
3. Leverage IT Precisely For Competitive
Advantage
ALIGN HR MORE CLOSELY TO THE
BUSINESS
The process of aligning HR to the goals of a
company’s business takes time and much thought.
The precise nature of the alignment depends on a
company's particular culture and strategic goals.
First, Use Shared Services Effectively. We found
centralizing certain functions in a Shared Services
model is the first piece of the alignment puzzle.
Shared Services clearly is more efficient: The
average headcount and external cost per employee
for decentralized operations was far higher than for
Shared Services, producing as much as a 48% gap in
Compensation Administration, and a 30% gap in
Training and Development. But Shared Services
positively impacts effectiveness: The average best
practice score for Shared Services was 10% higher
than that for decentralized functions.
Shared Services
Can Add to
Competitive
Advantage
Figure 3
Shared Services Increases Employee
Satisfaction
A global machinery manufacturer uses a
Shared Services arrangement for most of its
functions, except for Training and
Development, Employee Relocation and Exit
Management, which are all performed by an
outsourcer. By using Shared Services, this
company needs only 6 FTEs to administer a
national compensation program for 20,000
employees. Employees can take advantage
of a standardized skills and competencies
valuation, and better understand the basis for
their performance evaluation due to a direct
link in their IT system between job
description preparation and job evaluation.
Second, Put Employee Service Centers In Place.
Employee Service Centers (ESC) make sense for
large companies as part of a centralized HR
organization. In fact, over 80% of companies with
more than 5,000 employees had ESCs in place,
compared to 20% of companies with less than 5,000
employees. ESCs help increase efficiency and
employee satisfaction, providing employees with a
single point of contact for taking care of Benefits,
Pensions, Payroll, processing of Life Events,
employee data entry, applicant questions and data
processing, as well as on-boarding process and
paperwork.
5
 Third, Use HR Business Partners More Effectively. Making Choices for Advantage
Companies looking for an edge also use HR Business
The best companies take time to analyze
Partners where they will be strategically effective.
what to centralize, and control, and what to
Business Partners are HR generalists responsible for
de-centralize or outsource based on the
developing Employee Relations and supporting the
demands of their company’s unique culture.
business unit stakeholders with HR needs within a
One global electronics company, for
unit. First quartile companies put a few HR
example, has outsourced several of the
Generalists in strategic locations while fourth
transactional functions, including Pension
quartile organizations had up to two-thirds of their
Plan Administration and Benefits
staff out in the field. While this gap may indicate
Administration but relies on a Shared
increasing complexity of the company's overall
Services center to perform Payroll
organization structure, it may also reflect an
Administration, Compensation
opportunity for these fourth quartile organizations
Administration, as well as HR Strategy,
to consolidate HR organizations. We've found HR
Compensation and Benefits Planning. By
Business Partners should account for about one-
way of contrast, this company decentralizes
third of HR staff, depending on the complexity of
Resource Planning, in part because of its
the company's organization.
commitment to Six Sigma objectives. As an
HR manager put it, “we believe Resource
OUTSOURCE WISELY; CONTROL
Planning should be the job of project and
EFFECTIVELY
plant managers, so that they can have the
The results of this survey call into question some of resources necessary to meet their quality
the conventional wisdom about outsourcing. goals.”
Outsourcing did not always drive first quartile
performance. In analyzing the cost per employee
for in-house versus outsourced services, for LEVERAGE IT PRECISELY FOR
example, we found significant cost gaps in COMPETITIVE ADVANTAGE
Compensation Administration and Benefits
IT, in and of itself, does not drive improvement in
Administration between the first quartile and
Human Capital Management, but can be leveraged
average companies (see figure 5). Even more
precisely to help HR work efficiently and effectively
important, best practices were also not as prevalent
- and add to competitive advantage. Companies
in outsourced functions as in companies that
with a single enterprise-wide HR system are more
controlled more of their HR functions.

Maximizing
HR
Business
Partners

Figure 4

6
efficient and effective — and more strategically
focused — than companies with a fragmented
systems landscape. In our survey, companies with a
single enterprise-wide IT system:

Had lower staffing levels; and

Enjoyed higher levels of best practice scores in
transactional practices (4.0) and in their
expertise/strategy practices (3.6).
These results, while tentative because of the sample
size, are confirmed by results from other studies
that found organization achieve the highest level of
savings, and the greatest potential for future
innovation.
Outsourcing Does Not Always Equal
Best Practice
In one global company, the functions that were
outsourced (Training & Development and
Pension Plan Administration) averaged only a
1.1 score (out of five) on the best practices
identified and used by that function, while the
company's processes administered through a
Shared Services arrangement scored an
average of 3.5 on the best practices identified
for those processes. In Compensation
Administration, for example, the company
reported it had developed a variable
compensation plan based on a combination of
business and individual performance results and
implemented in tandem with an employee's
performance evaluation.
LEVERAGE IT PRECISELY FOR
COMPETITIVE ADVANTAGE.
IT, in and of itself, does not drive improvement in
Human Capital Management, but can be leveraged
precisely to help HR work efficiently and effectively
- and add to competitive advantage. Companies
with a single enterprise-wide HR system are more
efficient and effective — and more strategically
focused — than companies with a fragmented
systems landscape. In our survey, companies with a
single enterprise-wide IT system:

Had lower staffing levels; and,

Enjoyed higher levels of best practice scores in
transactional practices (4.0) and in their
expertise/strategy practices (3.6).
These results, while tentative because of the sample
size, are confirmed by results from other studies
that found organization achieve the highest level of
savings, and the greatest potential for future
innovation.

Does
Outsourcing
Control
COst?

Figure 5

7
 Changing the Approach to and made all information about jobs and job
Outsourcing classifications available online. When
managers create new positions, they are
A global consumer products company
immediately posted on the web, and made
understood that its outsourcing of Benefits
available in-house to internal candidates, who
was not working to the benefit of anyone
can apply online as soon as they wish.
(costs were rising, employee satisfaction
was declining). It brought Benefits
administration in-house. Management
Greater Employee Satisfaction from
developed a Shared Services center for
IT
Payroll and for benefits. The Benefits
Administration center establish-ed one point- One large equipment manufacturer
of-contact for all employee questions. Within developed a state of the art system that
the payroll system, each employee's allowed web-enabled distribution of, and
information is maintained in a single common access to, direct deposit advises for
database that Human Re-sources and Payroll employees. The same web-enabled tool
both share. Within the Pension Plan integrates with HR/Pay systems and
Administration, employees use the same automatically updates balances and totals.
self-service technology to enroll in pension Employee time-worked is automatically
plans, request retirement, forecast posted to labor distribution and/or project
projections, change beneficiary designations accounting systems. Employee identification
and get general information on their is standardized and employee information
particular plans. Despite the company's maintained in a single, common database
large size (with over 40,000 employees), shared by Human Resources and Payroll.
management under-stands the importance of
attracting and retaining talent in every aspect
of its business. As a result, it has put a
great deal of effort into the strategic process
of recruitment, creating a state of the art
system that integrates the whole process for
potential employees. The company created a
centralized sourcing directory for recruiting,

Leveraging
IT

Figure 6

8
PUSH HR TO STATE OF THE ART
HR managers balance the need for efficiency against
the long-term demand to develop the talent
necessary for organizational effectiveness. Even so,
the research clearly found opportunities for real
change in the approach most have been adopting.
In fact, we found the companies with the best track
record in strategic best practice push their HR
functions to automate, as much as is possible, the
transactional processes, and put their most capable
HR executives on the processes considered more
strategic or those requiring a great deal of expertise.
As a result, our research found companies that
allocated more of the HR staff to value-added,
expertise-based or strategy-related activities,
generated higher operating income per employee.
(see figure 7)
The proactive stance leads the best HR executives to
question past assumptions about best practice.
The
Importance
of Value-Add
Figure 7
IT Forces Best Practices
One company in our survey, a high tech
organization, used its IT system to develop
best-practices in its compensation program
because employees in this industry placed
great importance in individual motivation and
rewards. Every employee can receive a
bonus based on company and individual
performance. Merit increase guidelines
differentiate between the highest performers
and all the other employees. Because each
high tech employee wants to track his or her
compensation in high tech, the company
made the merit increase process fully self-
service with a direct feed into the payroll
system. The self-service aspect of the
system allows employees to update bank
information, choosing from one bank or
several and updating W-4 information. For
the same reason, the web-enabled tool
integrates with the pay system and
automatically updates balances. Managers
can review time reports and make weekly
corrections.
9
 STATE OF THE ART HR:
NEVER THE STATUS QUO
The SAP/ASUG HR Benchmarking study reinforces We found the best-performing organizations
many of the conclusions of other best practice systematically identify and benchmark best practices
benchmarking efforts. A great many companies are relative to their peer institutions — and
not satisfied with HR performance in areas of great continuously drive to improve performance along
strategic importance - those that impact planning, those dimensions that offer the greatest
recruitment, talent management and development. contribution to operating performance for HR as a
Many of the strategic innovations that have been function - and the organization as a whole.
introduced — such as e-learning — have yet to be
Over the next five years, there will be significant and
fully implemented or optimized.
ongoing evolution of the technology platforms that
As a result, the best performers: provide HR, and every employee, with actionable
information to drive business results. The tools are

Study HR best practice.
within reach. The challenge for HR leadership is to

Look more carefully at their own HR functions. put those tools to use and build a platform for the
future.

Decide how to make those functions more
effective.

Determine how to use IT more fully and
effectively.

Never deviate from stressing the overall
importance of a strategic approach to resource
development.

A great many companies are not satisfied with HR

performance in areas of great strategic importance -
those that impact planning, recruitment, talent
management and development. Many of the strategic
innovations that have been introduced — such as e-
learning — have yet to be fully implemented or
optimized.

10
ABOUT THIS SURVEY

SAP and ASUG are planning to conduct this survey on an annual basis, to allow participants to track trends
and share best practices. In addition, ASUG and SAP plan benchmarking efforts in TCO, and Consumer
Products. If you are interested in participating in any of these efforts, or if you would like additional copies,
please contact:
SAP America, Inc.
ASUG/SAP Benchmarking Program
Attention: Marco Valencia
20 Perimeter Summit Boulevard
Atlanta, GA, 30319

Tel: 404-943-6477
Fax: 404-943-4290
benchmarking@asug.com

APPENDIX

ASTD/NGA (2001). A Vision of e-learning for America's Workforce: Report of the Commission on
Technology and Adult Learning. www.nga.org/center/divisions/1, 1188, C_ISSUE_BRIEFAD_2128.00html.

Cedar Enterprise Solutions, Inc. (2004). Cedar 2004 Workforce Technologies survey, 7th annual edition,
www.TheCedarGroup.com.

Collinson, J. (2005). SHRM HR Technology Survey Report. Alexandria, VA: Society for Human
Resource Management.

Mercer Human Resource Consulting (2004). Transforming HR for Business Results: A Study of US
Organizations. www.mercerhr.com/referencecontent.html?idContent=1119865.

Towers Perrin (2003). HR on the Web: The Investment is Paying Off - HR Service Delivery Survey Report.
www.towersperrin.com/hrservices/us/default_us.html.

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January 2006