HR management systems move online as the web matures

There has been a proliferation in both the people management activities that HR software can support and in the options for delivering software solutions. In the third of our series on HR management systems, we look at delivery mechanisms.

Until relatively recently, setting up a typical human resource management system (HRMS) meant buying the software, installing it in-house, and training staff how to use and maintain it. The resilience of the internet, coupled with pressure on HR to become more of a strategic partner than a day-to-day administrative function, is making this traditional model redundant.

Web-enabled systems mean that HRMSs no longer have to be located in-house, but can be hosted externally on a service provider's server. Alternatively, the hardware may be located in-house with software suppliers given remote access to rectify problems or perform upgrades. Another delivery mechanism that is growing in popularity, and which increasingly relies on the web, is the shared service centre in which HR services - from routine administration to specialist HR information and advice - are supplied across the organisation from a central location by in-house or third-party experts through an outsourcing or co-sourcing arrangement.

Web-based delivery is also creating new ways to pay for HR systems, so that clients pay only for what they use or access. Marc Miller, senior analyst at HR.com, believes this will be a pivotal year for HRMSs and the beginning of a new era of "pay-as-you-go HR technology"¹. "The concept of a pay-as-you-go, pay-for-what-you-use software application model, first adapted by the likes of Salesforce.com, will move into HR technology in 2006," he says.

Research by technology analysts IDC confirms this shift. Its latest forecast says that software as a service (SaaS) offerings - a delivery model where the software company provides maintenance, daily technical operation and support for non-customised software over the web, typically for a relatively small monthly fee - are one of the key drivers of the human capital management (HCM) applications market in western Europe.

A tangled web

The internet is significantly altering the way HRMSs are bought and delivered. Software vendors are moving their applications to the web. ADP, which claims to be the world's largest payroll supplier, has already migrated its services, and reported last year that only 15% of clients own their HR management systems, while 85% get services delivered over the web.

Mike Theaker, European partner with Mercer Human Resource Consulting, believes that internet maturity is fuelling the shift to web-based delivery of HRMSs. "The internet has become a viable, reliable network capable of supporting business applications," he says². Chris Berry, managing director of Computers in Personnel, agrees. He says: "People know the web works. They use it at home. They know it's reliable."

The big bang

The Chartered Institute of Personnel and Development's 2004 HR technology survey shows that only 3% of the 356 participating organisations had outsourced their HRMS in the previous two years, and 11% of respondents planning a change said they intended to outsource in the next three years³. Nonetheless, there are indications that outsourcing will take a larger slice of the market for HRMSs.

According to data from analysts Gartner, the global HRMS outsourcing market - for applications dealing with payroll, benefits, recruitment, time management and training, for example - is now growing at a much higher rate than the licensed market. Its 2005 figures, although fuelled by developments in the US where trends often originate, show the outsourcing market is growing by around 20% a year, while annual growth in the licensed market is 7.5%.

Software vendor Frontier Software says payroll outsourcing is one of its fastest growing specialist services. Vincent Smallhorne, head of excellence at Oracle UK, also believes transactional activities, such as payroll, are the most likely areas to be outsourced first, but he sees this spreading to other functions. "Once they see it works, activities like recruitment and training will follow," he says.

Several large companies have outsourced the majority of the HR administration and transactional activities to technology services firms. Pioneers include BP and BAE Systems, and a spate of major deals have been announced recently. In April, Boots (now Alliance Boots) signed a £16 million seven-year deal with Northgate HR to run payroll services and core HR systems for the high-street pharmacist's 65,000 employees. "We had identified a need to upgrade and improve our core HR and payroll systems. After investigating our options, we concluded that the most efficient and effective way to do so was via outsourcing," comments Dave Vallance, head of HR operations at Alliance Boots. And in June, Unilever outsourced much of its HR function to Accenture. The global contract covers transactional, administrative and HR IT systems support for activities such as recruitment and resourcing, reward, training and performance management. "We believe that it is best for our business if we concentrate on our core competencies and transfer what is our back office and make it into someone else's front office," explains Sandy Ogg, Unilever's chief HR officer.

Going in the opposite direction, Britannia Building Society is bringing its payroll and HR systems back in-house. As part of the move, Britannia plans to roll out a SAP enterprise resource planning (ERP) platform as its five-year outsourcing deal with ICS comes to an end.

Rental space

Although AMR Research found in 2005 that the traditional pricing model of upfront licensing continues to dominate the market for HR software, it reported that many "best-of-breed" (BoB) vendors had successfully developed subscription models, and that the popularity of such arrangements was growing. "Companies are becoming more likely to pay for BoB HCM applications on a monthly subscription basis, rather than pay upfront for perpetual licences and maintenance," says AMR's Judy Sweeney. Subscriptions are often combined with application hosting, with clients paying a monthly fee per employee.

Theaker of Mercer HR Consulting has also noted the growing use of HR application service providers (ASPs), which enable organisations to get their HRMS on a rental basis, rather than paying outright for the software. He says that one factor driving take-up of such arrangements is that users are accustomed to using web browsers as a front end or gateway to an application and do not need to be trained in the look and feel of a new graphical user interface.

Most HR software vendors now operate an application service model, enabling customers to "rent" access to the software. The provider agrees a service level with the client that provides software capability, usually over the internet. Most organisations choose this option because it cuts down on the need for IT expertise and does not involve the high investment costs normally associated with acquiring HR software.

Software provider Snowdrop says its ASP web-based HR solution reduces reliance on internal IT resources as no investment in IT expertise or hardware is necessary. "Clients often choose ASP when they wish to make significant savings in initial costs and desire a known annual fee. As the charges are based upon the number of employees, both large and small organisations alike can benefit from this delivery model," the company says. Similarly, Ceridian, which provides managed HRMSs, boasts that a hosted service allows clients to "free up financial and IT resources" and "releases companies from the burden of manual upgrades".

Aside from the significantly reduced upfront costs, AMR says organisations choose hosted services because vendors can accommodate cyclical variations in demand for e-learning and recruitment applications. Such applications tend be accessed outside working hours, when in-house IT staff are not available to provide technical support, and, in the case of recruitment, by non-employees. Hosted applications make sense from a security standpoint. Niche suppliers have grasped the ASP model because it overcomes one of the main drawbacks for customers selecting a BoB application, namely the need for in-house IT to support multiple systems on different hardware and different operating systems.

However, big vendors are also beginning to offer an ASP delivery model. Northgate HR's web-enabled HR and payroll product, ResourceLink, can be delivered in a number of ways. An organisation can implement and manage it, with support from Northgate HR, or can choose from one of five levels of managed services.

Oracle now offers an ASP-type model called Oracle On Demand, which is a hosted and fully managed solution accessed via a web browser. Oracle On Demand enables clients to retain some software management tasks, with Oracle providing expertise, tools and assistance on a per user/per month basis. Oracle says the benefits include removing from customers the burden of applying patches, upgrades and unexpected repairs, while they retain access to the latest capabilities and innovations.

Hosted services may eventually lead to further expansion in outsourcing. "There is growing interest in suppliers not just hosting the system, but in doing some of the back-office administration as well," comments Berry at Computers in Personnel.

Sharing services

HR shared services - which offer a common service for, at least, routine HR administration - are growing in popularity following the emergence of the model in other business functions, such as IT and finance. A report from the Management Consultancies Association says the 16% increase in the market for HR consulting in 2005 was partly fuelled by the trend towards HR shared services. A study by analysts Ovum concluded that the shared-services market in the public sector alone would grow by nearly one-third between 2005 and 2010, to £1.6 billion.

Peter Reilly, director of HR consultancy at the Institute for Employment Studies (IES), believes that the shift to a shared-services model by large organisations will continue apace, at least in the short-term, as there are significant cost benefits from economies of scale and generally higher levels of quality from using such arrangements. "Centralising HR transactional and administrative activities will save companies money and usually improves standards," he says.

Ben Williams, HR systems manager at the London-based international law firm Allen Overy, says the move to shared services is more of a change management issue than a technology one. But creating such a service does usually involve significant IT infrastructure issues, not least in connecting the different systems and standardising data.

PA Consulting, which designed and implemented Barclays' shared service centre (SSC), believes the performance of an SSC is "heavily dependent on a robust technology platform", which it says should consist of three technology components: portal and telephony solutions; case management and flowchart, and an HRMS as the bedrock of the operation. Essentially, SSCs provide a dual response mechanism - human (usually via the telephone) and online - for dealing with enquiries and transactions, although suppliers tend to prefer the online option because it is cheaper.

Under the shared-services model, which can be resourced in-house or by a third-party supplier through an outsourcing or co-sourcing arrangement, the customer defines the level of service and decides what services it requires. PA Consulting suggests four distinct service levels⁴:

Major multinational companies - including IBM, Lloyds TSB, Shell and the Royal Bank of Scotland - have adopted the HR shared-services model. The public sector is also keen. The NHS launched its shared-services model in 1999, and in 2001 announced a £300 million upgrade to its HRMS to integrate HR and payroll in a 10-year deal with a consortium headed by the San Francisco-based healthcare company McKeeson, with Oracle, IBM and PricewaterhouseCooopers as preferred suppliers. The project involves creating shared service centres with the aim of eliminating data and systems duplication. The Ministry of Defence has moved its transactional HR activities to a shared-services operation, with contact centres established in Bath and Manchester, which are run by an in-house body called the People, Pay and Pensions Agency.

Mix of models

Organisations tend to use a variety of delivery mechanisms for their HRMSs. For example, they may operate an in-house system for core HR activities, and an ASP for other areas. With advances in HR software continuing apace, and the offerings from service providers constantly being expanded, the use of such a hybrid approach is likely to continue.

As technology advances and demands on the HR function change, the delivery of HRMSs can be expected to change again as new approaches emerge. Some currently popular delivery mechanisms may disappear. Peter Reilly at IES believes, for example, that more localised HR services may reappear once shared services become ubiquitous in large organisations. "Moves to shared services will continue until people revolt against standardisation. When everything is the same, you lose your competitive advantage," he says.

¹ Outlook for 2006 technology, (PDF format, 481K) .

² ASP is here to stay, www.evaluationcentre.com.

³ People and technology: is HR getting the best out of IT? Survey report June 2004, CIPD, www.cipd.co.uk/subjects/hrpract/general/peopleandtech04.htm .

⁴ Getting the most from an HR shared service centre, www.paconsulting.com/news/by_pa/2003/Getting+the+most+from+an+HR+shared+service+center.htm .