Redesigning the HR function: building the business case

Section six of the Personnel Today Management Resources one stop guide on redesigning the HR function, covering: preparing the business case; calculating business benefits; and structuring the business case. Other sections .

Use this section to Understand the features of a business case See how to calculate business benefits Write a business case

Why is a business case important?

The 2002 Watson Wyatt B2E/e-HR survey¹, carried out by one of the authors of this guide, identified a number of barriers to organisations implementing new HR technologies. These included an inadequate technical infrastructure, other HR initiatives taking precedent, the organisation not being prepared for change and a lack of under-standing of what technology could offer. However, much the biggest barrier was cost.

So without a strong business case, your visions of a brave new HR world will come to nothing. It is vital you think long and hard about the benefits that new HR systems and processes will bring.

Most change programmes will generate at least two business cases:

the prima facie justification for the change prior to doing any detailed analysis; this business case will be generated during the thinking and planning stage of the methodology set out in Section 3 .

the detailed business case prior to implementing any solution; this business case will be generated at the end of the specify and select stage of the methodology also set out in Section 3 .

The high-level business case is based on a broad estimate of cost savings and other benefits expected to arise from the change. Its purpose is to generate enough interest in the change programme to attract the resources to research the solution. To achieve this requires a:

clear and complete vision of where you want to go

broad understanding of where you are now

general sense of the things that would need to be done to achieve the vision

broad understanding of the savings/benefits resulting from closing the gap

broad understanding of the costs of building that vision given where you are now.

Based on this, you can derive an assessment of the net savings and benefits likely to result from closing the gap.

A good detailed business case contains a number of additional, different elements:

A detailed understanding of the key problems and current costs characterising the current state (as identified through comparison with the vision, from internal user and customer opinions, benchmark data, or other sources of good practice information)

A detailed specification or blueprint of the business requirements as regards the core elements of the proposed future better state

A detailed analysis of the technology, organisation, process and staffing options available for addressing these issues and achieving the vision which will need to include purchase cost details, implementation plans, implementation cost details, and expected benefits

Depending on the level of approval being sought, a more or less concrete recommendation regarding the solution to be implemented: in some cases, the process of approving a change programme may need to go through a number of stages with increasing levels of solution detail being presented.

Many business cases are misleading because of the tendency noted in earlier sections to poorly define business requirements and ignore the true business impact of the change proposed. Be prepared to be realistic about the resources you will need and the timescales for implementation. Reshaping your HR function, invariably involving technology, will be expensive, possibly in the millions of pounds range, and this will probably dwarf previous investments in HR systems. Accepting that is part of acquiring your new HR mindset: the new HR will not be just a processing and policing function, it will be a fundamental part of your organisation's operational capability, and as such needs to receive the appropriate levels of investment.

Be prepared for the timescales needed. Again, large-scale change may take several years to implement fully. If you go for the slowly-slowly approach it will probably be even longer before a full system is in operation (should you decide that is desirable).

Hints and tips on preparing a business case

Above and beyond recognising where you are in the approval cycle and thus knowing what kind of business case you need to prepare, there are four key points to bear in mind when building your business case:

know your audience

know where the change can add value

beware of reality

identify the risks and constraints you must work within.

Know your audience

HR outsiders often have very fixed ideas about what HR should do or is capable of doing. That could mean your proposals for changing HR's role within the business could be met by such incredulity that your ideas are not discussed seriously.

Take a long, hard look at how people perceive HR. Find the answers to these questions:

What status does HR enjoy (or not)?

What are its recent successes and failures?

What influence does it have?

Who does your business case have to influence?

Where do these people want the business to go and what implications does this have for what you want to do?

Do not carry on until you have answers to these questions.

Figure 14 Breaking down administrative costs

Know where the change can add value

Most organisations show a profile of HR-related costs similar to the traditional breakdown in Figure 14.

Typically, anywhere between 60 and 80 per cent of HR costs are incurred through the administration of HR-related activities. The rest is divided between advisory activities (such as providing advice and HR consultancy) and those that are strategic (related to the overall direction of the business). The biggest scope for reducing HR costs, therefore, lies in dealing with administrative activities, and we have looked at a variety of options for addressing these in Section 4 .

But cost reduction is not the only way in which redesigning the HR function can bring value. Any change has three potential sources of value:

direct tangible, essentially cost reduction within the HR function, such as savings on paper and labour through implementation of new ways of working

indirect tangible, value produced by freeing time in the rest of the business that can be used for more profitable purposes

intangible, where value is produced by creating new working environments which top management believes generates better performance.

These can be viewed as being in order of competitive significance. Direct tangible value is strategically the least important of the three, although usually the easiest to identify. Automation or shared services may reduce HR headcount and associated purchasing costs. A reduction of 60 per cent of the HR administrative workforce would be a significant reduction in the HR staffing budget. The associated elimination of one paper form may save £50,000 a year in the costs of buying paper, printing, storing, distributing, but given the small size of HR functions (and costs) relative to a business, the strategic importance of the savings is likely to be small.

Indirect tangible value is harder to identify because it requires understanding how the business as a whole works, and how the HR function adds or detracts value from what staff and managers are doing. Any business can be viewed as a chain of input-output processes, where, at each link in the chain, value is added. HR is a function that oils the links of the chain, making it work more smoothly and effectively. This activity has both tangible and intangible effects. However, in tangible terms, the question is how much more efficiency will HR put into the overall work process through the changes in HR services and practices being proposed. Look at each stage of the operational value chain and see how HR's impact might change for the better:

Do the proposed changes reduce the administrative burden on staff and/or managers? Can you measure that time saved and assess its value to the business?

Do the proposed changes make recurring managerial tasks (team management, staff deployment, resourcing and so on) easier? Can you measure the time saved and assess its value to the business?

Do the proposed changes make recurring staff activities (collaboration, research, work/life balance management, compensation management) easier? Can you measure the time saved and assess its value to the business?

Do the proposed changes provide better information or more access to existing information, improve the speed of decision-making, and thus time to value delivery?

Do the proposed changes reduce the time taken for performance needs to be identified and appropriately trained resources to be deployed, thus adding value sooner (faster recruiting, inducting, training or deploying)?

Finally we come to intangible benefits such as improved motivation, communication or collaboration. What has never been done before because it was not possible? What has never happened before because no-one supported it? What has nobody ever thought of before because it was inconceivable? For example, real-time collaboration systems make it easy for people in different locations and from different cultures to work together on the same problem. Who can predict what creativity this can inspire, or what markets this can identify?

Unfortunately, these 'soft' outcomes of HR change can be hard to prove, and harder still to link to demonstrable business benefit, notwithstanding the fact that ultimately they are what distinguishes a successful company from a less successful one. Glib statements of benefits arising in these areas have been made for years by HR functions with poor results. Indeed one study (Watson Wyatt, USA, Human Capital Survey, 2000) has shown a negative link between the level of shareholder value of a business and the implementation of HR function changes based on 'soft' business cases. The problem is not that intangible benefits are valueless, but rather that if no process for proving their value is attempted, it is hard to distinguish between real intangible benefit and fictitious benefit, with resultant poor investment decisions.

How to calculate direct tangible costs

You can calculate the direct tangible costs of a process by using a method called activity-based costing. To do this break down the task into its component parts, measure the amount of time taken to complete each part and work out how much each part costs, based on the cost of labour (manual or mechanical) per hour.

Look at this example of the cost required to process a change in an employee's personal details.

Then calculate the costs of managing the paper-based system, by looking at the total cost of printing, storing, distributing and internally posting the amendment form.

Repeat the calculation for the new process. In this example the employee makes the change themselves, online. This eliminates the need for completing and returning a paper form and for an administrator to transfer the details.

You can see that there is a significant potential cost-saving in terms of HR administrator time each time this operation is carried out using employee self-service. Multiply this by the number of times each year that they would, on average, carry out such a task. Providing you can demonstrate that this HR administration time can be turned into a reduction in HR staff numbers, this gives you the direct tangible HR cost saving of automating this process.

If you repeat this for every process you think can be automated, you will have a basis to justify your proposals.

How to calculate indirect tangible benefits

The above analytic tool can be used to calculate potential time savings for managers and staff across the business as a result of the introduction of, say, HR self-service. However, it is unlikely that the HR function could call for employee reductions on that basis: the stronger position is to assess the increase in output the manager or employee will achieve in his job as a result of a lower level of distracting administrative burden. In the right context, this could be significant as the time savings will be multiplied by the number of employees and managers affected. However, it is important that any presumed benefits in this area are validated with relevant managers and budget holders, since if it makes no difference to next year's planned targets, it probably has made no difference.

A stronger route to indirect benefit arising from HR change is to look for impacts on time to value. Examples of this would be; recruitment and on-boarding, transfer and secondment, resource identification and deployment, termination and training. For an example, let us look at how a recruitment procedure could be redesigned. Consider the traditional recruitment process:

prepare job advertisement

post job advertisements

wait for responses

sort through responses and shortlist.

There are obviously direct tangible costs within this process. Sorting paper responses to an advertisement can take a long time. However, the most significant cost associated with this process lies in the fact that it may take a long time overall, partly because of the time you wait while people respond to the advertisements, and because of scheduling interviews, perhaps partly because of the time to process applications. Any one of these can take several weeks. If there were some way to cut this it would be possible to have someone in the post more quickly, adding value by them being able to start their new job correspondingly sooner.

An automated online recruitment system could be one of the solutions you have in mind. As an example, think about a completely integrated recruitment system being used for an internal post

identify requirements for the job

enter requirements into online recruitment system

system identifies employees having necessary skills

system e-mails employees asking if they wish to apply

candidates indicate they do wish to apply

system automatically generates application form based on details held

person reviews applications and produces shortlist.

While there may be elements to this process that raise ethical issues, such a system could in principle generate a long list of applicants within hours of the job being identified. Such a process would therefore save several weeks, compared to traditional recruitment processes.

To assess the potential benefit, you will need to confirm the time savings in each step of the new process. Then, in collaboration with the relevant line manager, you will be able to assess the value of this time saved in terms of business benefits.

How to calculate intangible benefits

Although this is the most difficult of the three to define and quantify, it is almost certainly the most significant in the long term. These are the benefits that arise from HR change outcomes which top management believe will bring increased competitive advantage. For example, redesigning HR may enable your organisation to:

move towards becoming a fabled 'learning organisation' through controlling information so that it is directed more efficiently to people who need it and so that it can be found more easily, and also by making learning opportunities more easily accessible

establish a more performance-focused culture so that the business as a whole becomes much more efficient, making it more competitive and attractive to customers

attract the highest quality staff, as they see you as an organisation of the future.

Carrying out an assessment of intangible benefit is not easy. Simplifying the process somewhat, the first step is to identify case study, benchmark or other comparative evidence that shows that the claimed outcomes from the change do arise. The second is to review the business strategy to demonstrate that these outcomes are necessary to achieve the strategic goals of the business.

The final step is to show through further comparative evidence that there is no easier way to get these outcomes and that the proposed HR change programme is the only or most effective route to achieving these outcomes.

In summary: some examples

As an illustration, this table shows just a small number of possibilities of how changes in HR-related processes could add value². Whether any of the listed outcomes are of real value can of course only be determined in the context of the business goals and critical success factors.

Beware of reality

Although making the types of changes described elsewhere in this guide could certainly lead to significant cost savings and other benefits, it is easy to overlook some of the realities in the quest for the all-conquering business case. Think about some of these issues.

Are staff costs actually reduced?

Cost savings based on the assumption that jobs will be eliminated will not be realised if people are redeployed. HR administrative costs may be reduced by transferring people to other HR functions, but the business as a whole would not see a benefit, unless these people fulfil a recruitment target already budgeted for.

Savings in HR costs are small in relative terms

For most organisations, the scope for reducing HR costs is severely limited by the fact that HR is typically a small part of overall corporate costs. The average number of people working in HR departments in UK businesses is about 1 per 100 employees, so no conceivable reduction will generate significant HR cost savings without compromising essential legal or regulatory requirements.

Typically, savings possible from this source cannot justify the required investment to redesign the HR function or install the latest in HR technology.

Outsourcing may not save costs

As discussed in Section 4, outsourcing may increase costs if your business is subject to frequent changes, or you have poor interfaces between line management, employees and HR processes. In any event it is likely to be expensive to implement and potentially unsuccessful if you expect the outsourcer to move you from a current set of broken HR processes to a best practice vision.

Time saved may not be used profitably

Although your calculations may show that automation saves the average employee 15 minutes per day, it is an act of faith to say that 15 minutes will be used for profit-generating activities. The list of alternative activities that can fill 15 minutes but bring the business no benefit is endless. For this reason, it is essential that any business case based on manager and employee time savings enabling more revenue generation is underwritten by the relevant line managers.

'Dumping' HR may cause resentment

People may see a move to a more self-service approach to HR as dumping responsibilities, and that the responsibility has been transferred rather than removed. This will of course be an understandable complaint if the administrative burden for employees and line management goes up while the administrative work in HR goes down. There are only a few business case arguments (better management control or otherwise unachievable data quality may be two) which would make this a reasonable outcome of any HR redesign programme. Doing so runs the serious risk of reducing time available for revenue generating activity, which would defeat the point of any business change programme.

Having said that, sometimes employees and managers imagine their administrative burden has increased when in fact the time has simply been made more visible by eliminating the various informal processes that existed before. In these cases, a planned communication programme will be required to build a more appropriate understanding of what has happened.

Competitive advantage benefits are difficult to quantify

The very nature of competitive advantage benefits makes them difficult to quantify. At best they are a reasoned estimate, at worst a random guess. Many business cases don't deliver because the declared strategic and soft benefits have not been sufficiently well thought through in terms of the likelihood of delivering the competitive benefit or performance enhancement claimed.

Identify the risks and constraints you must work within

However compelling your analysis of cost savings and value added, you will have to take into account the realities of risks and constraints within your organisation. There are four types of risks and constraints you will have to consider in your business case:

financial

technical

business-critical

cultural.

Financial constraints

Can you afford it at all, regardless of the business case? However large the savings you project or the potential for adding value that you can identify, there will be a finite amount of money you can invest in new systems and processes. You will have to identify the changes that have the greatest potential and see how much these will cost. Based on that, you can make decisions about:

buying or renting, as renting would require less upfront investment than buying a system outright

whether or not to introduce systems incrementally, starting with the quick return investments followed by other systems and processes over the following few years.

Technical risks

Do you have the necessary skills in-house that will allow you to carry out this project and subsequently operate with the new organisation? You may of course need to hire specific skills to execute the work, but if there is a complete lack of in-house capabilities to guide the project and subsequently manage its performance, the project will face significant technical risk.

Business-critical constraints

Does what you want to do have any demonstrable impact on current, business-critical priorities? If not, this may make it difficult to win the approval necessary as it reduces the likelihood of gaining management attention for the project at all.

You will also need to think about issues such as:

changes likely to happen within the business over the next few years

potential expansion or contraction

legislation or regulation that will or may be introduced and that will have an impact on HR or the business.

Cultural constraints

Is your organisation ready for change? Do people think that HR works adequately at the moment? Could there be resistance to the change? People who feel undermined or threatened may resist change.

If so, you may need to spend more time on communications to stakeholders and other affected parties to win hearts and minds and bring more attention to current problems, before you present the more formal arguments of a business case.

Structure of a business case

A business case needs to contain a number of different things:

statement of the issues faced

description of the vision

general description of the options and criteria for selection

analysis of risks and constraints

specific description of selected options and proposals implementation

cost and benefits of the selected options including strategic fit and balance of risk

conclusion and implementation plan.

Statement of the issues

What is the problem? Why should anyone be interested? Who else cares? You need to sketch out a compelling introduction to the need for and relevance of the proposed change programme.

Description of the vision

Where do you intend the business to be, once you have completed the change programme? Why is this compelling? Who else is there already or is heading in that direction? Why should your business want to be there too?

Analysis of risks and constraints

Make it clear that you have considered the realities of your organisation and its employees. Summarise the financial, technical, business-critical and cultural constraints we outlined earlier.

General description of the options and criteria for selection

Depending on the kind of business case you are writing, you will need to lay out the options available for selection and what criteria you propose to use for selection.

This is where you may consider what business strategies your organisation is following or going to be introducing. Show how your ideas complement the strategies. Think about how the success of these may be compromised by the failure to introduce the new HR organisation, systems and processes, and underline the resulting importance of your proposals. What changes are likely in your organisation and its marketplace over the next few years? How flexible are your proposals in adapting to the likely changes? How will your proposals contribute to making these changes easier?

Point out what knock-on effects introducing new HR structures, systems and processes may have. Other organisational structures may need to be reviewed and new training needs may arise.

Specific description of selected options and proposals for implementation

Perhaps as part of the above or separately, you need to describe each option to an appropriate level of detail including the implementation tasks, timescales and resourcing requirements.

The possibility of introducing new systems and processes incrementally has been mentioned several times. At this point, your business case should suggest how this would happen, in terms of the processes to be introduced and the parts of the business where they would be tried out.

Costs and benefits of selected options

As part of the analysis of selected options, you will need to present a breakdown of costs and benefits to an appropriate level of detail. Be sure to cover all types of benefits, as described above.

Know what all the costs involved in implementing the new organisation, skill mix, systems and processes are. Consider:

initial capital costs, those that become fixed assets of the business, such as hardware and software

other start-up costs, such as those associated with reorganisation, process redesign, training and marketing the new concepts

ongoing capital costs, for upgrading hardware and software as necessary

associated ongoing costs, for service improvement, training, staff responsible for maintenance, and so on.

Show clearly how your proposals will benefit the business. Highlight both tangible and intangible benefits.

Show the balance of risk and return. Decisions about whether to make investments are always based on the balance between the risk that the investment implies and the net return that it will bring.

There are several different ways in which financial returns can be expressed:

return on investment (RoI), the percentage difference between the profit created by the investment required and the investment itself

net present value (NPV), where the lifetime of the project is considered and returns in the future are discounted at a standard percentage rate

internal rate of return (IRR), the percentage rate of return where the NPV is zero

cost of capital, the cost of the investment compared to the returns that could be gained from investing in other ways

payback period, how long it will take to recoup the initial investment.

Conclusion and implementation plan

Any business case must have a conclusion, but the conclusion need not always be a definitive recommendation. There may be many reasons why that cannot be done, most commonly because of the need for more data. An alternative might then be to propose a small-scale pilot or a further, more detailed analysis.

In any event, a plan for carrying out the recommendation must be included. The aim of this guide has been to show you how to approach change in your HR function in a way that leads to success. So let us review the main arguments.

Pressures for change are increasing

There are a number of pressures acting on HR now that are pushing for change:

Other business functions are changing and there is a danger HR will be left behind

The relative importance of people in the process of making your business successful is increasing as the cost of technological inputs to the business falls in relative terms

Globalisation is making it increasingly important for people to find new ways of using technology to help them to work together

 

Step	Who	Step	Process time (mins)	Elapsed time (days)	Labour costs (£)
1	Employee	Completes change of address form on-line	3	1	0.55
			Total process costs		0.55

 

Step	Who	Step	Process time (mins)	Elapsed time (days)	Labour costs (£, based on 2001 average figures)
1	Employee	Completes change of address form	5	1	0.92
2	Employee	Employee submits form to HR department	3	2	0.55
3	Administrator	HR administrator updates HR system	5	2	0.78
			Total process costs		2.26

 

Function	Processes	Associated costs	Potential for adding value
Organisation	Administration of personal information	Production, storage and distribution of paper forms	Elimination of errors
		Administrative time in processing paper forms
	Promoting collaboration	Travelling time, expenses and associated opportunity costs	Flexible, world-wide collaboration
Knowledge management	Disseminating knowledge		Easier access to internal information
Resourcing	Resource planning	Opportunity costs of absences in key posts due to retirement, other natural wastage	Proactive planning for training and recruitment needed
	Recruitment	Advertising	Identification of potential candidates
		Agency fees Interviewing costs	Pre-interview online testing, improving average quality of interviewees New jobholders in post more quickly
	Time and attendance	Administrative time	Real-time analysis of absence patterns
Performance management	Managing training	Trainer time Cost of printing and distributing training materials Administrative time in maintaining records	Greater flexibility for providing training Access to wider range of materials Streamlined process for managing training and individuals' learning records
	Managing appraisal programmes		Centralised storage and easier access
			Potential for linking to training opportunities and internal recruitment procedures
Reward management	Managing payroll processes Managing benefit systems	Printing and distribution costs Administrative time dealing with enquiries Administrative time transferring information between different systems	Faster links between performance and reward, leading to improve motivation
		Printing, storage and distribution of paper information Administrative time updating and distributing information, processing benefits	Greater flexibility in managing benefits
Employee relations	Providing information Conducting surveys	Administrative time Developing and distributing questionnaires Administrative time dealing with responses	Information to those who need it when they need it Streamlined distribution processes Automated calculation of responses

 

Key points for building a business case Know what kind of business case you need to prepare Know your audience Address all the different ways the change might add value: -        cutting direct tangible costs -        producing indirect tangible benefits -        producing intangible benefits Beware of reality Know the risks and constraints Prepare a well-structured business case

References

¹Hopkins, B., & Markham, J. (2003), e-HR: Using intranets to improve the effectiveness of your people, London: Gower.

² James Markham & Watson Wyatt, (2002), B2E/eHR Survey Results 2002, Watson Wyatt, www.watsonwyatt.com/research/resrender.asp?id=2000861&page=1

Personnel Today Management Resources one stop guide on redesigning the HR function Section one: The argument for HR redesign Section two: The changing role of HR Section three: Making the change Section four: A guide to the solutions you may be considering Section five: Specifying requirements and selecting suppliers Section six: Building the business case Section seven: Summary