Nestling warm and sleepy in your company, like the asp in Cleopatra’s bosom, is a department whose employees spend 80% of their time on routine administrative tasks. Nearly every function of this department can be performed more expertly for less by others. Chances are its leaders are unable to describe their contribution to value added except in trendy, unquantifiable, and wannabe terms—yet, like a serpent unaffected by its own venom, the department frequently dispenses to others advice on how to eliminate work that does not add value. It is also an organization where the average advertised salary for professional staffers increased 30% last year.
I am describing, of course, your human resources department, and have a modest proposal: Why not blow the sucker up?
I don’t mean improve HR. Improvement’s for wimps. I mean abolish it. Deep-six it. Rub it out; eliminate, toss, obliterate, nuke it; give it the old heave-ho, force it to walk the plank, turn it into road kill.
Why not?
Consider what HR does and whether it should do it. Start with payroll, since that’s a subject dear to the hearts of HR’s clientele. Outside providers now cut an estimated 25% of all paychecks issued in the United States. Their business boometh. The employers’ services division of Automatic Data Processing of Roseland, New Jersey, the biggest business in the field, grew 13% in 1995 and has been growing at double-digit rates for years. The reason, says Fred Anderson, ADP’s chief financial officer: “As companies move off mainframes, they are taking a look at what applications are strategic to them. When they decide that payroll and human resources functions are not strategic, they outsource them.” Back in the office, HR’s contribution to payroll administration comes down to keeping enough forms on hand for new hires to fill in and holding checks for people who were out of town on payday and haven’t yet signed up for direct deposit.
The same thing is happening with benefits administration. Johnson & Johnson is just one company that has turned entirely to outside vendors to run retirement, health, and other plans. In a 1995 survey of 314 large American companies, the Conference Board found that 26% had outsourced benefits administration, but that overall number hides how many farm out at least part of the job. As defined-contribution pensions like 401(k)s replace defined-benefit plans, for example, companies are more than twice as likely to turn to outsourcing, according to another Conference Board survey—fully 87% outsource record keeping and 59%, administration and service. Got a question about your 401(k)? Don’t call us: Call Fidelity’s 800 number. The good news is that you can call at night and reach someone who can actually help you rather than simply take notes (inaccurately) and get back to you (belatedly).
In an outstanding study of the changing role of human resources departments, the Corporate Leadership Council, a Washington, D.C., group that conducts research for 500 member companies, concluded that four big dollops of HR work have “significant potential to outsource fully”: benefits design and administration; information systems and record keeping; employee services such as retirement counseling, outplacement, and relocation; and health and safety (workers’ compensation, wellness programs, drug testing, and OSHA compliance). None, the Corporate Leadership Council noted, have much potential to produce competitive advantage for a company that does them especially well in-house; all offer economies of scale to outside suppliers; and for several, outsourcing reduces risk by offloading exposure to liability or regulatory claims.
To their credit, HR departments have seized the opportunity to outsource. Under pressure to cut costs, they have jettisoned administrative bureaucracies like drug dealers tossing hemp into the sea when a Coast Guard cutter heaves into view. The ten biggest employee benefits consulting-and-outsourcing firms earned over $3 billion in revenue in 1994, 242% more than they did ten years before.
But why stop there? A slew of other traditional HR functions can also be outsourced or devolved from HR to the line. Take recruiting. Everywhere I’ve worked where I had to hire people, the rule of thumb among managers was to involve HR as little as possible in the process. When HR professionals are themselves looking for work, two-thirds of the time they find it by networking or using search firms (a form of outsourcing), according to a survey of the HR job market by Manchester Partners International, a Philadelphia-based coalition of outplacement and executive-coaching consultants. Sure, HR performs a useful role maintaining job-posting lists, promoting diversity, and monitoring compliance with equal-opportunity laws, but just because the priest has to post the banns doesn’t mean he should pick your spouse.
Designing and running compensation and reward systems is another candidate for the combination of outsourcing and devolution—ironically, especially when state-of-the-art reward mechanisms are of paramount importance to competing. There may be a few companies with the scope and resources to conceive of innovative compensation plans, study them (necessarily by trial and error), find and extirpate contradictions (for example, teaching people how to work in cross-functional teams while functional bosses control all rewards), and reinvent them for yet another test. Still fewer might be able to do that quickly without confusing people and without turning on the organization’s immune system. Says James Kochanski, a principal at the Sibson & Co. consulting firm who has held HR positions at Northern Telecom, Quaker Oats, and Kellogg: ” ‘Not another new performance appraisal!’ is a common lament among managers.” Much better to buy the state of the art from outside, customize it, and instill responsibility for running it as far down in the organization as possible—where the work gets done for which you are paying and rewarding people. A Sibson survey of 50 manufacturers found that “mature” work teams—that is, teams that had shown a history of meeting goals and of continuous improvement—evaluated their own members’ performance 38% of the time, with 18% (nearly one out of five) being responsible for disciplining them too.
As for training: Will every reader who has taken a training course sponsored by his HR department and found it very valuable please raise his hand? There’s lots of evidence that training is a good thing, but it points to the worth of just-in-time, close-to-the-work training—that is, training that should be lodged in line functions—not off-the-shelf courses. One company studied by the Corporate Leadership Council gave business-unit heads the power to sign off on HR’s budget; of the $889,000 HR proposed spending on training, the general managers okayed only $222,000—one dollar out of four.
THAT SHOULDN’T be surprising. You don’t have to visit Washington to realize that bureaucracies self-inflate faster than airbags and, unlike airbags, often for no good reason. Says Vikesh Mahendroo, executive vice president of William M. Mercer, the big HR consulting firm: “HR is often out of sync with the needs of the business. The important question is, Will companies be able to bring the competence of the HR function to the level the business requires?” Mahendroo thinks they can—if they devote the same attention to reinventing human resources that they have to finance, manufacturing, and other areas.
And if he’s wrong, how far can a company go? Steel giant Nucor, with 6,000 employees, runs human resources with a headquarters staff of just three people (one a secretary), one HR agent at each plant (who reports to its general manager, not to corporate), and a set of company HR principles. Says Chairman Kenneth Iverson (who answers his own phone at the famously lean company): “We pushed the responsibility down to the divisional level. It works fine.”
Just as Georges Clemenceau said, “War is much too serious a matter to be entrusted to the military,” so human capital is too important to be left to Personnel. Says Matthew Olson, executive director of the corporate Leadership Council: “This is a make-or-break moment for the function.” HR people say that their work, far from becoming less important as they turn administrivia over to others, has become of high strategic importance. We are, they say, the trustees of the asset that matters above all others, proactive custodians of our core competence, holders of the keys to competitive advantage in the new economy.
True, true, true—but are these the guys you want to put in charge? Nothing is more dangerous than a group of people trained in the art of monitoring compliance with rules, fluent in a language that does not include a word for “customer,” and who have time on their hands and are looking for something to do. There’s a reason that more and more new HR executives come to the post with backgrounds in line management or consulting rather than from HR’s own ranks. Says Mahendroo: “I’ve seen this much, much more in the last five years.” There are two messages here. One, Mahendroo notes, is that human-capital management has become important enough that it is “an acceptable career path for an up-and-comer.” The second is that many people doing the work now can’t cut it in the HR of the future.
HUMAN RESOURCES has come to the proverbial fork in the road. One path leads to a highly automated employee-services operation handling what used to be paperwork in a ragingly efficient way. This function becomes little more than a gateway to outside suppliers, impersonal in one sense but highly amenable to supporting personalized, cafeteria-style services. The other leads straight to the CEO’s office. Says Sibson’s Kochanski: “I’m not clear whether the two functions have to be in the same organization. The high-tech part might be merged with other data centers, and the strategy part might link up better with other strategy parts.”
Clearly, companies need a place to think about the skills they need and will need, about executive development, about a way to focus on human capital. This is precisely why they should ask the do-or-die question of their human resources departments. The prospect of hanging, as Dr. Johnson said, is a sure way of concentrating the mind.
Reporter Associate: Wilton Woods
This article first appeared in the January 15, 1996 issue of Fortune magazine.
