J. Holincheck Research Note 3 December 2002 Commentary Leveraging HCM Technologies to Control Labor Costs Large human capital management application suite purchases will be few and far between in 2003. Niche HCM application purchases will help enterprises better manage and control labor costs. Labor costs represent as much as 80 percent of operating costs for many enterprises. In the current economic climate, enterprises want to reduce labor costs and more intelligently manage those costs in the future. The budgets for any new technologies will be tight in 2003. Enterprises will focus on application areas where there is a clear, demonstrable return on investment (ROI) that can pass budget scrutiny in 2003. There are three types of cost savings that human capital management (HCM) software can enable: Transactional: This is the cost savings from time savings by automating what was previously a manual business process. Informational: Once a business process is automated, there is more information available about the process that can be used to generate further savings. For example, information that is gathered through automating time reporting may provide insight into why overtime costs are higher than what was planned. This information could be used to adjust workforce schedules to reduce overtime costs. Proactive: Informational cost savings is reactive. Information helps to understand spending and to negotiate better cost rates. Proactive cost savings prevent costs from being incurred in the first place by enabling policies and procedures that take advantage of opportunities that are identified through better information. For example, policy and procedure information can be captured in travel planning applications so that an enterprise can ensure that its workers take advantage of volume discounts and preferred providers before the spending occurs. Typically, enterprises progress through each type of software as they implement new HCM technology. Prediction: Cost reduction will drive new HCM software purchases. Enterprises will buy applications that enable direct cost reduction or help them get more out of their current resources. Table 1 shows the applications that enterprises will focus on in 2003 and how cost reductions are achieved. Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
Table 1 Achieving Value From HCM Applications HCM Application Transactional Informational Proactive Compensation Speeds up the consolidation of budget information and reduces errors. Uses external market data to design better compensation plans. Performance information and market information help managers compensate appropriately, which aids the retention of high performers. Employee Self-Service Automates employee data capture, reducing errors. In addition, reduces the paper, printing and distribution costs that are associated with paper forms (such as address changes) and documents (such as pay stubs). E-Recruitment Captures resume information electronically, which reduces thetimetoprocessapplicants and speeds up the time to hire. Provides information on cost and the effectiveness of the sources of talent. Enables enterprises to focus on the best, most-cost-effective, and highest-quality sources for different positions. Suggests the best source of talent based on prior cost, timeliness and quality information. Performance Simplifies the tracking of processes (better information on outstanding reviews). Speeds up the review process (easier to create reviews). The standardization of review criteria for behaviors and competencies enable moreconsistent reviews. Enables feedback from multiple reviewers, and the ability to capture comments leads to more-accurate reviews. Uses scarce labor resources more effectively. Performs language checks on reviews to ensure that labor laws are not violated. Service Procurement Automates requisition, candidate sourcing and acquisition, and time and billing processes. Provides information on vendor usage, quality and prices to identify preferred providers with whom volume discounts can be negotiated. Provides mechanisms to ensure that preferred providers are used before other providers are considered. Time and Attendance Automates workforce scheduling and time-capture processes. In some cases, it eliminates paper reports, which provides paper, printing and distribution cost savings. Enables access to real-time information so that managers and supervisors can take immediate action to control labor costs. Uses information on work patterns and resource demands to improve work scheduling and reduce overtime and absence costs. Travel and Expense Automates expense reporting process (in some cases, it eliminates paper expense reports, which provides paper, printing and distribution cost savings). Provides information on travel service vendor usage and pricing to identify preferred providers with whom volume discounts can be negotiated. Provides travel planning applications that can enforce travel policies and the use of preferred travel service providers. Source: Gartner Research 3 December 2002 2
Through 2004, in 75 percent of enterprises, HCM software purchases will be required to show a positive ROI within 12 months (0.8 probability). Transactional cost savings can be more than 90 percent on a cost-per-transaction basis for enterprises that are moving from paper-based, manual processes to automated solutions (this includes labor, paper, printing and distribution costs). Informational cost savings can be even greater (although more variable). Impact on 2003 Traditional HCM application suite vendors will struggle to grow revenue in 2003. There will be few large HCM application suite deals in the market. It is a buyer's market. Enterprises should be able to buy HCM solutions at a discount as HCM point-solution vendors compete aggressively with larger HCM suite providers. Point-solution sales are smaller than HCM application suite sales, so we expect to see average deal sizes decreasing in 2003. Successful HCM application suite vendors will leverage their installed base to increase the number of customers to make up the difference. In addition, we will see consolidation in the HCM point-solution markets as competition intensifies and larger HCM application suite vendors look for ways to ramp up quickly in hotter markets. By 2005, 20 percent of HCM point-solution vendors will be acquired or fail (0.8 probability). HCM application suite vendors will not have mature functionality in all of the point-solution areas mentioned earlier. Thus, enterprises should expect to integrate point solutions and their associated business processes into their core HR management system solutions (personnel, payroll and benefits) to reap the benefits. To combat the integration issues, HCM point-solution providers will start to offer broader suites of products that are pre-integrated in 2003. In addition, point-solution vendors will offer additional value-added services (for example, resume scanning in e-recruitment) to differentiate themselves from the HCM application suite vendors. Enterprises will look at doing more in-house work and leveraging lower-cost resources (for example, offshore and nearshore resources) to lower implementation and support costs for HCM solutions. Reacting in 2003 Enterprises should evaluate self-service, time and attendance, travel and expense management, e- recruitment and performance management/compensation management to understand where they have the greatest potential for cost savings. Where a valid business case exists, enterprises should look at HCM application suite vendors and point-solution vendors to see who has the best solution (in terms of functionality fit, services and ROI). In many cases, solutions from the HCM application suite vendors will not be as robust as point solutions. For HCM point solutions, the payback period should be short enough (less than two years) that it will enable movement to the core HCM application suite vendor that is used by the enterprise, if desired. In addition, if an HCM point solution is selected, enterprises should add contract terms that protect them in case of acquisition as these markets consolidate. Because it is a buyer's market, ensure that there is a competitive bidding environment. Push all HCM technology vendors to provide their products for trial usage (for detailed product gap analysis and performance/scalability testing) and to make more of their revenue based on your achieving success with the products. Lock in maintenance rates at current prices and lock in deeply discounted prices for future products. Enterprises should ensure that they understand what types of resources will be required to implement their chosen HCM solutions and aggressively look to source those resources in house to lower project costs and increase knowledge transfer. In addition, enterprises should look at opportunities (for example, 3 December 2002 3
report development, interfaces, customizations and extensions) on HCM technology projects to leverage lower-cost external service provider resources (for example, offshore and nearshore resources) to reduce consulting and system integration costs. Prediction: Demand for services procurement applications will increase in 2H03. As the economy improves, enterprises will be more conservative and will want to manage their fixed cost base more aggressively. Contract labor, a variable cost, can be added when times are good and it can be more easily reduced during economic downtimes. In addition, many enterprises want to increase their use of offshore resources to drive their contract labor costs down. Services procurement software helps enterprises manage suppliers and control labor costs. Procurement organizations have taken the lead in purchasing and using services procurement software because of their responsibility to negotiate contracts with the suppliers and to manage supplier relationships. HR has not taken a leadership role in contract labor management. In 2003, the purchase and use of services procurement software will remain largely in procurement offices and will weaken an enterprise's ability to manage human capital and weaken the HR organization's position as the focal point of workforce management. By 2007, 30 percent of Fortune 1000 enterprises will use services procurement software to better manage their contract labor (0.7 probability). Impact on 2003 Demand for services procurement applications (for example, contract labor management tools) will increase to better leverage and manage contract labor. The services procurement market has already consolidated considerably; however, we expect to see additional consolidation in 2003 as the enterprise resource planning (ERP) II and HCM application suite vendors recognize the market opportunity. Reacting in 2003 Closely monitor demand for resources in the enterprise. Start tracking usage of contract labor and how the enterprise plans to leverage contract labor to meet future staffing demands. Create sourcing strategies that have the right mix of permanent employees and contract labor. Adding service procurement software without designing sourcing principles that identify where, when and why internal staff and contractors are deployed will increase business risk, business costs and workforce malaise. There is a risk of pushback from line managers in the adoption of service procurement software. The service procurement processes must be fast and uncomplicated to gain buy-in from managers. Procurement or HR organizations must be careful not to be obstacles in the way of managers who are trying to find the resources they need to get work done. HR, procurement and IS organizations need to partner in an unprecedented way to effectively use service procurement applications as part of an overall HCM strategy. If procurement organizations continue to drive service procurement, the cost and quality of contract labor may be better managed, but at the expense of truly optimizing staffing in the enterprise. Bottom Line: In 2003, enterprises will purchase new human capital management (HCM) technologies to reduce labor costs, and to better manage and control labor costs on an ongoing basis. 3 December 2002 4
Enterprises should use point solutions in areas such as self-service, time and attendance, travel and expense management, e-recruiting, performance management and compensation management, and service procurement when HCM application suite vendor offerings do not provide the needed capabilities. The payback period should be short enough (less than two years) so that an enterprise could choose to move to its HCM application suite vendor when it provides adequate capabilities. HR, procurement and IS organizations will need to partner in an unprecedented way so that enterprises can devise sourcing strategies that leverage all of the internal and external resources, and optimize staffing to meet business needs. HCM application suite vendors should develop and evolve solutions in self-service, time and attendance, travel and expense management, e-recruiting, performance management and compensation management, and service procurement to compete with point-solution providers. Enterprise resource planning II and HCM application suite vendors should leverage the tight integration of point solutions with their core HR management system products to drive sales within their installed bases. HCM point-solution vendors should continue to develop deep functionality that will drive high customer return on investment. HCM point-solution vendors should be prepared to differentiate themselves through product functionality and high-value-added services. 3 December 2002 5