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EDITOR’S NOTE: Living with the 40-60 Rule

Shedding superfluous talent is one benefit of HRO, but can you maintain a leaner organization? Measuring efficiencies before and after outsourcing HR will help ensure you avoid the pitfall of backsliding on productivity.

by Andy Teng

I have this 40-60 theory that generally applies to all organizations. Your experience may vary but I’ve observed that it holds true in many places. It states: 40 percent of the people in any organization carry the other 60 percent. In other words, a minority of employees shoulders the organization’s critical functions; the rest perform secondary, support services and can be easily replaced.

You might quibble about the ratio, but I’ve seen this theory at work in many companies, and I’ve surveyed its validity among friends, colleagues, and anyone else willing to listen to my wacky social theorems. As much as companies try to reorganize—trimming the fat that they insist to shareholders they can be rid of once and for all—the fact is that extraneous human capital is part of all organizations, much like on-hand inventory. You can tweak the numbers with initiatives such as lean manufacturing or just-in-time production—think “transformation” for HR—but the ratio stays roughly the same.

Which makes HRO somewhat appealing to SVPs of HR who have surveyed the landscapes and realized they have a problem—what to do with the 60 percent in HR? Outsourcing can actually change the ratio. One enterprise buyer told me earlier this year that it’s gut-wrenching to lay off people, but on the other hand, not everyone in the HR department is going to make it through transformation. Nor will they want to.

HRO is an opportunity to partially wipe the slate clean. Most large, enterprise deals have involved providers acquiring the shared services facilities and employees of their buyers. Lift-and-shift models give buyers a chance to retain really top talent internally while transferring the others to the providers.

Theoretically, the retained organization is sharper.

This sounds great until you realize that the 60 percent you were concerned about continue to provide transactional services to your organization. The only thing that’s changed is they now get a paycheck from the provider. The quality of people servicing your processes hasn’t markedly improved, but you can hold the providers’ feet to the fire for failing to meet SLA agreements.

But there are inherent problems with this scenario. An addendum to my theory is that organizations, even after outsourcing, continue to move toward that 40-60 ratio. A long-term benefit of outsourcing is that they’ll never be as soft; most likely, the crucial-to-ancillary ratio will be a much more desirable balance but not perfectly lean. HRO transformation is not a one-time shot. To stay really efficient, organizations must continually measure and benchmark internally, not just look at how well vendors are performing.

For new buyers, opportunities to jettison mediocre talent will likely diminish in the future. Although lift-and-shift has been the preferred method of deal-making in the HRO universe, providers know this is least attractive to them. True end-to-end guys have built a global footprint and don’t need to take on more people or facilities.

Moreover, a growing number of companies realize that cleaning up their HR mess before outsourcing produces better results. Transform-then-transfer enables employers to benchmark internal performance against outsourced service delivery so they can tell if the provider is on the mark. But this approach requires organizations to undergo a painful internal transformation before they outsource, which for some buyers defeats the purpose of the HRO exercise.

And don’t forget this perpetual dilemma: How to address displaced people in HR? Outsourcing doesn’t eliminate corporate responsibility, and transformation in any form can be painful initially. This thorny issue is best answered by each organization—how far are you willing to bend backwards for former employees?

HR leaders know that striking an appropriate mix of talent in the workforce is a complicated task. While HRO is aimed at helping buyers to realign their processes and people, it doesn’t perpetually keep the ratio from slipping. For buyers hoping to optimize outsourcing, going live with the engagement is just half the work. The rest is making sure the retained HR organization doesn’t slip toward the 40-60 ratio.

Tags: Consultants & Advisors, HRO Today Global, Multi-Processed HR, Professional Contribution, Sourcing

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