At many agencies, HR is one of those overhead services that can consume a surprising amount of money. It's also a place where managers can find cost savings.
This column was originally published on Jeff Neal’s blog, ChiefHRO.com, and was republished here with permission from the author.
A recent Government Accountability Office report on Department of Defense (DoD) efforts to reduce overhead costs highlights the difficulty in achieving savings in administrative services. DoD was tasked by Congress to reduce overhead costs by $10 billion per year. HR is one of those overhead services that can consume a surprising amount of money. In DoD or any agency, the cost of operating HR offices is a significant line item.
How significant? Let’s take a look at only those jobs that are in the two primary HR job series (GS-201 for HR Specialists and GS-203 for HR Clerks and Assistants). At the end of March (the most recent available data) the federal government had 29,830 GS-201s, with an average salary of $90,648. There were 10,168 GS-203s, with an average salary of $46,135. Without fringe benefits, the GS-201s cost $2.7 billion per year and GS-203s cost $469 million. Add 30 percent for fringe benefits (health and life insurance, retirement, etc.) and those costs go up to $3.5 billion and $610 million (a total of $4.1 billion). We know that not every person in HR is a GS-201 or GS-203, so the actual cost for HR office labor is actually more than $4.1 billion. A reasonable estimate of non-HR series labor costs in HR is about 10 percent, so if we add another $400 million to cover those folks, we have total HR labor costs of about $4.5 billion per year.
These numbers do not include other costs of running HR, such as technology, contracts, office space and other overhead costs. Most people use 80 percent as the amount of a typical budget that is direct labor, and 20 percent for those other costs. If we add that into our HR cost calculation, we end up with a conservative estimate of the total cost of running federal HR offices coming in around $5.6 billion per year. The costs are increased by duplication. Every time an agency has an abundance of HR offices, the cost of delivering services goes up. Salaries are the most obvious cost. For example, if an agency has too many HR offices, it will likely have far too many supervisors, administrative jobs and other support jobs in HR. It will have duplicate costs for some information technology. It will have higher costs for office space. All of those add up.
One example of how much those costs add up is my experience in the Defense Logistics Agency. We reduced the number of full service HR offices in DLA from seven to two. In doing so, we reduced the need for much of the office space, eliminated duplicative IT contracts and licenses, and reduced the number of supervisors. The bottom line? A 28 percent reduction in the cost of delivering HR services, with substantially improved quality of service.
What we did at DLA was not rocket science. It was the basics of management. Reduce duplication, control overhead, get more resources focused on service delivery and improve processes to get better results. That same approach can work in the Department of Defense or any other agency that has too many HR offices. I think that may mean most of them. Just look at the numbers. Two percent of the federal workforce are HR folks. The number should be significantly less than that. A servicing ratio goal of 1:100 is very attainable. When I left DLA we were at 1:102. The governmentwide cost savings for streamlined and consolidated HR services could easily exceed $1 billion annually.
How would that consolidation look? DoD is a great example. DoD has 730,000 civilian employees and more than 20,000 GS-203 and GS-201 employees. That does not include the non-HR job series folks who work in HR. Does DoD need 2.8 percent of its workforce to be in HR? At a cost of almost $2 billion per year? I think the answer is no. The entire DoD workforce could be supported by 20-25 HR offices that provided HR support to the armed services and the Defense agencies. I would suggest that DoD consolidate all of its HR services into a defense field activity, reporting to the chief human capital officer, that would be responsible for HR information technology, HR service delivery, and HR policy. If we use very conservative numbers and aim for a servicing ratio of 1:80 (about 9,125 operating HR jobs), and allow a very generous number (up to 20 percent, or 1,800 more jobs) on top of that for policy, HR IT and oversight positions, we would come up with a number of about 11,000 HR staff for the department. Even if we added an extra thousand jobs for whatever they might be needed to do, the savings would easily be in the hundreds of millions.
Would it be easy? No. It would require consolidation that DoD has resisted for many years, even after DLA proved it could be a successful approach. It would require significant changes in thinking, with the armed services and Defense agencies moving to the role of customer of an HR organization rather than owner of those same organizations. It would be disruptive, and we know how much everyone loves big changes. But — the bottom line would be better HR services at a lower cost.
HR is an interesting case. Most managers and employees will tell you they are not thrilled with HR. They can almost always point to HR folks who they think are great, but they complain about timeliness and quality of HR services. While some of that is the result of federal HR rules, regulations and laws that are inflexible and outdated, much of it is the result of poorly managed and trained HR staff who are using bad processes and outdated technology. When DLA consolidated its HR services, reduced costs and improved the quality of services, we did not do it with a new HR staff. Most of the same people who delivered poor service were able to deliver good service when they worked for a more effective and efficiently designed organization. The problem was not the workers, it was the management. I believe we might find the same thing is true in other parts of DoD and in other agencies. While we could continue lamenting the bad service, conduct wholesale outsourcing of HR work, or just do nothing, I would prefer to see what we can do with a smaller, better organized and better managed federal HR workforce. The results might surprise everyone.
Jeff Neal is a senior vice president for ICF and founder of the blog, ChiefHRO.com. Before coming to ICF, Neal was the chief human capital officer at the Homeland Security Department and the chief human resources officer at the Defense Logistics Agency.
HR — The $5 billion question
At many agencies, HR is one of those overhead services that can consume a surprising amount of money. It's also a place where managers can find cost savings.
This column was originally published on Jeff Neal’s blog, ChiefHRO.com, and was republished here with permission from the author.
A recent Government Accountability Office report on Department of Defense (DoD) efforts to reduce overhead costs highlights the difficulty in achieving savings in administrative services. DoD was tasked by Congress to reduce overhead costs by $10 billion per year. HR is one of those overhead services that can consume a surprising amount of money. In DoD or any agency, the cost of operating HR offices is a significant line item.
How significant? Let’s take a look at only those jobs that are in the two primary HR job series (GS-201 for HR Specialists and GS-203 for HR Clerks and Assistants). At the end of March (the most recent available data) the federal government had 29,830 GS-201s, with an average salary of $90,648. There were 10,168 GS-203s, with an average salary of $46,135. Without fringe benefits, the GS-201s cost $2.7 billion per year and GS-203s cost $469 million. Add 30 percent for fringe benefits (health and life insurance, retirement, etc.) and those costs go up to $3.5 billion and $610 million (a total of $4.1 billion). We know that not every person in HR is a GS-201 or GS-203, so the actual cost for HR office labor is actually more than $4.1 billion. A reasonable estimate of non-HR series labor costs in HR is about 10 percent, so if we add another $400 million to cover those folks, we have total HR labor costs of about $4.5 billion per year.
These numbers do not include other costs of running HR, such as technology, contracts, office space and other overhead costs. Most people use 80 percent as the amount of a typical budget that is direct labor, and 20 percent for those other costs. If we add that into our HR cost calculation, we end up with a conservative estimate of the total cost of running federal HR offices coming in around $5.6 billion per year. The costs are increased by duplication. Every time an agency has an abundance of HR offices, the cost of delivering services goes up. Salaries are the most obvious cost. For example, if an agency has too many HR offices, it will likely have far too many supervisors, administrative jobs and other support jobs in HR. It will have duplicate costs for some information technology. It will have higher costs for office space. All of those add up.
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One example of how much those costs add up is my experience in the Defense Logistics Agency. We reduced the number of full service HR offices in DLA from seven to two. In doing so, we reduced the need for much of the office space, eliminated duplicative IT contracts and licenses, and reduced the number of supervisors. The bottom line? A 28 percent reduction in the cost of delivering HR services, with substantially improved quality of service.
What we did at DLA was not rocket science. It was the basics of management. Reduce duplication, control overhead, get more resources focused on service delivery and improve processes to get better results. That same approach can work in the Department of Defense or any other agency that has too many HR offices. I think that may mean most of them. Just look at the numbers. Two percent of the federal workforce are HR folks. The number should be significantly less than that. A servicing ratio goal of 1:100 is very attainable. When I left DLA we were at 1:102. The governmentwide cost savings for streamlined and consolidated HR services could easily exceed $1 billion annually.
How would that consolidation look? DoD is a great example. DoD has 730,000 civilian employees and more than 20,000 GS-203 and GS-201 employees. That does not include the non-HR job series folks who work in HR. Does DoD need 2.8 percent of its workforce to be in HR? At a cost of almost $2 billion per year? I think the answer is no. The entire DoD workforce could be supported by 20-25 HR offices that provided HR support to the armed services and the Defense agencies. I would suggest that DoD consolidate all of its HR services into a defense field activity, reporting to the chief human capital officer, that would be responsible for HR information technology, HR service delivery, and HR policy. If we use very conservative numbers and aim for a servicing ratio of 1:80 (about 9,125 operating HR jobs), and allow a very generous number (up to 20 percent, or 1,800 more jobs) on top of that for policy, HR IT and oversight positions, we would come up with a number of about 11,000 HR staff for the department. Even if we added an extra thousand jobs for whatever they might be needed to do, the savings would easily be in the hundreds of millions.
Would it be easy? No. It would require consolidation that DoD has resisted for many years, even after DLA proved it could be a successful approach. It would require significant changes in thinking, with the armed services and Defense agencies moving to the role of customer of an HR organization rather than owner of those same organizations. It would be disruptive, and we know how much everyone loves big changes. But — the bottom line would be better HR services at a lower cost.
HR is an interesting case. Most managers and employees will tell you they are not thrilled with HR. They can almost always point to HR folks who they think are great, but they complain about timeliness and quality of HR services. While some of that is the result of federal HR rules, regulations and laws that are inflexible and outdated, much of it is the result of poorly managed and trained HR staff who are using bad processes and outdated technology. When DLA consolidated its HR services, reduced costs and improved the quality of services, we did not do it with a new HR staff. Most of the same people who delivered poor service were able to deliver good service when they worked for a more effective and efficiently designed organization. The problem was not the workers, it was the management. I believe we might find the same thing is true in other parts of DoD and in other agencies. While we could continue lamenting the bad service, conduct wholesale outsourcing of HR work, or just do nothing, I would prefer to see what we can do with a smaller, better organized and better managed federal HR workforce. The results might surprise everyone.
Jeff Neal is a senior vice president for ICF and founder of the blog, ChiefHRO.com. Before coming to ICF, Neal was the chief human capital officer at the Homeland Security Department and the chief human resources officer at the Defense Logistics Agency.
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