FSN White Paper
"Meeting the challenge of HR Planning with Clarity 6 "
29th January 2007
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INTRODUCTION
Over the last forty years there has been a dramatic change in the shape of the balance sheets of the largest companies that make up the economies of the United States and Western Europe . In the early 70's the value of a company (its market capitalisation) was tightly aligned with assets on its balance sheet so that the ratio of equity to market value was roughly 1:1. Since that time, market values and balance sheets have drifted steadily apart as the manufacturing base of the powerful industrial economies of the West has been steadily replaced by service oriented businesses. Now, it is not unusual to find equity to market value ratios of 1: 10 or even more, reflecting the reality of the position that modern businesses are no longer reliant on machines and other fixed assets but more crucially dependent on people, know-how and other intangibles.
In today's rapidly changing ‘knowledge economy', where know-how, intellectual property and relationships with a wide range of stakeholders are vital to success, people are often a company's most valuable assets. At the same time we have seen a telling change in terminology as the “Personnel” functions of the 80's have metamorphosed into “Human Resources” and more latterly, “Human Capital”; reflecting the true value of people in generating wealth.
So nurturing, retaining and attracting the best ‘talent' is a high priority for most companies and for example, leading organisations regularly compete to win national recognition as good employers through training awards and national employee surveys.
But having the right resources, at the right time and in the right place cannot be left to chance. Detailed Human Resources planning and forecasting is needed to match supply and demand, optimise staff mix, maximise employee productivity, understand the cost base and generate satisfactory returns for shareholders.
Nevertheless, HR Planning cannot be considered in a vacuum. The implications of a detailed HR budget and forecast need to be reflected in the financial and other operational plans of an enterprise. Similarly, other expense plans, capital expenditure and revenue forecasts need to be integrated with the financial plans, allowing the organisation to develop complete visibility of planned performance across the enterprise.
In this white paper we examine how Clarity 6 Human Resource Planning, an integral part of the Clarity 6 CPM Suite, meets these challenges.
THE DRIVERS FOR HUMAN RESOURCE PLANNING
Understanding the cost base:
As every employer knows, the cost of employment extends well beyond the headline salary. Taxes, insurance contributions, pensions, health benefits, vehicle schemes, holidays, maternity leave and training are just some of the additional costs that go with the territory. To these statutory, professional and contractual obligations has to be added the cost of infrastructure, (PC's, floor space, telephony and desks) as well as the ‘opportunity cost' of lost productivity through unplanned idle time or sickness.
Although ‘people' do not appear on the balance sheet as an asset they are usually the biggest expense in the profit and loss account for service oriented businesses. Recruiting, employing and training people is indeed a costly affair and in the face of increasingly stringent legislation and tighter labour markets, salary costs are effectively a fixed cost which is difficult to shed in a down turn. So understanding the cost base and its sensitivity to changes in say, recruitment patterns, staff mix and other factors is critical to success.
Matching supply and demand:
Matching the availability of skilled and unskilled resources to market demands lies at the heart of Human Resource planning in a services oriented business. Planning the ‘shape' of a people business, that is the proportion of individuals in each band of seniority or grade is critical to the long term health of the business The appropriate staff mix, i.e. blend of skills, experience and seniority, not only drives profitability in say a law firm or consultancy but is also fundamental to the delivery of customer satisfaction. Too few senior staff could drive poor quality work and low profitability, whereas too many could squeeze margins.
Succession Planning:
Human Resource planning is often a finely tuned balancing act. Planning staff resources in the long term can be especially challenging but is also crucial to the sustainability of a service business. An over abundance of senior personnel can impact profitability in the short term but create long term staff retention problems as younger staff find their careers blocked, with little headroom for promotion. On the other hand, not planning for future leadership could leave the business exposed as senior managers retire with nobody trained to take their place.
Strategic and tactical shifts:
Few businesses in today's economy can afford to stand still. Product offerings have to change in sympathy with market demands and new opportunities, but skill sets can quickly become out of kilter or irrelevant in the marketplace. Anticipating market trends and aligning human resource competencies is a cornerstone of HR Planning. This could involve creating new cost centres, shifting or loaning resources to another cost centre and formulating completely new compensation and training schemes all of which needs to be anticipated within HR planning.
Compliance and regulation:
Compliance and regulation are increasingly common planning considerations. Minimum wage laws, the EU Working Time Directive and the requirements of professional institutions and training bodies are all examples of regulatory drivers that have an impact on human resource planning. The need to pay a statutory minimum wage (perhaps to support and facilities staff in a professional services firm), or to limit the number of hours a professional is allowed to work during a week, or to allow a prescribed number of days for training and development in order to meet minimum professional standards are all factors that drive cost in an human resources plan.
Equally important are recent changes in Europe brought about by the EU Accounts Modernisation Directive and the Companies Act 2006 in the UK . Under the new legislation, (which is already effective) quoted companies must, “to the extent necessary for an understanding of the development, performance or position of the company's business”, include information about the company's employees and include “where appropriate” non-financial KPIs about its human capital. Although the rules leave room for manoeuvre most companies will find themselves effectively shamed into disclosure because of the need to state very publicly in the Business Review if they have left out employee metrics.
There is little consensus about what KPI's are appropriate to report, nevertheless they are likely to include measures around workforce composition, retention and motivation, skills and training, reward and fairness, leadership and succession. Some of these will therefore need to be incorporated in HR plans and forecasts which will have to cope with a range of financial and non-financial factors in order to predict whether the resulting KPIs are likely to be within acceptable ranges.
Performance management:
Regardless of the burden of compliance, modern organisations need to maintain a close watch on HR performance metrics. In professional services organisations, ratios such as support staff to fee earning staff, or partners to professional staff are leading indicators of future profitability and assumptions used in human resources plans can ensure that forecast KPIs fall within accepted norms for the firm, an industry or sector.
But human resource planning should not be carried out in a vacuum. Assumptions around the rate of hiring new employees, attrition rates, training objectives and global salary increases should be driven by its long term plans so that the shape of the organisation is strategically aligned along with other vital resources such as information technology, production capability, sales and marketing.
MEETING THE CHALLENGE OF HR PLANNING USING
CLARITY 6.0
The application
For decades organisations have carried out their human resource planning using a large number of spreadsheet templates but over the years these have been shown to suffer a number of limitations most notably; the lack of process support, the inability to quickly consolidate and report results, as well as the lack of audit trail and a high maintenance burden. But the advent of the web, coupled with Clarity's Web/Excel interface, allows organisations to cost effectively distribute familiar Excel style planning templates to a wide range of budget holders. |
| A major advantage of Clarity 6 is that it allows users to open a budget entry template in Excel and work offline with the data and then re-import the data with full security and auditability of the information. |
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In turn, the ability to involve a larger number of budget holders from a broader selection of functional areas across the business who are closer to the ‘coal face', has allowed organisations to build up a more accurate picture of forecast performance. Furthermore, by adopting ‘driver based' budgeting, cost centre managers who are not necessarily accountants can be guided through the creation of an HR forecast using familiar organisational terminology and concepts whilst being shielded from the accounting complexity. For example, a departmental manager, can plan for “new hires” and “leavers” simply by adjusting the number of staff in each calendar period, allowing the system to calculate the implications for tax, national insurance contributions, benefits, infrastructure and other overheads based on business rules established in the background. On the other hand, accountants can plan along traditional lines based on the chart of accounts, building up costs, line by line. Either approach allows the organisation to plan collaboratively and calculate its projected costs.
Furthermore, by validating calculations as budget data is entered, budget holders can be kept within planning assumptions set centrally for the organisation. For example, headcount increases may be restricted to 10 percent or support staff costs limited to 15 percent of overall departmental costs. |
| The ability to add commentary or attach a document to a cell, input schedule or entity improves the flow of information and encourages collaboration when rendering an HR plan. |
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But HR Planning is not limited to understanding the cost base. In a professional services environment prospective staff utilisation (percentage of available hours worked), valued at selling price, i.e. hourly fee rates, drives projected revenue as well. Indeed, the revenue, side of a model can be quite complex, for example, depending on grade of staff and type of work carried out. Once again, Clarity 6 permits a driver based approach which eliminates complexity and allows non specialist budget holders to create a budget based on straightforward assumptions about expected utilisation and work type.
One of the more difficult decisions to make in HR planning is around the appropriate level of detail at which to plan, for example, the level of a department, cost centre, grade of employee or even for each employee individually. Clarity supports planning at any of these levels or even a mixed approach allowing some departments to plan in more detail than others, exposing the detail in planning templates only when needed.
The intricacies of HR planning mean that standardised approaches are often difficult to achieve. Business rules and calculations have to be highly tailorable to fit the style and culture of the organisation. Clarity 6 is particularly suitable for large heterogeneous organisations because it can absorb the varied terms and conditions in different business units and an infinite variety of ways in which salary costs are compiled.
Fundamentally, HR planning deals with people – a creative and highly variable resource that cannot always be compartmentalised in neat and convenient ways. An HR planning system has to be able to yield to these differences when required but also preserve a full audit trail. In this context Clarity's ability to add comments (unstructured data) to accompany salary or other data at the all levels of the plan and store them as part of the audit trail is a major advantage in an HR system where there are often “exceptions to the rule.”
Similarly, flexibility of reporting, scorecarding and dashboarding allows users of the system to readily leverage information in the database and present it easily according to their personal preferences.
Clarity's CPM architecture encourages strategic alignment
Naturally, HR plans have financial consequences which need to flow through to detailed financial plans. For example, the timing of new joiners affects cash flows such as when salaries will be paid, infrastructure will be needed, training will be taken and fees will be earned, billed and collected. But there are also more elaborate considerations such as whether forecast fees based on projected client billings match hours billed based on forecast utilisation. In a spreadsheet environment it would be virtually impossible to align these dependencies but Clarity's HR Planning capability is a part of a much broader CPM (Corporate Performance Management) environment in which related applications share a single centralised data model.
This means that operational HR plans work in sympathy with detailed financial forecasts as well as longer term plans and actual performance captured via the consolidation application or other feeder systems. Infact each of the principal applications such as planning, consolidation and reporting not only share the same data model but also work in exactly the same way, for example, sharing the same user interface, methods of data entry, validation, business rules and other functionality where appropriate. Another common thread throughout the Clarity 6 suite is the workflow capability which allows HR plans to be routed automatically between budget holders and budget reviewers for approval, amendment or rejection.
An open and flexible architecture for high volume HR Planning
Clarity's open architecture is a particularly important capability in an HR setting where planning at the level of the individual employee often requires a system to hold very large volumes of data.
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| The ability of Clarity 6 to drill down from a high level plan to detailed employee records in a relational store give it a distinct advantage over other budgeting applications that cannot manage such high volumes. |
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Most planning and forcasting applications are not designed to handle data on this scale requiring a constant balancing act between holding too much information in an OLAP cube and not holding enough. However, Clarity 6 is able to read and write data from both a relational database and an OLAP database, using a single template or report. As it works with both leading OLAP and relational databases such as Essbase, Microsoft Analysis Services, SQL Server, Oracle and DB2 it is usually a straightforward matter for Clarity to leverage existing HR systems which greatly simplifies the implementation effort. For example, if an organisation has already deployed OLAP cubes using Essbase or Analysis Services, then Clarity 6 can usually plug directly into these cubes – without any material changes required to the cubes or the existing back-end processes that create them. This support for existing data models means that organisations with existing data models can deploy Clarity 6 HR Planning more quickly and with less effort. It also means that the detail of the HR planning model can be held within a relational table, where it is easy to add and remove rows of information and where relationships between the data can easily be maintained and simultaneously update the relevant salary related account level information in an OLAP cube.
Summary:
HR planning and forecasting in today's business environment is a highly demanding activity yet crucially important to organisations whose principal asset is their people. Nurturing and developing talent is a major pre-occupation and a constant challenge in the face of re-organisations, acquisitions, mergers, compliance and legislation. This is particularly so for a multinational organisations seeking to manage and harmonise its workforce across the world.
Clarity 6 HR planning is designed to meet these challenging conditions head on. The ability to manage high data volumes, multiple data sources and a large number of budget holders is vital. But so is the capability of linking them simply to each other and the HR process through tightly managed workflows so that the HR plan can be established collaboratively – an approach which encourages better quality forecasts.
Clarity HR planning is also designed to leverage the full capability of the broader CPM suite so that the commercial consequences of an HR plan are tightly coupled to financial and longer term plans.
However, it is the simple elegance of the Clarity 6 architecture that allows an organisation to develop a best practice performance management regime. A single data model serves budgeting, planning and forecasting processes as well as financial consolidation and reporting applications. This approach, which few suppliers can emulate, provides data integrity and consistency of reporting whether, for example, a business user is viewing actual HR expenditure in the profit and loss account, a cash flow forecast or a detailed recruitment plan.
Furthermore, the uniform architecture allows authorised users to share information and business insights, accessed through a simple web/excel interface or more elaborate reporting methods if required. In so doing, Clarity 6 allows an organisation to embed its long range strategic objectives in its operational plans, communicate its HR strategy and monitor its success. |
| About FSN Publishing Limited |
FSN Publishing Limited is an independent research, news and publishing Organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University , a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.
Gary.simon@fsn.co.uk
www.fsn.co.uk
Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document. |
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