HR Staffing: Who Do We Need?

Just as the size of the staff in the HR function presents a dilemma, so does the composition of the staff.  Over the last several years, I have been asked numerous times if it makes sense to use generalists or specialists, more professionals or support staff, or more managers than professionals.  Basically, the questions revolves around how should I organize the workforce, flow, and load of the human resource function.  In the last two or three years, as organizations have dealt with few resources being available and rising cost of HR expertise, the question has become do I need that skill on my team or can I accomplish the same thing another way.

A large health care provider that I worked with recently has this very challenge.  They have a qualified staff, but they need to add two team members due to recent vacancies.  Based on budget cuts, they have one FTE approved to deal with both positions.  The decision has become what skills to emphasize in hiring, what level of employee, and how to be competitive with compensation?  They could focus on gaining expertise in one position only, but that would leave a gap in their team.  The other feasible option is to add a new team member that possesses both abilities.  However, this would necessitate hiring a higher level employee. Clearly, there is a dilemma between skills, level, and cost.  I encouraged the organization to look at staff overall and determine the approach mix of skills and levels for the function as a whole.

Figure 1: Staffing Composition by Size

So, what is the typical composition of an HR function by level of staff? The 2010 SHRM Benchmark Survey found that management is the largest category of employees until the organization reaches more than 1,000 FTEs (see Figure 1).  Professional or technical staff grows incrementally as a percentage and become the largest group for organizations with 1,000 FTEs or more.  Support staff increase in a fairly linear fashion with the size of the organization.

These trends are not surprising since most organizations grow their HR capability around a core individual that becomes the leader of the HR function over time.   Transactional tasks are completed by lower level employees and support staff is generally added to meet this need.  As the work becomes more complicated, more professional staff is needed that understand the regulatory, strategic, and practical nature of human resources.

Figure 2: Staffing Composition by HR Phase

What does this process look like from an evolutionary standpoint?  If we take the phases that we discussed several posts ago, some basic distributional patterns develop.  Figure 2 illustrates the distribution of staff by phase taken from the 2010 HCS Survey of HR Staffing.  As we move through the phases, professionals grow while management decreases.  The only real difference between size (Figure 1) and phase (Figure 2) is the trend for support staff.  As the size of the organization grows, the support staff increases while more strategic phases slightly reduce the support staff.

 

 

 

What questions should you ask in determining human resource staff composition?  The basic questions pertain to:

  • What is the level of service needed?
  • What phase is the human resource operation in?
  • What is the level of automation?
  • What capabilities are needed in house on a full time basis?
  • Where is the function hoping to be in three and five years?

HR Staffing: Pulling It All Together

Our discussion to this point has shown that a variety of factors impact HR staffing size: service level, offerings, degree of automation, organizational size, industry, and phase of development.  Overall, the results have indicated that there is not a deterministic formula that determines the appropriate size of the human resource function in a typical organization.  At best, we have found that based on the factors there are certain “rules of thumb” or anticipated ranges.  In order to pull it all together and demonstrate the findings using real data, we will analyze a sample of 400 organizations collect by HCS that vary by each of the major factors.

Figure 1: Relationship of HR Ratio and FTE

In order to highlight some of the data, two scatter plots are included.  Figure 1 captures the distribution of the respondents by size and staffing ratio.  The HR Ratio varies considerably in smaller organizations, but as the organization grows in size, there is more compaction in the results.  The largest respondents have HR Ratios between .4 and 1.0.  Figure 2 demonstrates the comprehensiveness and quality of services of the respondents based on a scale of one to ten with ten being the most comprehensive and highest employee satisfaction with services. The basic trend is that there is more satisfaction with higher HR Ratios. There are a few exceptions in the .4 to .6 range, but these are large employers with well-developed offerings.

Figure 2: Relationship of HR Ratio and Service

Based on this sample of organizations, average differentials in the HR Ratio were calculated.  The table below summarizes the differences that should be applied to the HR Ratio taking into account each factor.  For example, a private, automated, high service, strategic organization would have a HR Ratio 22 points smaller than a public, non-automated, low service, and transactional organization.  Consequently, assuming an average HR Ratio of 1.1 for all organizations, the change in characteristics would result in an average HR Ratio of .858 based on the results of this sample.

Factor Adjustment
Private vs. Public -.08
Automated vs. Not Automated -.15
Large vs. Small -.05
Low Service vs. High Service -.04
Transactional vs. Strategic -.03

Obviously, there are interactive effects that this simple approach does not account for such as if I am large I am more likely to automate, strategic organizations tend to have moved toward automation, and low services organizations tend to be smaller.  These need to be addressed, but will necessitate a larger sample.  Nevertheless, given these results, several key findings should be kept in mind when determining the right staffing size compared to FTEs:

  • Multiple factors impact the “right size” of current HR staff
  • Different factors have different impacts on the needed staff
  • Automation is one of the biggest factors impacting staff size in current practice
  • Reducing HR staff without the necessary tools and processes will impact service

More HR Staffing Differences? Industry and Phase

As we discussed in the last post, there are a variety of factors that impact the size of the HR staff.   We focused on service offering and level, degree of automation, and organizational size as factors that play a key role in the size and composition of the HR staff.  Another important element to consider is industry.  Major industry groups allocate resources to human resources differently. One of the most important reasons for the differential is the relative emphasis placed on the HR function.  Although that may sound counter-intuitive to the common assumption that all human resource functions are inherently the same, philosophical view of human resources does vary.

Figure 1: HR Ratio by Sector and Size

What are  the differences across sectors? Figure 1 summarizes HR Ratio data collected by HCS from 400 organizations across the public, private, and non-profit sectors.  Obviously, the concerns with the HR Ratio apply here, so the metric is used just to provide a basic indication of variation. Public and non-profit possess a higher HR Ratio than private regardless of the size of the organization.  This is not surprising given the greater concentration of technology and manager-centered approaches to HR in the private sector.  More surprising is the same metric with the private sector divided by major industry group.

Figure 2 captures the breakdown by industry from the same HCS survey, Human Resource Staff and Composition Survey (2011). The finance industry is the highest in all size categories except 500-999 employees where high technology firms have a higher ratio.  These results indicate that higher numbers of knowledge workers and more market competition necessitate more HR staff.  One explanation is that these industries are more dependent on single individuals or small teams that can make big differences.  These critical workers need more recruiting, talent management, and compensation support than other types of workers.

Figure 2: HR Ratio by Industry and Size

Increasingly, scholars and practitioners alike argue that the biggest influence on HR staff size is the specific evolution of the HR function.  Most agree that as an organization evolves, its HR function transforms to better match the needs of the organization.  Three general categories are normally utilized to describe the linear progression:

  • Transactional
  • Organizational Partner
  • Strategic Leader

Transactional

Most organizations have transactional HR functions that deal with employee record keeping, federal and state compliance, compensation, benefits, labor relations, and leave and attendance.  HR serves as a record keeper, transaction agent, and compliance officer.  This level of service gains the most from automation, manager empowerment, and employee self-service.

Organizational Partner

During the last two decades, numerous articles and presentations have addressed the need to accept HR as a business partner.  Conventional business wisdom has accepted that HR can contribute much more to an organization than simple compliance and processing transactions.  In many ways, during this phase HR has a “seat at the table” and possesses the similar weight to other operational areas.  However, many organizations struggled to define the breadth of the role it wanted to grant HR.   Some of the most popular, new functions adopted during this category include organizational design, targeted recruiting, training and development, and total compensation management.

Strategic Leader

The future of HR is to play more of a leadership role.  As more professionalization, education, and automation has transformed perceptions to and practice of HR alike, more organizations are realizing that not only should HR be involved in decisions, but should be an equal partner in setting the direction of the organization.  If an organization wants to truly reach its full potential, a strong and well equipped HR function is necessary.  The critical tasks and tools that need to be employed include talent management, performance management, competency management, and succession planning.

Obviously, each category or phase necessitates different staffing levels and composition.  Different industries possess different levels of maturity, but would have some in each category of development.  Consequently, it might be safe to assume that industry and category are two additional factors and less deterministic indicators.

 

 

Human Resource Staffing: The Magic Number

Most human resource (HR) operations from time to time contend with “right sizing” of its staff.   Moreover, the need to reduce staff to realize cost savings many times targets various “back office” functions and human resources is not immune.  On a regular basis, clients will ask me how large their human resource staff should be compared to total employees.  Several weeks ago, I had a discussion with a HR Director that was predicting her department’s staffing needs after bringing benefits administration back into her organization.  She needed an exact number so she could compare it to her current staffing level and determine the number of additional resources she needed.

One of the most common methods of assessing the appropriate staff level in an organization is the HR ratio.  The ratio involves dividing the HR FTEs (Full Time Equivalents) by the total employee FTEs and multiplying the result times 100. Most organizations attempt to standardize the comparison by only including generalists and specialists and leaving out the payroll and training functions of the organization when computing the ratio.  Although the HR ratio is the one possible element for determining the appropriate staffing level of the HR function, it is neither comprehensive nor conclusive.  Nevertheless, for the last several decades, convention wisdom has advocated a ratio of 1.0 or 1 HR FTE per 100 employee FTEs as the best method of determining appropriate staffing level.  As automation has become more prevalent, the ratio has crept higher with some even advocating a ratio of 1 HR FTE per 1,000 employees.

What are the factors that limit the applicability of the HR ratio? Three core factors general the most concern:

  • Service offering and level
  • Degree of automation
  • Organizational size

Service Offerings and Level

Different human resource functions offer different services, possess different levels of service, and have different approaches of service delivery (centralized or decentralized).   The typical human resource function includes:

  • Ensuring compliance with local, state and federal labor laws
  • Recruitment and selection
  • Employee record keeping
  • Organizational design and development
  • Change management
  • Performance management
  • Employee relations
  • Workforce analysis
  • Compensation and benefits management
  • Training and development

A subset of organizations includes payroll, risk management, or labor relations as part of the core human resource functions and would consider these employees part of their HR staff.  Obviously, the inclusion of different functions results in different needs and employee counts.    In order to have meaningful comparisons when utilizing the HR ratio, it is important to ensure that same functions are being compared across different organizations or the comparison is of little value.  The level of service also plays a role.  Some organizations place a strong emphasis on strong internal customer service and develop comprehensive human resource functions.  A strong commitment to service can increase the HR employee count by as much as 20 percent.  Just like quality of service, the delivery method impacts size of staff as well.  The major delivery methods include:

  • Centralized with little management involvement
  • Centralized with management involvement
  • Decentralized with little management involvement
  • Decentralized with management involvement

Technology and training are critical determinants of management involvement.   A centralized system with little manager and employee ownership of the major human resource processes usually has the largest number of HR staff.  The smallest staff is generally associated with a decentralized structure with management involvement.

Degree of Automation

As mentioned with method of delivery, automation plays a key role in determining the long term size of the HR staff.  Automated tools can reduce human involvement in typical transactional processes and shift more basic HR functions to managers and employees.   As many organizations have found, the implementation of HR automation does not immediately result in a reduction of staff.  HR professionals are redeployed most times to use the new gains to improve customer service and to cover more strategic needs.  The real labor cost savings accrue from the ability to improve the efficiency and effectiveness of services without additional staff in the future.  Consequently, it is important to examine not only if automation has been implemented, but when the process occurred.

Organizational size

Figure 1: HR Ratio by Organization Size

Like many staffing calculations, there is an economy of scale effect with HR staff as an organization becomes larger.  As an organization increases in employees, the number of HR staff grows dramatically with the effort to fill the necessary specializations to address their most pressing needs.  Once the core expertise is assembled, the staff trend begins to slow as the volume increases for each team member, but there is no need for additional staff.  Figure 1 captures the ratio change for each size of organization.  According to the SHRM Human Capital Benchmarking Study, the average ratio is 2.7 with fewer than 100 employees and diminishes to a ratio of .42 for 7,500 employees or more.   The previously mentioned factors all play into this change: assembly of specialists, more defined functionality, standardized processes, automation, and great use of self service for managers and employees.

The short answer to the question of how large my HR staff should be is that it depends.  As we discussed, it depends on a variety of factors that inter-relate and mutually influence each other.  In the next several posts, I will discuss some general guidelines that will help you better determine the appropriate staffing level needed to provide human resource services.