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What Drives Companies to Centralize HR?


Nine months into the new century, with the rapid advances in information technology, a tighter labor market with higher recruitment and retention efforts by employers together with an increasingly mobile workforce in a global market place, the face of the Human Resources function has changed forever. All these influences represent both challenges and opportunities for all management functions and especially for Human Resources, with employees’ skills and knowledge becoming the key factor to success in today’s very competitive marketplace.

HR Professionals are being asked to do more with less, to do different work and to do it better, which puts them under greater pressure to redefine their roles and reevaluate their structure.

In today’s business environment, the HR function must not only be focused on the workplace but also the marketplace and linked directly to the core business strategy. In order to achieve this, the HR department should be an integrated unit within the business and therefore centralized.


As a unit within a business competing in an increasingly competitive world, HR should be operated more like a business. Businesses have clear strategies, products and structures to achieve their objectives.

According to Michael Mercer, industrial psychologist and author of Turning Your Human Resources Department into a Profit Center, HR executives must accept one essential fact of business: that its purpose is to make money. Human Resources in the future must be operated strategically as a business in itself and not as a unit generating overhead.

In order to manage HR as a business, it must shift from a traditionally more administrative function to a strategic unit. Companies are finding they must reduce costs and increase the contributions HR makes to the bottom line. By now, most HR managers having realized that they are to help deliver competitiveness, may have already asked the IT department's help in order to speed recruiting and improve employee development, performance management and succession planning. If HR is becoming a profit center, costs need to be reduced and processes optimized - this can only be achieved by having all key players work at the same centralized location, which is essential for effective communication as well as the awareness and commitment to the above by all parties.

Human Resources Professionals, with the increased use of IT, will focus on adding value to the organization through the delivery, development and retention of human capital.

Ideally, HR should see itself as a customer focused business (with the customer being the organization and the employees) with support groups that exist to meet the customer’s needs as efficiently as possible – operating centrally is necessary for all parties to be fully aware of the overall strategy and to pull into the same direction.

The challenge then is clear: once aware of the overall business strategy, HR needs to ensure that all structures, systems and processes are favorable. Behaviors and attitudes which block expansion and business goals need to be identified and dealt with; and finally HR needs to reappraise employees skills and development needs to facilitate the corporate objectives.


Another factor producing the need for a centralized, smaller and more efficient HR unit is the effect of technology on human resources. How will new technologies affect the Human Resource management profession? The American Payroll Association predicts that within the next five to ten years, nearly every working person will wear a small voice-activated computer that will connect the wearer to a vast database of information. The palm-sized computer will provide accurate, real-time answers to almost every question and reduce the data entry function within HR. Through a Web browser, employees can access and update HR data from their desks or home, and line managers can perform personnel-related tasks without the assistance of an HR professional. Using Employee Service Systems, an employee can change his or her address and phone number; update beneficiaries after marriage, divorce or births; and report new skills or degrees obtained. New technology will help create new jobs and increase telecommuting. Human resource professionals will fight with more than just what is (or will soon be) available in terms of hardware and software. Technology will require human resource professionals to stop thinking in terms of months and years and start thinking in terms of weeks and days. This implicates a change from being a support unit within an organization to being a change agent in order to facilitate the rapid pace of change introduced because of technology.

Human Resources delivery has to speed up to keep up with corporate pace. For many, this means faster delivery of training (including offering online training opportunities), focusing on the increased job changes that a strong economy and technology seem to encourage through stronger recruitment and retention programs.

In response to the changing demands, HR professionals' relationships with the IT department need to change as well. Traditional HR departments need to be more IT-conscious and prepared to bring IT into the HR community.

A centralized HR department will certainly facilitate this change – different units need not only to collaborate more closely but they should also be located in proximity of the IT department to cope with all these changes more effectively.


Another factor influencing the structure of modern organizations are economic trends. Globalization and an increasing number of mergers and acquisitions are resulting in an increasingly mobile workforce. Through "electronic immigration" companies will be able to employ citizens from virtually any country to work on projects. A global market of the "best and the brightest" workers will develop, and organizations will have greater access to it.

Cross-border mergers and acquisitions are creating transnational corporations. In contrast to the multinational corporations of the past, these organizations see themselves as world corporations characterized by the fact that they are obligated to stakeholders around the world. This means key competencies for human resource professionals in the future will include the ability to successfully integrate corporate cultures following cross-border mergers and the ability to create organizations whose workers see themselves in the global context.

Pressure will develop to set global standards. As barriers fall between cross-border interaction, global standards will make the exchange of information and the execution of company policies, standards and objectives easier. For example, one client has determined that 80% of its payroll business processes are the same on a global basis – so they are centralizing their payroll operations to optimize that 80%, while employing specialists to handle the unique 20%. At the same time, they are creating global standards for HR processes and data that will result in unprecedented management of their global human assets.

Companies will have to be more transparent with clearly defined, centralized, easily manageable departments, which are cost effective and efficient. Companies will also be asked to make more and more information available to their stakeholders. Thanks to online investment and growing entrepreneurship giving birth to hundreds of high-tech start-ups, stock investment has seen a sharp rise. Company practices that could affect stock performance will be scrutinized. This will affect organizations as a whole, including HR which still is split in many organizations into Employee relations, Payroll, Training, Benefits, etc. Larger organizations may even have more than one HR department that do not talk to each other.


So if the Human Resources function is to contribute to the overall performance of the organization, it should be an integral part of the management team developing strategy and improving organizational performance. To be a contributor to the bottom-line, HR departments need to be integrated into revenue-generating business processes. For example – as new products are created, HR is involved in the process so that when the product comes to market a sales-rep training program is already in place. Or when a new product is being considered, HR actively recruits people with the essential skills to form the new-product team.

Human resource departments have been acquiring new responsibilities over the years. According to a survey conducted by SHRM (Society for Human Resource Management) 39% of HR executives reported one or more changes in their departments' duties within the past year 1999. The role of the traditional HR function is shifting and this involves structural changes as well. Only by being and acting like a central unit can these new challenges HR is facing be met.

So what are these new roles?

Based on its knowledge of the competencies of the organization, HR can make a direct contribution in developing new strategies. The goal is not to ask HR executives to become business experts and to be trained in marketing, accounting, finance, etc. (even though these skills are definitely useful for a long term career in HR), but to create an “HR corporation” that combines many different talents and skills to address the overall human asset issues.

HR should also play a leading role as an internal consultant to the ongoing redesign of the organization to achieve better performance and increase profitability.

Undergoing changes almost always brings some level of resistance - HR can help with the learning processes, develop new careers and ways to give employees ownership of the changes and in the performance of the company. The latter involves ensuring that performance management practices (appraisals and rewards) are integrated with business management practices.

Finally, HR professionals will have to be able to work cross-functionally, being part of cross-functional leadership teams dealing with rapid change.


HR needs to treat the employer as a valued client that needs both its administrative and strategic competencies to be a profitable, competitive organization.

In order to satisfy this client, HR needs to:

Reflect on its cost structure

Overhead for several non centralized HR departments versus centralized department
Cost and turnaround time for organizational changes in central vs. non central
IT strategy and integration of HRIS systems (is it possible to reduce costs by using fewer HRIS systems, reduce upkeep (IT hours spent maintaining interfaces, etc., upgrading software is less expensive with fewer systems)
Study the best practices in its area and review how it can add value to the bottom line for the organization

Use of desired practices within the framework of the organizations HRIS software (which practices work best with various HR systems? – reduced labor costs to operate, shorter learning curve, more efficient enhancements to system, etc.
Centralized department allows consistent application of HR practices across the entire organization
Adding Value

Continuous change management within HR department (always in the process of reviewing policies against measurable outcomes such as cost to the organization and turnover)
Working closely with IT to help achieve a more efficient use of the HRIS system
Using the HRIS system to plan and test organizational changes before implementation to ensure efficiency and effectiveness.

……and being one, centralized department is the key and starting point to all of the above