Contents

1HRasaStrategicPartner:TheMeasurementChallenge

2ClarifyingandMeasuringHR’sStrategicInfluence:IntroductiontoaSeven-StepProcess

3CreatinganHRScorecard

4Cost-BenefitAnalysesforHRInterventions

5ThePrinciplesofGoodMeasurement

6MeasuringHRAlignment

7CompetenciesforHRProfessionals

8GuidelinesforImplementinganHRScorecard

Appendix:ResearchandResults

Notes

AbouttheAuthors

Foreword

BOBKAPLANANDIFIRSTINTRODUCEDtheideaofaBalancedScorecardina1992HarvardBusinessReviewarticle.1Sincethattimewe,andourconsultingorganization,havehadtheopportunitytodesignBalancedScorecardsinmorethan200companies.Thesedesignsalwaysstartwiththesamesimplequestion,Whatisyourstrategy?Thisexperiencehasgivenusfarreachinginsightsintothewaysthatexecutiveteamsthinkaboutstrategyandtheirorganizations.Thetypicalexecutiveteamhasahighdegreeofawarenessandconsensusaroundthefinancialstrategy,aswellastheprioritiesforoperationalprocessimprovement.Theytypicallyhavelimitedconsensusaroundcustomerstrategies(i.e.,whoarethetargetsegments,whatisthevalueproposition),althoughthishasimprovedinrecentyears.Buttheworstgradesarereservedfortheirunderstandingofstrategiesfordevelopinghumancapital.Thereislittleconsensus,littlecreativity,andnorealframeworkforthinkingaboutthesubject.Worseyet,wehaveseenlittleimprovementinthisoverthepasteightyears.

Thegreatestconcernhereisthat,intheNewEconomy,humancapitalisthefoundationofvaluecreation.(Variousstudiesshowthatupto85percentofacorporation’svalueisbasedonintangibleassets.)Thispresentsaninterestingdilemma:Theassetthatismostimportantistheleastunderstood,leastpronetomeasurement,and,hence,leastsusceptibletomanagement.Clearly,weareatawatershed.Asaneweconomicmodelripplesthroughtheeconomy,anewscienceofmanagementisneeded.Inaneconomywherevaluecreationisdominatedbyhumancapitalandotherintangibleassets,therecanbenobetterstartingpointforthisnewsciencethanwiththemeasurementofhumanresourcestrategies.TheHRScorecarddoesjustthatandprovidesanimportantstepforwardinourabilitytomanagestrategy.

Severalfacetsofthebookwillmakelastingcontributions.First,the

developmentofcausalmodels,whichshowtherelationshipofHRvaluedriverswithbusinessoutcomes,takestheBalancedScorecardtothenextlevelofsophistication.Second,theresearchintothedriversofhigh-performanceHRorganizationsgivesexecutivesaframeworkwithwhichtobuildstrategiesforhumancapitalgrowth.Andfinally,theirinsightsintothecompetenciesrequiredbyHRprofessionalslaythegroundworkforanorganizationthatcandeliveronthepromiseofitsmeasurementsystems.

Wecan’tmanagesomethingthatwecan’tdescribe.Measurementisthelanguageusedtodescribeorganizationsandstrategy.Throughtheframeworks,research,andcasesencompassedinthiswork,theauthorshavegivenusanewgenerationoftoolstomeasureandmanagethecreationofhumancapital.TheHRScorecardshouldbeessentialreadingfortheNewEconomymanager.

DAVIDNORTON

BOSTON,MASSACHUSETTS

PrefaceandAcknowledgments

PROFESSIONALSINHUMANRESOURCESareincreasinglychallengedtotakeamorestrategicperspectiveregardingtheirroleintheorganization.WefindthatasHRprofessionalsrespondtothischallenge,measuringHR’sperformanceanditscontributiontothefirm’sperformanceconsistentlyemergesasakeytheme.Thisshouldcomeasnosurprise.Thelastdecadehasbeenhighlightedbyanever-increasingappreciationforthevalueofintangibleassetsandtheassociatedtrendtowardstrategicperformancemeasurementsystemssuchasRobertKaplanandDavidNorton’sBalancedScorecard.NewopportunitiesforHRprofessionals,newdemandsforHR’saccountability,andnewperspectivesonmeasuringorganizationalperformancehaveallconverged.ThisbookisintendedtoguideHRmanagersthroughthechallengeoftheseconvergingtrends.ItisbasedonmorethanadecadeofacademicresearchontheHR-firmperformancerelationshipandgroundedbyourconsultingworkinawiderangeofcompanies.Theresultisanewapproachtomanagingafirm’s“HRarchitecture”(thesumoftheHRfunction,thebroaderHRsystem,andresultingemployeebehaviors)asastrategicasset,aswellasmeasuringitscontributiontothefirm’sperformance.

Ourwork(somewouldcallitanobsession)inmeasuringHRbeganwithoureffortstotrytounderstandwhether,andifsobyhowmuch,thisbroaderHRarchitecturecontributestofirmsuccess.OverthelastdecadewehavecollecteddataonHRmanagementqualityfromnearly3,000firmsandhavematchedthesedatawithemployeeturnover,productivity,stockmarket,andaccountingperformancemeasures.We’vevisitedthesecompanies,followedtheirperformanceovertime,writtencasesaboutthem,andsubjectedthemtodetailedstatisticalanalyses.Alloftheseactivitieshaveledustothesamebroadconclusion:FirmswithmoreeffectiveHRmanagementsystems

consistentlyoutperformtheirpeers.

Yet,inourteachingandconsultingworkwithexecutivesweconsistentlyconfronted(andwereconfrontedby)thesameparadox:EvidencethatHRcancontributetofirmsuccessdoesn’tmeanthatitisnoweffectivelycontributingtosuccessinanygivenbusiness.Managers(HRandline)haverepeatedlychallengeduswiththequestion,Basedonyourresearch,howcanImakeHRastrategicassetinmyfirm?

WehavecometobelievethatthecapacitytodesignandimplementastrategicHRmeasurementsystem—whatwecallinthisbookanHRScorecard—representsanimportantleverthatfirmscanusetodesignanddeployamoreeffectiveHRstrategy.However,implementingeffectivemeasurementsystemsisnoteasy;ifitwere,wewouldseealotmoreofthem.Inaddition,beingheldaccountableforresultsthroughmeasurementcanbethreatening.Manymanagerswillavoiditiftheycan.Butbasedonourexperience,firmsfrequentlyunderinvestintheirpeople—and,justasimportant,investinthewrongways.Moreover,manyfirmsseemtobeunawareoftheconsequencesoftheirinvestmentdecisionsinvolvingpeople.Themosteffectivewayweknowtochangethecalculusistodevelopameasurementsystemdesignedtolinkpeople,strategy,andperformance.Thisiswhatthisbookisintendedtodo.

ACKNOWLEDGMENTS

Thisprojectdrawsinspirationandwisdomfromtheeffortsandsupportofmanyindividuals.WeareespeciallyindebtedtoGarrettWalker,directorofHRPlanning,MeasurementandAnalysisatGTE(nowVerizon),andSteveKirn,VPforInnovationandOrganizationalDevelopmentatSears.GarrettandStevewereverygenerouswithboththeirtimeandtheirpatience,providingawindowintothebestcurrentworkonHRmeasurementsystems.ThereaderwillalsoquicklyrecognizetheintellectualdebtweowetoBobKaplanandDaveNorton.Wehavebenefitednotonlyfromtheirworkon“balanced”strategicperformancemeasurement,butalsofromthepassionandgenerositywithwhichtheysharethoseideas.BrianBeckerandMarkHuselidwouldalsoliketothankReedKellerandBobLindgrenofPriceWaterhouseCoopers,LLCfortheirvisionandenthusiasmaboutmeasuringHR’simpactonfirmperformance.Theydisplayedaconfidenceintheseideas,andinus,atatimewhentheseideasweren’tverywellaccepted.

Ourworkhasalsobenefitedimmenselyfromtheinfluenceofawidevarietyofcolleagues.WewouldparticularlyliketothankJaneBarnes,DickBeatty,WayneBrockbank,SusanJackson,SteveKerr,JeffreyPfeffer,andRandallSchulerfortheirabilitytoframetheissuesaboutmeasurementandtheirwillingnesstodebatetheseideasandsharetheirinsights.CarolTutzauer’sfamiliaritywiththeGalileoprogramwasanessentialcontributiontochapter6.WayneCasciohasalsohadanimportantinfluenceonourthinking,especiallyevidentinchapter4.

ThisprojectwouldnothavebeenpossiblewithoutthefinancialsupportoftheSchoolofManagementandLaborRelationsatRutgersUniversity,theHumanResourcePlanningSociety,andtheSHRMFoundation.Inadditiontofundingmuchofthisresearch,RutgersalsoprovidedMarkwithasabbaticaltoworkonthisproject.MarkwouldalsoliketothankhisgraduatestudentsinHRStrategy,HRMeasurement,andFinancialAnalysisforHRManagers,whocontinuallychallengehimandhelphimtorefinehisthinking.

WealsooweaspecialdebtofgratitudetotheeditorsattheHarvardBusinessSchoolPress.Thereaderwillbenefitfromthegentle,butfirm,effortsofNicolaSabinandLaurieJohnsontomoveusawayfromournaturaltendenciestowritelikeacademics.

Finally,wearemostgratefultoourfamilies,whoprovideloveandsupporttoovaluabletomeasure.

BRIANE.BECKER

MARKA.HUSELID

DAVEULRICH

1

HRASASTRATEGICPARTNERTheMeasurementChallenge

HowcanweensurethatHRisatthetable—andnotonthetable?

ASYOUBEGINTOREADTHISBOOK,takeamomenttoreflectonyourfirm’shumanresources“architecture”—thesumoftheHRfunction,thebroaderHRsystem,andtheresultingemployeebehaviors.Whyarethesethreefeaturesimportant?HowdoestheHRarchitecturehelpyourcompanytoexcelinthemarketplace?

Ifyourorganizationislikemost,you’reprobablyfindingitdifficulttoanswerthesequestions.Inourexperience,manyHRmanagementteamshaveawell-developedvisionoftheirdepartment’sstrategicvalue(atleastfromtheperspectiveofHR),buttheCEOandseniorlinemanagersareatbestskepticalofHR’sroleinthefirm’ssuccess.Worse,inmanyfirms,executiveswanttobelievethat“peopleareourmostimportantasset,”buttheyjustcan’tunderstandhowtheHRfunctionmakesthatvisionareality.

Whatexplainsthissituation?Webelievethattheseproblemshavethesamerootcause:HR’sinfluenceonfirmperformanceisdifficulttomeasure.Considertheelementsandoutcomesofyourfirm’shumanresourcesarchitecturethataretrackedonaregularbasis.Youmighthaveincludedtotalcompensation,employeeturnover,costperhire,thepercentageofemployeeswhohadaperformanceappraisalinthelasttwelvemonths,andemployeeattitudessuchasjobsatisfaction.NowconsiderthoseHRattributesthatyoubelievearecrucialtotheimplementationofyourfirm’scompetitivestrategy.Hereyoumightmentionacapableandcommittedworkforce,developmentofessentialemployeecompetencies,oratrainingsystemthathelpsyouremployeeslearnfasterthanyourcompetitors.

HowwelldoyourexistingHRmeasurescapturethe“strategicHR

drivers”thatyouidentifiedinyoursecondlist?Formostfirmstherewon’tbeaveryclosematch.Moreimportant,eveninfirmswhereHRprofessionalsthinkthereisaclosematch,frequentlytheseniorexecutivesdonotagreethatthissecondlistactuallydescribeshowHRcreatesvalue.Ineithercase,thereisadisconnectbetweenwhatismeasuredandwhatisimportant.

Thesequestionsarefundamental,becauseneweconomicrealitiesareputtingpressureonHRtowidenitsfocusfromtheadministrativeroleithastraditionallyplayedtoabroader,strategicrole.Astheprimarysourceofproductioninoureconomyhasshiftedfromphysicaltointellectualcapital,seniorHRmanagershavecomeunderfiretodemonstrateexactlyhowtheycreatevaluefortheirorganizations.Moreimportant,theyhavebeenchallengedtoserveincreasinglyasstrategicpartnersinrunningthebusiness.

Butwhatdoesitmeantobeastrategicasset?Theliteraturedefinesthetermas“thesetofdifficulttotradeandimitate,scarce,appropriable,andspecializedresourcesandcapabilitiesthatbestowthefirm’scompetitiveadvantage.”1Thinkaboutthedifferencebetweentheabilitytoaligneveryemployee’seffortswiththecompany’soverallvision,andaninnovativepolicysuchas360-degreeperformanceappraisals.Thefirstisastrategiccapabilitywhosecauseislargelyinvisibletocompetitors;thesecondisapolicythat,althoughinitiallyinnovative,isvisibletocompetitors—andthusquicklycopied.Simplyput,strategicassetskeepafirm’scompetitiveedgesharpforthelonghaul—butbydefinitiontheyaredifficulttocopy.

ThusHR’sproblem—thatitsimpactonfirmstrategyisdifficulttosee—istheveryqualitythatalsomakesitaprimesourceofsustainablecompetitivepotential.Buttorealizethispotential,humanresourcemanagersmustunderstandthefirm’sstrategy;thatis,itsplanfordevelopingandsustaininganadvantageinthemarketplace.Then,theymustgrasptheimplicationsofthatstrategyforHR.Inshort,theymustmovefroma“bottom-up”perspective(emphasizingcomplianceandtraditionalHR)toa“top-down”perspective(emphasizingtheimplementationofstrategy).Finally,theyneedinnovativeassessmentsystemsthatwillletthemdemonstratetheirinfluenceonmeasuresthatmattertoCEOs,namely,firmprofitabilityandshareholdervalue.

THEEVOLVINGPICTUREOFHR:FROMPROFESSIONALTOSTRATEGIC

PARTNER

RecentdecadeshavewitnesseddramaticshiftsintheroleofHR.Traditionally,managerssawthehumanresourcefunctionasprimarilyadministrativeandprofessional.HRstafffocusedonadministeringbenefitsandotherpayrollandoperationalfunctionsanddidn’tthinkofthemselvesasplayingapartinthefirm’soverallstrategy.

EffortstomeasureHR’sinfluenceonthefirm’sperformancereflectedthismind-set.Specifically,theoristsexaminedmethodologiesandpracticesthatarefocusedattheleveloftheindividualemployee,theindividualjob,andtheindividualpractice(suchasemployeeselection,incentivecompensation,andsoforth).Theideawasthatimprovementsinindividualemployeeperformancewouldautomaticallyenhancetheorganization’sperformance.

AlthoughsuchresearchattemptedtoextendtherangeofHR’sinfluence,itdidlittletoadvanceHRasanewsourceofcompetitiveadvantage.ItprovidedscantinsightintothecomplexitiesofastrategicHRarchitecture.Andsimplyput,itdidn’tencourageHRmanagerstothinkdifferentlyabouttheirrole.

Inthe1990s,anewemphasisonstrategyandtheimportanceofHRsystemsemerged.Researchersandpractitionersalikebegantorecognizetheimpactofaligningthosesystemswiththecompany’slargerstrategyimplementationeffort—andassessingthequalityofthatfit.Indeed,althoughmanykindsofHRmodelsareinusetoday,wecanthinkofthemasrepresentingthefollowingevolutionofhumanresourcesasastrategicasset:

Thepersonnelperspective:Thefirmhiresandpayspeoplebutdoesn’tfocusonhiringtheverybestordevelopingexceptionalemployees.

Thecompensationperspective:Thefirmusesbonuses,incentivepay,andmeaningfuldistinctionsinpaytorewardhighandlowperformers.Thisisafirststeptowardrelyingonpeopleasasourceofcompetitiveadvantage,butitdoesn’tfullyexploitthebenefitsofHRasastrategicasset.

Thealignmentperspective:Seniormanagersseeemployeesasstrategicassets,buttheydon’tinvestinoverhaulingHR’scapabilities.Therefore,theHRsystemcan’tleveragemanagement’sperspective.

Thehigh-performanceperspective:HRandotherexecutivesviewHRasasystemembeddedwithinthelargersystemofthefirm’sstrategyimplementation.Thefirmmanagesandmeasurestherelationship

betweenthesetwosystemsandfirmperformance.

We’relivinginatimewhenaneweconomicparadigm—characterizedbyspeed,innovation,shortcycletimes,quality,andcustomersatisfaction—ishighlightingtheimportanceofintangibleassets,suchasbrandrecognition,knowledge,innovation,andparticularlyhumancapital.ThisnewparadigmcanmarkthebeginningofagoldenageforHR.Yetevenwhenhumanresourceprofessionalsandseniorlinemanagersgraspthispotential,manyofthemdon’tknowhowtotakethefirststepstowardrealizingit.

Inourview,themostpotentactionHRmanagerscantaketoensuretheirstrategiccontributionistodevelopameasurementsystemthatconvincinglyshowcasesHR’simpactonbusinessperformance.Todesignsuchameasurementsystem,HRmanagersmustadoptadramaticallydifferentperspective,onethatfocusesonhowhumanresourcescanplayacentralroleinimplementingthefirm’sstrategy.WithaproperlydevelopedstrategicHRarchitecture,managersthroughoutthefirmcanunderstandexactlyhowpeoplecreatevalueandhowtomeasurethevalue-creationprocess.

Learningtoserveasstrategicpartnersisn’tjustawayforHRpractitionerstojustifytheirexistenceordefendtheirturf.Ithasimplicationsfortheirverysurvivalandforthesurvivalofthefirmasawhole.IftheHRfunctioncan’tshowthatitaddsvalue,itrisksbeingoutsourced.Initself,thisisn’tnecessarilyabadthing;outsourcinginefficientfunctionscanactuallyenhanceafirm’soverallbottomline.However,itcanwastemuch-neededpotential.Withtherightmind-setandmeasurementtools,theHRarchitecturecanmeanthedifferencebetweenacompanythat’sjustkeepingpacewiththecompetitionandonethatissurgingahead.

Arecentexperienceofoursgraphicallyillustratesthisprinciple.Inacompanywevisited,weaskedthepresidentwhatmostworriedhim.Hequicklyrespondedthatthefinancialmarketwasvaluinghisfirm’searningsathalfthatofhiscompetitors’.Insimpleterms,hisfirm’s$100ofcashflowhadamarketvalueof$2,000,whilehislargestcompetitor’s$100ofcashflowhadamarketvalueof$4,000.Heworriedthatunlesshecouldchangethemarket’sperceptionofthelong-termvalueofhisorganization’searnings,hisfirmwouldremainundervaluedandpossiblybecomeatakeovertarget.Healsohadalargeportionofhispersonalnetworthinthefirm,andheworriedthatitwasnotvaluedashighlyasitcouldbe.

WhenweaskedhimhowhewasinvolvinghisHRexecutiveingrapplingwiththisproblem,hedismissedthequestionwithawaveofhishandandsaid,“MyheadofHRisverytalented.Butthisisbusiness,notHR.”He

acknowledgedthathisHRdepartmenthadlaunchedinnovativerecruitingtechniques,performance-basedpaysystems,andextensiveemployeecommunications.Nevertheless,hedidn’tseethosefunctions’relevancetohisproblemofhowtochangeinvestors’perceptionsofhisfirm’smarketvalue.

Sixmonthsafterourmeeting,acompetitoracquiredthefirm.

ThesadtruthisthattheHRexecutiveinthisstorymissedavaluableopportunity.IfhehadunderstoodandknownhowtomeasuretheconnectionbetweeninvestmentsinHRarchitectureandshareholdervalue,thingsmighthaveturnedoutdifferently.Armedwithanawarenessofhowinvestorsvalueintangibles,hemighthavehelpedhispresidentbuildtheeconomiccaseforincreasedshareholdervalue.

ThestoryofSears,RoebuckandCo.’srecenttransformationstandsinstarkcontrasttothisanecdoteandshowswhatcompaniescanachievewhentheydoalignHRwiththelargerorganization’sstrategy.2Afterstrugglingwithlackoffocusandlossesinthebillionsintheearly1990s,Searscompletelyoverhauleditsstrategyimplementationprocess.LedbyArthurMartinez,aseniormanagementteamincorporatedthefullrangeofperformancedriversintotheprocess,fromtheemployeethroughfinancialperformance.Then,theyarticulatedanew,inspiringvision:ForSearstobeacompellingplaceforinvestors,theysaid,thecompanymustfirstbecomeacompellingplacetoshop.Forittobeacompellingplacetoshop,itmustbecomeacompellingplacetowork.

ButSearsdidn’tjustleavethisstrategicvisionintheexecutivesuiteortypeituponlittlecardsforemployeestoputintheirwallets.Itactuallyvalidatedthevisionwithharddata.Searsthendesignedawaytomanagethisstrategywithameasurementsystemthatreflectedthisvisioninallitsrichness.Specifically,theteamdevelopedobjectivemeasuresforeachofthethree“compellings.”Forexample,“supportforideasandinnovation”helpedestablishSearsasa“compellingplacetowork.”Similarly,byfocusingonbeinga“funplacetoshop,”Searsbecameamore“compellingplacetoshop.”3Theteamextendedthisapproachfurtherbydevelopinganassociatedseriesofrequiredemployeecompetenciesandidentifyingbehavioralobjectivesforeachofthe“3-Cs”atseverallevelsthroughtheorganization.Thesecompetenciesthenbecamethefoundationonwhichthefirmbuiltitsjobdesign,recruiting,selection,performancemanagement,compensation,andpromotionactivities.SearsevencreatedSearsUniversityinordertotrainemployeestoachievethenewlydefinedcompetencies.Theresultwasasignificantfinancialturnaroundthatreflectednotonlya“strategic”influence

forHRbutonethatcouldbemeasureddirectly.

FewfirmshavetakensuchacomprehensiveapproachtothemeasurementofstrategyimplementationasSearshas.Granted,retailserviceindustriesarecharacterizedbyaclear“lineofsight”betweenemployeesandcustomers.Thustheirvalue-creationstoryiseasiertoarticulate.Butthatdoesn’tmeanthatotherindustriescan’taccomplishthisfeat.Thechallengesmaybegreater—butsoaretherewards.

WHYHR?WHYNOW?

Considerthefollowing:

Inmostindustries,itisnowpossibletobuyontheinternationalmarketplacemachineryandequipmentthatiscomparabletothatinplacebytheleadingglobalfirms.Accesstomachineryandequipmentisnotthedifferentiatingfactor.Abilitytouseiteffectivelyis.Acompanythatlostallofitsequipmentbutkepttheskillsandknowhowofitsworkforcecouldbebackinbusinessrelativelyquickly.Acompanythatlostitsworkforce,whilekeepingitsequipment,wouldneverrecover.4

Thisexcerptcapturesthedifferencebetweenphysicalandintellectualcapital—andrevealstheuniqueadvantagesofthelatter.TheCoca-ColaCompany’sexperiencetestifiestothisreality.Accordingtothen-CFOJamesChestnut,aftertransferringthebulkofitstangibleassetstoitsbottlers,Coke’s$150billionmarketvaluederivedlargelyfromitsbrandandmanagementsystems.5

Theevidenceisunmistakable:HR’semergingstrategicpotentialhingesontheincreasinglycentralroleofintangibleassetsandintellectualcapitalintoday’seconomy.Sustained,superiorbusinessperformancerequiresafirmtocontinuallyhoneitscompetitiveedge.Traditionally,thisefforttooktheformofindustry-levelbarrierstoentry,patentprotections,andgovernmentalregulations.Buttechnologicalchange,rapidinnovation,andderegulationhavelargelyeliminatedthosebarriers.Becauseenduring,superiorperformancenowrequiresflexibility,innovation,andspeedtomarket,competitiveadvantagetodaystemsprimarilyfromtheinternalresourcesandcapabilitiesofindividualorganizations—includingafirm’sabilitytodevelopandretainacapableandcommittedworkforce.Asthekeyenablerofhuman

capital,HRisinaprimepositiontoleveragemanyotherintangiblesaswell,suchasgoodwill,researchanddevelopment,andadvertising.

Table1-1takesacloserlookatthemajordifferencesbetweentangibleandintangibleassets.ItalsosuggeststhatmanagingHRrequiresvastlydifferentskillsfromthoseneededtomanagetangibleassets.Inparticular,thebenefitsofHRasanassetarenotalwaysvisible—theycometolightonlywhentheHRroleisskillfullyalignedwithanotherintangibleasset:theorganization’sstrategyimplementationsystem.

Table1-1TangibleversusIntangibleAssets

TangibleAssets IntangibleAssetsReadilyvisible InvisibleRigorouslyquantified DifficulttoquantifyPartofthebalancesheet NottrackedthroughaccountingInvestmentproducesknownreturns AssessmentbasedonassumptionsCanbeeasilyduplicated CannotbeboughtorimitatedDepreciateswithuse AppreciateswithpurposefuluseHasfiniteapplications HasmultipleapplicationswithoutvaluereductionBestmanagedwith“scarcity”mentality Bestmanagedwith“abundance”mentalityBestleveragedthroughcontrol BestleveragedthroughalignmentCanbeaccumulatedandstored Dynamic,shortshelflifewhennotinuse

Source:HubertSaint-Onge,ConferenceBoardpresentation,Boston,MA,October17,1996.Reprintedwithpermission.

INTANGIBLEASSETSGENERATETANGIBLEBENEFITS

Theincreasingimportanceoforganizationalcapabilitiesandintangibleassetsismuchmorethanacademicspeculation.TrendsinU.S.equitymarketsalsoreflectthisshift.Specifically,thesemarketshaveshownaconsistentwideningintheratioofthemarketvalueofafirm(i.e.,theshareholders’assessmentofthefirm’svalue)toitsbookvalue(theshareholders’initialinvestment).Thisratiohasmorethandoubledinthelasttenyearsalone(seefigure1-1).Thisphenomenoniswidespread,butit’sparticularlynoteworthyincompaniesthatrelyheavilyonintellectualcapitalastheirsourceofcompetitiveadvantage.Someofthesefirmshaveinventedentirelynewbusinessmodelsbasedlargelyonintangibleassets.Forexample,DellandAmazon.com,whichessentiallydealincommodities,havereapedextraordinarygainsinshareholdervaluethroughtheirmanagementsystems.

Inaddition,manyfinancialanalystsarenowincludingintangiblesintheirvaluationmodels.Arecentstudyoffinancialanalystsandportfoliomanagersrevealsthat,fortheaverageanalyst,35percentofhisorherinvestmentdecisionisdeterminedbynonfinancialinformation(seetable1-2).

Figure1-1MarkettoBookValueofS&P500

Theseresultsarestrikingforseveralreasons.First,noticethatatleastsevenoftheseintangiblesareaffectedbyastrategicallyfocusedHRsystem,eitherdirectlyorindirectly.Second,notethatthemostimportantintangiblecitedbyfinancialanalystsistheabilitytoimplementstrategy.Thisfindingisconsistentwithoneoftheunderlyingthemesinourbook,namely,thattheabilitytoexecutestrategymaybemoreimportantthanthestrategyitself.Indeed,apopularanalogycomparesthedifferencebetweenstrategiccontentandimplementationtothedifferencebetweenstylesinapokergame.Theformeremphasizeswhatgameyouplay;thelatter,howyouplayyourhand.

Yetdespitethehighrankingofstrategyimplementationinthetable,financialanalystsareoftenfrustratedintheireffortstocollectinformationonthisformoforganizationalcompetency.Frequently,theyresorttosuchunconventionalsourcesaspersonalcontactsthroughoutthefirmandindustry,contactswithcustomers,andrumor.Organizationsthatdolinkbusinessperformancemeasurementwithstrategyimplementationthuspositionthemselveswelltocommunicatewithanalystsandtherebyinfluencetheirperceptionsofthemarket.ByaligningtheHRarchitecturewiththefirm’soverallstrategy,HRprofessionalscouldplayakeyroleinshapingthoseperceptions.

Managers,too,arefrustratedbythequalityofnonfinancialinformationthattheyreceive.Acrossavarietyofdatacategories,includingfinancial,

operations,customer,andemployees,J.LowandT.Siesfield,theauthorsofthestudyrankingnonfinancialvariables,askedseniormanagershowmuchtheyvaluedthistypeofinformationandwhetherornottheywouldbewillingtobettheirjobsonthequalityofthisinformationwithintheirownfirms.Predictably,managersplacedgreatvalueonfinancialdata,andtheyalsoexpressedahighdegreeofconfidenceintheirownfirm’sfinancialinformation.Managersplacedgreatvalueoninformationrelevanttotheirfirm’shumancapitalaswell.Yettheygavetheirownfirmsextremelylowmarksonthequalityofemployee-relateddata.Thegapbetweenthedesiredandactualdataqualityforpeoplewasmorethanfiftypercentagepoints—substantiallymorethanthegapfoundinanyothercategorythattheystudied.

Table1-2TopTenNonfinancialVariablesConsideredbyFinancialAnalysts

Variable RankExecutionofcorporatestrategy 1Managementcredibility 2Qualityofcorporatestrategy 3Innovation 4Abilitytoattractandretaintalentedpeople 5Marketshare 6Managementexpertise 7Alignmentofcompensationwithshareholders’interests 8Researchleadership 9Qualityofmajorbusinessprocesses 10

Source:J.LowandT.Siesfield,MeasuresThatMatter(Boston:Ernst&Young,1998).

ACLOSERLOOKATINTANGIBLES:THEMEASUREMENTCHALLENGE

GTE(nowpartofVerizon)hasbeenaleaderineffortstodevelopmeasuresofintangibleassetssuchashumancapital.Thefirmhasrecognizedboththelimitationsoftraditionalaccountingmeasuresforintangibleassets,andthepotentialrepresentedbymore“balanced”performancemeasurementsystems.AccordingtoLawrenceR.Whitman,deputyCFOatGTE:

Adirectlinkbetweenhumancapitalandcorporatefinancialresultsisnotreadilyapparentintraditionalaccountingpractices.Rightnow,weareonlybeginningtounderstandthepotentialofthistool,butit’sthe

measurementprocessthat’simportant.…Onceweareabletomeasureintangibleassetsmoreaccurately,Ithinkinvestorsandfinanceprofessionalswillbegintolookathumancapitalmetricsasanotherindicatorofacompany’svalue.6

Clearly,businesspeopleeverywhererecognizetheimportanceofintangiblesintoday’smarketplace.Yetmanagingtheseintangiblesischallenging,foranumberofreasons.Foronething,theaccountingsystemsinusetodayevolvedduringatimewhentangiblecapital,bothfinancialandphysical,constitutedtheprincipalsourceofprofits.Duringthistime,thoseorganizationsthathadthemostaccesstomoneyandequipmentenjoyedahugecompetitiveadvantage.Withtheemphasisonknowledgeandintangibleassetsintoday’seconomy,conventionalaccountingsystemsactuallycreatedangerousinformationaldistortions.Asjustoneexample,thesesystemsencourageshort-termthinkingwithrespecttothemanagementofintangibles.Why?Becauseexpendituresintheseareasaretreatedasexpensesratherthaninvestmentsinassets.Bycontrast,investmentsinbuildingsandmachineryarecapitalizedanddepreciatedovertheirusefullives.Considertheseniormanagerfacedwiththedecisiontoinvest$10millioninhardassetsor$10millioninpeople.Inpracticalterms,whenafirminvests$10milliondollarsinabuildingorotherphysicalasset,thisinvestmentisdepreciatedovertime,andearningsarereducedgraduallyoveratwenty-orthirty-yearperiod.Incontrast,a$10milliondollarinvestmentinpeopleisexpensedinitsentirety(andthereforeearningsarereducedby$10milliondollars)duringthecurrentyear.Formanagerswhosepayistiedtothisyear’searnings(asmanyare),thechoiceofinvestmentisobvious.

Asaresult,companiesunderfinancialpressuretendtoinvestinphysicalcapitalattheexpenseofhumancapital—eventhoughthelattermaywellgeneratemorevalue.Thiskindofpressurecanleadtopoordecisions:forinstance,toinitiatearoundoflayoffssolelytogarnershort-term“costsavings.”Researchhasrepeatedlyshownthatafteralayoff,themarketmayinitiallyrespondwithajumpinsharevalue.However,investorsofteneventuallyloseallofthesegains,andsometimesmore.7Thispatternisn’tsurprising,giventhatpeopleareacrucialsourceofcompetitiveadvantageratherthananexpensiveluxurythatshouldbeminimized.

Thebottomlineisthis:Ifcurrentaccountingmethodscan’tgiveHRprofessionalsthemeasurementtoolstheyneed,thentheywillhavetodeveloptheirownwaysofdemonstratingtheircontributiontofirmperformance.ThefirststepistodiscardtheaccountingmentalitythatsaysthatHRisprimarilyacostcenterinwhichcostminimizationistheprincipalobjectiveand

measureofsuccess.Atthesametime,HRmanagersmustgrasptherareopportunityaffordedthembythistransitionalperiod.Investorshavemadeitclearthattheyvalueintangibleassets.It’suptoHRtodevelopanewmeasurementsystemthatcreatesrealvalueforthefirmandsecureshumanresources’legitimateplaceasastrategicpartner.

THEHRARCHITECTUREASASTRATEGICASSET

Ifthefocusofcorporatestrategyistocreatesustainedcompetitiveadvantage,thefocusofHRstrategyisequallystraightforward.ItistomaximizethecontributionofHRtowardthatsamegoal,therebycreatingvalueforshareholders.ThefoundationofastrategicHRroleisthethreedimensionsofthe“valuechain”representedbythefirm’sHRarchitecture:thefunction,thesystem,andemployeebehaviors.ThinkingaboutHR’sinfluenceonfirmperformancerequiresafocusonmultiplelevelsofanalysis.Weusetheterm“HRarchitecture”tobroadlydescribethecontinuumfromtheHRprofessionalswithintheHRfunction,tothesystemofHR-relatedpoliciesandpractices,throughthecompetencies,motivations,andassociatedbehaviorsofthefirm’semployees.8(Seefigure1-2.)

TheHRFunctionThefoundationofavalue-creatingHRstrategyisamanagementinfrastructurethatunderstandsandcanimplementthefirm’sstrategy.NormallytheprofessionalsintheHRfunctionwouldbeexpectedtoleadthiseffort.ThisimpliesadeparturefromthetraditionalfunctionalorientationofmanyHRmanagersandawiderunderstandingofthestrategicrolethatHRmightplayinthefirm.Forexample,MarkHuselid,SusanJackson,andRandallSchulerpointoutthathumanresourcesmanagement(HRM)effectivenesshastwoessentialdimensions.Thefirst,technicalHRM,includesthedeliveryofHRbasicssuchasrecruiting,compensation,andbenefits.Thesecond,strategicHRM,involvesdeliveringthoseservicesinawaythatdirectlysupportstheimplementationofthefirm’sstrategy.

HuselidandhiscolleaguesfoundthatmostHRmanagerswereveryproficientinthedeliveryoftraditionalortechnicalHRMactivities,butmuch

lesssoindeliveringstrategicHRMcapabilities.Inasampleofnearly300largefirms,theaverageleveloftechnicalproficiencywas35percenthigherthantheaveragelevelofstrategicHRMproficiency.HRmanagerswereparticularlylimitedintheirabilitytotranslatethefirm’sstrategyandoperationalgoalsintoactionableHRgoals,andsubsequentlytoimplementthosegoals.YetitwasthisabilitytoembedHRwithinthelargersystemofstrategyimplementationthatturnedouttohavethemostimportantinfluenceoncorporatefinancialperformance.Thiswastruewhetherfirmperformancewasmeasuredassalesperemployee,cashflowperemployee,ormarketvalueperemployee.TheauthorsconcludethatmostfirmsarealreadydemonstratingacceptablelevelsoftechnicalHRMcompetenciesandeffectiveness,notingthattraditionalHRskillshavenotdiminishedinvalue,butsimplyarenolongeradequatetosatisfythewiderstrategicdemandsontheHRfunction.9ThecompetenciesthatHRmanagersneedtodevelop—andtheonesthathavethegreatestimpactonfirmperformance—arebusinessandstrategicHRMcompetencies.

Figure1-2HR’sStrategicArchitecture

TheHRSystemTheHRsystemisthelinchpinofHR’sstrategicinfluence.ThemodelofthissystemadvocatedinthisbookiswhatwecallaHigh-PerformanceWorkSystem(HPWS).InanHPWS,eachelementoftheHRsystemisdesignedtomaximizetheoverallqualityofhumancapitalthroughouttheorganization.Tobuildandmaintainastockoftalentedhumancapital,anHPWSdoesthefollowing:

•linksitsselectionandpromotiondecisionstovalidatedcompetencymodels;

•developsstrategiesthatprovidetimelyandeffectivesupportfortheskillsdemandedbythefirm’sstrategyimplementation;and

•enactscompensationandperformancemanagementpoliciesthatattract,retain,andmotivatehigh-performanceemployees.

Theitemsonthislistmayseemobvious.However,theyarevitalstepsinimprovingthequalityofemployeedecision-makingthroughouttheorganization—somethingthatmakesgoodbusinesssenseastraditionalcommand-and-controlmanagementmodelsincreasinglygooutoffashion.Inshort,forHRtocreatevalue,afirmneedstostructureeachelementofitsHRsysteminawaythatrelentlesslyemphasizes,supports,andreinforcesahigh-performanceworkforce.

Butadoptingahigh-performancefocusforindividualHRpoliciesandpracticesisnotnearlyenough.Weusethetermsystemintentionallyhere.ThinkingsystemicallyemphasizestheinterrelationshipsoftheHRsystem’scomponentsandthelinkbetweenHRandthelargerstrategyimplementationsystem.Itistheselinkagesbetweenasystem’scomponents—notanyindividualcomponentitself—thatmakeasystemmorethanjustthesumofitsparts(see“TheLawsofSystemsThinking”).

THELAWSOFSYSTEMSTHINKING

Thinkingsystematicallyisafoundationalcompetencyforseveralstepsinourmodel,becausecertainstepsrequireunderstandingwhathappenswhenmultiplesystemsintersect.Whileacomprehensivetreatmentofsystemsthinkingiswellbeyondthescopeofthisbook,wewouldliketorevisitseveralpertinent“lawsofsystemsthinking”describedbymanagementtheoristPeterM.Senge.*

Today’sProblemsComefromYesterday’s“Solutions.”HRmanagersoperatewithinalargerorganizationalsystem,aswellaswithintheHRsystem.Problems“solved”inonepartofthebusinessoftencropupasnewproblemsinanother.Forexample,topmanagersfacemountingpressurefrominvestorstoboostprofits.Theycutcostsbylayingoffstaff,particularlymiddlemanagers.ThissatisfiesWallStreet,butinthreeorfouryears,thecompanyfindsitselffacedwithaleadershipcrisis.Moreover,HRisstuckwithbothadevelopmentandrecruitingproblem.Systems-savvyHRmanagerscanpointoutthelinksbetweentheseproblemsandsuggestwaystocutstaffthatprotectthefirm’scadreoffutureleaders.

TheEasyWayOutUsuallyLeadsBackIn.Oneimportantbenefitofsystemsthinkingisthatithelpsustoadoptnewperspectivesonproblems.Toooften,werelyoncomfortableandfamiliarsolutionsthathaveworkedinthepast.Totrulyserveasstrategicpartners,humanresourceprofessionalsmustviewHR’svalue-creationrole—

particularlyHRenablers—inawholenewlightandresistthetemptationtouse“tried-and-true”butoutdatedideas.

CauseandEffectAreNotCloselyRelatedinTimeandSpace.Thislawspeakstothedifferencebetweenleadingandlaggingindicators.HR’sinfluenceonfirmperformanceislikelytobemuchlessdirectthanthatofotherstrategicdrivers.ThislagbetweencauseandeffectforHRperformancedriversdoesn’tdiminishtheirultimateinfluence,butitdoesmakeitdifficulttoidentifyandmeasurethatinfluence.Manyseniormanagersrelyprimarilyonconventional,financialperformancemeasures—whicharelaggingindicators.Theyoftentrytosolvefinancialproblemsbyimmediatelycuttingcostsratherthanidentifyingthefundamentalsourcesoftheproblem.Pressuredbytheshort-termdemandsofcapitalmarkets,theyseekthequickfix—onlytodiscoverthatsuchsolutionseitherdon’tlastoractuallyworsentheoriginalproblem.

TheHighestLeveragePointsAreOftentheLeastObvious.Seasonedsystemsthinkersconstantlylookforthelessobvioussolutiontoaproblem.Notsurprisingly,formostCEOs,theobvioussolutionstoimprovedperformancehaverarelyincludedHR.

Thisisthechallengefacinghumanresourceprofessionals.Problemsinfinancialperformancegeteveryone’sattention,butnoonethinksabouthowHRcanhelp.Nevertheless,becauseHRdriversaresofoundational,smallchangesinhowthey’remanagedgathermomentumastheyworktheirwaythroughthestrategyimplementationprocess.Forexample,atSears,amere4-percentincreaseinemployeesatisfactionreverberatedthroughtheprofitchain,eventuallyliftingmarketcapitalizationbynearly$250million.†

CuttinganElephantinHalfDoesn’tGetYouTwoSmallerElephants;ItGetsYouaMess.Inotherwords,ifyoutrytodissectasystem,expectingtobeabletoexamineitspartsinisolation,youmayendupdestroyingit.Organizationsarecomplexsystemsthatinvolveinteractionswithinandbetweenmanydifferentsubsystems.Thus,theyarebestunderstoodfromasystemwideperspective.Yetmostmanagersthinkoftheirfirm’ssubsystemsasfunctionsandlimittheirattentiontotheirown“turf.”Functionalleadersmight“seethefirm’sproblemsclearly,butnoneseehowthepoliciesoftheirdepartmentinteractwith[thoseof]others.”‡AsSengeargues,it’stheinteractions

betweensystemsandamongasystem’spartsthatgeneratebothproblemsandpotentialleveragepointsforchange.Dependingonthesituation,differentsysteminteractionswillbemoreorlessimportantatvarioustimes.Skilledmanagers—includingthoseHRprofessionalswhowanttobemorethanjustadministrators—knowwhichinteractionsmostrequiretheirattention,andwhen.

*PeterSenge,TheFifthDiscipline(Doubleday:NewYork,1990),57–67.†AnthonyJ.Rucci,StevenP.Kirn,andRichardT.Quinn,“TheEmployee-Customer-ProfitChainatSears,”HarvardBusinessReview76,no.1(1998):87.‡Senge,TheFifthDiscipline,66.

OurdescriptionoftheHPWSraisestheobviousquestion:What,exactly,arethespecificpoliciesandpracticesthatleadtohighperformance?Since1990,twoofushaveconductedabiannualsurveyoftheHRmanagementsystemsinU.S.publiclyheldcompanies.ThefoundationofthisresearchefforthasbeenabiannualsurveyofHRsystemsthattargetsabroadcross-sectionofpubliclytradedfirms:firmswithsalesgreaterthan$5millionandmorethan100employees.ThesedataonHRsystemsarethenmatchedwithpubliclyavailabledataonfinancialperformance.Thisresearchprogramisongoingandnowincludesmorethan2,800corporations.10

EachsurveyenabledustoconstructanHPWSindexthatmeasurestheextenttowhichafirm’sHRsystemisconsistentwiththeprinciplesofahigh-performanceHRstrategy.Table1-3comparesfirmsinour1998sampleatthetwoendsofthehigh-performanceHRcontinuum.BasedonourHPWSindex,wecalculatedeachfirm’spercentilerankinginoursampleandthencomparedfirmsrankedinthetopdecileontheHPWSindexwiththoseinthebottomdecileonseveralcharacteristics.Theresultsintable1-3arebasedonthe429firmsinour1998sample.However,theresultsareveryrobustandhighlysimilarforour1992,1994,and1996samples.11

Table1-3ComparisonofHighandLowHRManagementQuality

Bottom10%HRIndex(42firms)

Top10%HRIndex(43firms)

HRPractices Numberofqualifiedapplicantsperposition 8.24 36.55Percentagehiredbasedonavalidatedselectiontest 4.26 29.67Percentageofjobsfilledfromwithin 34.90 61.46PercentageinaformalHRplanincludingrecruitment,development,andsuccession 4.79 46.72Numberofhoursoftrainingfornewemployees(lessthan1year) 35.02 116.87Numberofhoursoftrainingforexperiencedemployees 13.40 72.00Percentageofemployeesreceivingaregularperformanceappraisal 41.31 95.17Percentageofworkforcewhosemeritincreaseorincentivepayistiedtoperformance 23.36 87.27Percentageofworkforcewhoreceivedperformancefeedbackfrommultiplesources(360) 3.90 51.67

Targetpercentilefortotalcompensation(marketrate=50%) 43.03 58.67Percentageoftheworkforceeligibleforincentivepay 27.83 83.56Percentageofdifferenceinincentivepaybetweenalow-performingandhigh-performingemployee 3.62 6.21Percentageoftheworkforceroutinelyworkinginaself-managed,cross-functional,orprojectteam 10.64 42.28PercentageofHRbudgetspentonoutsourcedactivities(e.g.,recruiting,benefits,payroll) 13.46 26.24NumberofemployeesperHRprofessional 253.88 139.51Percentageoftheeligibleworkforcecoveredbyaunioncontract 30.00 8.98

HROutcomes*

Extenttowhichstrategyisclearlyarticulatedandwellunderstoodthroughoutthefirm 3.40 4.21Extenttowhichtheaverageemployeeunderstandshowhisorherjobcontributestothefirm’ssuccess 2.80 4.00Extenttowhichseniormanagementseesemployeesasasourceofvaluecreationversusacosttobeminimized 3.31 4.21Extenttowhichtheexecutiveleadershipteamisvisionary 3.02 4.33Extenttowhichthefirmattemptstoprovidejobsecurity,evenifconfrontedwithdecliningfinancialperformance 2.71 4.11Extenttowhichthefirm’sdecision-makingstylecanbedescribedasparticipative 3.02 3.81Extenttowhichthefirm’sHRprofessionalsaregenerallyperceivedtobeadministrativeexperts 3.76 4.56Extenttowhichthefirm’sHRprofessionalsaregenerallyperceivedtobeemployeechampions 3.69 4.40Extenttowhichthefirm’sHRprofessionalsaregenerallyperceivedtobeagentsforchange 3.31 4.12Extenttowhichthefirm’sHRprofessionalsaregenerallyperceivedtobebusinesspartners 3.19 4.30Extenttowhichlinemanagersgenerallybelievethateffectivediversitymanagementisabusinessimperative 2.45 3.65Extenttowhichtopmanagementshowscommitmenttoandleadershipinknowledgesharing 2.99 4.05Extenttowhichthefirmhasdevelopedandcommunicatedmeasuresoffinancialperformance 3.38 4.63Extenttowhichthefirmhasdevelopedandcommunicatedmeasuresofcustomerreactions 3.02 4.27Extenttowhichthefirmhasdevelopedandcommunicatedmeasuresofkeybusinessprocesses 3.09 4.13Extenttowhichthefirmhasdevelopedandcommunicatedmeasuresoflearningandgrowth 2.26 3.12FirmPerformance Employeeturnover 34.09 20.87Salesperemployee $158,101 $617,576Marketvaluetobookvalue 3.64 11.06

*Eachofthevariablesinthe“HROutcomes”sectionisscaledfrom1to6,where1=“notatall”and6=“toaverygreatextent.”

Thedifferencesbetweenthesetwogroupsoffirmsareverysubstantial,andthesedifferencesarenotsolelyduetofirmsize,industry,orage.Firmswithhigh-performanceworksystemsadoptHRmanagementpracticesverydifferentfromthoseadoptedbyfirmswithlow-performanceworksystems:Theydevoteconsiderablymoreresourcestorecruitingandselection,theytrainwithmuchgreatervigor,theydoalotmoreperformancemanagementandtiecompensationtoit,theyuseteamstoamuchgreaterextent,theyhaveroughlydoublethenumberofHRprofessionalsperemployee,andtheyaremuchlesslikelytobeunionized.Indeed,themoststrikingattributeofthesecomparisonsisnotanyoneHRmanagementpractice—itisnotrecruitingortrainingorcompensation.Rather,thedifferencesaremuchmorecomprehensive—andsystemic.

TheHRoutcomesassociatedwiththissystemarecomprehensiveaswell.Comparedwithlow-performingHRmanagementsystems,theverybestfirmsinoursamplearemuchmorelikelytohavedevelopedaclearstrategicintentandcommunicatediteffectivelytoemployees.Inaddition,theyaremorelikelytohavetheirHRprofessionalsratedpositivelyinboththeirtraditional

andstrategicroles.Theyarealsomorelikelytohavedevelopedacomprehensivemeasurementsystemforcommunicatingnonfinancialinformationtoemployees.

Finally,firmswiththemosteffectiveHRmanagementsystemsexhibiteddramaticallyhigherperformance:Employeeturnoverwasclosetohalf,salesperemployeewerefourtimesasgreat,andtheratiooffirmmarketvaluetothebookvalueofassets—akeyindicatorofmanagementquality,asitindicatestheextenttowhichmanagementhasincreasedshareholders’initialinvestment—wasmorethanthreetimesaslargeinhigh-performingcompanies.

AnHPWSisitselfastrategyimplementationsystem,embeddedwithinthefirm’slargerstrategyimplementationsystem.HRintersectswiththatlargersystematmanydifferentpointsandperhapswithmultipleelementsoftheHRsystematthesamepoint.Understandinghowtoidentifythosepointsofintersectioninyourownfirm,andhowtoaligntheHRsystemaccordingly,isthekeytosecuringastrategicroleforHRandknowinghowtomeasureHR’simpactonvaluecreation.Inaddition,firmsmustconstantlysharpentheirawarenessofhowwelltheHRsystem’scomponentsarealigned,thatis,howmuchtheyreinforceorconflictwithoneanother.Asanexampleofreinforcement,afirmmightcombineabove-marketpaypolicieswithcomprehensiveperformancemanagementsystems.Thiscombinationletsthefirmcultivateatalentedapplicantandemployeepool,andrecognizeandrewardthebestemployeesforsuperiorperformance.Bycontrast,whenthesecomponentsareinconflict,anorganizationmightencourageemployeestoworktogetherinteams,butthenprovideraisesbasedonindividualcontributions.

Inshort,anHPWSdirectlygeneratesuniquecustomervalue,oritleveragesotherrelatedsourcesofsuchvalue.Incertainserviceindustries,theemployee-customerrelationshipissovisiblethatitsimpactonvaluecreationisunmistakable.Butformostfirms,valuederivesfromoperationalprocessesorinnovationsthataffectthecustomerinlessobviousways.ItisthesefirmsthatmostneedtoarticulatethestrategyimplementationprocessandthenaligntheHRsystemtosupportthatprocess.Anditisinthesefirms,wheresuchalignmentsandstrategiesarenoteasilyobservedandthusimitatedbycompetitors,thatHRhasthegreatestpotential.

Inourview,thisalignmentprocessmustbeginwithaclearunderstandingofthefirm’svaluechain—asolidcomprehension,throughoutthefirm,ofwhatkindofvaluetheorganizationgeneratesandexactlyhowthatvalueis

created.Forexample,everyfirmshouldbeabletodescribehowitsultimatefinancialgoalsarelinkedtokeysuccessfactorsatthelevelofitscustomers,operations,people,andITsystems.RobertKaplanandDavidNortonhavecoinedtheterm“strategymap”todescribetheserelationships.12Withthissharedunderstandingofthevalue-creationprocess,theorganizationcanthendesignastrategyimplementationmodelthatspecifiesneededcompetenciesandemployeebehaviorsthroughoutthefirm.Thefirm’ssystemformanagingpeoplecanthenbegearedtowardthegenerationofthesecompetenciesandbehaviors.Infact,akeydistinguishingcharacteristicofaHigh-PerformanceWorkSystemisnotjusttheadoptionofappropriateHRpoliciesandpracticessuchasemployeeacquisition,development,compensation,andperformancemanagement,butalsothewayinwhichthesepracticesaredeployed.InanHPWS,thefirm’sHRpoliciesandpracticesshowastrongalignmentwiththefirm’scompetitivestrategyandoperationalgoals.Moreover,eachHPWSwillbedifferent.Nosinglebestexampleexists;eachorganizationmustcustomizeitssystemtomeetitsownuniquestrengthsandneeds.Forexample,table1-3showsthathigh-performingfirmsarecharacterizedbygreateruseofincentivepay.However,thebehaviorsandoutcomesthatarebeingreinforcedwilldiffersubstantiallyacrossfirmsandstrategies.

StrategicEmployeeBehaviorsUltimatelyanydiscussionofthestrategicroleofhumanresourcesorhumancapitalwillimplicitlyfocusontheproductivebehaviorsofthepeopleintheorganization.Inonesensethisisalmosttautologicalsinceitisonlythroughbehaviorsthathumanbeingscaninfluencetheirenvironment.Weareinterested,however,incertaintypesofemployeebehaviorsandnotothers.Inchapter2wedescribeourownresearchlinkingemployeestrategicfocustofirmperformance.Thisworkemphasizestheimportanceofaligningorganizationalprocessesandsupportsystemssothattheyencourageandmotivateanunderstandingof“thebigpicture.”Similarly,wedefinestrategicbehaviorsasthesubsetofproductivebehaviorsthatdirectlyservetoimplementthefirm’sstrategy.Thesestrategicbehaviorswillfallintotwogeneralcategories.Thefirstwouldbethecorebehaviorsthatflowdirectlyfrombehavioralcorecompetenciesdefinedbythefirm.Thesearebehaviorsthatareconsideredfundamentaltothesuccessofthefirm,acrossallbusinessunitsandlevels.Thesecondaresituation-specificbehaviorsthatareessentialatkeypointsinthefirm’sorbusinessunit’svaluechain.Anexampleoftheselatterbehaviorsmightbethecross-sellingskillsrequiredinthebranchofa

retailbank.

IntegratingafocusonbehaviorsintoanoverallefforttoinfluenceandmeasureHR’scontributiontofirmperformanceisachallenge.Whichonesareimportant?Howshouldtheybe“managed”?Weneedtokeepafewpointsinmind.First,theimportanceofthebehaviorswillbedefinedbytheirimportancetotheimplementationofthefirm’sstrategy.Understandinghowpeopleandprocesseswithinthefirmactuallycreatevalueisthefirststep.Thatanalysiswillrevealboththekindsofbehaviorsthataregenerallyrequiredthroughoutthefirmandthosewithspecificvalueatkeypointsinthevaluechain.Second,it’sessentialtorememberthatwedon’taffectstrategicbehaviorsdirectly.TheyaretheendresultofthelargerHRarchitecture.EspeciallyimportantistheinfluenceofanHRsystemthatisalignedwiththefirm’sstrategy.

ALIGNINGPERFORMANCEMEASUREMENTAND

STRATEGYIMPLEMENTATION

Youareundoubtedlyfamiliarwiththeassertionthat“whatgetsmeasuredgetsmanaged—andwhatgetsmanagedgetsaccomplished.”Buthowtrueisthis,really?Canmeasuringorganizationalprocessesprovidecompetitiveadvantage?Webelievethatdevelopingmeasurementcompetencyisimportant,becauseitcanaddvalueatthelevelofthefirm.Butfewmanagers(HRorotherwise)havestrongcompetenciesinthisarea.Inrecentyears,HRmanagershavebeenaskedtolearnaboutfinanceandaccounting.Now,theymusthonetheirmeasurementskillsaswell.

Wearenotthefirsttoemphasizetheimportanceofmeasuringbusinessperformancefromtheperspectiveofstrategyimplementation,ratherthanrelyingsimplyonfinancialresults.RobertKaplanandDavidNorton’sBalancedScorecardapproachpioneeredthisconceptofmovingbeyondmerefinancialmeasurement.13Tousethistool,afirmmustspecifynotonlythefinancialelementsofitsvaluechainbutalsothecustomer,businessprocess,andlearningandgrowthelements.Then,itmustdeveloptangiblewaystoassesseach.

ThepremiseunderlyingtheBalancedScorecardapproachisthatseniormanagershavepaidfartoomuchattentiontothefinancialdimensionsof

performance,andnotenoughattentiontotheforcesthatdrivethoseresults.Afterall,financialmeasuresareinherentlybackward-looking.Because“performancedrivers”arewithinmanagement’scontrolnow,theentireBalancedScorecardmeasurementsystemencouragesmanagerstoactivelyengagewiththestrategyimplementationprocess,ratherthansimplymonitorfinancialresults.Byspecifyingthevitalprocessmeasures,assessingthem,andregularlycommunicatingthefirm’sperformanceonthesecriteriatoemployees,managersensurethattheentireorganizationparticipatesinstrategyimplementation.TheBalancedScorecardapproachthusmakesstrategyeveryone’sbusiness.

THEPURPOSEOFTHISBOOK

Inthisbook,weaddressthecrucialquestionofhowHRpractitionerscanmeasuretheircontributiontotheirfirm’sstrategyimplementation—andthusbeatthetableandnotonthetable.Webelievethateffectivemeasurementsystemsservetwoimportantpurposes:Theyguidedecisionmakingthroughouttheorganization,andtheyserveasabasisforevaluatingperformance.Themeasurementapproachwedescribeaddressesthesetwopurposesinthreeways.First,itencouragesaclear,consistent,andsharedviewofhowthefirmcanimplementitsstrategyateachlevelintheorganization.Itwon’tguaranteethateveryemployeecanarticulatetheentirevalue-creationprocess,butitshouldensurethateachemployeehasaclearunderstandingofhisorherownroleintheprocess.Useofourmodelalsobuildsconsensusaroundhowdifferentelementswithintheorganizationcontributetovaluecreation.

Second,ourapproachforcesmanagerstofocusonthe“vitalfew”measuresthatreallymakeadifference.Anyonecouldeasilygeneratefiftyormoremeasuresoffirmperformance,acrossavarietyofcategories.Yetthisexercisewouldprobablybecounterproductivebecausethatmanymeasureswouldbedifficulttotrack.Wearguethatatrulyeffectivemeasurementsystemcontainsnomorethantwenty-fivemeasures.

Third,thisapproachletspractitionersexpressthesevitalfewmeasuresintermsthatlinemanagersandseniorexecutiveswillunderstand—andvalue.InHR,conventionalmeasuresofcostcontrol,suchashoursoftraining,timetofillanopeningposition,andeventurnoverratesandemployeesatisfaction,willcontinuetolackcredibilityunlesstheyareshowntoinfluencekey

performancedriversinthebusiness.

We’vealsoorganizedthebookaroundtwocentraltenets.Thefirstisthatafirm’sHRarchitecture—particularlytheHRmanagementsystem—canhaveasubstantialimpactonfirmperformance.ThisthesiswillprobablycomeasnosurprisetomostHRprofessionals.Theybelievethatthefieldhasalwaysbeenimportant,evenifmanymanagersoutsidetheHRfunctiondidn’trecognizeitstruevalue.Butforthefirsttime,HRhasthepotentialtoboostthebottomlinebyamethodotherthansimplybyminimizingcosts.ToparaphraseC.K.PrahaladandGaryHamel,HRprofessionalsarenowinapositiontobecomenumeratormanagers(contributingtotop-linegrowth)ratherthanjustdenominatormanagers(cuttingcostsandreducingoverhead).14However,toexertthisinfluenceonfirmperformance,theHRsystemhastobeembeddedintheorganization’sstrategyimplementation,thatlargermanagementsystemthatisthekeytosustainedcompetitiveadvantageandfinancialsuccess.

ThisstrategicrolealsorequiresnewcompetenciesonthepartofHRprofessionals.Tobesure,theHRfieldhasmadehugetechnicalstridesinthelasttwentyyears.Nevertheless,ithasessentiallybeendoingthesamethings,thoughbetterandmoreefficiently.TheneweconomicparadigmrequiresthatHRprofessionalsdodifferentthings,inanentirelydifferentrole.Thismeansmorethanjustunderstandingthefirm’sarticulatedstrategy.BeingastrategicpartnerrequiresthatHRprofessionalscomprehendexactlywhatcapabilitiesdrivesuccessfulstrategyimplementationintheirfirms—andhowHRaffectsthosecapabilities.Thisisachallengingtask,forHR’straditionalrolesasadministrativeexperts,employeechampions,andagentsofchangearenolessimportantinthisnewenvironment.

Thesecondkeytenetofthisbookfollowsdirectlyfromthefirst.ItreflectsthetwomostcommonquestionswehearfromHRpractitioners:

•HowcanwemeasurethevalueofwhatwedoinHRintermsthatlineandgeneralmanagerswillunderstandandrespect?Forexample,howcanwedeterminethereturnoninvestment(ROI)ofanewtraininganddevelopmentprogram?

•HowcanHRmetricsbeincorporatedinmyorganization’smeasuresofbusinessperformance?

Todemonstrateitsstrategiccontributiontoseniorlinemanagers,HRneedsameasurementsystemthatfocusesontwodimensions:

•costcontrol(drivingoutcostsintheHRfunctionandenhancingoperationalefficiencyoutsideofHR),and

•valuecreation(ensuringthattheHRarchitectureintersectswiththestrategyimplementationprocess)

Aswe’veseen,KaplanandNorton’sBalancedScorecardframeworkhasreceivedenormousattention,inpartbecauseitincorporatesmeasuresthatdescribetheactualvalue-creationprocessratherthanfocusingonjustthefinancialresultsthattraditionalaccountingmethodsassess.Itisaframeworkthatwewilldrawonheavilyinthisbook.Inaddition,weseektostrengthenanaspectoftheBalancedScorecardapproachthatNortonandKaplanthemselvesacknowledgetobeitsweakestfeature—thequestionofhowbesttointegrateHR’sroleintoafirm’smeasurementofbusinessperformance.Theynotethefollowing:

[W]henitcomestospecificmeasuresconcerning[HRandpeople-relatedissues]companieshavedevotedvirtuallynoeffortformeasuringeitheroutcomesorthedriversofthesecapabilities.Thisgapisdisappointing,sinceoneofthemostimportantgoalsforadoptingthescorecardmeasurementandmanagementframeworkistopromotethegrowthofindividualandorganizationalcapabilities.…[This]reflectsthelimitedprogressthatmostorganizationshavemadelinkingemployees…andorganizationalalignmentwiththeirstrategicobjectives.15

OurbookisdesignedtoclosethegapthatKaplanandNortonhaveidentified.TheframeworkthatwepresentherewillhelpHRpractitionersdeveloptheconceptualandoperationaltoolstheyneedtostructuretheirroleinawaythataddsunmistakablevalue.Moreover,itwillshowthemhowtodemonstratethosegainsintermsthatseniorHRmanagersandotherleaderswillfindcompelling.

OURFOCUSONHRMANAGERS

ThereaderwillseethatwehaveorganizedourworkaroundtheroleoftheHRprofessionalratherthanthegeneralmanager.Byadoptingsuchafocus,wedonotmeantogivetheimpressionthatlinemanagersplayanunimportantroleinmakingHRastrategicasset.Infact,theappropriatevaluesandbehaviorsofanorganization’sleadershipteamarekeyprerequisitesforHRtorealizethepotentialrolewedescribeinthisbook.Inaddition,therearemanygeneralmanagerswhosetraditionalviewofHR’srolewouldbenefitfromanintroductiontotheseideas.Nevertheless,HRmanagershavethegreatest

professionalstakeinthefutureroleofHRintheirorganizations,andthereforewehavechosentoorientthebooktotheirparticularchallenge.

USINGTHISBOOK

ThenextfivechaptersinthisbookshowyouhowtoactuallycreateameasurementsystemforassessingHR’scontributiontovaluecreationinyourfirm.Chapter2describesaseven-stepprocessthatwilllaythefoundationforHR’sstrategicinfluence.WespecificallyhighlighttheimportanceofastrategicallyfocusedHRarchitectureasaprerequisiteforameasurementsystemthatcanlinkHRwithfirmperformance.

Chapter3thenlaysoutaprocessfordevelopingtheHRScorecardbasedontheconceptsdiscussedinchapter2.Wespecificallydiscusshowtoincorporateconceptssuchasefficiency,valuecreation,andalignmentintheHRmeasurementsystem.

HRmeasurementalsomeansbeingabletoevaluateHRprogramsandinitiativeswiththesamerigorasdecisionselsewhereintheorganization.Inchapter4wedescribeaprocessforcost-benefitanalysisthatwillallowHRprofessionalstodeterminethereturnoninvestmentforthesedecisions.

Chapter5offersaprocessforvalidatingthequalityofthemeasurementsystemyoudevelopandthedataitgenerates.Hereweexplorewaystodeterminewhen“enoughisenough,”defineaccountabilitiesforthemeasurementprocess,andpresentguidelinesfordevelopingmeasurementchampionsinyourorganization.

Chapter6focusesononeofthemostdifficultmeasurementchallengesforafirmattemptingtomanageHRasastrategicasset—theproblemofalignment.Inthischapterwedescribeseveralwaystothinkaboutalignmentandofferseveralalternativemeasurementapproaches.

Chapter7discussestheprevailingcompetencymodelsforHRprofessionalsandhowourviewofwhatconstitutesanappropriatesetofHRcompetenciesisinfluencedbythedemandsofastrategicmeasurementinitiative.

Inchapter8weconcludewithadiscussionofthechallengesinvolvedinimplementingastrategicallyfocusedHRarchitectureandHRScorecard.Wedevelopaseven-stepmodelforplanningandevaluatingthechangemanagementactivitiesassociatedwiththeimplementationefforts.

Forthosereadersinterestedinthefullextentofthetheoreticalunderpinningsofourapproach,wehavealsoprovidedanappendixatthebackofthisbookdescribingourresearchinmoredetail.

AFINALNOTEOFADVICEANDENCOURAGEMENT

Clearly,designinganynewmeasurementsystemforintangibleassetsisn’teasy—ifitwere,mostcompanieswouldhavealreadydoneit.Embracingthischallengetakestimeandalotofcarefulthought.Weencourageyoutoprogressthrougheachchapterinthisbookinsequenceandtoactivelyengagewiththeconceptsasmuchaspossible.ThismeansthinkingabouthowyourownHRarchitectureoperatesandidentifyingwaysinwhichyoucancustomizeourapproachtomeettheuniqueneedsandcharacteristicsofyourfirm.WealsofullyexpectyoutoinvolveyourentireHRstaffinmasteringthetoolsdescribedinthisbook.Afterall,realinnovationcomesonlywhenpeopleworktogetheronthemostpressingchallengesoftheworkplace.

2

CLARIFYINGANDMEASURINGHR’SSTRATEGICINFLUENCE

IntroductiontoaSeven-StepProcessItwasexcitingstuff.WecouldseehowemployeeattitudesdrovenotjustcustomerservicebutalsoturnoverandthelikelihoodthatemployeeswouldrecommendSearsanditsmerchandisetofriends,family,andcustomers.Wediscoveredthatanemployee’sabilitytoseetheconnectionbetweenhisorherworkandthecompany’sstrategicobjectiveswasadriverofpositivebehavior.…Wewerealsoabletoestablishfairlyprecisestatisticalrelationships.Webegantoseeexactlyhowachangeintrainingorbusinessliteracyaffectedrevenues.

ANTHONYJ.RUCCI,STEVENP.KIRN,

ANDRICHARDT.QUINN1

THISQUOTATIONCAPTUREStheenergythatcanbecreatedwhenanorganizationalignsitsHRarchitecturewithitslargerplanforstrategyimplementation—anddevisesawaytomeasurethatalignment.IfwetakeacloserlookatSears’transformationalexperience,wecanseethatthecompany’seffortcenteredontellingthe“story”ofhowvalueiscreatedwithintheorganization.Specifically,Searsexecutivesclarifiedhowtheiremployeesdrivecustomersatisfactionandhowthatsatisfaction,inturn,fuelsoverallfirmperformance.Theythenreinforcedthestorybyinvolvingabroadcross-sectionofseniormanagers,providingdevelopmentalopportunitiesforthosesupervisorswholackedtheleadershipskillsneededtoimplementthenewstrategy,andrealigningtheHRsystemtosupportthestrategy.

Equallyimportant,theydesignedameasurementsystemthatletthemtesttheirhypothesesabouthowemployeebehaviors,customersatisfaction,andfinancialperformancearealllinked.Inotherwords,Searsmovedbeyondthe

hypotheticalanddevisedwaystodemonstrateobjectivelyHR’scontributiontoimplementationofthecompany’snewstrategy.Humanresourcemanagerscouldnowcitehardevidencethat“a5-pointimprovementinemployeeattitudeswilldrivea1.3-pointimprovementincustomersatisfaction,whichinturnwilldrivea.5%improvementinrevenuegrowth.”2

BALANCEDPERFORMANCEMEASUREMENT

ToachievethekindofstrategyalignmentthatSearsaccomplished,acompanymustengageinatwo-stepprocess.First,managershavetounderstandfullythe“story”ofhowvalueiscreatedintheirfirm.Oncetheyachievethisunderstanding,theycanthendesignameasurementsystembasedonthatstory.Wecanthinkofthisprocessintermsoftwogeneralquestions:

First,howshouldstrategybeimplementedinourfirm?Thisisanotherwayofaskinghowthefirmgeneratesvalue.Askingthisquestionfocusestheorganizationontwodimensionsofthestrategyimplementationstory:

Breadth:Thecompanymustattendtomorethanfinancials,whicharejusttheoutcomesofstrategyimplementation.Totrulygraspthevalue-creationstory,theorganizationmustalsofocusonperformancedrivers(suchascustomerloyalty)thatithasidentifiedas“keysuccessfactors.”

Causalflow:Thisistheseriesoflinkagesamongfinancialandnonfinancialdeterminantsoffirmperformance.Allmanagersneedtohaveanunderstandingofthisflow(thoughmostlackit).Acomprehensionofcausalflowpushesmanagerstothinkbeyondthefinancialsandappreciatetheimportanceofotherkindsofsuccessindicators.It’snotenoughjusttohavealistofimportantnonfinancialmeasuresofsuccess.Managersalsoneedtounderstandandincorporatethe“causallogic”thatgivesthesenonfinancialsvalueintheorganization.Figure2-1showsthekindofbasicframeworkthatafirmcanconceptualizebyaskingitselfhowstrategyshouldbeimplemented.

Second,whatperformancemeasurescapturethisbroadlydefinedstrategyimplementationprocess?Thisquestionencouragesmanagerstoattachmetricstotheconceptualfoundationthattheyenvisionedafterunderstandingtheirfirm’svalue-creationstory.

Oncehigh-levelmanagershaveaddressedthesetwoquestions,theymustthencommunicateittomiddlemanagersandfront-lineemployees.Thatway,everymemberoftheorganizationknowshowtosupportthefirm’ssuccess.Thesequestionsalsohelptheorganizationdecidehowtoallocateresourcessoastobreathelifeintothevalue-creationstory.Finally,andmostimportant,theinsightsgeneratedbythequestionsguidethedecisionsthateveryemployeemakes,everyday.

Figure2-1ASimpleIllustrationofValueCreation

Source:RobertS.KaplanandDavidP.Norton,(Boston,MA:HarvardBusinessSchoolPress,1996),31.

Balancedperformance-measurementmodels,suchastheonewepresentinthisbook,pulltheanswerstothesetwoquestionstogetherinapowerfulassessmenttool.Themodelrecognizestheimportanceofbothintangibleandtangibleassets,andoffinancialandnonfinancialmeasures.Italsoacknowledgesthecomplex,value-generatingconnectionsamongthefirm’scustomers,operations,employees,andtechnology,3andintegratesHR’sroleinanunprecedentedway.Finally,themodelhighlightstheimportantdistinctionbetweenlaggingandleadingindicators.Laggingindicators,suchasfinancialmetrics,typicallyreflectonlywhathashappenedinthepast.Suchmetricsmayaccuratelymeasuretheimpactofpriordecisions,buttheywon’thelpyoutomaketoday’sdecisions,nordotheyguaranteefutureoutcomes.Thepopularanalogycomparesusingthemtoguidedecisionsaboutthefuturetodrivingyourcarbylookingintherearviewmirror!Therefore,youalsoneedasetofmetricscalledleadingindicators.Thiswillbedifferentforeachfirm,butexamplesmightincludeR&Dcycletime,customersatisfaction,oremployeestrategicfocus.Theseindicatorsassessthestatusofthekeysuccessfactorsthatdriveimplementationofthefirm’sstrategy.Andbytheirverynature,theyemphasizethefutureratherthanthepast.

INTEGRATINGHRINTOBUSINESSPERFORMANCE

MEASUREMENT:UNDERSTANDINGHRDELIVERABLES

GraspingtherelationshipsamongkeysuccessfactorsisessentialformeasuringHR’straditionallyelusiveroleindrivingorganizationalperformance.OnceacompanyfirmlyanchorsHRinitsstrategyimplementationsystem,itcanthenseetheconnectionsbetweenHRandthecompany’ssuccessdrivers.BymeasuringHR’seffectonthesedrivers,thefirmcanquantifyHR’soverallstrategicimpact.

TointegrateHRintoabusiness-performancemeasurementsystem,managersmustidentifythepointsofintersectionbetweenHRandtheorganization’sstrategyimplementationplan.WecanthinkofthesepointsasstrategicHRdeliverables,namely,thoseoutcomesoftheHRarchitecturethatservetoexecutethefirm’sstrategy.ThisisincontrasttoHR“doables”thatfocusonHRefficiencyandactivitycounts.Thesedeliverablescomeintwocategories:performancedriversandenablers.HRperformancedriversarecorepeople-relatedcapabilitiesorassets,suchasemployeeproductivityoremployeesatisfaction.Eventhoughthesemayseemsoimportantastobegeneric,thereisactuallynosinglecorrectsetofperformancedrivers.Eachfirmcustom-identifiesitsownsetbasedonitsuniquecharacteristicsandtherequirementsofitsstrategyimplementationprocess.

Enablersreinforceperformancedrivers.Forexample,aparticularchangeinacompany’srewardstructuremightencouragepreventivemaintenanceratherthanreactivemaintenance.Anemphasisonpreventivemaintenancemightinturn“enable”aperformancedrivercalled“on-timedelivery.”Anyperformancedrivermayhaveseveralenablers.Theenablersthemselves,inisolation,mayseemmundane,but—aswe’llsee—theircumulativeeffectcanhavestrategicimportance.

Let’slookatthesetwocategoriesofHRdeliverablesingreaterdetail.

HRPerformanceDriversPerhapsnotsurprisingly,humanresourcemanagerstendtofocusonHRperformancedriversinattemptingtodemonstratetheirstrategicinfluence.

Butalltoooften,theymerelyasserttheimportanceofaparticulardriver,suchasemployeesatisfaction,withoutbeingabletomakethebusinesscaseforitsprimacy.ThispredicamentstemsfromthedifficultiesinherentindiscerningHR’sactualcontributiontooverallmissionandstrategy.Becauseofthisdifficulty,companiesoftenexperienceadisconnectbetweenthemetricstheyuseandtheHRpoliciestheyinstitute.Forexample,onefirmweknowofincorporatesvarioussophisticatedmeasuresintoitsbonuscompensationsystem,butHR’smeasuresconsistofsimplehurdlesthatanymanagercanachieve(forinstance,“100percentofdirectreportshavefiledacareerdevelopmentplan”).SuchsimplisticmeasuresundermineHR’scredibilityinthewiderorganization.

ThecredibilityofHRmeasuresisparticularlyimportantwhenfinancialandnonfinancialperformancemeasuresconflict.Inevitably,therecomesatimewhenpeoplemeasuresareup,butfinancialsaredown.Naturally,theCFOobjectstopayingbonuseswhen“performance”doesn’twarrantit.However,suchreactionsmissanessentialpoint:Balancedperformancemeasurementmeanspayingattentiontobothlaggingandleadingindicators.And,it’stheleadingindicators—suchasHRmeasures—thatreallydrivevaluecreationintheorganization.ThehesitationtorewardmanagerswhenpeoplemeasuresareupandfinancialmeasuresaredownreflectsalackofagreementamongexecutivesthatHRmeasuresinfactdrivetheentirecompany’sperformance.Inthisexample,therewardsystemhasbeen“balanced”toaddresssomevagueconcernabout“peopleissues,”butnoonecanarticulatehowthesemeasuresreflectvaluecreationinthefirm.

Moreover,managersoftendon’tunderstandthedelaysinherentinleadingindicators.HighHRscoresinthefaceoflowfinancialsactuallysignalimprovedfinancialsinthefuture,assumingthatotherleadingindicatorsarealsopositive.Thereverseisequallytrue,ofcourse.StrongfinancialsinthefaceofweakHRdriversandotherleadingindicatorsshouldraiseconcernsaboutfuturefinancialperformance.Thelesson?Becausetrulybalancedperformancemeasurementsystemsreflectbothcurrentandfuturefinancialperformance,managersmustinterpretthemdifferentlyfromthewaytheydotraditionalperformancemeasures.

IdentifyingkeyHRperformancedriverscanbechallenging,becausetheyareuniquetoeachfirm.TheexperienceatQuantumCorporationoffersanaptexample.AtQuantum,aleadingmanufacturerofharddisksandcomputerperipherals,executivesemphasizesomethingtheycall“time-to-volume.”InQuantum’sview,beingfirsttomarketdoesnotmeanbeingfirsttoannounceordemonstrateanewproduct.4Rather,itmeansthatcustomersactuallyget

thenewproductstheywant,whentheywantthem,andinthequantitiestheyrequire.Time-to-volumehingesonrapidproductdevelopment—withoutthesacrificeofquality—plustheabilitytorampupproductionfastenoughtomeetcustomers’needs.Quantumidentifiedasetofvaluebehaviors,suchasstayingflexibleandadaptable,takinginitiativeforone’sowndevelopment,andresolvingissuesinanobjectivemanner,asonetime-to-volumedriver.Thereisnothingadhocorsymbolicabouttheimportanceofthesebehaviorstothesuccessofthecompany.Quantumintegratesthemdirectlyintoitsperformancecriteriaandgivesthemequalweightwithmoretraditionalperformancemeasures.Indeed,one-halfofbonusandmeritpayisbasedonfinancialresults,andone-halfonanemployee’sadherencetothevaluebehaviors.Asoneseniorexecutiveobserved,“Youcan’tsimply‘getresults’toooftenwhileleavingapileofdeadbodiesbehindyou.”

HREnablersAswementioned,HRenablersreinforcecoreperformancedrivers.Toprovideanotherexample,ifafirmidentifiesemployeeproductivityasacoreperformancedriver,then“re-skilling”mightbeanenabler.WeencouragehumanresourcemanagerstofocusasmuchonHRenablersastheydoonHRperformancedrivers,buttodramaticallyexpandtheconcept.Forinstance,ratherthanthinkingjustintermsofHR-focusedenablersinyourorganization(thoseenablersthatinfluencethemorecentralHRperformancedrivers),trythinkingabouthowspecificHRenablersalsoreinforceperformancedriversintheoperations,customer,andfinancialsegmentsoftheorganization.

Ourexperiencewithamajormoney-centerbankillustrateswhatcanhappenwhenmanagersdon’tconnectHRenablerswithvariousperformancedriversinthebroaderorganization.Thisparticularbankhaddecidedtoshiftthefocusofitsretailbusinessfromservicetosales.Thebankidentifiedasetofperformancedriversthatincludedincreasedcross-sellingtoexistingcustomers,tellerproductknowledge,andsalesskills.However,itsHRenablersstillemphasizedservice.Forinstance,theorganizationstillhadthefollowing:

•trainingprogramsthatfocusedonserviceratherthansales;

•performanceappraisalandmeritpaythatrewardedserviceratherthansales;

•hiringpracticesbasedonservicecompetenciesratherthansales

competencies;

•turnoverratesthatunderminedrelationshipbuildingbetweentellersandretailcustomers;and

•lowpayandbenefitsfortellers,whowereconsideredoverheadratherthanasourceofrevenuegrowth.

BecauseofthedisconnectbetweenitsnewgoalsandoutdatedHRenablers,thebankfailedtoachieveitssalesandprofitabilitytargets.Withouttheproperlyalignedenablers,itwassimplyunabletoimplementitsnewsalesstrategy.ThelessonhereisthattheentireHRsysteminfluencesemployeebehaviorfrommanypoints.ThusHRhasthatmanymoreopportunitiestoenable—orimpede—thefirm’skeyperformancedrivers.

AnotherexamplefromthebankingindustryillustrateshoweasyitistooverlookthepowerofHRenablers.WhentheWellsFargoOnlineFinancialServices(OFS)groupimplementedaBalancedScorecardtomeasurethefirm’soverallprogresstowarditsgoalsofgrowingrevenueandmaximizingprofits,itidentifiedthreekeystrategicdrivers5:

•addandretainhigh-valueandhigh-potential-valuecustomers;

•increaserevenuepercustomer;and

•reducecostpercustomer.

Figure2-2articulatesthe“story”ofhowOFSexpectedtoachievethosegoals.OFSalsoidentifiedseveralHRperformancedriversthatitfeltwouldplayanimportantpartinthesuccessofitsstrategy,shownintheLearningandGrowthsectionofthefigure:

•attractandretainkeyOFSplayersandstaff;

•enhanceOFSbenchstrengthandsuccessionplanning;

•increasemanagerialcompetencyandfunctionalcompetencyatalllevels;

•continuedevelopmentoftheOFSorganizationandculture;and

•deploytheScorecardandembeditinOFS.

AccordingtoMaryD’Agostino,VPofstrategyatOFS,acknowledgingtheseHRdriverssignaledanimportantstepforWellsFargo,inwhichtheculture“embracesfinancialmeasures.”ButOFSmanagersneverachievedconsensusonhowtheseHRdriversdirectlyaffectedthethreestrategicgoals.Asaresult,whilethecompanyagreedtomonitorthesedriversyearly,it

neglectedtoformallybuildthemintoitsScorecard.

Inshort,humanresourcesmanagersshouldevaluatethedegreetowhichtheirfirm’sentiresystemofenablers—fromemployeeselectiontodevelopmentandrewards—supportsthenon-HRdriversoutlinedinthefirm’sScorecard.Forexample,onecommonperformancedriveristo“developsuperiorservicequality.”Butiflinemanagersarestrugglingwithhighstaffturnoverandinsufficientrewardsforservicequality,howcantheyachievetheirtargetedservicequalitylevels?Asanotherexample,supposeanorganization’sR&Dfunctionhadidentifiedtimelinessofmarketablenewproductinnovationsasakeyperformancedriver.ByunderstandinghowtheR&Dunitcontributestothefirm’slargerstrategyimplementationprocess,thisorganization’sHRmanagercouldreadilygenerateideasforenablingtheR&Dunit’ssuccess.Specifically,shemightsuggestarewardsystemthatencouragesmarketableinnovations,atimelysourcingfunctionthatprovidestechnologicalexpertise,andincentivestoencouragealowlevelofemployeeturnoveramongkeyR&Dtalent.ThiskindofsynergymakesfortruebusinesspartneringbetweenHRandtherestoftheorganization.

Figure2-2PreliminaryLinkageMap

Source:AdaptedfromRobertS.KaplanandNicoleTempest,“WellsFargoOnlineFinancialServices(A),”Case9-198-146(Boston,MA:HarvardBusinessSchool,1998,rev.1999),exhibit7.

ASEVEN-STEPMODELFORIMPLEMENTINGHR’SSTRATEGICROLE

HowcanHRformalizethiskindofstrategicrole?Figure2-3illustrateshowHRcanlinkitsdeliverablestothefirm’sstrategyimplementationprocess.Whileweelaborateonvariouscomponentsofthismodelinsubsequentchapters,wesummarizeitforyouinthefollowingsevensteps:

Step1:ClearlyDefineBusinessStrategyAtthestrategy-development“table,”seniorHRleadersprovideanessentialperspective.Byfocusingonhowtoimplementthestrategyratherthansolelyonwhatthestrategyconsistsof,theycanfacilitateadiscussionabouthowtocommunicatethefirm’sgoalsthroughouttheorganization.Whenstrategicgoalsarenotdevelopedwithaneyetowardhowtheywillbeimplementedandcommunicatedthroughouttheorganization,theytendtobecomeverygeneric—forexample,“maximizeoperatingefficiency,”or“increasepresenceininternationalmarkets,”or“improveproductivity.”Thesegoalsaresovaguethatindividualemployeessimplycan’tknowhowtotakeactiontoachievethem.Worse,employeescan’trecognizethemasuniquetotheirfirm.Toillustrate,weoftenrunasimpleexperimentinourexecutiveeducationclasses.Weaskparticipantstowritedowntheirfirm’smissionorvisionstatement,whichwethenretype(removinganymentionofthefirm’sname)andredistributeamongthegroup.Nextweaskparticipantstopickouttheirownmissionandvisionstatementsfromthiscollection.Thesestatementsaresovague—andsosimilar—thatmostfinditverydifficulttodoso.

Clarifyingyourorganization’sstrategyinprecisetermscantakepractice.Thekeythingistostatethefirm’sgoalsinsuchawaythatemployeesunderstandtheirroleandtheorganizationknowshowtomeasureitssuccessinachievingthem.

Step2:BuildaBusinessCaseforHRasaStrategicAsset

Onceafirmclarifiesitsstrategy,humanresourceprofessionalsneedtobuildaclearbusinesscaseforwhyandhowHRcansupportthatstrategy.Inmakingthisbusinesscase,youhavethebenefitofadecadeofsystematicresearchtosupportyourrecommendations.Whileacomprehensivereviewofthisresearchisbeyondthescopeofthisbook,wecanhighlightthekeyresults.First,evidencegatheredfromfournationalsurveysandmorethan2,800firms

stronglysuggeststhatahigh-performanceworksystemhasadistinct,positiveinfluenceonafirm’sfinancialperformance.Figure2-4illustratesthoseresults.

Figure2-3TransformingtheHRArchitectureintoaStrategicAsset

Thex-axisinfigure2-4reflectstheextenttowhichafirm’sHRsystemisconsistentwithourprinciplesofaHigh-PerformanceWorkSystem,rangingfrom0forthelowest-ratedfirmsinoursurveyto100forthehighest-ratedfirms.They-axisrepresentsthemarketvalueperemployeeassociatedwithdifferentpointsonour1996HRindex.Onceagain,theresultsdemonstratethatbetterHRmanagementmatters—anditdoessointermsthatmatteroutsideHR.

Figure2-4alsoindicatesthatthereturnsfrominvestmentsinahigh-performanceHRstrategyarenotlinear.FirmsinthissampleappeartohavethreedistinctexperiencesastheirHRsystemsbecomemorefocusedonperformance.First,firmsmovingfromthelowestpercentilerankingstothetwentiethpercentileenjoyasignificantimprovementinfirmperformance.Atthispoint,HRfunctionsmovefrombeinganimpedimenttostrategy

implementationtohavinganeutralstrategicinfluence.Saiddifferently,byimprovingtothetwentiethpercentile,theHRMsystemcreatesvaluesimplybygettingoutoftheway.

Figure2-4HRasaSourceofValueCreation

Note:TherelationshipbetweentheHPWSindexandmarket/bookvalueinthisfigureisadjustedforcompanydifferencesinresearchanddevelopment,industry,salesgrowth,employmentlevel,andunionization.Notealsothatthemarketvaluesperemployeereflect1996levelsandwillhaveincreasedovertime.

Source:MarkA.HuselidandBrianE.Becker,“HighPerformanceWorkSystemsandOrganizationalPerformance,”paperpresentedat1995AcademyofManagementannualmeeting,Vancouver,B.C.,August1995.

Second,forthebroadmiddlerange(twentiethtosixtiethpercentilefirms),improvingthequalityofafirm’sHRMsystemhaslittlemarginalimpactonfirmperformance.Thismarkstheconsolidationofthetransformationfromapersonneltoaprofessionalfocusinhumanresources.Thisapproachdoesnodamage,butHRMisstillnotreallyastrategicpartner.

Finally,firmsabovethesixtiethpercentilenotonlyhaveadoptedtheappropriateHRMpracticesandimplementedthemeffectivelythroughoutthefirmbutalsohavebeguntointegratetheHRMsystemintothestrategic“fabric”ofthefirm.Asapracticalmatter,abovethesixtiethpercentile,themarginalimpactofHRMonfirmperformanceisthesameasitisforthosefirmsbelowthetwentiethpercentile,butfordifferentreasons.TheverybestfirmsinoursampleenjoythepayoffsfromcombiningtheappropriateHRMpoliciesandpracticesintoaninternallycoherentsystemthatisdirectlyalignedwithbusinessprioritiesandoperatinginitiativesmostlikelytocreateeconomicvalue.Inessence,ourfindingspointtothesignificantfinancialreturnsavailabletofirmsthatdramaticallyincreasethequalityoftheirHRMsystems.

Whiletheseeffectsarefinanciallysignificant,keepinmindthattheydonotrepresentamagicbullet.Thatis,simplechangesinanHRpracticewillnotimmediatelysendafirm’sstockpricesoaring.RememberthatourHRmeasuredescribesanentirehumanresourcesystem.Changingthissystembythemagnituderequiredtoenjoythesegainstakestime,insight,andconsiderableeffort.It’sfairtosaythatitrequiresatransformationoftheHRfunctionandsystem.Ifitcouldbedoneovernight,humanresourcesystemswouldbeeasilyimitatedandwouldquicklylosemuchoftheirstrategiccharacter.

ThebusinesscaseforastrategicHRrolemustalsoincorporateHR’skeyinfluenceonstrategyimplementationandtheroleofstrategicallyfocusedmeasurementsystems.Figure2-5describesthemodelforsuchabusinesscasebasedonourmostrecentsurveyofmorethan400firms.6Theseresultstellasimplebutpowerfulstory.Consistentwiththepremiseofthisbook,ourresearchsuggeststhatstrategyimplementation,ratherthanstrategycontent,differentiatessuccessfulfromunsuccessfulfirms.Itissimplymucheasiertochooseanappropriatestrategythanitistoimplementiteffectively.Moreover,successfulstrategyimplementationisdrivenbyemployeestrategicfocus,HRstrategicalignment,andabalancedperformancemeasurementsystem.Thelinchpinofsuccessfulstrategyimplementationisastrategicallyfocusedworkforce,whichwecouldconsidertheultimateHRperformancedriver.Finally,abalancedperformancemeasurementsystem,intandemwithanalignedHRsystemandeffectiveknowledgemanagement,isthefoundationforastrategicallyfocusedorganization.7

Step3:CreateaStrategyMapClarifyingyourfirm’sstrategysetsthestageforimplementingthatstrategy.Butitisjustthefirststep.Inmostorganizations,thecustomervalueembodiedinthefirm’sproductsandservicesistheresultofacomplex,cumulativeprocess—whatMichaelPorterreferstoasthefirm’svaluechain.8Allfirmshaveavaluechain—eventhosethathaven’tarticulatedit—andthecompany’sperformancemeasurementsystemmustaccountforeverylinkinthatchain.

Todefinethevalue-creationprocessinyourorganization,werecommendthatthetop-andmid-levelmanagerswhowillbeimplementingthefirm’sstrategydevelopwhatBobKaplanandDaveNortoncallastrategymapto

representthefirm’svaluechain.9Thesearediagramsofthevaluechain,suchasthoseshowninfigures2-1and2-2.Suchgraphicrepresentationsofthecompany’svaluechainrevealhowthefirmcreatesvalueintermsthatmanagersandemployeesalikecangraspandacton.Thevalue-chainmappingprocessshouldinvolvemanagersfromallfunctionsacrosstheorganization.Thisbroadparticipationnotonlyimprovesthequalityofthestrategymapbutalsoincreasesbuy-inamongcriticalplayers.Tobeginthemappingprocessinyourownorganization,takeacloselookatyourcompany’sstrategicobjectivesandaskyourselfthefollowingquestions:

Figure2-5HRandStrategyImplementation

•Whichstrategicgoals/objectives/outcomesarecriticalratherthannicetohave?

•Whataretheperformancedriversforeachgoal?

•Howwouldwemeasureprogresstowardthesegoals?

•Whatarethebarrierstotheachievementofeachgoal?

•Howwouldemployeesneedtobehavetoensurethatthecompanyachievesthesegoals?

•IstheHRfunctionprovidingthecompanywiththeemployeecompetenciesandbehaviorsnecessarytoachievetheseobjectives?

•Ifnot,whatneedstochange?

Thesesimplequestionscangenerateawealthofinformationabouthowwellafirm’sHRfunctionhasbeencontributingtotheorganization’ssuccess.Wealsosuggestsupplementingthesediscussionswithavarietyofotherinformation-gatheringtools,includingquestionnairestotestemployees’understandingofthefirm’sgoals,andsurveystogenerateadditionaldataaboutthefirm’sperformancedriversandorganizationalcapabilities.Once

youthinkyouhaveafullpictureofyourfirm’svaluechain,translatetheinformationthatyouhavegatheredintoaconceptualmodelusinglanguageandgraphicsthatmakesenseinyourorganization.Thentestforunderstandingandacceptanceinsmallgroupsofopinionleadersandthoughtleadersthroughoutthefirm.

Astrategymapofthevalue-creationprocesscontainshypotheses,orpredictions,aboutwhichorganizationalprocessesdrivefirmperformance.Normally,acompanyvalidatesthesehypothesesonlyafterachievingtargetsonperformancedriversandobservingtheimpactoftheseresultsonfirmperformance.However,iftheorganizationcangraphicallydepicttherelationshipsamongperformancedriverswhilemappingthefirm’svaluechain,itcanhavethatmuchmoreconfidenceinitsstrategyimplementationplan.

Searsisagoodexampleofanorganizationthathadachancetotestitshypothesesandfurtherrefineitsstrategymapbasedonactualexperience.Beginningwiththework-shop-investmodeldescribedinchapter1,Searsdramaticallyenhanceditsunderstandingoftheseconstructsasitgainedmoreexperiencewiththemodel—whichitsubsequentlyusedtoenhancethequalityofitsmeasurementsystem.Figure2-6describesthemorecomprehensive(“totalperformanceindicator”)strategymapthatSearsdevelopedatthelevelofthefull-lineretailstore.

Step4:IdentifyHRDeliverableswithintheStrategyMap

WementionedearlierthatHRcreatesmuchofitsvalueatthepointsofintersectionbetweentheHRsystemandthestrategyimplementationsystem.Maximizingthatvaluerequiresanunderstandingofbothsidesofthatintersection.Historically,HRmanagerslackedtherequisiteknowledgeofthebusinesssideoftheintersection,andgeneralmanagersdidnotfullyappreciatetheHRside.Whilethisgaphasnarrowedinrecentdecades,humanresourcemanagersshouldtakeprimaryresponsibilityfordepictingbothHRperformancedriversandHRenablersonthestrategymap.

Thisprocesscanbedifficult.Ontheonehand,humanresourceperformancedriverssuchasemployeecompetence,motivation,andavailabilityaresofundamentalthatitmaybevirtuallyimpossibletoknowwheretolocatethemonthemap.Toperformthisstep,werecommendasking

yourselfwhichHRdeliverables(again,bothperformancedriversandenablers)supportthefirm-levelperformancedriversdepictedinthestrategymap.Trytofocusonthekindsofstrategicbehaviorsthatarebroadlyafunctionofcompetencies,rewards,andworkorganization.Forexample,yourfirmmaydecidethatemployeestability(i.e.,lowturnover)improvesR&Dcycletime(afirm-levelperformancedriver).EmployeestabilityisthusakeyHRenabler.Seeingthisconnectionwouldpromptyoutodesignpolicies—suchasabove-market-ratesalariesorbonuses—thatwouldencouragelengthytenureamongexperiencedR&Dstaff.

Figure2-6Sears“TotalPerformanceIndicator”ModelforFull-LineRetailStores

Source:Sears,RoebuckandCo.Reprintedwithpermission.

LINKINGHRTOSTRATEGYATGTE

Steps1through3inthemodeldescribedinthischapteraremuchmorestraightforwardifthecompanyhasimplemented,orisintheprocessofimplementing,awiderBalancedScorecard.Insomecases,however,HRmanagershavetoapproximateSteps1through3withoutthebenefitofthemoresystematicanalysisthatwouldhavebeenpartofalargerBalancedScorecardeffort.TheexperienceatGTEisagoodillustrationofhow,whenthelargerorganizationhasnotparticipatedinthecreationofa“strategymap”linkingleadingandlaggingindicatorsofstrategicperformance,HRcanbegintolinkitsmeasurementsystemtotheenterprisestrategy.

AtGTE,HRinitiallydevelopedthefirm’s“peopleimperatives”aspartofatopleadershipplanningprocesscalled“Leadership2000.”These

imperativesfocusedonthenewbehaviorsandcapabilitiesrequiredtodrivebusinessresultsoverthenextfivetotenyears.ThisinturnwasthefoundationforanewHRstrategythatwasorganizedaroundfivestrategicthrusts,asfollows:

•talent;

•leadership;

•customerserviceandsupport;

•organizationalintegration;and

•HRcapability.

Mostimportant,GTEHRdidn’tstopwiththeseveryhighlevelstrategicthrusts.Instead,theymetwithGTEbusinessleadersandfoundoutwhatitwasabouteachofthefivestrategicthruststhatkeptthebusinessleadership“awakeatnight.”ThisalignmentprocessresultedinseventeenspecificquestionsthatbecametheorganizingfocusforthemetricsinHR’sownBalancedScorecard.Someexamplesofthesequestionsincludethefollowing:

•Dowehavethetalentweneedtobesuccessfulinthefuture?

•HowisHRhelpingGTEpositionitselftomeettheneedsofexternalcustomers?

•IsHRviewedasanenablertoattractingandretainingtoptalentatGTE?

•Arewemanagingthecostofturnover/churn?

•Arewemanagingfinancialrisk?

•WhatisGTE’sreturnoninvestmentinpeople?Source:GarrettWalker,HRdirectoratGTE,interviewwithauthor(MarkHuselid),August2000;andMeasureWhatMatters:AligningPerformanceMeasureswithBusinessStrategy(AmericanProductivityandQualityCenter,1999).

Step5:AligntheHRArchitecturewithHRDeliverables

Upuntilnow,you’vebeenthinking“topdown,”wherebystrategytellsyouwhichHRdeliverablesyoushouldfocuson(Step4).Nowthequestionis,HowcantheHRsystem(rewards,competencies,workorganization,etc.)be

structuredsoastoprovidethosedeliverables?Figure2-7illustrateshowaproperlyalignedHRsystemcreatestheHRdeliverable(lowturnoveramongseniorR&Demployees)thatenablesakeyperformancedriver(cycletime)inthestrategymap.TheexperienceatGTEillustratesthesesameconcepts.Asdescribedinthesidebar“LinkingHRtoStrategyatGTE,”GTEhasdevelopedaScorecardfortheHRfunction(seechapter3)thatfocusesonfiveenterprise-wideHRperformancedrivers,whichitcallsstrategic“thrusts.”Thesearehuman-capital-relatedareasthatareimportanttosuccessfulstrategyimplementationoverall,butarenotspecificallylinkedtoaparticularbusinessproblem.

However,GTEhasalsousedthesestrategic“thrusts”toguideitsanalysisofuniqueHRproblemsfacingitsrespectivebusinessunits.ThisisverysimilartoournotionoftheHRenabler,whichisahighlyfocusedpointofimpactfortheHRarchitecture.Forexample,inoneSBU,astrategicperformancedriverismakingserviceakeymarketdifferentiator.BasedonananalysisbyGTEHR,theHRdeliverable,touseourterms,isa“stableandengagedworkforce.”WewoulddifferentiatethisdeliverableasanHRenablerbecauseitwouldnotrisetothelevelofanenterprise-wideHRperformancedriver.Finally,GTEHRalignstheHRsystemtoprovidethenecessarytalentacquisition,incentiveplans,cultureinitiatives,and“braindrain”initiativestoprovidetherequiredHRdeliverable.

GTEHRhasalsoworkedwithindividualbusinessunitstodevelopSBU-specificstrategymapsthatmoresystematicallydescribeandguideHR’scontributiontotheunit’sstrategy.Forexample,GTE’sWirelessgroupdecidedtofocusonakeymarkettoincreasesalesandrevenue.HRworkedwithbusinessleadersinWirelesstodeveloptheuniquecompetenciesneededtoimplementthatstrategy.Figure2-8describestherelationshipbetweenHR’sinitiativesandfinancialperformance.HeretheHRdeliverableisasetofsalesskillcompetencies.

Figure2-7IntersectionofHRwithStrategyMap

Figure2-8representsresultsonemightexpectfromfollowingSteps1through4attheSBUlevel.ImplementingStep5meansdevelopingacompetencymodelanddevelopmentprogramtoprovidetheHRdeliverable

specificallyrequiredbythisstrategy.

Step5bringsyourfirm’svalue-creationstorytolifebyaligningtheHRsystemwiththefirm’slargerstrategy-implementationsystem.Buttodothis,youneedtothinkabouthowthecomponentswithinyourHRsystemfittogether(internalalignment)aswellashowtheHRsystemalignswith(thatis,supports)theotherelementsinthefirm’svaluechain(externalalignment).Theseconceptsofinternalandexternalalignmentarecloselyinterrelated.Specifically,internalalignmentisnecessarybutnotsufficientinitselfforexternalalignmenttooccur.Forexample,inthe1980s,IBMwascharacterizedbyhighlevelsofinternalHRalignment.Ledbyoneofthelargestandmostcompetentcadreofhumanresourceprofessionalsinbusinesshistory,thecompanydesignedaremarkablycohesiveHRmanagementsystemandthenlinkedittightlywithitscompetitivestrategy.ThisHRsystemwassocohesivethatwhenIBMchangeditsstrategy,manyestablishedhumanresourcestructuresbecameirrelevantandeveninappropriate.AhighlycohesiveHRstrategywillfailifitisnotperiodicallyreshapedsoastoalignwiththefirm’slarger(andoftenchanging)businessstrategy.YetallfirmsneedaninternallyalignedHRstrategyinordertoachievetheiroverallgoals.

Figure2-8StrategyMap:CompetencySkillAttainmentFocus

Source:ReprintedwithpermissionofGTECorporation.

MisalignmentbetweentheHRsystemandthestrategyimplementationsystemcanactuallydestroyvalue,asourexperiencewithalargemoney

centerdemonstrated.Likemanyotherbanksinthisindustry,thefirminquestionswitchedfromfull-timetopart-timefront-linetellerstosavepayrollcosts.Inmanyofitslocations,thecompanyoutsourcedentirecadresoftellersandthenleasedtheemployeesbackfromacontractor.Intheshortrun,thisstrategydidlowerlaborcosts.However,aboutayearlater,thebankfacedashortageofcandidatesfortheheadtellerandjuniorloanofficerpositions.Notonlyhadtheorganizationdismantledthetraininganddevelopmentopportunitiesthathadhistoricallypreparedtellersforpromotion,butinitsshifttopart-timeemployment,ithadattractedworkerswhoweren’tparticularlyinterestedinfull-timepositions,aswellassomeindividualswhowerenotnecessarily“promotable.”Asanunintendedconsequenceoftheshifttowardpart-timeemployment,recruitingandcompensationcostsshotupforpositionstwotothreelevelsabovetheentry-leveltellerpositions.Thebankwasnowforcedtohirefromtheoutside,butitnolongerhadtheselectionandtrainingsystemsinplacetodoso.Inthelongrun,totalcompensationcoststhusincreasedsignificantly,includingconsiderabletimelostanddiscontentamongotheremployees.Thelessonisthatthemeasurementsystemadoptedbythefirm(short-termpayrollcosts)eventuallyharmedthebusiness’soverallperformanceandhadexactlytheoppositeeffectofwhattheproblemfixersintended.

UNINTENDEDCONSEQUENCESATGTE

Thesystemicthinkingencouragedbya“balanced”performancemeasurementmodelisillustratedbytheexperienceofGTE.PriortothedevelopmentoftheirScorecard,GTEHRhadbeenunderstrongpressurebylinemanagerstofocuslargelyonefficiencyandcostcontrol.Inresponse,HRinoneregionreducedcycletimetofilljobsby50percentbelowthecompanyaverageandgenerallyachievedverylowstaffingcosts.However,theGTEcallcentersinthisregionwerenotseeingthebenefitsofthisHRefficiencyintheirbusinessresults.Insteadtheyhadaturnoverratetwicethecompanyaverageandfallingcustomerservicelevels.

Whathappened?BothlinemanagersandGTEHRhadbeenthinkingtoonarrowlyaboutHR’sinfluenceonthebusinessanddidn’tanticipatetheindirectinfluenceofthosedecisions.Asitturnedout,GTEHRhadstartedrecruitingfromadifferenttalentpooltoreducetheircycletime.Theyshiftedfromapoolofgraduatingstudentsandexperiencedprofessionalstotemporaryagenciesandjobbankapplicants.Cycletimeandstaffingcostsfell,butwiththeresultthatthesourcingprocesswaslessselectiveandnew

hiresdidnothavethesame“fit”aspasthires.Theresultwashigherturnoverratesandhighertrainingcosts,asthesehireslackedmanyofthefoundationalskillsoftheearlierpool.Customerservicelevelsfellasturnoverincreasedthepercentageofinexperiencedemployeesandfurtherdivertedmoreexperiencedstafffromcustomerstosupportthesenewemployees.

ThenewpartnershipwithbusinessleadersencouragedbytheHRScorecardresultedinamorecompleteunderstandingofthesesystemicrelationships.Theresultwasanacceptancethatlongercycletimesandhigherstaffingcostsareactuallyinvestmentswithsubstantialpositivebusinessresults.

Step6:DesigntheStrategicHRMeasurementSystemSteps1through5guidethedevelopmentoftheHRarchitectureandlaythegroundworknecessarytomeasuretheHR-firmperformancerelationship.InStep6,youactuallydesignthatHRmeasurementsystem.ThisrequiresnotonlyanewperspectiveonmeasuringHRperformance,butalsotheresolutionofsometechnicalissuesthatmanyHRprofessionalsmaynotbefamiliarwith.

TomeasuretheHR-firmperformancerelationshipwithprecision,youneedtodevelopvalidmeasuresofHRdeliverables.Thistaskhastwodimensions.First,youhavetobeconfidentthatyouhavechosenthecorrectHRperformancedriversandenablers.Thisrequiresthatyouclearlycomprehendthecausalchainforeffectivestrategyimplementationinyourorganization.Second,youhavetochoosethecorrectmeasuresforthosedeliverables.Forexample,infigure2-7theHRdeliverableisseniorstaffemploymentstability,butthereareseveralwaysthisconceptcouldbemeasured.Developingtheactualmeasurewouldrequirethatyoupreciselydefinewhoconstitutestheseniorstaff(forexample,thosewithfivetofifteenyearsofprofessionalexperience)andwhatyoumeanbyemploymentstability.Doesthelatterincludeallturnoverorjustvoluntary?Doesitincludeindividualswhohavebeenpromotedtomanagementresponsibilities?Finally,youneedtomeasurethosevariablesaccurately.

Inourexperience,mostfirmsgothroughseveralstagesofincreasingsophisticationwhentheydevelopanHRScorecard.Figure2-9illustratesthemeasurementchoicesfacingHRprofessionals.MostHRmeasurement

systemsfallintheTraditionalcategory,orStage1.Theseincludeoperationalmetricssuchascostperhireandactivitycounts.ThegapbetweenStages1and2inthediagramsymbolizesthesubstantialdividebetweenastrategicallyandoperationallyfocusedHRmeasurementsystem.

Figure2-9TheCreationofEmployeeStrategicFocusThroughIncreasingMeasurementSophistication

Inthesecondstage,HRmeasureshavetheauraofstrategicimport,buttheydolittletovalidateHR’sroleasastrategicasset.Firmsmaydeclareseveral“people”measures,suchasemployeesatisfaction,ashavingstrategicvalue,andthesemetricsmightevenmaketheirwayintotherewardsysteminsomefashion.Insuchcases,thereisa“balance”betweenfinancial($$)andnonfinancial(NF)measures,butthereisnoconsensusabouthowthesevariablesservetoimplementstrategy.Thereisthereforenostrategiclogiclinkingthesemeasurestogether.SuchfirmshaveskippedSteps2through5inourmodel.

Stage3infigure2-9isakeytransitionpoint.Thefirmincludesnonfinancialmeasures(amongthemHRmeasures)initsstrategicperformancemeasurementsystem.Inaddition,itlocateseachmeasurewithinastrategymap.Forthefirsttime,humanresourcemeasuresarelegitimatelytrackingHR’scontributiontofirmperformance.

InStage4,HRmeasurementsystemsletthefirmestimatetheimpactofHRpoliciesonfirmperformance.Ifthefirm’svaluechainisshort,asitisatSears,thecompanycangaugethefullimpactofHRonoverallperformance.Inorganizationswithmorecomplexvaluechains,estimatesofHR’sinfluencemaybelimitedtosegmentswithinthechain.Justbecauseyoucan’tcapturethefullimpactofHRonfirmperformance,thatdoesn’tmeanthatyou

shouldn’tmeasurepartoftheimpact.Forexample,considertheexampleofanimaginarycompanycalledPetroPipelineinfigure2-10.ThisdescribesaverysmallportionofalargerstrategymapdepictingPetro’sstrategyimplementationsystem.ItwouldbereasonablystraightforwardtomeasuretheinfluenceoftheHRdeliverables(improvedemployeefocusonpreventivemaintenance)on“repairdowntime”andsubsequenteffectsoncustomerperceptionsofPetroasareliableprovider.

Clearly,measuringtheHR-firmperformancerelationshipisnotanall-or-nothingproposition.Anyprogressbeyondtraditionalmeasurementapproachesislikelytoyieldsubstantialimprovementlaterinthevaluechain.Themoresophisticatedthemeasurementsystem,thegreatertheeventualbenefits.

Step7:ImplementManagementbyMeasurementOncetheHRScorecardisdevelopedalongtheprinciplesdescribedinourmodel,theresultisapowerfulnewmanagementtool.Actuallyimplementingthistoolismuchmorethanjust“keepingscore”ofHR’simpactonfirmperformance.IftheScorecardisalignedwiththeimperativesofthefirm’sstrategy,HRprofessionalswillhavenewinsightintowhatittakestoactuallymanageHRasastrategicasset.

Forexample,GTEHRhadalwaysmeasuredtheturnoverratesinitsbusinesses,butpriortothedevelopmentofitsHRScorecard,therehadbeenlittleefforttounderstandtheunderlyingdimensionsoftheturnoverratesandtheirconsequencesfororganizationalprofitability.Inotherwords,althoughGTEHRmeasuredturnoverinthepast,itreallydidn’tmanageitasabusinessprobleminitsrespectivebusinessunits.AstheHRScorecardwasimplemented,theseturnoverratesweremorecloselyanalyzedindicatingsubstantialincreasesamongnewhiresandthemostexperiencedemployees.TheresultwasnewHRinterventionsforbothgroupsthataddressedtheseproblemswithassociatedbenefitsfortheperformanceofthebusinessunitsinvolved.10

Figure2-10InfluenceofHREnablersatPetroPipeline

Note:Thisfigureisasubsectionofalargercausalmap.

ImplementinganewmanagementprocessbasedontheworkdoneinSteps1through6requiresconsiderablechangeandflexibility.Moreover,theprocessisnotjustaone-timeevent.HumanresourceleadersmustregularlyreviewtheHRdeliverablesthey’vedefinedinordertobesurethatthesedriversandenablersremainstrategicallysignificant.ThisisparticularlytrueforHRenablersthathavedirectlinkstospecificbusinessobjectives.SkilledHRmanagersunderstandwhenanenablerisnolongerplayingastrategicroleandneedstobereplaced.

SUMMARY:DEVELOPINGWORLD-CLASSPERFORMANCEMEASUREMENT

Developingaworld-classperformancemeasurementsystemhingesonaclearunderstandingofthefirm’scompetitivestrategyandoperationalgoals—andadefinitivestatementoftheemployeecompetenciesandbehaviorsrequiredtoachievethefirm’sobjectives.Moreover,asystemsperspectiveisaprerequisiteforcultivatinginternalandexternalalignmentoftheHRsystemandthusforgeneratingtruecompetitiveadvantage.Measurementsystems—forthefirmasawholeorfortheHRfunction—cancreatevalueonlywhentheyarecarefullymatchedwiththefirm’suniquecompetitivestrategyandoperationalgoals.Thus,firmsshouldbenchmarkotherorganizations’measurementsystemswithcaution.Inthecaseofmeasurementsystems,“bestpractices”maynotbeportableacrossfirms.Thereinliestheir

competitivevalue!

3

CREATINGANHRSCORECARD

ASWE’VESEEN,anHRScorecardletsyoudotwoimportantthings:(1)manageHRasastrategicassetand(2)demonstrateHR’scontributiontoyourfirm’sfinancialsuccess.AlthougheachfirmwilldepictitsScorecardinitsownway,awell-thought-outScorecardshouldgetyouthinkingaboutfourmajorthemes:thekeyhumanresourcedeliverablesthatwillleverageHR’sroleinyourfirm’soverallstrategy,theHigh-PerformanceWorkSystem,theextenttowhichthatsystemisalignedwithfirmstrategy,andtheefficiencywithwhichthosedeliverablesaregenerated.

WediscussthesedimensionsoftheHRScorecardinmoredetaillaterinthischapter.However,tobegintounderstandwhatbuildinganHRScorecardrequires,let’slookatthatprocessinacompanywe’llcallHiTech.Forthesakeofillustration,we’llfocusonHiTech’sR&DfunctionandexploreHR’spotentialroleinthisunit’sstrategyimplementationmodel.Asinmanybusinessunits,R&DatHiTechhasprofitabilitygoalsthathingeonbothrevenuegrowthandproductivityimprovement—twoimportantperformancedrivers.TobuildanHRScorecardforjustthisunit,weneedtounderstandtherolethatHRplaysinthesetwodimensionsoftheR&Dstrategymap.Wecoulddescribethisroleasfollows:

•Revenuegrowthultimatelyderivesfromincreasedcustomersatisfaction,whichinturnisboostedbyproductinnovationandreliabledeliveryschedules,amongotherthings.

•Productinnovationstronglydependsonthepresenceoftalentedstaff

withsignificantcompanyexperience.Throughcompetency-basedselectionmethodsandretentionprograms,HRcontributestostable,high-talentstaffinginR&D.

•Reliabledeliveryschedulesinparthingeonthemaintenanceofoptimalstaffinglevelsinmanufacturing.Evenifturnoverinmanufacturingislow,thecompanymustfillvacanciesquickly.Byreducingrecruitingcycletime,HRsupportsoptimalstaffinglevels.

•Productivityimprovementhaslinkstothemaintenanceofoptimalproductionschedules,whichinturndependsonthemaintenanceofappropriatestaffinglevels.Again,HRrecruitingcycletimedrivesstaffinglevels.

DEVELOPINGANHRMEASUREMENTSYSTEM

Nowlet’s“walkthrough”afewstepsintheHRScorecardapproachinordertoillustratehowHiTechmightbegindevelopingitshumanresourcemeasurementsystem.

IdentifyingHRDeliverablesTherearetwoHRdeliverablesinthisexample.Thefirstisstable,high-talentstaffingintheR&Dfunction.Thisdeliverablehasseveraldimensions.Foronething,theR&DstaffmusthavetheuniquecompetenciesdefinedbyHiTechandmustdemonstratethosecompetenciesatthehighestlevels.Thesecompetenciescombinecutting-edgetechnicalknowledgewiththespecializedproductdemandsfoundinHiTech.Thustheyarenotinfluencedbyin-houseprofessional-developmentefforts.Moreover,becausethesecompetenciesarespecifictoHiTechandrequireseveralyearsoffirmexperiencetodevelop,thecompanymustkeepitsR&Dstaffingturnoververylow.

ThesecondHRdeliverableisoptimalstaffinglevelsinthemanufacturingunit.

BothofthesedeliverableshaveclearimplicationsforHiTech’soverallperformance.Onecontributestorevenuegrowth,whiletheotherinfluencesproductivitygrowth.

High-PerformanceWorkSystemOncetheHRdeliverableshavebeenclearlydefined,wecanbegintoidentifyandmeasurethefoundationalHigh-PerformanceWorkSystemelementsthathelptogeneratethosedeliverables.WetermtheseelementsaHigh-PerformanceWorkSystemtorepresentthefactthattheyhavebeenselectedspecificallywiththeintentofimplementingstrategythroughtheHRdeliverables.InthecaseofHiTech,thismeansdesigningandimplementingavalidatedcompetencymodellinkedtoeveryelementintheHRsystem,andprovidingregularperformanceappraisalstoallemployees.AswithalloftheotherelementsoftheHRscorecard,thereareavarietyofwaysthatthesedatacanberepresented.Themostcommonapproachistopresenttheproportionofachievementoneachelement,althoughitisalsopossibletoindicatewhetherornoteachelementiseitheruptostandardorbelowstandardwithatoggleindicatingred(belowstandard),yellow(marginal),orgreen(meetsstandard).

IdentifyingHRSystemAlignmentWhatHRsystemelementsneedtoreinforceoneanothersoastoproducethetwoHRdeliverables?Inthecaseofstable,high-talentstaffinginR&D,wecanassumethatthefirmhasdevelopedavalidatedcompetencymodel.AtHiTech,selectionintothesepositionsmustcorrespondtotheexistingcompetencymodel,andthequalityofthehiresshouldbeatthehighestlevels.Thesealignmentgoalswouldstronglyinfluencetheparticularsourcingdecisionsneededtoproducethoseresults.However,thesourcingdecisionsdonothavetobepartoftheHRScorecard.Theassumptionisthatsinceyouaremeasuringtheoutcomesofthosesourcingdecisionsandsince“whatgetsmeasuredgetsmanaged,”thensourcingdecisionswillbeguidedbytheneedtoachievetheseoutcomegoals.

HiTechalsoneedstoenactthekindsofretentionpoliciesthatbuildexperienceintheR&Dunit.Note,though,thatunderstandingthatretentionpoliciesareakeyleadingindicatorismoreimportantthantheactualselectionofpolicies,whichareuniquetoeachfirm.AtHiTech,acarefullychosenrangeofHRactivitiesandpolicies,fromsupervisorytrainingtouniquebenefitpackages,mightbeinorder.ThekeythingisthatseeminglyirrelevantHR“doables”haveaclearstrategicrationale.

Toachieveoptimalstaffinginmanufacturing,HRmustkeepitsrecruiting

cycletimeshort.Theappropriatealignmentmeasure—forexample,afourteen-dayrecruitingcycletime—wouldreflectprogresstowardthatobjective.

IdentifyingHREfficiencyMeasuresInthissimpleexample,HiTechcouldidentifycostperhireasastrategicefficiencymeasure.Forbothdeliverables,costperhirewillprobablybehigherthanaverage.But,thebenefitsofthosehiringprocesseswillalsobewellaboveaverage.TheHRScorecardthatHiTechdevelopsshouldhighlighttheselinksbetweenimportantcostsandbenefits.

Figure3-1givesyouabasicideaofhowHiTech’sR&DHRScorecardmightlook.Ofcourse,anHRScorecardfortheentirecompanywouldincludemanymoreentries.ThisdiagramrepresentsaconcisebutcomprehensivemeasurementsystemthatwillbothguideHRstrategicdecisionmakingandassessHR’scontributiontoR&D’sperformance.Moreimportant,thescorecardispresentedinsuchawaythatitreinforcesthe“causallogic”orstrategymapofhowHRcreatesvalueatHiTech.

THETHINKINGBEHINDTHEHRSCORECARD

WhyhavewechosentheidentificationofHRdeliverables,theuseoftheHigh-PerformanceWorkSystem,HRsystemalignment,andHRefficiencymeasureasessentialelementsoftheHRScorecard?WebelievethatthisarrangementreflectsabalancebetweenthetwinHRimperativesofcostcontrolandvaluecreation.CostcontrolcomesthroughmeasuringHRefficiency.ValuecreationcomesthroughmeasuringHRdeliverables,externalHRsystemalignment,andtheHigh-PerformanceWorkSystem.TheselastthreeessentialelementsoftheHRarchitecturetraceavaluechainfromfunctiontosystemstoemployeebehaviors.

Inthefollowingtwosections,weoutlineawayofthinkingaboutcostcontrolandvaluecreation.Again,itismoreimportantthatmanagersunderstandthereasoningbehindtheScorecardthannarrowlyfollowtheparticularformatwehaveselected.ThevalueoftheScorecarddiagramitselfliesinthethinkingthatgoesintoitanditspowerasadecision-makingtool

onceit’sconstructed.

TheBottom-LineEmphasis:BalancingCostControlandValueCreation

LikemostHRmanagers,youareprobablyunderconstantpressuretohelpyourorganization“driveoutcosts.”Indeed,manylinemanagersconsidermuchofwhatHRdoesasoverhead.Inmanyinstances,thesemanagersarecorrect,whichputsevenmoreresponsibilityonHRtofindefficiencieswhereverpossible.WeacknowledgethesedemandsandbelievethateveryHRScorecardshouldincludeadimensionthatcapturestheefficiencyoftheHRfunction.Theproblemisthat,inorganizationsthatviewHRasnothingmorethanacostcenter,efficiencyoftheHRfunctiontendstobetheonlybottom-linemetricintheHRmeasurementsystem.

YetdespitethisimperativetomeasureHRefficiency,theHRfunctiondoesnothaveastrategicsignificancefortheorganization.HRefficiencyhasthesamevalueasanyotheraccounting-focusedformofcostcontrol,butitdoesn’tgenerateunique,intangibleassetsoverthelongrun.Recallouranalysisinchapter1ofhowthestructureandalignmentoftheHRsystemcontributetoshareholdervalue.WemadenomentionofHRefficiencyinthatdiscussion,becauseitisnottypicallyasourceofvaluecreation.Andinchapter2,wherewediscusstheresearchbehindmakingthebusinesscaseforstrategicmanagementofHR,wedidnotmentionefficiency.

Figure3-1HRScorecardforHiTech’sR&DFunction

Whyhaveweputsolittleemphasisonthistheme?First,efficiencyinthe

HRfunctionsimplycan’tgenerateenoughcostsavingstosubstantiallyaffectshareholdervalue.Second,whatevercompetitiveadvantagesuchefficienciesmightofferisverylikelylostasotherfirmsadoptsuchpractices.Inotherwords,mostHRfunctionsarefairlyadeptatprovidingefficientHRprocesses;thiscapabilitydoesn’tdistinguishthesuccessfulfromtheunsuccessfulfirm.Therefore,thesesortsofmeasureswillplayalimitedroleindeterminingHR’sstrategicinfluence.

There’sacrucialdifference,however,betweencostcontrolandefficiencywithintheHRfunctionandHR’scontributiontocostsavingandefficiencyinlineoperations.Forexample,mostbalancedperformancemeasurementsystemscontainmetricsassessingbothrevenuegrowthandproductivityorefficiency.“Efficiency”willoftenberepresentedbyafinanciallaggingindicator,suchas“reduceunitcosts.”Anumberofperformancedriverswillmapontothatindicator(thearrowsinyourstrategymap),butmanywon’t.WhenHRenablersaffectthe“efficiency”componentofthosedrivers,theyareactuallyinfluencingtheefficiencyoflineoperations.IntheHiTechexample,thereisaclearlineofsightbetweenefficientHRrecruitingprocessesandthefirm’sbottomlinethroughHR’scontributiontoimprovedoperatingefficiency.Thispointwasalsoillustratedbyourexampleinchapter2ofGTE’straditionalnarrowfocusonHRefficiency.Theireffortstoreducehiringcycleasanefficiencymeasureultimatelyresultedinbusinessproblemsthatweremuchmoresignificantthantheoriginalefficiencygains.

Still,theHRScorecardneedstoemphasizeHR’svaluecreation,temperedbyattentiontoefficiency.OnlyinthiswaycanthehumanresourcemanagementsystemstrengthenHR’sstrategicinfluenceintheorganizationoverall.ThatiswhymostoftheScorecardshouldfocusonthevaluecreatedthroughHR’scontributiontostrategyimplementation.Figure3-2illustratesthisperspective.

Asthisfiguresuggests,ifHRmanagersaremeasuringwhatmatters,theyaremeasuringthoseHRdecisionsandoutcomesthatgetthehighestrateofreturn.Forexample,theoperationalside(thetraditionalfocusofHR)focuseslargelyondoables(HRefficiency)andgeneratesalimitedrateofreturn.Thoughexceptionsexist,weconsidertheoperational-high-returnoutcomean“emptyset.”Therearesofewhigh-returnopportunitiesonthissideofHRthattheyprobablyarenotworthexploringatlengthhere.Atthesametime,blindlyfocusingon“strategy”doesn’tguaranteehighreturnseither.Infact,this“tunnelvision”ledtomuchofthefrustrationintheearlyyearsof“strategic”HR.Duringthattime,humanresourcemanagersdevotedtoomuchefforttogettingaseatatthestrategicplanningtableandoverlookedthe

greateropportunitiesavailableinstrategyexecution.Theyweren’tdevelopingastrategicallyfocusedHRarchitecturethatisthekeytoHR’svalueasastrategicasset.TheseHRmanagerswereoperatinginthatlower-right-handcorner,exchangingonelow-returnphilosophyforanother.

BalancingcostcontrolandvaluecreationmeasureshelpsHRmanagerstoavoidanothermistakeaswell:thetendencytofocusonthebenefitsofHR’sstrategiceffortswhileignoringthecostsofthosebenefits.ThehighestratesofreturnforHRcomefromadisciplinedstrategicfocus.HRdeliverables,ratherthandoables,arethesourceofthesebenefits,butonlyiftheHRsystemismanagedefficiently.Rememberdoablestendtobecost-focused;deliverables,benefits-focused.Inpractice,manyHRprocessesthatcomprisethedoablesarethecostsassociatedwithgeneratingthedeliverables.It’snotthatdoablesareunimportant;it’sjustthatyouneedtogaugehowwelltheytranslateintodeliverableswithvalue.YoumustkeepbothinmindwhenevaluatingHR’soverallrateofreturn.

Figure3-2BalancingCostControlandValueCreation

Let’srevisittheHiTechexampletoseehowthisworks.Inthatscenario,HR’sabilitytoreducerecruitingcycletimeimprovedoperationalefficiencyintheR&Dunitandwouldultimatelyboostfinancialperformancefortheentirefirm.Butreducingrecruitingcycletimefrom,say,fifty-twotofourteendaysmightwellhaverequiredspecialinvestmentinstaffortechnology.Managersfocusedonlyonefficiencymayhaverecoiledattheadditionalcostandrejectedthedecisiontoinvest.EvenHRmanagerswhounderstoodthatthiswastherightdecisionmayhavehadonlyavaguesenseofwhetherthebenefitswouldtrulyjustifythecost.Anappropriatemeasurementsystemwouldhaveshowntheminconcretetermsthatthedecisiontoinvestinreducedrecruitingcycletimecouldpayoff.

Thisexampleillustratesanotheradvantageofunderstandingthebalancebetweencostcontrolandvaluecreation.ManyHRmanagersworkforfirms

thatpridethemselvesonbeing“leanandmean.”SuchorganizationskeepHRthinlystaffed,soastocontroloverheadasmuchaspossible.ThispolicycanbeshortsightedifHRistrulytoserveasanintangibleasset.Aswesawinchapter1,high-performingfirmshadmorethantwiceasmanyHRprofessionalsperemployeeasdidlow-performingfirms.Evenmorefrustrating,manyorganizationsnowexpectHRmanagerstoplayastrategicrole—butwithnoincreaseinresources.Underthesecircumstances,mostmanagersarealmostdoomedtofail.Theonlywaytheycanpassthistestistodemonstrate,throughtheirmeasurementsystem,howresourcesallocatedtoHRmightactuallycreatevalue.

TheArchitecturalEmphasis:WhichHRValueChainElementsGointothe

Scorecard?SincetheprimaryfocusofHR’sstrategicroleisvaluecreation,thinkingaboutHRarchitecturemeanstakingthebroadviewofHR’svaluechain.Justasacorporatescorecardcontainsbothleadingandlaggingindicators,theHRScorecardmustdothesame.OfthefourHRarchitectureelementsthatwerecommendincludingintheScorecard—High-PerformanceWorkSystem,HRsystemalignment,HRefficiency,andHRdeliverables—thefirsttwoareleadingindicatorsandthesecondtwoarelaggingindicatorsforHR’sperformance.

MeasuringtheHigh-PerformanceWorkSystemlaysthefoundationforbuildingHRintoastrategicasset.AHigh-PerformanceWorkSystemmaximizestheperformanceofthefirm’semployees.Theproblemisthattheperformancedimensiontendstogetlostintheattentionmostfirmsgivetoissuesofefficiency,complianceconstraints,employeerelations,etc.—noneofwhichispartofHR’sstrategicrole.Thisisamistake.TheperformancedimensionneedstohaveprominenceifafirmwantstoenjoythefinancialbenefitsthattheScorecardapproachmakespossible.Therefore,everyfirm’sHRmeasurementsystemshouldincludeacollectionofindicatorsthatreflectsthe“performancefocus”ofeachelementintheHRsystem.

Aswe’veseen,measuringHRsystemalignmentmeansassessinghowwelltheHRsystemmeetstherequirementsofthefirm’sstrategyimplementationsystem,orwhatwehavecalled“external”alignment.Wehavealsomentioned“internal”alignment,definedastheextenttowhicheach

oftheelementsworkedtogetherratherthaninconflictwithoneanother.Wedonotgiveequalemphasistointernalalignmentinourmeasurementsystembecause,iftheHRsystemisuniformlyfocusedonstrategyimplementation,theelementsshouldtendtowardinternalalignment.Inotherwords,ifHRmanagerscanmanageexternalalignment,theninternalmisalignmentswilltendtodisappear.AfocusoninternalalignmentbecomesmoreappropriateasaninitialdiagnosticforthosefirmsthathavenotadoptedastrategicHRperspective.Internalmisalignment,therefore,ismuchmorelikelytobeasymptomofanoperationallyfocusedHRsystem.

HRefficiencyreflectstheextenttowhichtheHRfunctioncanhelptherestofthefirmtogeneratetheneededcompetenciesinacost-effectivemanner.ThisdoesnotmeanthatHRshouldtrytosimplyminimizecostswithoutattentiontooutcomes,butneithershouldthey“throwmoneyoffthebalcony.”Themetricsincludedinthiscategoryshouldreflectthatbalance.

Andfinally,HRdeliverablesarethekeyhuman-capitalcontributorstoimplementationofthefirm’sstrategy.Theytendtobestrategicallyfocusedemployeebehaviors,suchasthelowturnoverratesintheHiTechexample.

Howdoesthissimpleillustrationinfigure3-3helpusinunderstandingtheappropriatestructureofanHRScorecard?Whilewewilldeveloptheseideasinmoredetaillaterinthechapter,therearesomeorganizingprinciplestokeepinmind.ThestructureofastrategicHRmeasurementsystemdependsonstrikingthecorrectbalancebetweenefficiencyandvaluecreation,whilebeingguidedbyabroadstrategicratherthananarrowoperationalperspectiveonHR.

Itisimportanttounderstandthatproperpositioningonbothdimensions(seefigure3-3)providesthebasisforsynergiesbetweenHRmanagementandthemeasurementsystem.Inotherwords,forHRtobeabletodemonstrateasignificantimpactonfirmperformance,theHRarchitecturemustbedesignedasastrategicassetandtheHRmeasurementsystemmustbedesignedtoguidethemanagementofthatstrategicasset.

CONSTRUCTINGTHEHRSCORECARD

Nowthatwe’vetalkedaboutthefourdimensions—HRdeliverables,theHigh-PerformanceWorkSystem,externalHRsystemalignment,andHRefficiency—thatshouldgointotheHRScorecardandthereasoningbehindincludingthem,let’smoveontohowyoumightactuallyusethemto

constructyourScorecard.First,wewilltakeacloserlookateachdimension.

TheHigh-PerformanceWorkSystemHR’sstrategicinfluencerestsonafoundationofhigh-performingHRpolicies,processes,andpractices.However,giventheconflictingdemandsthatHRmanagerstypicallyconfront,theseprofessionalsneedasetofmeasuresthatkeeptheperformancedimensionofthoseHRactivitiesattheforefrontoftheirattention.Suchmeasuresdon’treflectwhatisasmuchastheyremindmanagersofwhatshouldbe.Therefore,theycanberepresentedontheHRScorecardassimpletoggles,indicating“unsatisfactory”or“satisfactory.”Or,theycanbeincludedasmetricsalongacontinuum.

Figure3-3TheSynergyofMeasurementStructure

ForanillustrationofthekindsofbroadquestionsweincludeinourHPWSsurvey,seethesidebar“ExamplesofHigh-PerformanceWorkSystemMeasures.”Asyoucansee,thesequestionsarenotdesignedtotestwhetheranorganizationiscurrentontheverylatestHRfadorhasaddedanothertendegreestoitsperformance-appraisalsystem.Rather,theyworkthrougheachHRfunctionfroma“macro”levelandhighlighttheperformanceorientationofeachactivity.

EXAMPLESOFHIGH-PERFORMANCEWORKSYSTEMMEASURES

•Howmanyexceptionalcandidatesdowerecruitforeachstrategicjobopening?

•Whatproportionofallnewhireshavebeenselectedbasedprimarily

onvalidatedselectionmethods?

•Towhatextenthasyourfirmadoptedaprofessionallydevelopedandvalidatedcompetencymodelasthebasisforhiring,developing,managing,andrewardingemployees?

•Howmanyhoursoftrainingdoesanewemployeereceiveeachyear?

•Whatpercentageoftheworkforceisregularlyassessedviaaformalperformanceappraisal?

•Whatproportionoftheworkforcereceivesformalfeedbackonjobperformancefrommultiplesources?

•Whatproportionofmeritpayisdeterminedbyaformalperformanceappraisal?

•Ifthemarketratefortotalcompensationwouldbethefiftiethpercentile,whatisyourfirm’scurrentpercentilerankingontotalcompensation?

•Whatpercentageofyourexemptandnonexemptemployeesiseligibleforannualcashordeferredincentiveplans,orforprofitsharing?

•Whatpercentageofthetotalcompensationforyourexemptandnonexemptemployeesisrepresentedbyvariablepay?

•Whatisthelikelydifferentialinmeritpayawardsbetweenhigh-performingandlow-performingemployees?

JeffreyPfefferhasdevelopedasimilarsetofhigh-performancecharacteristicsthatheassociateswithafirm’sabilitytotransformpeopleintoasourceofcompetitiveadvantage.1Heincludesselectivehiring,highpay,incentivepay,employeeownership,informationsharing,andanemphasisontraininganddevelopment.Butinaddition,hecitesseveraldimensionsdesignedtoprovidemoreemployeeequityinorganizationalprocessesandoutcomes.Amongthelatter,hementionsemployeeparticipationandempowerment,narrowerpaydifferentialsacrossthefirm,symbolicegalitarianism,andgreateremploymentsecurity.Foryourreference,we’velistedmoreHigh-PerformanceWorkSystemmetricsintable3-1.

HRSystemAlignmentThenextcomponentintheHRScorecardencouragesyoutogaugethe

alignmentoftheHRsystemwithdriversofthefirm’sstrategyimplementationprocess.TotransformagenericHigh-PerformanceWorkSystemintoastrategicasset,youneedtofocusthatsystemdirectlyonthehuman-capitalaspectsofthosedrivers.

Choosingthecorrectalignmentmeasuresisrelativelystraightforward,ifyoubeginwiththeprocessdiscussedinchapter2.ThisprocesshelpsyouunderstandtheexactHRdeliverablesrequiredtocreatevalueintheorganization,whichinturnindicatesspecificelementsoftheHRsystem(leadingindicators)thatmustreinforceoneanotherinordertoproducethosedeliverables.Therefore,specificalignmentmeasureswillbelinkeddirectlytospecificdeliverablesintheScorecard.Connectingtheminthiswayhighlightsthecause-and-effectrelationshipsneededtosupportHR’scontributiontofirmperformance.

Table3-1High-PerformanceWorkSystemMeasures

Averagemeritincreasegrantedbyjobclassificationandjobperformance Percentageofemployeeswhosepayisperformance-contingent

Backuptalentratio PercentageofemployeeswithdevelopmentplansCompetencydevelopmentexpenseperemployee PercentageoftotalsalaryatriskFirmsalary/competitorsalaryratio QualityofemployeefeedbacksystemsIncentivecompensationdifferential(lowversushighperformers) Range(distribution)ofperformance-appraisalratingsNumberandqualityofcross-functionalteams RangeinmeritincreasegrantedbyclassificationNumberandtypeof“specialprojects”todevelophigh-potentialemployees

Numberofsuggestionsgeneratedand/orimplemented

Toselecttheappropriatealignmentmeasures,focusonthoseelementsofyourHRsystemthatmakeadefinableandsignificantcontributiontoaparticularHRdeliverable.Thesedifferforeachfirm,buttheexperienceatSearsdescribedinchapter1isagoodexample.IdentifyingthesemeasuresrequiresyoutocombineaprofessionalunderstandingofHRwithathoroughknowledgeofthevalue-creationprocessinyourownfirm.Rememberthatthealignmentmeasureswillfollowdirectlyfromthe“top-down”process.Basedonthelarger“strategymap”(Step3inourseven-stepmodel),youwillidentifyyourHRdeliverables,whichinturnwillpointtocertainelementsoftheHRsystemthatrequirealignment.Therefore,therearenostandardalignmentmeasuresthatcanbeprovidedasexamples.Instead,weemphasizetheneedforastandardprocessbywhicheachfirmwilldevelopsitsownsetofalignmentmeasures.

MuchliketheHigh-PerformanceWorkSystemmeasures,theexternalHRsystemalignmentmeasuresaredesignedlargelyforusewithinafirm’sHRdepartment.TheytoocanberepresentedastogglesontheScorecard,

indicatingalignmentornonalignment.ThekeyissueisthattheypromptHRmanagerstoroutinelythinkaboutalignmentissuesandhighlightareasrequiringaction.

HREfficiency:CoreversusStrategicMetricsAsanHRprofessional,youdoubtlesshaveaccesstoawiderangeofbenchmarksandcoststandardsbywhichyoucanmeasureHR’sefficiency.Weshowanumberoftheseintable3-2.2Allofthesemetricsencouragecostsavingsandarethekindsofmeasuresyouwouldfindinthefirstlevelofourmeasurementpyramid(figure2-9inchapter2).ButunlessyouwantHRtobetreatedlikeacommodityinyourorganization,youshouldbewareofbuildingyourmeasurementsystemunthinkinglyonthesegenericbenchmarks.Instead,separateoutthecostsassociatedwithHRcommoditiessuchasemployeebenefitstransactionsandpolicycompliance,andtheuniqueinvestmentsrequiredtocreateHR’sstrategicvalueinyourorganization.(Thesechoiceswilldifferforeachorganization.Partofourrationaleforincludingsuchalonglistofpotentialmetricsistohighlighttheimportanceofchoosingkeymetricscarefullyusingtheprocesswehavedescribed.Otherwise,itispossibletobecomeoverwhelmedbythepotentialchoices).BenchmarkingisfinefortheHRcommodityactivities,butithasnosignificantinfluenceonyourfirm’sabilitytoimplementitsstrategy.

Table3-2HREfficiencyMeasures(Doables)

AbsenteeismratebyjobcategoryandjobperformanceAccidentcostsAccidentsafetyratingsAverageemployeetenure(byperformancelevel)AveragetimefordisputeresolutionBenefitscostsasapercentageofpayrollorrevenueBenefitscosts/competitors’benefitscostsratioCompliancewithfederalandstatefairemploymentpracticesCompliancewithtechnicalrequirementsofaffirmativeactionComprehensivenessofsafetymonitoringCostofHR-relatedlitigationCostofinjuriesCostpergrievanceCostperhireCostpertraineehourHRdepartmentbudgetasapercentageofsalesHRexpenseperemployeeHRexpense/totalexpenseIncidenceofinjuriesInterviews-per-offerratio(selectionratio)

LosttimeduetoaccidentsMeasuresofcycletimeforkeyHRprocessesNumberofapplicantsperrecruitingsource(byquality)Numberofhiresperrecruitingsource(byquality)NumberofcoursestaughtbysubjectNumberofrecruitingadvertisingprogramsinplaceNumberofsafetytrainingandawarenessactivitiesNumberofstress-relatedillnessesNumberoftrainingdaysandprogramsperyearOffer-to-acceptanceratioOSHAauditsPercentageofandnumberofemployeesinvolvedintrainingPercentageofcorrectdatainHRinformationsystemPercentageofemployeedevelopmentplanscompletedPercentageofemployeeswithaccesstoappropriatetraininganddevelopmentopportunitiesPercentageofnewmaterialintrainingprogramseachyearPercentageofpayrollspentontrainingPercentageofperformanceappraisalscompletedontimeResponsetimeperinformationrequestSickdaysperfull-timeequivalentperyearSpeedofsalaryactionprocessingTimeneededtoorientnewemployeesTimetofillanopenpositionTotalcompensationexpenseperemployeeTotalHRinvestment/earningsTotalHRinvestment/revenuesTurnoverbyrecruitingsourceTurnovercostsTurnoverratebyjobcategoryandjobperformanceVariablelaborcostsaspercentageofvariablerevenueWorkers’compensationcostsWorkers’compensationexperiencerating

Source:AdaptedfromDaveUlrich,“MeasuringHumanResources:AnOverviewofPracticeandaPrescriptionforResults,”HumanResourcesManagement36(Fall1997):303–320.

WethusrecommendthatHRmanagersdividetheirkeyefficiencymetricsintotwocategories:coreandstrategic.CoreefficiencymeasuresrepresentsignificantHRexpendituresthatmakenodirectcontributiontothefirm’sstrategyimplementation.StrategicefficiencymeasuresassesstheefficiencyofHRactivitiesandprocessesdesignedtoproduceHRdeliverables.Separatingthesetwohelpsyouevaluatethenetbenefitsofstrategicdeliverablesandguidesresource-allocationdecisions.Toseehowthisworks,considerthefollowingHRefficiencymeasures:

•benefitcostsasapercentageofpayroll

•workers’compensationcostperemployee

•percentageofcorrectentriesonHRinformationsystem

•costperhire

•costpertraineehour

•HRexpenseperemployee

Thefirstthreemeasuresonthelistwouldtypicallygointhecoreefficiencycategory.Whilecertainbenefitcostsmightgiveafirmanedgeinrecruitinghigh-talentemployees,above-averagebenefitcostsorworkers’compensationpaymentsarelegitimatelyconsideredexpensesratherthanhuman-capitalinvestments.Likewise,transactionalaccuracymarginallyimprovesemployees’workexperience,butithaslittlestrategicsignificance.

Nowlookatthelastthreemeasures.Noticethattheseexpenditurescaneachbethoughtofasinvestmentsthatwouldyieldconsiderablestrategicvalue.Todeterminetheirvalue,youwouldgothroughtheseven-stepprocessdescribedinchapter2,tracingthelinksbetweenastrategicefficiencymeasureandthesubsequentelementsintheHRvaluechain.Again,theHiTechexampleofreducingrecruitingcycletimeapplies.Tighteningthiscyclemaywellraise“costperhire,”butinfactthispracticeisthefirststepinproducinganHRenabler(stablestaffinginR&D)thatisessentialtoakeyperformancedriver(R&Dcycletime)inthefirm’sstrategyimplementationprocess.ThisisagoodillustrationofhowafirmmightattendtoboththebenefitsandcostsofanHRdeliverable(seetheupper-rightboxinfigure3-2).

HRDeliverablesHRdeliverablemeasureshelpyouidentifytheuniquecausallinkagesbywhichtheHRsystemgeneratesvalueinyourfirm.Theyarenotnecessarilyexpressedintermsoffirmperformanceordollars,buttheyshouldbeunderstoodbroadlytoinfluencefirmperformance.Thetestoftheirimportanceisthatseniorlinemanagersunderstandtheirsignificanceandarewillingtopayforthem.

Onechallengeinmeasuringtheimpactofsuch“upstream”driversistoavoidmeasureproliferation.Itiseasytothinkthateverythingisimportant,butifyoudothis,soonnothingisimportant.Formeasurementtomatter,youhavetomeasureonlywhatmatters.HRdeliverablemetricsthatcannotbetieddirectlytoyourfirm’sstrategymapshouldnotbeincludedintheHRScorecard.Onceagain,theprocessoutlinedinchapter2ensuresthatyourHRmeasurementprocesshastheproperfoundation.

ChoosingtheappropriateHRdeliverablemeasuresdependsontherolethatHRwillplayinstrategyimplementation.Atoneextreme,HRdeliverablescouldbecharacterizedasorganizationalcapabilities.3Such

capabilitieswouldcombineindividualcompetencieswithorganizationalsystemsthataddvaluethroughoutthefirm’svaluechain.

Note,though,thatacapabilityissocentraltosuccessfulstrategyimplementationthatitcannotbelinkedtojustoneperformancedriver.Weknowofamajorinternationalconsumer-productsfirmthatwantedtodramaticallyrestructureitsleadershipcapabilities.Inmanagement’sview,thefirmwiththebestleadershiptalentwouldwininthemarketplace,andthiscompanyintendedtocultivatethebestleadershiptalentinitsindustry.Toachievethisgoal,themanagementteamdevelopeditsowncompetencymodel,whichitconsideredproprietary.Next,itbroughttheexecutivesearchfunctionin-housesothatexecutivesourcingwouldreflecttheproprietarycompetencymodel.Finally,theteamaddedapowerfulstaffing-informationsystemthatwouldenablemanagersthroughouttheworldtorapidlyandeffectivelyidentifyavailablemanagerialtalent.Nosingleelementofthiseffortwouldconstituteastrategicassetbyitself,buttakentogether,theseelementshelpedthefirmdevelopaneworganizationalcapabilitythatseniorlinemanagersconsiderakeytotheorganization’sfuturesuccess.

ThinkingaboutHRdeliverablesintermsoforganizationalcapabilitieshasadistinctappealforhumanresourcesmanagersinterestedinunderscoringHR’sstrategicvalue.Thisisbecausesuchcapabilitiesseemtoofferacompetitiveadvantagesocompellingthatothermanagerscan’thelpbutacknowledgetheirstrategicvalue.Theproblemisthatwithoutclearvalidationofthatstrategicvaluefromtheseniorexecutiveteam,HRmanagerswillhaveadifficulttimemakingthecaseposthoc.ViewingHRdeliverablesasorganizationalcapabilitiesisthusanappropriatebutlimitedmeasureofHR’sstrategicvalue.Identifythispotentialwherepossible,butalsorecognizethatmuchofHR’sstrategicvaluelieselsewhere.Mostimportant,don’ttrytopuffupeveryHRinitiativeasapotentialorganizationalcapability.ThiskindofposturingwillonlyundermineHR’slegitimatestrategiccontribution.

Inshort,wearetalkingabouttakingadifferentperspectiveonHR’sinfluenceonfirmperformance.Oneapproachistofocusoncomprehensivepeople-relatedcapabilities(suchasleadershipandorganizationalflexibility).It’seasytoimaginehowsuchcapabilitiescontributetoorganizationalsuccessingeneral,andperhapseveninyourownorganization.TheyarealsoappealingbecausetheyimmediatelyallowHRmanagerstorecastwhattheyaredoingin“strategic”terms.Whilewedon’tdismissthisapproachoutofhand,weencourageHRmanagerstounderstanditslimitationsaswell.Mostimportant,anapproachthatthinksonlyofHRdeliverablesintermsof

organizationalcapabilitiestendsnottolinkthosedeliverablesconcretelytothestrategyimplementationprocess.Inotherwords,thevaluationofthosedeliverablesrequiresmuchthesameleapoffaiththathashistoricallyunderminedHR’slinktofirmperformance.

Incontrast,withourseven-stepmodel,measuringHR’scontributiondoesnotrequireadirectleapfromHRdeliverabletofirmperformance.Insteadthereisa“causallogic”betweenHRandothernon-HRbusinessoutcomes(suchasR&DcycletimeinHiTech),whichlinemanagersconsidercredible.

Forthisreason,asyoustructurethe“HRdeliverables”sectionofyourScorecard,youshouldfocusmoreonHRperformancedriversandHRenablersthanonpotentialorganizationalcapabilities.Thesemeasuresrepresentthehuman-capitaldimensionsofdiscreteperformancedriversinthefirm’sstrategymap.TheirindividualeffectsonfirmperformancearemuchsmallerthanthatofanHRcapability,buttherearesomanyofthemthat,cumulatively,theyrepresentasignificantsourceofvaluecreation.Table3-3showsalistofpotentialHRperformance-drivermeasuresforpurposesofillustration.4However,wewouldneverrecommendselectingameasurewithoutfollowingtheearlierstepsinourmodel.

Ideally,the“HRdeliverables”sectionofyourScorecardwillincludesomemeasureofthestrategicimpactofthedeliverablesyou’veidentified.Thiscouldincludeestimatesoftherelationshipsbetweeneachdeliverableandindividualfirm-levelperformancedriversinthestrategymap.Or,inamoreelaboratesystem,youcouldlinktheeffectsofthedeliverablesthroughtheperformancedriversandultimatelytofirmperformance.WesawthisapproachintheSearsstory.

Atthispoint,youwillhavedefinedtheconstituentelementsofHR’sstrategicimpactonyourorganization.YeteventheHRdeliverablesrepresentjustthehypotheticalstrategicinfluenceofHR.Wherepossible,weencouragehumanresourcemanagerstotrytoestablishtheactualimpactofthesedeliverablesonfirmperformance.ThisisthelastpieceofthesophisticatedHRmeasurementsystemdescribedinchapter2.Itallowsyoutoconfidentlymakeprecisestatementssuchas“HRdeliverableaincreasedxby20percent,whichreducedyby10percent,whichinturnincreasedshareholdervalueby3percent.”WediscussthisaspectofdesigningyourHRmeasurementsysteminmoredetailinchapter5.

BASINGTHEHRSCORECARDONTHEHRFUNCTION

OurapproachtoHRperformancemeasurementhasbeentoadoptascomprehensiveadefinitionofHRaspossible,henceouremphasisonwhatwecalltheHRarchitecture.Thishasinvolvedbothasomewhatdifferentperspectiveon“HR”inthefirmandsomenewideasabouttheimportantdimensionsofHR’sperformance.MakingtheleapfromlittleornoperformancemeasurementforHRtotheconceptofmeasuringtheperformanceoftheHRarchitecturecanbedaunting.SomefirmsmaybemorecomfortabledevelopingaScorecardfortheHRfunctionasaninterimstepinthisprocess.WhilewebelievethatthebenefitsofamorebroadlyfocusedScorecardarecompelling,someverygoodexamplesofHRScorecardsinpracticehavebeenorganizedaroundtheHRfunction.

Figure3-4illustratesagraphicaldepictionofGTE’sHRScorecard.HeretheHRfunctionisviewedasanorganizationalunitthatcanbeanalyzedintermsoftheleadingandlaggingindicatorsassociatedwithaBalancedScorecard.Inthisapproachthe“Operations”and“Customers”arenotthelargeroperationsorcustomersofGTE,butrathertheoperationsorcustomersofGTE’sHRfunction.ThischoicemakesitmoredifficulttoexplicitlylinkHRtostrategyimplementationthroughtheScorecard,butitisareasonabledecisiongiventhat,atthetime,thelargerorganizationhadnotdevelopedastrategymapaspartofacorporate-wide“balanced”performancemanagementsystem.

Table3-3HRPerformance-DriverMeasures

AccesstobusinessinformationtofacilitatedecisionmakingAdherencebytheworkforcetocorevalues,suchascostconsciousnessAveragechangeinperformance-appraisalratingovertimeChangeinemployeemind-setClimatesurveysConsistencyandclarityofmessagesfromtopmanagementandfromHRCustomercomplaints/praiseCustomersatisfactionwithhiringprocessDegreeoffinancialliteracyamongemployeesDegreetowhicha“sharedmind-set”existsDiversityofraceandgenderbyjobcategoryEffectivenessofinformationsharingamongdepartmentsEffectivenessofperformanceappraisalprocessesfordealingwithpoorperformersEmployeecommitmentsurveyscoresEmployeecompetencygrowthEmployeedevelopment/advancementopportunitiesEmployeejobinvolvementsurveyscoresEmployeesatisfactionwithadvancementopportunites,compensation,etc.

EmployeeturnoverbyperformancelevelandbycontrollabilityExtentofcross-functionalteamworkExtentoforganizationallearningExtentofunderstandingofthefirm’scompetitivestrategyandoperationalgoalsExtenttowhichemployeeshavereadyaccesstotheinformationandknowledgethattheyneedExtenttowhichrequiredemployeecompetenciesarereflectedinrecruiting,staffing,andperformancemanagementExtenttowhichemployeesareclearaboutthefirm’sgoalsandobjectivesExtenttowhichemployeesareclearabouttheirowngoalsExtenttowhichhiring,evaluation,andcompensationpracticesseekoutandrewardknowledgecreationandsharingExtenttowhichHRishelpingtodevelopnecessaryleadershipcompetenciesExtenttowhichHRdoesathoroughjobofpre-acquisitionsoft-assetduediligenceExtenttowhichHRleadershipisinvolvedearlyinselectionofpotentialacquisitioncandidatesExtenttowhichHRmeasurementsystemsareseenascredibleExtenttowhichinformationiscommunicatedeffectivelytoemployeesExtenttowhichtheaverageemployeecandescribethefirm’sHRstrategyExtenttowhichtheaverageemployeecandescribethefirm’sstrategicintentExtenttowhichthefirmshareslargeamountsofrelevantbusinessinformationwidelyandfreelywithemployeesExtenttowhichthefirmhasturneditsstrategyintospecificgoals/objectivesthatemployeescanactonintheshortandlongrunExtenttowhichtopmanagementshowscommitmentandleadershiparoundknowledge-sharingissuesthroughoutthefirmPercentageofemployeesmakingsuggestionsPercentageoffemaleandminoritypromotionsPercentageofinternconversiontohiresPercentageofworkforcethatispromotablePercentageofrepatriateretentionafteroneyearPercentageofemployeeswithexperienceoutsidetheircurrentjobresponsibilityorfunctionPercentageofretentionofhigh-performingkeyemployeesPerceptionofconsistentandequitabletreatmentofallemployeesPerformanceofnewlyhiredapplicantsPlanneddevelopmentopportunitiesaccomplishedTheratioofHRemployeestototalemploymentRequestsfortransferpersupervisorRetentionratesofcriticalhumancapitalSuccessrateofexternalhiresSurveyresultsonbecoming“the”employerofchoiceinselected,criticalpositions

Source:AdaptedfromDaveUlrich,“MeasuringHumanResources:AnOverviewofPracticeandaPrescriptionforResults,”HumanResourcesManagement36(Fall1997):303–320.

The“bubbles”infigure3-4representHR’sobjectivesforeachleveloftheScorecard.TheseinturnarelinkedtomeasuresatboththeenterpriseandSBUlevel(seetable3-4).Table3-4linkstheHRScorecardattheSBUlevelwiththeHRScorecardattheenterpriselevel.ThedirectionalarrowscorrespondtoastrategymapfortheHRfunctionandtellthestoryofhowGTEHRwillimplementitsfunctionalstrategy.ThisHRlinkagemodeldoesnothavethekindofdirectlinkagetostrategicperformancedriversthatwouldbepossibleifalargerBalancedScorecardexistedfortheentireenterprise.Nevertheless,thereareatleastthreepointswheretheHRfunctionScorecardwouldtendtoconnectwiththelargerorganization’sstrategyimplementationefforts.

First,recallfromchapter2thatGTEHRdevelopedfivestrategicthrustsforitsHRstrategyaftercloseconsultationwiththeorganization’sbusiness

leaders.ThefoundationalroleofthesefivestrategicthrustsisreflectedbytheirlocationatthebottomoftheHRlinkagemodel(seefigure3-4).Second,theHRfunctionScorecardfocusesonmorethanefficiencygoals.Thetwoobjectives(maximizehumancapitalandminimizeHRcosts)inthefinancialcategoryareanefforttocapturebothvaluecreationandefficiencyasdriversoffirmperformance.Finally,atthecustomerleveltheHRScorecardidentifiesstrategicsupportforbusinesspartnersasakeyobjective.ThistooshouldhavetheeffectofimprovingthealignmentbetweentheeffortsofHRmanagersandthebusinessproblemsfacedbylinemanagers.

Webeganthischapterwiththeobservationthatawell-developedHRScorecardshouldallowHRmanagerstodoabetterjobofmanagingHRasastrategicasset,aswellasprovideabetterdemonstrationofHR’scontributiontofirmperformance.InorganizationsthathavenotgonethroughthesystematicdevelopmentofastrategymapdescribingstrategicperformancedriversandopportunitiesforHR,itbecomesmoredifficulttoaggregatetherelationshipsthateasilydescribeHR’simpactonfirmperformance.However,asGTE’sHRScorecarddemonstrates,evenafunctionallyorientedScorecardcanservetorefocusthemanagementdecisionsofHRprofessionals.GTEHRcreditsitsScorecard,andtheassociatedchangeinperspective,withdramaticallyimprovedrelationsbetweenHRandbusinessunitmanagers.

Likewise,whileouremphasishasbeenonmeasuringHR’s“strategicimpact,”HRprofessionalshavemultipleroles,asDaveUlrichhaspointedout:strategicpartner,administrativeexpert,changeagent,andemployeechampion.5IfHRprofessionalswantaScorecardthatbroadlytouchesoneachoftheseroles,thefunctionalemphasisillustratedbytheGTEScorecardisagoodstartingpoint.

Figure3-4GTEHRLinkageModel

Source:ReprintedwithpermissionofGTECorporation.

Table3-4MeasuresforGTEHRScorecard,byObjective

BENEFITSOFTHEHRSCORECARD

InconstructinganHRScorecard,avoidthetemptationtomerely“fillintheboxes.”Thekeyquestiontoaskis,Whatwouldyoulikethistooltodoforyou?Or,putanotherway,HowwouldyoulikemanagersoutsideofHRtothinkaboutyourmeasures?WebelievethattheScorecardoffersthefollowingbenefits:

ItreinforcesthedistinctionbetweenHRdoablesandHRdeliverables.

TheHRmeasurementsystemmustclearlydistinguishbetweendeliverables,whichinfluencestrategyimplementation,anddoables,whichdonot.Forexample,policyimplementationisnotadeliverableuntilitcreatesemployeebehaviorsthatdrivestrategyimplementation.AnappropriateHRmeasurementsystemcontinuallypromptsHRprofessionalstothinkstrategicallyaswellasoperationally.

Itenablesyoutocontrolcostsandcreatevalue.HRwillalwaysbeexpectedtocontrolcostsforthefirm.Atthesametime,servinginastrategicrolemeansthatHRmustalsocreatevalue.TheHRScorecardhelpshumanresourcemanagerstoeffectivelybalancethosetwoobjectives.Itnotonlyencouragesthesepractitionerstodriveoutcostswhereappropriate,butalsohelpsthemdefendan“investment”byoutliningthepotentialbenefitsinconcreteterms.

Itmeasuresleadingindicators.OurmodelofHR’sstrategiccontributionlinksHRdecisionsandsystemstoHRdeliverables,whichinturninfluencekeyperformancedriversinthefirm’sstrategyimplementation.Justasthereareleadingandlaggingindicatorsinthefirm’soverallbalancedperformancemeasurementsystem,therearebothdriversandoutcomeswithintheHRvaluechain.ItisessentialtomonitorthealignmentofthoseHRdecisionsandsystemelementsthatdriveHRdeliverables.AssessingthisalignmentprovidesfeedbackonHR’sprogresstowardthosedeliverablesandlaysthefoundationforHR’sstrategicinfluence.

ItassessesHR’scontributiontostrategyimplementationand,ultimately,tothe“bottomline.”AnystrategicperformancemeasurementsystemshouldprovidethechiefHRofficer(CHRO)withananswertothequestion,“WhatisHR’scontributiontofirmperformance?”ThecumulativeeffectoftheScorecard’sHRdeliverablemeasuresshouldprovidethatanswer.Humanresourcemanagersshouldhaveabrief,credible,andclearstrategicrationaleforalldeliverablemeasures.Ifthatrationaledoesn’texist,neithershouldthemeasure.LinemanagersshouldfindthesedeliverablemeasuresascredibleasHRmanagersdo,sincethesemetricsrepresentsolutionstobusinessproblems,notHRproblems.

ItletsHRprofessionalseffectivelymanagetheirstrategicresponsibilities.TheHRScorecardencourageshumanresourcemanagerstofocusonexactlyhowtheirdecisionsaffectthesuccessfulimplementationofthefirm’sstrategy.Justaswehighlightedthe

importanceof“employeestrategicfocus”fortheentirefirm,theHRScorecardshouldreinforcethestrategicfocusofhumanresourcemanagers.AndbecauseHRprofessionalscanachievethatstrategicinfluencelargelybyadoptingasystemicperspectiveratherthanfiddlingwithindividualpolicies,theScorecardfurtherencouragesthemtothinksystemicallyaboutHR’sstrategy.

Itencouragesflexibilityandchange.Acommoncriticismofperformancemeasurementsystemsisthattheybecomeinstitutionalizedandactuallyinhibitchange.Strategiesevolve,theorganizationneedstomoveinadifferentdirection,butoutdatedperformancegoalscausemanagersandemployeestowanttomaintainthestatusquo.Indeed,onecriticismofmanagementbymeasurementisthatpeoplebecomeskilledatachievingtherequirednumbersintheoldsystemandarereluctanttochangetheirmanagementapproachwhenshiftingconditionsdemandit.TheHRScorecardengendersflexibilityandchangebecauseitfocusesonthefirm’sstrategyimplementation,whichconstantlydemandschange.Withthisapproach,measurestakeonanewmeaning.Theybecomesimplyindicatorsofanunderlyinglogicthatmanagersacceptaslegitimate.Inotherwords,it’snotjustthatpeoplegetusedtohittingparticularsetsofnumbers;theyalsogetusedtothinkingabouttheirowncontributiontothefirm’simplementationofstrategy.Theyseethebigpicture.Webelievethatthatlargerfocusmakesiteasierformanagerstochangedirection.Unlikeinatraditionalorganization,inastrategy-focusedorganization,peopleviewthemeasuresasmeanstoanend,ratherthanendsinthemselves.

SUMMARY:TIPSFORMANAGINGWITHTHEHRSCORECARD

BuildinganHRScorecardshouldnotbeconsideredaone-timeorevenanannualevent.Tomanagebymeasurement,humanresourceleadersmuststayattunedtochangesinthedownstreamperformancedriversthatHRissupporting.Ifthesedriverschange,orifthekeyHRdeliverablesthatsupportthemchange,theScorecardmustshiftaccordingly.InbuildinganHRScorecardforyourowncompany,youthereforemaywanttoincludeacomponentindicatinghowuptodatetheHRdeliverablesare.

ThesamestrategicperspectivethatguidestheconstructionoftheHRScorecardshouldalsoguidethemanagementofHR.Inparticular,humanresourcestaffshouldkeeplinemanagerscontinuallyinformedofthestatusofHRdeliverables.Feelfreetoalsoinvitelinemanagerstoidentifypotentialdeliverablesontheirown.Thisisallpartofforgingapowerfulnewpartnership.

4

COST-BENEFITANALYSESFORHRINTERVENTIONS

PERHAPSONEOFTHEMOSTimportantfunctionsoftheHRScorecardmeasurementsystemisthatitprovidesameanstoidentify,inquantitativeterms,thediscrepanciesbetweenyourfirm’scurrentandidealHRarchitecture.SuchgapsmayhavearisenwithintheelementsoftheHRsystemitself,betweentheHRsystemandfirmstrategy,orbetweendesiredandactualemployeebehaviors.

Forexample,inonefirmwevisited,thecompany’sHRScorecardandplanningprocessesindicatedthattheywouldfaceashortageofmidlevelmanagerialtalentastheirbusinessexpandedandasanumberofmidlevelmanagersreachedretirementeligibility.(Businessslowdownsandamultiyearhiringfreezehadshrunkthenumberofretireereplacementsinthepipeline.)

SeniorHRmanagersinthisfirmquicklyasked,Howcanwebestdeveloptheemployeecompetenciesnecessarytomeetthefirm’scurrentandfutureneeds?Shouldwelearnhowtotrainemployeesinthesecompetenciesin-house,orshouldweuseanexternalvendor?Shouldweexploresomeotherstrategyentirely?Inanycase,whatreturnoninvestment(ROI)canweexpectfromthevariousscenarioswe’reconsidering?

Thesekindsofquestionsformthefocusofthischapter.Inparticular,weexploredata-collectionandanalyticalmethodsthatcanhelpyouassesswhethercertainHRprogramswillpayoffintheshortandlongrun.Takentogether,thesemethodsmakeupwhatwecallcost-benefitanalysis.Inmanyways,cost-benefitanalysisisamicrocosmoftheHRScorecardframework.

Determiningwhichelementsofyourworkshouldbe“costed”isessentiallyastrategictask;thusyoushouldtieittothefirm’scompetitivestrategyandoperationalgoals.Forthesakeofefficiency,youshouldalsofocusthisdecisionprocessononlythevitalfewHRactivitiesthatreallymakeadifference.Inotherwords,theHRScorecardwillhelptoidentifythemostappropriate“doables”and“deliverables”thatwillbecomethefocusofacost-benefitanalysisprocess.

Likemostotherhumanresourceprofessionals,youprobablyalreadyunderstandtheimportanceofassessingthecostsandbenefitsassociatedwithinvestmentsinspecificHRpoliciesandpractices.Indeed,formanyyears,HRpractitionershavepursuedthiskindofinformationasifitweretheHolyGrail.ManyHRmanagershaveeventoldusthattheseniormanagementteamintheirorganizationwouldbehappytofundmoreextensiveHRinitiativesandinnovations—ifonlyhumanresourceleaderscouldprovideeconomicjustificationforsuchpolicies.

DeterminingtheROIofspecificHRinterventions,whetherasanendinitselforasameansofdecidingonpoliciesandpractices,isnotasdifficultasitmightfirstappear.Nevertheless,itdoesrequiresomeknowledgeoffinance,accounting,andtheprocessofcapitalbudgeting.Italsorequiresaconsistent,step-by-stepprocess.Inthischapterwewillexplorethethinkingbehindthisprocessandthenoutlinearecommendedseriesofsteps.

OPERATIONALVERSUSSTRATEGICCOST-BENEFITANALYSIS

Wecanthinkofmostcost-benefitanalysesasoperational(designedtolowercosts)orstrategic(designedtohelpimplementthefirm’sstrategy).Operationalcost-benefitanalysestellyouhowtoimproveactivitiesthatthefirmalreadyperforms.Bycostingsuchactivities,theorganizationcanexplorewaystolowerrecruiting-relatedexpenses,comparetheadvantagesofoutsourcingthebenefitsfunctionversuskeepingitin-house,etc.Incontrast,strategiccost-benefitanalysesderivefromthefirm’sstrategyandoperationalgoalsandthusfocusonquestionssuchas,Howcanwebestenhanceemployeestrategicfocus?Youcaneasilyidentifytheanswerstosuchkeyquestionsfromyourfirm’sHRScorecard—thesearethedeliverablesthatyouhaveidentifiedinthelastchapter.

Inmostcases,cost-benefitanalysesofeitherkindrequiretheassemblyof

aspecialprojectteam.Moreover,becauseyouwon’tfindthedatayouneedinyourfirm’sfinancialormanagerialaccountingsystem(aswe’veseen),you’llhavetocustom-designadata-collectionmethod.Thegoodnewsisthat,whilethe“start-up”costsofdesigningsuchasystemmayproverelativelyhigh,youcaninstitutionalizeyourmethodanduseittoensurecontinuousimprovement.

WHICHHRACTIVITIESSHOULDYOUCOST,ANDWHY?

ManyHRmanagersaskus,HowcanIdeterminetheROIonmyinvestmentsinHR?Thisquestionoftenstemsfromwell-intentionedeffortstodemonstratehowinvestmentsintheHRfunction(asopposedtotheHRarchitecture)createvaluethroughouttheorganization.Invariably,weanswerthatcost-benefitanalysiscanprovebothtime-consumingandexpensiveandthathumanresourceleadersshouldclarifytheirgoalsbeforeembarkingonacostingproject.

Thus,beforedoinganythingelse,askyourselfwhattypes(orcategories)ofHRactivitiesshouldbe“costed”andwhy.Forexample,isitimportanttoknowpreciselywhattheROIisforyourtrainingactivities,orisitenoughtoknowthatthebenefitsofyourfirm’strainingactivitiesexceedtheircosts?Whatisamoreworthwhileactivity:calculatingyourfirm’scost-per-hireordeterminingthemosteffectivewaytoincreaseemployeecompetenciesinacertainarea,forexample,financialliteracy?Shouldyoudoone,both,orneither?YourHRScorecardcanbeapowerfultoolinthisstageoftheprocess.Specifically,theHRScorecardshouldhelpyoutoidentifythemostsalientHRdoablesanddeliverables.Theseelementsshouldbetheprimaryfocusofanycost-benefitanalysesthatyouundertake.

Thekeyobjectiveatthisstageisthatyouhaveacrystal-clearrationaleforundertakingacostingprojectandthattheeffortisguidedbythefirm’sstrategyandtheresultingHRScorecard.Tobemeaningful,theprojectshouldhavethefollowingattributes:

•Strategicimportance.Theprojecthasdirectlinkstotheimplementationofthefirm’sstrategy.Whethertheprojectaddressesanoperationalorstrategicconcern,theoutcomesoftheprojectshouldhaveadirectlineofsighttothefirm’soverallstrategy.Youcandeterminewhetherthislineexistsbyusingthevalue-driveranalysismethoddescribedinchapter3.

•Financialsignificance.AneffectivecostingprojectaddressesanareaofHRthatinvolvessignificantandongoinginvestments—forexample,overalltraininganddevelopment,asopposedtoaone-timetrainingsession.

•Widespreadimpact.Themostvaluablecostingprojectshavethepotentialtoaffectasignificantproportionofthefirm’sworkforce.Alternatively,theytargetcategoriesofemployees(e.g.,R&Dscientistsinabiotechnologyfirm)whohavecloselinkswiththeoverallsuccessofthebusiness.Forinstance,aprojecttodeterminetheROIforatrainingprogramcostingmillionsofdollars,affectingthousandsofemployees,andunfoldingovermanyyearscanofferinsightsofsignificantfinancialmagnitude.

•Linkstoabusinesselementofconsiderablevariability.Successfulcostingprojectsmeasureattributesofthefirm’sworkforceorHRarchitecturethatexhibitconsiderablevariabilityinoutcomesorperformancelevels.Forexample,ifyourfirm’smanagementdevelopmentsystemisseenashighlysuccessfulinonepartofthebusinessbutisadisasterelsewhere,thenacost-benefitanalysismayhelpyouunderstandwhy.

•Focusonakeyissue,problem,ordecisionfacinglinemanagers.Finally,effectivecostingprojectsshouldprovideananswertoakeyquestionorproblemfacingthefirm.Forexample,doweoutsourceourrecruitingactivitiesorcontinuetorecruitin-house?Isourlevelofemployeeturnoveroptimal?Beforebeginningsuchaproject,determinewhetherthereiswidespreadinterestintheresultsoftheproposedstudy.Ifthereisn’t,thenaskyourselfwhyyouwanttoconductthestudy.

THENEEDFORFINANCIALSAVVY

HRmanagersrequestingfundsfromseniorlinemanagementteamsencountermuchtougherroadblocksthantheirpeersinmanufacturing,operations,andevenmarketing.Thoseotherdisciplineshavealongtraditionofquantifyingthepotentialcostsandbenefitsoftheirproposedprogramsandpresentingtheseestimatesinalanguagethatallcanunderstand—money.Incontrast,mosthumanresourceprofessionalshavelittleexperienceinquantifyingwhattheydo.Inaworldwherenumberspushasideintuition,suchmanagersareatadistinctcompetitivedisadvantage.

Howcanweremedythissituation?First,HRmanagersneedtofamiliarizethemselveswiththeconceptsoffinanceandaccounting,especiallytheprocessofcapitalbudgeting.Organizationsusecapitalbudgetingtodecidehowtoallocatecapitalamongcompetinginvestments.Forinstance,dowebuyanewbuildingorleasespace?Doweexpandourproductionlineormovetothreeshifts?Dowepurchaseanothercompanyornot?Notonlydoesthecapital-budgetingprocesshelptherestofthefirmdetermineitsbudgets,italsooffersastrictdisciplineforrationaldecisionmaking.Moreover,becausethisprocessrequiresmanagerstothinkintermsofthecostsandbenefitsofeachprojectoveritsentireusefullife(asopposedtojustthisyear),itencouragesalonger-termfocusoncostsandbenefitsacrossmultipletimeperiods.ThereareawidevarietyofresourcesavailableforHRmanagerswishingtoimprovetheirfinancialliteracy—fromcollegecoursestoin-houseprogramofferings.Inchapter7weexploresomeofthesedeliveryoptionsinmoredetail.

DETERMININGTHEROIINHR:ATHREE-STEPPROCESS

Intheory,determiningtheROIinaparticularHRpolicyorpracticeisn’tcomplicated.Essentially,youneedtoassessthetotalcostsandtotalbenefitsassociatedwiththeinvestment,andthencalculatebenefitslesscosts.Youcandothisbyfollowingthisgenericprocess:

1.Identifypotentialcosts.

2.Identifypotentialbenefits.

3.CalculatetheROIoftheprogramusinganappropriateindex.

Aswithmostseeminglysimpleprocesses,the“devilisinthedetails”forthisone.Inthiscase,thechallengeliesincollectingorestimatingdata.Mostfirmsdon’tregularlytrackcostandbenefitdataonHRactivities,sotheyenduphavingtoestimate.Herearesomewaystogetaroundthisdifficulty.

IdentifyingCostsandBenefitsByitsverynature,identifyingcostandbenefitcategoriesandattachingdollarvalueestimatestothemispartartandpartscience.Potentialbenefitsare

particularlydifficulttoestimatebecause(a)theyarelikelytocomesometimeinthefuture(whilethecostsareusuallybornetoday)and(b)boththelevelofthebenefitsandtheprobabilityofreceivingthemarelikelytobeuncertain.That’sokay.Thetrickistocomeupwithplausibleestimates,aswellasconfidenceintervals(arangeofexpectedvaluesforeachestimate).Attachingarangetoeachestimateisimportant,aswewillsee.IfyourestimateoftheROIonatraininginitiativeis22percent,plusorminus3percent,thiswouldindicateaprojectwithaveryhighprobabilityofsuccess.Ifyourestimateis22percent,plusorminus25percent,thiswouldimplythattheprojectismuchmorerisky.

Successatthisstagehingesontheexpertjudgments—andcarefulanalysis—ofHRaswellaslinemanagers.Thereareanumberofwaystogeneratethesenumbers.Oneeffectivemethodisfirsttodevelopa“strawman”ofpotentialcostandbenefitcategories.1Then,usingcolleagues,subjectmatterexperts,focusgroups,andarchivaldata,gatherfeedbackonthecategoriesandaskforhelpingeneratingdollar-valueestimatesforeachofthecategoriesthatyouhavedeveloped.Itisimportanttorecognizethatsomeofthesedatamaybeavailableinfullorpartfromyourfirm’sHRinformationsystem.Thetrickistohavecarefullydevelopedthecostcategoriesbeforeyoubegintodevelopthecostestimates.

Asimpleexamplecanillustratewhythisisimportant.IfyouweretoaskmostseniorHRprofessionalshowmuchtheyinvestintrainingperyearonaper-employeebasis,theycouldprobablygenerateanumberbasedonthecorporatetrainingbudget.However,ifthefirmisverylarge,thereisoftenaconsiderableamountoftrainingthatisdoneatthedivision-orbusiness-unitlevels,andtheseinvestmentsaregenerallynottrackedbycorporateHR.Inaddition,thereisoftenquiteabitof“on-thejob”trainingthatisnottrackedbythecorporateordivisionalfinancialstatements.So,inmostfirms,thecorporatebudgetfortraininganddevelopmentcanunderstatethetruespendingontraining,andoftenbyaconsiderablemargin.Thisiswhyitisimportanttohavedefinedyourquestioncarefully(e.g.,Dowewanttoknowthereturnoncorporate’sinvestmentintrainingorthefirmwideinvestmentintraining?)beforeyoubegintocollectactualdataoncosts.

UNDERSTANDINGFIXEDANDVARIABLECOSTS

Ifyouaskanaccountanttodescribeyourfirm’scosts,youwillquicklydiscoverthatthereareamyriadofcostcategories.Conventionalmanagerialaccountingsystemsoftendividethesecategoriesintofixedcosts(i.e.,those

thatdonotvarywiththelevelofproductionoroutput)andvariablecosts(thosethatchangedirectlywiththelevelofproductionoroutput).Fixedcostsincludebuildings,utilities,andinsurance,aswellasallocatedstaff“overhead”suchasaccounting,finance,legal,andhumanresources.Variablecostsdependontheparticularindustry.Forexample,intheautomotiveindustry,thecostsassociatedwithtireswouldbevariable(becausetheychangewiththenumberofcarsproduced).

WhyisitimportantforHRprofessionalstounderstandbasicaccountingconventionsiftheywishtoperformcost-benefitanalyseseffectively?Theansweristhatwearereallyinterestedinwhetheraparticularpracticeorinterventionmakessensefromaneconomicperspective(i.e.,increasingshareholderwealth)asopposedtoanaccountingperspective.Foravarietyofreasons,accountingsystemsdon’tyieldmeasuresoftrueprofitabilitythewaythataneconomistmightdefineit.Forexample,achargefor“depreciation”ofphysicalassets(e.g.,plantandequipment)effectivelyreducesafirm’sreportednetincome(whichisreportedasthe“bottomline”onafirm’sincomestatement)—eventhoughnooneactually“paid”fordepreciation.Depreciationissimplyanadjustingentrythatisdesignedtomatchcurrentrevenueswithcurrentexpenses—whetherrealorestimated.Thecentralconceptisthatsincewehaveinvestedinbuildingsormachineryintendedtoprovideuswitheconomicbenefitsovermanyyears,weshould“match”(ordepreciate)thecostofthebuildingoveritsusefullife.Incontrast,manyHRprofessionalsarenotawarethatinvestmentsinpeopleinanyformarenotconsideredlong-livedassets,butarerather“expensed”intheirentiretyintheyearinwhichtheyareincurred.Aswenotedinchapter1,thisiswhymanagersareoftenreluctanttoinvestinpeopleasopposedtobuildings,especiallyiftheirpayislinkedtothefirm’snetincome.

Accountingsystemsaredesignedtoallocateafirm’scostsacrossalimitednumberofcategories,primarilyforthepurposesofexternalreporting.Thegoalistodistributethesecostsinareliableandpredictablemanner,consistentwithgenerallyacceptedaccountingprocedures(GAAP).Althoughfirmshavecompletefreedomtodeveloptheirowninternalaccountingsystems,mostcompaniesusethesamecostallocationsforinternaldecisionmakingastheyuseforexternalreporting.

Thissituationcandistortthedecision-makingprocess.SinceweareinterestedinestimatingtrueeconomicprofitabilityratherthanfollowingGAAP,weneedtothinkcarefullyabouttheroleoffixedcostsinanycost-benefitanalysis.Fixedcostsareeconomicallyrelevantonlyifwehavetospendmoneydirectlyonthemoriftheyincuranopportunitycostelsewhere

intheorganization.Forexample,supposeyourfirmwantstodeterminetheROIofanewtrainingprogramformidlevelexecutives.Thefirmcurrentlyownsanexecutiveeducationcenter,whichisgenerallybookedat60percentofcapacity.Theprogramyouproposewillincreasecapacityanother20percent,toatotalof80percentoftotalcapacity.IncalculatingtheROIofthetrainingprogram,shouldthefirmincludeachargeforthefixedassetsassociatedwithitstrainingcenter?Theansweris,itdepends.Ifyouwanttoallocateallofthefirm’scostsacrossasetofcategories(asisdoneinconventionalaccountingsystems),thentheanswerisyes.If,ontheotherhand,youwanttoknowwhethershareholderwealthwillincreaseiftheactivityisperformed,thentheanswerisno.Notethatthissituationchangesifthetrainingcenterisrunningatcapacityandadditionalcapitalinvestmentswouldberequiredtorunthenewprogram.Inthiscase,itwouldalwaysbeappropriatetoincludeanallocationforfixedcosts.Thisdistinctionisimportant,asmanyfirms(ofteninappropriately)requirethatnewprogramscoversomethingcalleda“fullyallocatedfixedcost,”effectivelyincreasingthecostsoftheprogramandloweringtheprobabilitythatitwillhaveapositiveROI.Aswehaveseenfromourdiscussionofeconomicversusaccountingcosts,suchanallocationoffixedcostsisnotalwaysappropriate.

UNDERSTANDINGSUNKCOSTS

Inadditiontounderstandingfixedandvariablecosts,HRmanagersalsoneedtogainperspectiveonsunkcosts,orthetotaleffortandresourcesthathavebeeninvestedinaprojecttodate.Theeasiestwaytoexplainsunkcostsisbyexample.Formanyyears,oneofushasnurturedapassionfortherestorationofclassiccars(aprimeexampleofsunkcostsifthereeverwasone!).Asyourestoreanoldcar,theinitialcostofthecarandthesubsequentrestorationcostscaninsomecasesexceedthemarketvalueofthecompletedcar.Toillustrate,supposeyou’veinvested$25,000inthepurchaseandpartialrestorationofacar.Ifyousoldtheunfinishedcartoday,itwouldbring$15,000.Finishingthecarwouldeatupanadditional$20,000,butthecarwouldthenbeworthonly$30,000.

Bysellingthecarunfinished,youwouldincuralossof$10,000.Yetbyinvestingadditionaltimeandresourcestocompletethecar,youwouldlose$15,000(plustheopportunitycostsassociatedwiththeadditional$20,000investment).Whileanimpartialobserverwouldhavenotroublearrivingattheappropriatedecisionhere,inthebusinessworldmanymanagerspayentirelytoomuchattentiontosunkcosts.Muchlikeanimpassionedcarowner,HRprofessionalsoftenfallinlovewiththeirprojectsandwanttosee

themcompleted.Indecidingwhethertoinvestfurtherinaproject,theylookatthesunkcostsandfigurethat,sincethey’vealreadyinvestedsomuch,theysimplycan’tabandontheeffort.

Howcanyouavoidthis“fallacyofsunkcosts”?Theonlysolutionistoperiodicallyreevaluateyourprojects.Aretheassumptionsthatyoumadestillreasonable?Istheprojectcostingwhatyouhadexpected?Areyouseeingthebenefitsthatyouhadhopedfor?Remember:Atanygivenpointinthelifeofaproject,theonlytwothingsthatmatteraretheamountofeffortandresourcesrequiredtocompletetheproject,andthepresentvalueofthecashflowsthattheprojectwillgenerate.Asharshasthismayseem,theenergyandeffortalreadyinvestedintheprojectareirrelevant.Goalsandstrategieschange,andsometimesthemostprudentcourseofactionistocutyourlossesandtomoveontomorevalue-creatingprojects.

UNDERSTANDINGTHEFINANCIALIMPACTOFEMPLOYEEPERFORMANCE

Inadditiontograspingtheimportanceoffixed,variable,andsunkencosts,youalsoneedtounderstandthefinancialimpactofemployeeperformanceinidentifyingcost/benefitcategoriesandestimates.Atitscore,determiningtheROIinpeopleentailscomprehendingtherelativeimpactofhigh-andlow-performingemployeesonthefirm.Sometimestheimpactisminimal.However,manymanagersunderestimateit.Forexample,werecentlyworkedwithmanagersintheoilandgaspipelineindustrywhodidnotconsiderworkforcemanagementapotentialsourceofcompetitiveadvantageintheirfirm.Becausetheywereinacommoditybusiness,theyargued,theirkeysourcesofcompetitiveadvantagewereaccesstopipelinesandpriceofcrudeoil.Onlywhentheysawthatthelevelofpipelinethroughput(akeystrategicdriveroffirmprofitability)differedsubstantiallybyshift—andthattheycouldinfluencepipelinethroughputviaemployeetraining,competencies,andsupervision—didtheyperceivethepotentialimpactofpeopleontheirfirm’sprofits.

Mostmanagersarealreadyconvincedthatindividualemployeeperformancelevelsdiffersignificantly.However,oftentheycan’tsaywithconfidencehowmuchdifferencebetteremployeescanmake.Forexample,askyourselfthisdeceptivelysimplequestion:Whatistherelativeeconomicvalueofanemployeewhoperformsatthefiftiethpercentilecomparedtothatofanemployeewhoperformsattheeighty-fourthpercentile?(Suchashift—34percent—reflectsastandarddeviationimprovement.Astandarddeviation

isaconventionalmeasureofvariability.Saiddifferently,whatistherelativeeconomiccontributionofaverageemployeesascomparedtoemployeeswhoarewellaboveaverage?2

Therearetwoimportantideashere.First,youneedtounderstandtheeconomiccontribution(valuedaddedlesssalariesandotherrelevantcosts)ofaverage(fiftieth-percentile)employees.Thisprovidesa“realitycheck”onhowyourfirmisdeployingresources.Forexample,ifthenetbenefitslesscostsofyourdirectsalesforceaverage$50,000peremployee,youshouldexplorethepossibilityofaddingtoyoursalesstaffbecauseeachsalespersonisgenerating$50,000moreresourcesthansheisconsuming.Ifthebenefitslesscostsareveryclosetozeroperemployee,youwouldexploreotheractions,suchasrestructuringorreassigningemployees,orinthemostextremecases,downsizing.

Thekeyquestioniswhether,onaverage,employeesinaparticularjobcontributealittleoralottothefirm’ssuccess.Economistsgenerallyusetheaveragewagelevelforagivenpositionasaproxyforitseconomiccontributiontofirmperformance.Forthefirmtoearnaprofit,theargumentgoes,anemployeemustcontributeatleastherwagesandbenefitstothefirm’ssuccess,aswellascompensateshareholdersfortheirrisk.Forexample,stockbrokersusuallymakemorethanjanitorsbecausetheformerpresumablycontributemoreprofittothefirm’ssuccess.

Second,youmustgaugethevariabilityoftheimpactofemployeeperformanceonfirmfinancialperformance.Imagineasituationwheretheverybestemployeesinagivenjob(eighty-fourthpercentileorhigher)haveonlyalittlemoreimpactonfirmperformancethandoaverageemployees(anunusualscenario,webelieve).Insuchasituation,thefirmwouldnotbelikelytoinvestconsiderableresourcesintheattraction,selection,anddevelopmentofthoseemployees,because,quitesimply,employeecompetenciesandperformancedon’tmakeasufficientdifferencetothefirmoverall.

Let’stakeacloserlookathowthisworks.Imaginethattherearetwokindsofemployeesinyourfirm.Thefirstgrouphashighaveragewages,relativetotherestofthefirm’semployees,andthereisahighdegreeofvariabilityinoutputfromemployeetoemployee.Forexample,inalargesalesorganization,itisnotunusualforthehighestoutputsalespersontoselltentimesthatofthelowestoutputsalesperson.However,thisgroupofhighperformersmayberelativelysmall,perhapsonly500ofthefirm’s50,000employees.

Lowwagesandlowlevelsofvariabilityintheoutputamongemployees

characterizethesecondgroup.Specifically,thebestemployeesinthisgrouphaveaneconomicimpactonfirmperformancethatisnogreaterthantwicethatoftheworstemployeesinthisgroup.However,thereareconsiderablymoreoftheseemployeesthroughoutthefirm.

Youbelievethat,byspecificchangesintrainingprograms,performancemanagementprocesses,andtheintroductionofanincentivecompensationplan,youmightbeabletoraisetheperformanceoftheaverageemployeeineachgroupfromthefiftiethtotheseventy-fifthpercentile.IfeachofyourproposedprogramshasapositiveROI,youaregoingtowanttoimplementbothofthem.Andobviously,youwillwishtofocusontheonewiththelargestROIfirst.Buthowwouldyoudecideamongtheseproposedprograms?

Clearly,estimatingtheimpactofhighandlowemployeeperformanceonthefirmisnosimpletask.Indeed,theseestimateshavebeendescribedasthe“Achilles’heel”oftheHRfield.3Fortunately,youhaveavarietyofmethodsatyourdisposal.Anunderstandingofbasicsocial-scienceresearchmethodscanhelp.4Byputtingonyoursocialscientist“hat,”youcanobserve“naturallyoccurringfieldexperiments”inyourorganizationandgleaninsightsintotherelativeimpactofemployeeperformance.Forexample,aninterventionmightbehappeninginonepartoftheorganization,butnotinanother.Whatoutcomesdoyouobserveineachsituation?Or,asitwasinthepipelinecompanywementionedearlier,youmightnoticethatproductivityishighinoneshiftbutlowinanother.Takingacloserlookatwhythisishappeningmightyieldimportantinsights.

THEBECKER-HUSELIDAPPROACHFORCALCULATINGTHEECONOMICVALUEOFHIGHANDLOWJOBPERFORMANCE

Academicshaveworkedformanyyearstodevelopmethodologiestohelpdeterminetheeconomicbenefitsofhighandlowemployeeperformanceinaparticularjob.Forexample,scholarsworkinginthefieldofutilityanalysishavedevotedconsiderableefforttodeterminingtheeconomicbenefitoftheuseofmoreeffective(valid)selectiontestsonemployeeperformance.

Thegeneralconclusionofthislineofresearchisthatemployeesconsideredtobehighperformers(i.e.,thoseattheeighty-fourthpercentile,oronestandarddeviationaboveaverage)havefrom40percentto80percentgreaterimpactonfirmperformancethandoaverageemployees(i.e.,thoseatthefiftiethpercentile).Theimplicationsofthislineof

researcharethathighlevelsofemployeeperformancehaveagreatereconomicimpactthanwaspreviouslybelieved.

Whiletheseresultsarebasedonstudiesthatincludemanyfirms,itisalsopossibletodevelopestimatesoftheeconomicimpactofemployeeperformancewithinone’sownfirm.In1992BeckerandHuseliddevelopedaproceduretoprovidejustsuchestimates.Inasampleof117retailhomeproductsfirms,BeckerandHuselidusedregularlycollecteddatatodeterminethathigh-performingsalesassociatesexhibited74percentto100percentgreatereconomicperformancethandidaverage-performingemployees.

Thisprocedurecanbeusedwhentherearefinancialdatathatcanbeisolatedtoparticulardivisions,units,orworkteams.Forexample,departmentswithinaretailenvironment,manufacturingcellsorteams,orsalesfunctionscanoftenlinksalesorprofitstospecificunits.Datathatdescribeindividuallevelsofemployeeperformance,aswellasanyrelevantcontrolvariables,suchasemployeeeducationandexperience,arealsoneeded.Itisespeciallyhelpfulifthesedatacanbecollectedovertime.Oncethesedatahavebeencollected,multipleregressionanalysescanbeusedtodeterminetheimpactoftheindependentvariable(employeeperformance)onthedependentvariable(salesorprofits).

Suchanalysescanbeveryhelpfulindeterminingwhichcategoriesofemployeescreatethemostvalueintheorganization,whichcanthenbeusedtohelpprovidefocusforthefirm’sorganizationalinterventionefforts.Source:BrianE.BeckerandMarkA.Huselid.“DirectEstimatesofSDyandtheImplicationsforUtilityAnalysis,”JournalofAppliedPsychology77,no.3(1992):227–233.

CalculatingBenefitsLessCostsLet’ssayyou’vechosencostandbenefitcategoriesforyourHRprojectanalysisandhavecomeupwithplausibleestimatesforeach.Thenextstepistocomparethecostswiththebenefitstodeterminethenetbenefit(orloss!)associatedwiththeprojectorprogram.

IfallthebenefitsandcostsfromaparticularHRinvestmentoccurredinasingleperiod(e.g.,oneyear),thencalculatingaprogram’sROIwouldbeverysimple.Youcouldeitherdividethedollarvaluebenefitsoftheprogrambyitscosts(yieldingapercentage)orsubtracttheprogramcostsfromitsbenefits(yieldingadollarvaluesavings).Forexample,outsourcingyourfirm’s

benefitsadministrationmightsave$1.2milliondollarsof“in-house”costswhileincurring$800,000dollarsinconsultingfees,inadditionto$100,000in“transition”costs.TheROIofthisendeavorexpressedinapercentageisthefollowing:

(($1.2MM-[$800,000+$100,000])/[$800,000+$100,000])=33percent

Expressedindollarsofsavings,thefigurewouldbeasshown:

$1.2MM-[$800,000+$100,000]=$300,000

Youcanconductsimilarcalculationstodeterminethepaybackperiod(thenumberofmonthsoryearsbeforeaprogramfullycoversitscosts).Followinguponthesameoutsourcingexample,assumethatyourbenefitscostsarecurrentlythefollowing:

($1.2MM/12months)=$100,000/month

Thecostsoftransitioningtotheoutsourcingvendorare$100,000.Thereafter,thevendorwillsavethefirmthefollowingpermonthinbenefitsadministrationcosts:

([$1.2MM-$800,000]/12)=$33,333

Thus,thepaybackperiodforthisinvestmentwouldbeasshown:

($100,000/$33,333)=3months

Finally,HRprofessionalsfrequentlycalculatethebreakevenvolume(e.g.,thenumberofparticipantswhomustattendaparticulartrainingprogramfortheprogramtobreakeven).Forexample,aconsultingfirmspecializinginexecutiveseminarscalculatedthatatypicalone-daycourseitoffersrequiresaninvestmentof$20,000inadvertising,staffsupport,salaryforthepresenter,androomandequipmentrental.Eachofthesecostsisessentiallyfixed,inthatitremainsconstantifthereis1payingparticipantor100.Eachparticipantpays$395perdayasaregistrationfee,andfromthisfeeisdeductedallvariablecosts(food,incentivecompensationforthepresenterandstaff)of$100perparticipant.Thus,thebreakevencostofthisprogramwouldbethefollowing:

($20,000)/($395-$100)=68participants

Themanagersinthisfirmusethisnumber(andtheirconsiderableexperience)tomakeajudgmentabouttheviabilityofeachnewprogram.Inessence,theyask,Arewesurethatwecanattractatleastsixty-eightparticipants?Iftheanswerisno,theprogramiscancelled.

ButinvestmentsinHRarerarelythissimple,inpartbecausethecosts—

andespeciallythebenefits—ofsuchprogramsoftenunfoldovermorethanasingleyear.Forexample,amanagementdevelopmentprogramforanentirecadreofseniorexecutivesmightwellcostmillionsofdollarstodevelopandadministerduringitsfirstyear.Yetthefirmmaynotbegintofeeltheimpactoftheprogramforasmanyaseighteenmonthsdowntheroad.Aconventional,single-periodROIcalculationforsuchaprogramwouldactuallyshowanegativeROI(significantcostsbutnobenefitsinthefirstyear).

Thus,amoreappropriatecost-benefitcalculationwouldincorporatemultipletimeperiods(toreflectthatinvestmentstodayyieldpayoffsinfutureperiods),aswellasthetimevalueofmoney(thenotionthatadollartodayismorevaluablethanadollarsometimeinthefuture).Moneyismorevaluabletodaythaninthefuturebecauseofbothopportunitycost(ifIhavethedollartoday,Icaninvestitelsewhere)anduncertainty(thefartheroutintothefutureaproject’sestimatedbenefitsare,thelesslikelytheyaretoberealized).

Mostorganizationsarewillingtospendnowforpotentialfuturebenefitsaslongastheyareadequatelycompensatedfortheiropportunitycostsandriskassociatedwiththeinvestment.Firmsalsorequirethataspecificprogramcompensatethemfortheirmarginalcostofcapital—theamountofinteresttheywouldhavetopaylendersiftheyborrowedmoneytopayfortheprogram.

Netpresentvalue(NPV)analysisdrawstogetherallthesefactors—costsandbenefitsovermultipletimeperiods,andcompensationforuncertainty,opportunitycosts,andthefirm’scostsofcapital—toassesstheoverallpotentialvalueofaproposedHRprogram.InperforminganNPVanalysisonaprogram,yourestatetheprogram’scostsandbenefitsintoday’sdollars.5Then,yousubtractthepresentvalueoftheprogramcostsfromthepresentvalueofitsbenefits,yieldinga“net”presentvaluefortheprogram.Inthisway,youcompare“appleswithapples,”whileaccountingforthelikelihoodthattheprogramwillyieldbenefitsinthelongrun.

Forexample,imaginethatyouareconsideringthedevelopmentandimplementationofanewintegratedperformancemanagementandincentivecompensationprogram.Thetotaldevelopmentcostsforthisprogramwillbe$250,000.Youestimatethatthisprogramwillincreaseannualcashflowfromoperations(i.e.,profits)atotalof$270,000eachyearforthenextfiveyears.However,becausetheprograminvolvesincentivepay,wageswillincreaseatotalof$130,000peryearforthefive-yearperiod.Assumingthefirm’smarginalcostofcapitalis14percent,shouldyourfirmrolloutthenew

program?AnNPVanalysisofthissituationwouldlookasfollows(Note:Thepresentvalue“factors”shownintheexampleherecanbefoundinanyintroductoryfinancialanalysistextbook.Alternatively,thesevaluescanbecalculatedviaaspreadsheetorfinancialcalculator.):

Year Explanation Amount x Factor = Presentvalue

1 Programdevelopmentcost –$250,000 1 –$250,0001-5 Increasedwages –$130,000 3.433 –$446,2901-5 Increaseinannualcashflowfromoperations +$270,000 3.433 +$926,910 Netpresentvalue: $280,620

Basedontheseanalyses,theprogramshouldbedevelopedandimplemented.

Cost-BenefitAnalysisProcedures:AHierarchyofApproaches

Atthispoint,youmayhavegatheredthatthereareabroadarrayoftoolsandmethodsforconductingcost-benefitanalyses.Havingtochoosefromamongthesevariousapproachesdoesmakethisdifficulttaskmorechallenging.However,bylookingatthepatternsinthewaysotherfirms’HRdepartmentsgrapplewiththis,wecangleansomemeaningfullessons.

Wehaveexploredthistopicaspartofourresearch.Specifically,weasked968seniorHRmanagerswhatkindsofcostsandbenefitstheymeasuredandhowtheymeasuredthem.Wealsoaskedthemtorespondinoneofthreeways:(1)“wedon’tmeasureanyelement,”(2)“weuseasubjectiveestimateorintuition,”and(3)“weuseaformalprocedure.”Table4-1summarizestheirresponses.

Asyoucanseefromthetable,mostfirmsdonotrigorouslyevaluateeitherthecostsorthebenefitsassociatedwithHRpoliciesandprograms.Indeed,thefiguresinthetablemayevenoverstatetheextenttowhichfirmsusetheseprocedures.(Ifafirmusedamethodonce,theirresponsemayhaveimpliedthattheyuseitregularly.)

Basedonthesedataaswellasourobservationsinawidevarietyoffirms,webelievethatarangeofcost-benefitanalysis“quality”exists.Thisrangestartsatitslowendwithsimplecostestimatesandprogressestobenefitsestimatesandcost-benefit-indexcalculations.Firmsshowingthehighestqualityofcost-benefitanalysisengageinthesecalculationsonaregular,disciplinedbasis.

Table4-1WhatFirmsSayTheyAreMeasuringandHow

968FIRMS

Don’tDetermine

SubjectiveEstimate

orIntuition

FormalEstimationProcedure

Turnovercosts 43.7% 43.1% 13.1%Employeereplacementcosts 38.2% 48.8% 13.0%Economicvalueofemployeestotheorganization 67.4% 26.6% 6.0%Costofvariousemployeebehaviors(absenteeism,smoking,etc.)

48.3% 38.2% 13.5%

Economicbenefitsofdevelopingasuperiorselectiontest

79.4% 17.1% 3.5%

Economicbenefitsofvarioustraininglevels 47.2% 46.5% 6.3%Economicbenefitsofadditionalrecruiting 57.3% 35.4% 7.3%Economicbenefitsofincreasingjobsatisfaction,organizationalcommitment,orsimilarjobattitudes

54.9% 42.3% 2.8%

Economicbenefitsofhigh,medium,andlowperformanceonaparticularjob

54.2% 39.7% 6.1%

Whiletheoreticallysomefirmsmaycombinetheseelementsinvariousways,ourexperiencehasrevealedanumberoftypicalcombinations(seefigure4-1).

Level1organizationsarebyfarthemostprevalent.ThesefirmsdonotroutinelycalculatethecostsorthebenefitsassociatedwiththeirHRprograms.TherecentdownsizingofHRdepartmentsandthemovementofHRresourcesclosertothelineorganizationshaveexacerbatedthistrend.Becausethesefirmsdolittle,ifany,formalcostorbenefitcalculations,theydonotcalculatetheROIassociatedwiththeiractivities.

Level2organizations,incontrast,havebeguntothinksystematicallyaboutthecostsassociatedwiththeirHRinvestments.However,theygenerallyuseintuitiveorsubjectiveestimatesoftheseprograms’potentialbenefits.Inaddition,theyuserelativelyunsophisticatedprocedures,suchaspaybackperiods,breakevenvolumes,orsingle-periodROIcalculations.Finally,theyconducttheseanalysesinfrequently.

Level3organizationsaretherarestofthethreegroups.Thesefirmsdemonstrateahighdegreeofsophisticationonallthreeelements:TheyidentifythecostandbenefitsoftheirHRprogramsanduseanappropriateestimationprocedure(e.g.,NPVanalysis)tocalculatethem.Becausetheyseethevalueinsuchanalyses,theyconductthemregularly.

Figure4-1HierarchyofCost-BenefitAnalysisDecisions

ShouldyourorganizationperformLevelThreeanalysesonallofitsHRpoliciesandprograms?Ourperhapssurprisingansweris,no.Developingmeasurementcompetencemeansbeingabletomatchthedepthandbreadthofthedata-collectionandanalysisprocedureswiththeimportanceofthedecisionyou’retryingtomake.Forexample,supposeyou’remullingoverwhethertodevelopanon-sitechild-carecenter.Youknowthatyouwillgoaheadaslongastheestimatedbenefitsareatleastequaltothecosts(NPV=0).Inthiscase,youdon’tneedtoarriveatapreciseestimateofthechild-carecenter’sROI,ifallindicationssuggestthatthecenter’sROIissubstantialandpositive.

Incontrast,imaginethatyou’retryingtodeterminetheviabilityoftwocompetingoptions:outsourcingyourbenefitsfunctionorcontinuingtoperformtheseactivitiesin-house.Inthiscase,moreprecision,andamovetowardLevelThreeanalyses,mayserveyouwell.Ifaparticulardecisioninvolveslargedollarsorhassubstantialstrategicimport,youmaywanttoshootformoreprecisionthereaswell.Ourpointisthatyoushouldn’tcollectanymore,butcertainlynoless,informationthanyouneed.

THEROLEOFBENCHMARKING

Anydiscussionofthecost-benefitanalysisofHRMinvestmentinevitablyraisestheissueofbenchmarking,ortheprocessofcollectingdataonvariousaspectsofafirm’sHRMsystemfromavarietyoffirmsandthenusingthesedatatoevaluateone’sownfirm.

Benchmarkingstudiescanbegroupedintothosethatfocusonspecificlevelsofaparticularvariableorattribute(e.g.,Whatisourcostperhirerelativetootherfirmsinourindustry?)andthosethatfocusonspecificprocesses(e.g.,HowdoesWal-Martoperateitsworld-classlogisticsand

distributionsystem?).Studiesthatbenchmarklevelsofanattributeareoftenconductedviasurveyandincludelargenumbersoffirms;studiesthatbenchmarkprocessesgenerallyincludeonlyafewfirmsandtendtobeconductedviasitevisitsortelephoneinterviews.

Ourexperiencehasbeenthatstudiesthatbenchmarkprocessescanprovidearichsourceofinformation,understanding,andofteninspiration.Whilesomehaveridiculedsuchstudiesas“industrialtourism,”webelievethatobservingexemplaryprocessesinsitucanbeaveryimportantlearningexperienceforteamsthathavetheresponsibilityfordesigningandimplementingnewprocesseswithintheirownorganizations.Incontrast,wearelessenthusiasticaboutstudiesthatbenchmarklevelsofaparticularvariable.

Whythereticence?Anumberofrecenttrendshavemadeitmoredifficulttoperformhigh-qualitybenchmarkingstudiesthatfocuson“levels”ofHRMpracticesoroutcomes.ThefirstisthatmanyHRfunctionsrunmuchleanerthantheyhaveinthepast,meaningthattherearefewerHRprofessionalsavailabletocompletesurveys.Inaddition,themovementofbothHRresourcesandHRresponsibilitiestothelineorganizationmakesitharderthanevertoensurethecomparabilityofthedataacrossfirms.

CanBenchmarkingEverBeStrategic?

Forbenchmarkingtohelpanorganizationcreatealong-termsourceofcompetitiveadvantage,theinformationderivedfromthisprocesswouldhavetoberare,difficulttoimitate,andvaluedbythefirm’sinternalorexternalcustomers.*Yetalmostbydefinition,iffirmsarereadilywillingtosharesuchdata,thenitprobablywon’thavemuchstrategicvalue.ConsiderthecaseofHewlett-Packard.HPisoneofthemostwidelybenchmarkedcompaniesintheworld,anditsbusinessprocesses(especiallyitsHRmanagementphilosophyandpractices)havebeenwidelyreportedinthebusinesspressandmanyacademicbooksandarticles.WhyisHPwillingtosharesuchinformation,whichwillsurelybecomeavailabletotheircompetitors?Webelievethatthereareatleasttwoimportantreasons.Thefirstisthatevenifthefirmiscompletelyforthcomingaboutwhattheydo,itdoesn’thelpunlessyouknowhowtheygeneratedthesolution,andthenuancesofthecontextinwhichithasbeenimplemented.Saiddifferently,evenifyouhadtherecipe,youstillmightnotbeabletomakethesoup.Second,HP’smanagementinfrastructurereliesheavilyonleveragingemployeecompetenciesandtalentsinnew

anddifferentsolutions.Inthiscontext,thefirmiscontinuouslyimprovingitsintellectualcapital,andbythetimeyourfirmhasreplicatedwhatitlearnedinthebenchmarkingprocess,HPwillhavecreatednewcompetenciestoallowittoadapttoanewsituation.Inmanyindustries,thefirmsthatcanlearnthefastestarethewinners.HPisagoodexampleofjustsuchafirm.

Our“bottomline”isthatbenchmarkingofkeyprocessescanbeveryhelpful,especiallyifitcanhelpyoulearnaboutnewprocessesandwaysofdoingthings.Andiftheprocessestobebenchmarkedcomefromindustriesotherthanone’sown,theyhavethepotentialtograntevenmoreusefulinsights.Butbenchmarkingof“levels”ofaparticularattributeshouldbedonewithgreatcare,ifatall.

*SeeJayB.Barney,“FirmResourcesandSustainedCompetitiveAdvantage,”JournalofManagement17,no.1(1991):99–120.

PUTTINGITALLTOGETHER:ANEXAMPLE

We’vecoveredalotofdifferentconceptsandcostingtoolssofar.Howmighttheyallcometogetherin“real”life?Anexamplemayhelp.Becausewehavelongbelievedthatfirmsdramaticallyunderestimatethecostsofemployeeturnover(especiallyamonghigh-performingemployees),let’susethisissuetoconstructasamplecostingmodel.

Tograsptheimpactofyourfirm’sturnoverlevel,youmustfirsthaveasensefortheperformancelevelsoftheleaversandwhetheryoucouldhavehadanyinfluenceoveranemployee’sdecisiontodepart.Obviously,turnoveramonglow-performingemployeesisdesirable.However,inthesetimesofhighemployee(andfamily)mobilityandtwo-careercouples,someemployeesmayleaveafirmforreasonsunrelatedtotheirjob.Insuchcases,turnoverisoutsideyourcontrolandmaythereforebeunavoidable.Infact,mostscholarsworkinginthisareabelievethattherearefourdistinctcategoriesofemployeeturnover.6

•Undesirable,controllable.Average-tohigh-performingemployeesleave,andthefirmmissedanopportunitytokeepthem.Thisis“bad”turnover.

•Undesirable,uncontrollable.Average-tohigh-performingemployees

leave,butthefirmhadnocontroloverthesituation(e.g.,anemployee’sspousewastransferredtoamuchbetterjob).Thistypeofturnoverisunfortunate,butitisalsounavoidable.

•Desirable,controllable.Low-performingemployeesleave,withyourassistance.Thisis“good”turnover.

•Desirable,uncontrollable.Low-performingemployeesleavebytheirownchoice.Thisisalso“good”turnover;however,inthiscategorythefirmwasnotawareoftheemployees’intentionsortheirperformancelevelsandthushadnocontroloverthedepartures.

Toestimateturnovercosts,youthustakestockof(1)thekindsofemployeeswhotypicallyleavethefirm,(2)theirperformancelevels,and(3)theirreasonsforleaving.Webelievethatturnoverofaverage-tohigh-performingemployeesisveryexpensive,whileturnoveramonglow-performingemployeescanactuallybebeneficial—especiallyifthefirmcanthenreplacelowperformerswithhighperformers.However,mostfirmsfinditmorecostlytoretainunusuallytalentedemployeesthanaverageoruntalentedones.Therefore,thetypeofturnoverthatyou’re“costing”willinfluencethecostsofyourinterventionaswell.Inourexperience,personnelrecords,alongwithexitinterviews,canhelpyousortthe“leavers”intothefourcategoriesjustdescribed.Mostfirmswillthenfocusonestimatingcostsandbenefitsofthe“undesirable,controllable”category.

Considertheexampleofanorganizationthatsuccessfullyexpandeditsbusinessbutthenbecametroubledbywhatitsawasanexodusofhigh-potentialmidlevelmanagers.Thefirmemploys1,000managers,400ofwhomitconsiders“highperformers.”Thirtypercentofthesehighperformersleavethefirminanygivenyear,sothecompanymusthire120managersasreplacements.(Notethatthisexamplefocusesonlyonhigh-potentialmanagers—totalturnovercostswouldbemuchhigher.)Assumethateachmanagerearns$100,000peryear.Furtherassumethatallturnoverinthisgroupisvoluntary.Therefore,therearenocostsassociatedwithseverancepayorincreasedunemploymentpremiums.Becausethe“leavers,”bydefinition,arehighperformers,wecanalsoassumethattheirreplacementswill,onaverage,exhibitlowerperformance—atleastatfirst.Table4-2showsthecostcategoriesandrelatedestimates.

Turnoveramonghigh-performingmidlevelmanagerscoststhisfirmanestimated$6.7millionperyear,orapproximately$55,500peremployee.Thisisconsistentwithrecentestimatessuggestingthatreplacingamidlevelmanagercancostabout50percentofhisorhersalary,notincluding

opportunitycosts.Itiscertainlyalotofmoney.Butisittoomuchmoney?Orisitsimplyacostofdoingbusiness?Tomakethisdetermination,weneedtofigureoutwhethereffortstoreduceturnovermightprovecheaper.Todothis,wewouldcomparethemarginalcostsassociatedwithareductioninturnoverwiththemarginalbenefits.Andbecause“retained”employeeswillstaywiththefirmmorethanayear,ourestimatesmusttakeintoaccountmultipletimeperiodsaswell.

Table4-2CostEstimateofReplacing120High-PotentialManagers

Year1(hire120newmanagers) Separationcosts $60,000Recruitingcosts $900,000Selectioncosts $900,000Trainingandacculturationcosts $600,000Lowerproductivity—acculturation $1,200,000Lowerproductivity—longrun $3,000,000Total $6,660,000

Note:Allfiguresinpresentvalue.

Table4-2estimatesonlythecostsofemployeeturnover.Thesedatahavemeaningonlywhenwecomparethemwiththebenefitsassociatedwitheffortstoreducethisundesirableturnover.Eveninthebestofsituations,turnoverrarelyreacheszero.However,anumberofinterventionscouldeasilycutturnoverbyhalf.Let’ssaythat,basedonexitinterviewsandanalysisofcompanyrecords,ourexamplefirmhasdeterminedthatitcouldreduceturnoveramonghigh-potentialmanagersfrom30percent(120managersperyear)to15percent(60managersperyear).How?Byofferinghigherwages,competencydevelopment,andenhancedpromotionalopportunitiestothehighest-performingemployees.Clearly,someofthesecostswilloccurjustonce;otherswillrequirecontinuinginvestments.

Shouldthefirminvestintheturnover-reductionprogramforthehigh-potentialmanagers?Supposethat,atthispoint,linemanagersexpressskepticismabouttheproposedprogram.Theyvaluetheperformanceoftalentedmanagers,butthey’renotconvincedthattheinvestmentrequiredtoretainthesemanagerswouldpayoffsufficiently.Tables4-3and4-4showthecostandbenefitestimates,respectively,ofreducingturnoverinthisgroupfrom30percentto15percent.(Thecostestimatesshownintable4-3needtobeappliedtoallemployeesinthiscategory,sinceyouwon’tknowinadvancewhichemployeesyouwillgettokeep.However,thebenefitestimatesintable4-4applyonlytothe60additionalemployeesinthefirstyearwhomyou

expecttoretain.)

Thesetablesillustratethatinvestmentsinhumancapitaloftenrequireexpendituresinthecurrentyearthatarenotrecovereduntilsomeyearsinthefuture.ThisisespeciallysalientinHR,because,aswehavediscovered,mostaccountingsystemsfocusmanagers’attentionsonthecurrentperiod.Thismakessenseifwethinkaboutitfromanumberofperspectives.First,asYogiBerraonceeloquentlyobserved,“It’stoughtomakepredictions,especiallyaboutthefuture.”ThisisastrueforHRasitisforbaseball.Peopleleave,strategieschange,newcompetitorsenterthemarketplace.EachoftheseelementsmakesinvestmentsinHRmorerisky.Atthesametime,smartmanagersknowthatnewbusinessopportunitiesariseallthetime.Further,theonlywaythattheirfirmscantakeadvantageoftheseopportunitiesistocultivateacompetent,capable,andflexibleworkforce.Thus,managersgenerallycomparethepresentvalue(PV)ofanintervention’sbenefitswiththepresentvalueofitscosts,soastobecompensatedfortheireffortsandrisk.Table4-5showshowthiswouldworkforourexamplefirm.

Table4-3CostEstimateofReducingTurnoverfrom30Percentto

15Percent

Year1 Increasedvariablepayforhighperformers $1,200,000Enhancedpromotionalopportunities $360,000Additionaltraining(competencydevelopment) $600,000Year2 Increasedvariablepayforhighperformers $1,200,000Enhancedpromotionalopportunities $360,000Additionaltraining(competencydevelopment) $600,000Year3 Increasedvariablepayforhighperformers $1,200,000Enhancedpromotionalopportunities $360,000Additionaltraining(competencydevelopment) $600,000PresentValueofCosts(3years@10%costofcapital) $5,858,381

Table4-4BenefitEstimateofReducingTurnoverfrom30Percentto

15Percent

Year1(60Employees) Enhancedproductivityandlowerreplacementacculturationcosts $3,000,000Year2(120Employees)

Enhancedproductivityandlowerreplacementacculturationcosts(currentandprioryear’sretainedemployees)

$6,000,000

Year3(180Employees) Enhancedproductivityandlowerreplacementacculturationcosts(currentandprioryears’retainedemployees)

$9,000,000

PresentValueofBenefits(3years@10%costofcapital) $13,320,929

Table4-5NetPresentValueofReducingTurnoverfrom30Percentto

15Percent

PresentValueofBenefits $13,320,929PresentValueofCosts– $5,858,381PresentValueofBenefitsLessPresentValueofCosts $7,462,548

Inthisparticularscenario,theNPVoftheproposedturnover-reductionprogramissubstantiallygreaterthanzero($7.5million).Thusthedataindicatethatthisinvestmentwouldmakesenseevenunderthemostrestrictiveofassumptions.Inthecaseof“mixed”results,wheretheinvestmentappearswarrantedgivenoptimisticassumptionsbutquestionableunderconservativeones,wesuggestgatheringmoredatacarefullyandconductingmorerigorousanalysis.Aspecificmethodologyfordevelopingverydetailedandprecisecostestimates,activity-basedcosting,hasbecomeapopulartoolformanagementaccountants.7

SUMMARY:COMPARINGCOST-BENEFITANALYSIS

ANDHRSCORECARDDEVELOPMENT

InthischapterwemadethedistinctionbetweendevelopinganHRScorecardandcalculatingthereturnoninvestmentofaspecificHRprogramorintervention.ThesetwoactivitieshelptheHRfunctioncreatevalue.However,theyinvolvedifferentprocessesandrequiredifferentcompetenciesfrompractitioners.

Cost-benefitanalysesaredifferentfromHRScorecardsintheirbreadth(theyaremuchnarrowerandmoreprojectfocused)andintheirlongevity(theyprovideonespecificansweronly).Moreover,generallyonlythedecisionmakersinvolvedseetheresultsofcostinganalyses.Incontrast,theHRScorecardisbroadinscopeandlaysoutatheoryabouthowpeoplecreate

valuethroughoutthebusiness.Itisalsousedbyamuchwideraudience,viewedandupdatedregularly,andemployedasatoolforfollowingtheprogressofstrategyimplementation.

Bothcost-benefitanalysisandHRScorecarddevelopmentareimportant;indeed,theyarecomplementary.Mostfirmsusethemsequentially,however.TheydevelopaScorecardtoidentifywheretheywanttobeinthefutureandwheretheyarenow,thentheyconductROIanalysestochoosethemostefficientwayofgettingtotheirdesiredfuture.HRmanagersneedtohonetheirabilitytousebothofthesepowerfultools.

Inthenextchapter,weshowyouhowtocombinetheknowledgeyougainfromdevelopingmeasurestotrackyourfirm’sstrategyimplementationwiththeinsightsyougainfromcost-benefitanalyses.

HRSP/RUTGERSUNIVERSITYHRCOSTINGPROJECT

Canmostfirmsaccuratelydeterminehowmuchmoneytheyinvestinpeople?Andiftheycould,wouldtheythenmakebetterdecisionsaboutthoseinvestments?InarecentprojectsponsoredbytheHumanResourceSystemsProfessionals(HRSP)andRutgersUniversity,CharlesFay,SteveDirector,PaulHempel,andMarkHuseliddevelopedanintegrated,spreadsheet-basedcostingmodeltoevaluatethetrueeconomiccostsandbenefitsassociatedwithinvestmentsinpeople—whethertheseinvestmentsoriginatedintheHRfunctionorelsewhereintheorganization.Thegoalsofthemodelweretwofold:

1.Todevelopestimatesofthecostofhuman-resource-relatedactivitiestothefirm;and

2.Toallowtheusertoestimatethecostsassociatedwithchangesinvarioushuman-resource-relatedpractices.

Fayandcolleaguesshowedthatdevelopingsuchamodelisnotasstraightforwardasmightbeimagined,however.Inafirm’sfinancialstatements,investmentsinpeopleareusuallyreflectedincostofgoodssold(COGS)orselling,general,andadministrativeexpenses(SG&A).Formostfirms,whatthismeansisthatthetruecostsassociatedwiththefirm’sinvestmentsinpeople—whetheryouconsidertotalcostsorthecostsassociatedwithaparticularHRMpractice—areverydifficulttoisolatebecausethesecostsare“embedded”inlargercostcategories.Indeed,manyfirmswouldfinditdifficulttodeterminethetruecostofinvestmentintraining,becausethesecostsaredistributedthroughoutthefirmandconventionalaccountingsystemsarenotdesignedtocapturethesecosts.

Compoundingthisproblemisthefactthatinvestmentsinpeople—eventhoseinvestmentsthataredesignedtocreatevalueoverthelongterm—areexpensedintheirentiretyontheincomestatementduringthecurrentperiod.Becausefirmsdon’ttrackinvestmentsinpeopleoverthelongrun,theyhavelittleincentivetopaycarefulattentiontotheseinvestments.

Thus,indevelopingtheHRSP/Rutgerscostingmodel,theauthorswereobligedtodevelopmutuallyexclusiveandexhaustivecategoriesforHRcosts.Theythendevelopedamethodologyforcollectingtherelevantdataandthenvalidatedtheirmodelinasampleofsixlargefirms.Incontrasttopreviousresearch(whichhasmostoftenattemptedtoestimatethecostsofasinglehumanresourceactivity),theirapproachfocusedonthecostsandbenefitsoftheentireHRMsystem.

IntheHRSPprojecttheauthorsconceptualizedcostsofandbenefitsfromanytypeofHRMinterventionasanumberofinterrelatedcomponents(seefigure):

BaseLineOperatingCosts:Theseareannualcostsassociatedwithhumanresourcemanagementprocessesandactivities.Theyrepresentthe“startingpoint”andserveasthebenchmarkagainstwhichproposedchangesinhumanresourcemanagementprocessesandactivitieswillbecompared.

AdjustmentCosts:Thesecostsoccuronlyonceastheresultoftheimplementationofahumanresourcemanagementinitiative.

Steady-StateCosts:Thesearerecurringcostsassociatedwithimplementationofahumanresourcemanagementinitiativeplusthoseunrelatedtothenewinitiative.

AdministrativeCosts:Thesearethecostsassociatedwithdesigning,piloting,implementing,administering,andevaluatingahuman

resourceinitiativeorongoingHRactivity.

DirectCosts:TheseareadditionalcostsincurredasaresultofahumanresourceinitiativeorongoingHRactivity.Forexample,apayincreaserequiressomeadministrativecosttodesignandimplement;theextrapayrollresultingfromimplementationisadirectcost.

Bothadministrativeanddirectcostsaredividedintothefollowingfourcomponents:

•personnel

•supplies

•capital

•outsideservices

KeyLessonsfromtheHRSPProject

Indevelopingandvalidatingthismodel,theauthorsconcludedthefollowing:

1.Thetruecostsassociatedwithafirm’sinvestmentinpeoplewerenotapparentinthebudgetingandaccountingsystemsofmostHRMdepartments.Indeed,theHRdepartmentbudgetdramaticallyunderestimatedthefirm’struelevelsofinvestmentinpeople,because(1)theyarenotwellcapturedbyaccountingsystemsingeneral,and(2)muchinvestmentinpeopleisdistributedthroughoutthefirmintheoperatingbudgetsoflinemanagers.Becausemostaccountingsystemsareveryimpreciseinhowtheyallocatecostsforinvestmentsinpeopleandbecausemanyofthosecostsaredistributedthroughouttheorganization,thebudgetforafirm’sHRdepartmentdramaticallyunderestimatesafirm’stotallevelofinvestmentinpeople,perhapsbyasmuchas50percent.Asaresult,mostfirmscannoteasilydeterminetheirtruelevelsofinvestmentinsomefairlycommoncategories,suchastraining.

2.ThedisciplineimposedbyamovementfromconsideringonlyinvestmentsintheHRfunctionastrackedbytheaccountingfunctiontothinkingabouttheeconomicinvestmentsinpeople(wherevertheymayoccurinthefirm)canbeveryhelpfulintheprocessofcost-benefitanalysis.

3.Itispossibletodeterminethefirm’struelevelofpeople-related

investments,butitrequiresconsiderableresources.Beforeembarkingonsuchaproject,firmsshouldhaveaverygoodreasonfordoingso,astheprocessisverylabor-intensive.

Sources:C.H.Fay,P.S.Hempel,S.M.Director,andM.A.Huselid,“CostingHumanResourceInitiatives”(SchoolofManagementandLaborRelations,RutgersUniversity,1997);andC.H.Fay,P.S.Hempel,S.M.Director,andM.A.Huselid,“RutgersHumanResourceCostingModelSoftware(Version1.3)User’sManual”(SchoolofManagementandLaborRelations,RutgersUniversity,1997).

5

THEPRINCIPLESOFGOODMEASUREMENT

THEHUMAN-RESOURCEperformance-measurementsystemyouuseplaysakeyroleindeterminingHR’splaceinyourfirm—includingsecuringHR’scredibility.Italsoinfluencestheorganization’sabilitytocapitalizeonHRasastrategicasset.Forthesereasons,youmustgroundthatmeasurementsysteminsomeessentialprinciples.Let’stakeanotherlookatHiTech,thecompanywefirstmetinchapter3,toseewhatcanhappenwhenafirmignorestheseprinciples.

HiTechisalargemanufacturerheadquarteredinthewesternUnitedStates.Itsinnovativeproductshaveearneditrecognitionasanindustryleader.Likemanycompanies,HiTechforseveralyearshademphasizedtheimportanceofpeopleasasourceofcompetitiveadvantage.However,althoughthecompanyhadprominentlyemphasizedsome“peoplepolicies,”ithadnotarticulatedthecause-and-effectrelationshipsthatmightlinkitsHRarchitecturetocustomerandshareholdervalue.Asafirststeptowardmeasuringtheserelationships,HiTech’sHRleadershipconductedafeasibilitystudytoexplorewhatitwouldtaketodevelopastrategicmeasurementsystem.Thefollowingaretheproblemstheyencounteredinthisproject.Aswe’llsee,thislistprovidesinsightintothenecessaryingredientsforaneffectivemeasurementeffort.

Availabledata—notrelevantdata—droveHiTech’skeydecisions.BecauseHiTechhadnotarticulatedtheprocessesthroughwhichpeoplecreatevaluethroughoutthebusiness,itdidnotmanage(andthereforemeasure)therelevantdriverswithinthatvaluechain.Not

surprisingly,themeasuresitdidhaveavailableweredesignedforotherpurposes.Thecompanyusedpeoplemeasuresfromthetraditionalannualemployeesurvey,forexample,andfinancialmeasuresthatincludedbudgetvariance.Thefeasibilityprojectwasfocusedononeofthefewbusinessunitsthatcurrentlycollecteddataonallthreecomponentsinthevaluechain.Tothatend,HRchoseaservice/call-centeroperationbecauseofthecloserelationshipbetweenfront-lineemployees(HiTech’sservicecontracts)andcustomers.Thoughthecallcenterwasaconvenientsourceofdata,itwasclearlynotHiTech’s“corebusiness.”Nevertheless,HRhadnootherdatatoworkwith.

Byincompletelyarticulatingitscausalstory,HiTechundermineditsmeasurementresults.Byrelyingonmeasuresthatwereavailableratherthanappropriate,HiTechfounditverydifficulttodrawevententativeinferencesaboutimportantrelationships.Forexample,thecallcentergeneratesrevenuethroughafee-for-servicearrangementwiththeregionalsalesoffice.Itmayalsogenerateadditionalrevenuethroughnewsalesofadditionalproductstoexistingcustomers.Call-center“profitability”isthusthenetofthecombinedrevenuefromthesetwosourcesminusbudgetedcosts.Thecompanyassessedcustomers’perceptionofvaluebyusingtwoavailableefficiencymeasures(callvolumeandspeedperanswer)andbygaugingserviceaccuracyandcustomersatisfaction.

Thisisatypicalsetofmetricsthatyouwouldfindinacompanythatusesmeasurementtomonitoractivitiesagainstsomestandard,particularlycostcontrol.Thesemetricsarenotsohelpfultoanorganizationthatwantstounderstandthevalue-creationprocess.Forexample,theHiTechcallcenterreallyhasthreewaystodrive“profitability.”First,itcanincreaserevenuesbyprovidingoutstandingservice,whichovertimewilladdtotheoverallproductvalueperceivedbyHiTech’scustomers.Butthereislikelytobeasignificantdelaybetweencall-centerperformanceandchangesinproductpurchases.Indeed,HiTechmightmoreaccuratelylinkitscall-centerperformancetoproductsalesratherthanservicebilling,sinceservicebillingisultimatelyaninternalcostthatHiTechwouldliketoreduce.Inotherwords,thecallcenter’sgainbecomesachargeagainsttheproductsalesbusinessunit.

Second,thecallcentergeneratesrevenuethroughservicesalesthatleadtotop-linegrowth,thatis,newservicesalesthatarenottiedtoapreexistingcustomerpurchase.Here,HiTechcouldexpectthetimelag

betweenthecustomer’sserviceexperienceandbuyingdecisionstoberelativelyshort.

Third,HiTechincludedbudgetvarianceasameasureofcostcontrol(andthusameasureofprofits,indirectly).Whilecostcontrolisonetraditionalmeasureoffinancialperformance,itmaywellconflictwith“newsales”revenue.Forexample,measuresofefficiencyandspeedmaydrivedowncosts,buttheydonotnecessarilyrepresentthemosteffectivewaytogeneratenewrevenues.HiTech’ssimplecausalmodelcombinestheseconflictingeffectsintoonerelationship.

Initsmeasurementsystem,HiTechincludedwhatwemighttermtheoperationalorinternalprocessmeasuresofaBalancedScorecard(speedandvolume)inthe“customer”segment,alongwithcustomersatisfaction.Amoreappropriatemodelwouldhavehadthoseprocessmeasuresdrivingcustomersatisfaction,whichinturnwoulddrivefinancialperformance.Thismorerealisticcausalconnectionwouldhavegivenmanagersactionableresultsthattheycouldthenusetoadjusttheimplementationofthecallcenter’sstrategyattheappropriatepointinthesystem.

Finally,thepeoplemetricsHiTechusedhighlightedacommonproblemmanyHRmanagersfacewhentryingtomakebusinesssenseoftheirHRmeasurementsystem.HiTechreliedonemployeeattitudesurveysthatcontainedasubstantialnumberofquestions.However,thesequestionsrepresentedjustonelargeandill-definedmeasureofemployees’attitudestowardthecompanyandtheirsupervisors.Becausethesurveyresponsescouldnotbedividedmeaningfullyintoseparatedeterminantsofemployeestrategicbehavior(competencies,motivation,strategicfocus),HiTechhadnoideahowtoaligntheHRsystemtodrivechange.EveniftheseniorHRmanagementteambelievedthatpeoplecouldgeneratevalueatHiTech,themeasurestheyusedprovidedlittleinsightintohowtheHRsystemshouldbealignedtoinfluencepeopleresults.

HiTechdidn’tcommunicateHR’sstrategicvalueupfront.HiTech’sHRVPrequiredthecooperationofotherbusinessunitstocollectthenecessarydataforthefeasibilitystudy.However,becausetheorganizationhadnotgonethroughSteps2through5inourmodel(describedinchapter2),theVPhadnowaytoconvincetheseotherunitsthattheresultsofhisprojectwouldmakeadifferenceintheperformanceoflineoperations.Therefore,theseunitssawtheproject

asadiversionandnotapriority.Asaresult,thefeasibility-projectteamcollectedusefuldataonjustafewunitsoutofamuchlargerpopulation.ThislimitationmadeitnearlyimpossiblefortheseniorHRmanagementteamtodrawmeaningfulinferencesaboutthepotentialrelationshipsinthemodel.

MultipleproblemscompoundedtolimitthevalueofHiTech’sfeasibilitystudy.Thefeasibilitystudy’ssmallsamplesizewascompoundedbytheCHRO’sover-relianceonavailabledata.Moreover,thosedatawerenotnecessarilyavailableintheappropriatetimeperiods.Theunitofobservationwasthesupervisorygroupwithinthecallcenter.ButthemeasuresthattheCHROchosetofocusonrequireddatathatbecameavailableondifferentcycles.Forexample,theoperationalprocessmeasuresofspeed,efficiency,andvolumewereavailablemonthly.Revenueandcustomersatisfactionmeasuresweregatheredquarterly.Andtheemployeesurveydatacameupannually.Thesedisparitiesintimingforcedthefeasibility-projectteamtoannualizeallthemeasuressoastoconformtotheemployeedatacycle.Thus,insteadofhavingthousandsofunitobservationsoverseveralyears,theprojectteamhadaccesstolessthanthirty.

Takentogether,theseflawsinHiTech’smeasurement-systemfeasibilitystudyhamstrungtheproject.Notsurprisingly,theresultsofthepilotprojectprovidedlittletoreinforceHR’sstatusasastrategicassetortoguideHR’sstrategiceffectiveness.Thepilotprojectwasnotextendedtoamorecomprehensiveanalysis,andHiTechmissedanopportunitytosharpenthestrategicfocusofHR.

WHYBETTERMEASUREMENT?

Asoundperformance-measurementsystemdoestwothings.First,itimprovesHRdecision-makingbyhelpingyoufocusonthoseaspectsoftheorganizationthatcreatevalue.Intheprocess,itprovidesyouwithfeedbackthatyoucanthenusetoevaluatecurrentHRstrategyandpredicttheimpactoffuturedecisions.Awell-thought-outmeasurementsystemthusactsasbothaguideandabenchmarkforevaluatingHR’scontributiontostrategyimplementation.

Second,itprovidesavalidandsystematicjustificationforresource-allocationdecisions.HRcan’tlegitimatelyclaimitsshareofthefirm’s

resourcesunlessitcanshowhowitcontributestothefirm’sfinancialsuccess.Anappropriatelydesignedperformance-basedmeasurementsystemletsyouexplicatethoselinksandthuslaythegroundworkforinvestmentinHRasastrategicresource,ratherthanHRservingasacost-centertoberetrenched.

Forexample,supposeyoumeasureyourfirm’sstandingontheHigh-PerformanceWorkSystemindex(describedinchapter2).TheHPWSindexisasummaryindicatorofthe“performance”orientationofkeyHRpractices.Youfindthatyourfirm’sHRsystemfallsintheforty-fifthpercentileamongallfirmsandthefifty-sixthpercentileinyourindustrygroup.AgoodmeasurementsystemwillletyoupredicthowmuchimprovementinfirmperformanceyoucanexpectifyouboostyourHRsystemtoahighertarget-percentilelevel.Or,let’ssayyoufindthatyourfirmisalreadyintheninetiethpercentileontheHPWSindex.Youcanthencalculatehowmuchofthecompany’sshareholdervalueisattributabletoyouroutstandingHRsystem,comparedtothevaluecreatedbyaHRsystematthefiftiethpercentile.

Thisapproachisasophisticatedformofbenchmarking,becauseitgoesbeyondmeasuringjustthe“level”oftheHRsystem.Itletsyouattachdollarvaluestothegapbetweenyourfirm’scurrentHRsystemandsometargetlevel.Still,itsuffersfromthesameweaknessasanybenchmarkingapproachformeasuringHR’sstrategicinfluence.Itdoesn’ttellyoumuchabouthownarrowingthatgapactuallycreatesthepredictedgainsinshareholdervalue.Ineffect,there’sa“blackbox”betweenHRandfirmperformance—andpreventingHRfromgainingthecredibilityitneedstobecomeatruestrategicpartner.

Ultimately,youmusthaveapersuasivestoryaboutwhat’sintheblackbox.YoumustbeabletothrowbackthecoverofthatboxandrevealaplausibleprocessofvaluecreationfromHRtofirmperformance.ThestrategicHRarchitecturewehavedescribed,alignedwiththestrategyimplementationprocess,formssuchastory.Tellingthisstory—throughthemeasurementsystemyoudesign—willhelpyouidentifyactionablegoalsandperformancedrivers.

THEMEASUREMENTCHALLENGE:ATTRIBUTESANDRELATIONSHIPS

WhenwespeakofmeasurementasastrategicresourceforHRmanagers,whatdowereallymean?Forexample,manyfirmsidentifyoneortwo

“people-related”measures,suchasemployeesatisfaction,inabalancedmeasureofcorporateperformance.Linemanagers,evenHRmanagers,mightbeheldaccountableforthesemeasures,whichcouldalsobeincorporatedintothemanagerialbonusplan.Suchmeasurescapturethequantity,orlevel,ofaparticularattribute—inthiscase,employeesatisfaction.Howmuchisthere?Doesitchangeovertime?Howdoesitcomparewiththatofotherfirms,oracrossSBUs?Mostofuswouldassumethatmoreofthisattributeisagoodthing.Wesay“assume,”becauseinmanyfirmsthereisprobablylittleevidencesupportingthelinkbetweenemployeesatisfactionandfirmperformance.Suchorganizationsemphasizetheleveloftheattribute,ratherthantherelationshipbetweentheattributeandsomestrategicoutcome(performancedriversorfirmperformance).

Goodmeasurementrequiresanunderstandingofandexpertiseinmeasuringbothlevelsandrelationships.ToomanyHRmanagersunderpressuretodemonstratetheHR-firmperformancerelationshiprelyonlevelsofHRoutcomesasproxiesformeasuresofthatrelationship.Inotherwords,theycan’tshowthedirectcausallinksbetweenanyHRoutcomeandfirmperformance,sotheyselectseveralplausibleHRmeasuresascandidatesforstrategicdrivers—andthensimplyasserttheirconnectiontofirmperformance.

Thisinabilitytodemonstratetheserelationshipsissometimeobscuredbydiagramsthatvaguelysuggestcauseandeffect.Figure5-1showsacommonexampleofwhatmightbecalledasuperficialstrategymap.Afirmmightincludeoneortwomeasuresundereachofthesethreecategoriesanddoagoodjobofmeasuringthelevelsofthoseattributes.Butwhatdoesdoingwellonthosemeasuresreallymean?Thearrowsimplythatbetterperformanceonthe“People”dimensionimprovesperformanceonthe“Customer”dimension,whichinturnwillimprove“Profits.”Buttherealstoryofvaluecreationinanyfirmismuchmorecomplicated,sothis“story”isincomplete.Itprovidesonlythemostsuperficialguidetodecisionmakingorperformanceevaluation.It’sonlymarginallybetterthantraditionalmeasuresthatmakenoefforttoincorporatealargerstrategicroleforHR.Boxesandarrowsgivetheillusionofmeasurementandunderstanding,butbecausetherelationshipmeasuresaresolimited,suchdiagrams—andthethinkingbehindthem—canactuallyhelptoundermineHR’sconfidenceandcredibility.

Figure5-1ASuperficialStrategyMap

Eventhoughrelationshipmeasurementisthemostcompellingassessment

challengefacingHRmanagerstoday,attributemeasuresshouldformthefoundationofyourmeasurementsystem.Why?BecauseevidenceofastrongrelationshipbetweenAandBisworthlessifthemeasuresofAandBthemselvesareworthless.Butwordssuchas“worthless”or“useful”or“appropriate”aren’tpreciseenoughforourdiscussionabouttheelementsofgoodmeasurement.Infact,therearewell-definedprinciplesdelineatingeffectivemeasurementpractice.UnderstandingthoseprinciplesletsyoutakethatessentialfirststepindevelopingastrategicallyfocusedHRmeasurementsystem.

NUMBERSWITHMEANING

Let’sbeginwithasimpledefinitionofwhatwemeanbymeasurement.Typically,measurementisdefinedastheassignmentofnumberstoproperties(orcharacteristics)ofobjectsbasedonasetofrules.Numericalrepresentationisimportant,becauseoftenweareinterestedinquantities.But,weareinterestedinquantitiesthathavemeaning.Forexample,knowingthataverageemployeesatisfactionis3.5ona5-pointscaleisnumerical,butitdoesn’thavemuchinherentmeaning.Is3.5goodorbad?Orconsideranemployeeturnoverrateof15percent.Percentagepointshavemoreinherentmeaningthan5-pointscales,butsimplyobservingthenumberdoesn’trevealmuchaboutwhether15percentisaproblem.

Toaddmeaningtotheselevels,weneedcontext.Thisistheappealofabenchmark.Ifwefindthatour3.5ona5-pointscaleisconsiderablybetterthanourindustrypeers’ratings,wecanbegintoattachsomesignificancetothatmeasure.However,wemightalsoobservethatour3.5isconsiderablybelowourownhistoricallevelonthismeasure.We’redoingbetterthanourpeersbutnotmaintainingourhistoricalperformance.Ofcourse,inbothcaseswehavemadeinterpretationsaboutrelativevalueonly.Thatis,wearebetterorworsethansomestandard.Inneithercasedowehaveanymeasureofmanagerialvalue.Inotherwords,whatdifferencedoesitmakewhetherwehavea3.0or4.0valueona5-pointemployeesatisfactionscale?Tohavemanagerialvalue,themeasuremustbeexpressedinnumericalunitsthathaveinherentperformancesignificance(suchasdollars).Barringthat,wehavetobeabletotranslatethemeasureintoperformance-relevantunits.

Considerthissimpleexample:Supposeyouwanttodemonstratethedollarcost(newhiringandtrainingcosts,lowerproductivity)associatedwitheach

additionalpercentagepointinyourfirm’sturnover.Togetmanagerialvalueoutofthisexercise,youwouldhavetolinkHRmeasurestoperformancedriverselsewhereinthefirm,andultimatelytofirmperformance.RecalltheSearsstory.Thekey“people”measuresinSears’measurementmodelreflectedemployees’attitudestowardtheirjobsandthecompanyoverall.Searscouldhavebenchmarkedthoseattitudesagainstsimilarlevelsatothercompanies,orperhapsagainstSears’ownhistoricalnorms.Fromthis,thecompanymighthaveidentifiedagap.However,thenitwouldhavehadtoask,sowhat?Unlikemostcompanies,Searshadananswertothisquestion,becauseitcouldtranslatechangesinthoseattitudemeasuresintochangesinfirmperformance.The“people”numbersthushadbusinessmeaning.

Measuringrelationshipsgivesmeaningtothelevels,andtopotentialchangesinthoselevels.However,thoserelationshipsareverylikelytobefirm-specific.Therefore,themorethemagnitude(theimpactofonemeasureonanother)ofthoserelationshipsisuniquetoyourfirm,thelessusefulitisforyoutobenchmarkonlevels.Benchmarkingonmeasurementlevelsassumesthattherelationshipsamongtheselevelsarethesameinallfirms,andhencethattheyhavethesamemeaninginallfirms.That’sthesameassayingthatthestrategyimplementationprocessisacommodity,oratleastthatHR’scontributiontothatprocessisacommodity.Forthisreason,wefindbenchmarkingonHRstrategicmeasurestobemisguidedatbestandcounterproductiveatworst.

MEASURESVERSUSCONCEPTSORVISIONS

Forourpurposes,the“objects”inourdefinitionofmeasurementareafirm’sHRarchitectureandstrategyimplementationsystems.The“properties”ofthoseobjectsthatmostinterestusarethevalue-creatingelementsinthosetwosystems—inotherwords,theHRdeliverablesandthefirm’sperformancedriversthatthedeliverablesinfluence.Wecanthinkofthesepropertiesasabstractconcepts,butalsoasobservablemeasures.First,anorganizationortopmanagementteamcanidentifykeylinksinthevalue-creationchainbytakingwhatwecalla“conceptual”or“vision”perspective.Forexample,thesimplerelationshipbetweenemployeeattitudesandfirmperformanceservesasthefoundationoftheSearsmeasurementmodeldescribedearlier.Searsrefineditsmodelfurtherwithbriefvisionstatementsabouttheimportantattributesofeachelementinitsmodel.Ifyourecall,thecompany’stopmanagementdecidedthatSearsmustbeacompellingplacetowork,a

compellingplacetoshop,andacompellingplacetoinvest(the“threeC’s”).Asanother,morespecificexample,aretailbankthatwe’veworkedwithidentified“superiorcross-sellingperformance”asakeyperformancedriver.

Suchconceptsandvisions—let’srefertothemcollectivelyas“constructs”—arepropertiesofthestrategyimplementationprocess.However,theyaresoabstractthattheyprovidelittleguidancefordecisionmakingorperformanceevaluation.Toillustrate,identifying“superiorcross-sellingperformance”asakeyperformancedrivermaytakethingsonestepbeyondthevisionstage,butit’sstilltooconceptualtobeoperational.Whatdoesitmean?Howwillweknowitwhenweseeit?Willtwodifferentmanagersbothknowitwhentheyseeit?Inshort,howdowemeasureit?

Compellingandeasy-to-graspconstructsareimportantbecausetheyhelpyoucaptureandcommunicatetheessenceofpowerfulideas.They’relikesimplebutevocativemelodiesthateveryonecanhum.Nevertheless,theyarenotmeasures.Rather,theyconstitutethefoundationonwhichyoubuildyourmeasures.Clarifyingaconstructisthefirststepinunderstandingyourfirm’svalue-creationstory.Butyoumustthenknowhowtomovebeyondtheconstructtothelevelofthemeasure.

Onewaytodetectagoodmeasureistoseehowaccuratelyitreflectsitsunderlyingconstruct.Earlier,wesaidthatameasureoftherelationshipbetweenAandBisworthlessiftheunderlyingmeasuresofAandBthemselvesareworthless.AorBwouldbeworthlessiftheydidnotreflecttheconstructsbehindthem.Forexample,ifSearsmeasuredtheconstruct“compellingplacetowork”simplybyassessingthelevelofemployeesatisfactionwithpay,themeasurewouldnothaveverymuchrelevance.Why?Becauseitomitskeydimensions,suchastheunderstandingofbusinessstrategyorrelationshipswithsupervisors,oftheunderlyingideathatitisdesignedtotap.

Onewaytoavoidthiskindofmistakeistousemultiplemeasuresthatreflectdifferentdimensionsofthesameconstruct.InSears’case,managersusedaseventy-itemsurvey,whichtheythendistilleddowntotenitemsastheirmeasureof“compellingplacetowork.”Nexttheyconsolidatedthosetenitemsalongtwodimensions—employeeattitudesaboutthejobandemployeeattitudesaboutthecompany.Figure5-2illustratesthistechnique.Thisapproachgavetheorganizationanexplicitwaytoassesshowwellitwasrealizingitsvisionofbeinga“compellingplacetowork.”

Figure5-3illustratesanotherproblemthatcanariseinchoosingmetrics.Inthefigurenoticethatthemeasuredoesnotcorrespondtoitsunderlying

constructfortworeasons.First,themeasuredoesn’tfullycaptureallofthepropertiesoftheconstructofinterest.This“deficiency”isthedarkareaontheleft.Second,themeasureiscapturingsomethingbeyondtheconstructofinterest.Inotherwords,themeasureiscontaminated(lighterareaontheright).Thiskindofmeasurementerrorisalltoocommon.Forexample,recalltheretailbankthatidentified“cross-sellingperformance”asakeyperformancedriver.Howshouldthefirmmeasurethisconstruct?Itmightusetotalsales,undertheassumptionthatemployeesorbrancheswithmorecross-sellingskillwouldhavehighertotalsales.Buttotalsaleswouldalsoincludesalesotherthanthosederivedfromcross-sellingperformancebytellers;thoseotherdatawouldthuscontaminatethemetric.Whataboutassessing“totalnumberofdifferentproductssoldpercustomer,”or“newsalestoexistingcustomers”?Ineitherofthesecases,thebankwouldstillhavetodevelopameasurethattappedtheimportantattributesoftheperformancedriverinquestionwithoutblurringthepicturewithunrelatedinfluences.

Figure5-2AnExampleofMultipleMeasuresReflectingDifferentDimensionsoftheSameConstruct:ACompellingPlacetowork

Responsestothese10questionsona70-questionemployeesurveyhadahigherimpactonŁemployeebehavior(and,therefore,oncustomersatisfaction)thanthemeasuresthatweredevisedinitially:personalgrowthanddevelopmentandempoweredteams.

Source:AdaptedfromAnthonyJ.Rucci,StevenP.Kirn,andRichardT.Quinn,“TheEmployee-Customer-ProfitChainatSears,”76,no.1(January–February1998):90.

Thesesortsofmeasurementerrorsseverelyreducethevalueyoucanderivefromyourmeasurementsystem.Ifyouuseadeficientmeasure,it’sverylikelythatemployeeswillignoreormisinterpretaparticularperformancedriver.Forexample,ifakeydriveris“positivecustomerbuyingexperience,”youmightuse“timewithcustomer”asameasure.Indeed,marketresearchshowsthatcustomersappreciateitwhensalesstaffdonotpressurethemtomakeaquickpurchase.Ontheotherhand,ifthisisyouronlymeasureofthecustomer’sbuyingexperience,sales-peoplemightbetemptedtoneedlesslydragouttheirencounterswithcustomers.It’sstilltruethatwhatgetsmeasured,getsmanaged.Simplyput,wecan’tmeasureAandhopeforB.1

METRICSTHATMATTER

Supposeyou’vedevelopedaclearstrategymapdescribingyourfirm’sstrategyimplementationprocess,identifiedthekeyperformancedriversinvolved,andevenhaveagoodideaofwhatmeasuresyoumightusetocapturetheHRenablersofthosedrivers.Youstillhaveseveralimportantdecisionstomakeregardingthestructureofthosemeasures—decisionsthatwilldramaticallyaffecttheireventualusefulness.Themeasurementprocessisnotanendinitself.Ithasvalueonlyifitsresultsprovidemeaningfulinputintosubsequentdecisionsand/orcontributetomoreeffectiveperformanceevaluation.Therefore,asyouthinkaboutthechoiceandformofaparticularmeasure,stopforamomentandthinkcarefullyaboutwhatyouwoulddowiththeresults.Imaginereceivingyourfirstreportsummarizingthismeasure.Whatkeydecisionswilltheseresultsinform?Willanothermanager,particularlyoutsideHR,considerrecommendationsbasedonthismeasuretobepersuasive?Wouldtheseresultsprovideacompellingfoundationforaresource-allocationdecisionwithinyourfirm?

Figure5-3MisalignmentofConstructandMeasure,CausingContamination/Deficiency

Wehavedefined“measurement”astheprocessofassigningnumberstopropertiesofobjectsbyfollowingcertainrules.Numericalmeasuresareappealingbecausetheydescribequantities,whichplayacentralroleinmostdecisions.Butnotallmeasuresprovideinformationaboutquantities.Herearesomepointerstokeepinmindasyouchoosemetricsforyourownsystem:

NominalMeasures.Nominalmeasuresarethelowestlevelofmeasurementandtellusnothingaboutquantityofaparticularattribute.Theysimplyindicatedifferencesorcategorizationsacrosscertainproperties.Forinstance,classifyingemployeesbygenderindicatesadifferencebetweenmalesandfemales.Itdoesn’tsayanythingaboutwhetheronecategoryis“more”or“less”thantheotheronthepropertyofgender.Nominalmeasuresareusefulonlyforcounting.Anynumbersattachedtothesecategoriesareusedaslabels,asin“category

1”or“category2.”InHR,gendercountswouldmostlikelybeusedtoassesscomplianceactivities,suchasadherencetoEEOpolicies,buttheywouldhavelittlevalueinmeasuringHRasastrategicasset.

OrdinalMeasures.Ordinalmeasuresrepresentthenextlevelupofmeasurement.Theyprovidethefirst,butleast-sensitive,measureofquantity.Thinkofordinalmeasuresmosteasilyasrank-orderassessments.IfweknowthatAexceedsBontheunderlyingpropertyinquestion,wecan“rank”AaboveB.Wejustdon’tknowbyhowmuch.Inaddition,weknowthatifBisgreaterthanC,thenAisalsogreaterthanC.Wecansaynothing,however,abouthowthedifferencebetweenAandBcomparestothedifferencebetweenBandC.Rank-ordermeasuresareprobablymostusefulinperformanceevaluations,suchas“good,”“better,”and“best.”Promotionrecommendationsprovideanotheraptexample:Thetopcandidateisbetterthantherest,butthistoprankingsaysnothingabouthowmuchbetter.(Notethatforthepurposesofsuccessionplanning,thismaynotmatter.)

IntervalMeasures.Intervalmeasuresareanimprovementbeyondordinalmeasuresbecausetheyletusassumethattheintervalbetween“scores”of1and2isequaltotheintervalbetween2and3.Manycommonbusinessperformancemeasuresexpressedintime,dollars,units,marketshare,oranycombinationoftheirratiosareintervalmeasures.Forinstance,a1-pointpercentagechangeinmarketsharemeansthesamenumberofcustomersgoingfrom34to35percentasitdoesgoingfrom67to68percent.(Notethattheseexamplesarealsoratiomeasures,whichwedescribenext.)Themorecommon—andpurest—formofintervalmeasureisoneofthosescalesonwhich“1”means“stronglyagree”and“5”means“stronglydisagree.”

RatioMeasures.Inthecasesofdistance,dollars,andtimejustdescribed,youcanseethatratioscaleshaveanimportantadvantageoverintervalscales,becausetheyhaveatruezeropoint.Thispointofreferenceletsyoumakemeaningfulcomparisonsbetweentwovalues.Forexample,youcoulddescribeoneresultastwo-thirdsthequantityofanotherresult.Ratiomeasuresarealsoappealingbecausetheunitsofmeasuretendtohaveinherentmeaning(dollars,numberofemployees,percentages,time,etc.).Finally,thesemeasuresarerelativelyeasytocollect.(Note,though,thatjustbecausethey’rereadilyavailabledoesn’tnecessarilymeanthatthey’llaccuratelyreflecttheunderlyingconceptorvisionthatyou’retryingtoassess—aswesawearlier.)

Ideally,youwilldevelopameasurementsystemthatletsyouanswerquestionssuchas,howmuchwillwehavetochangexinordertoachieveourtargetchangeiny?Toillustrate,ifyouincreasetrainingtimeby20percent,howmuchwillthatchangeemployeeperformanceand,ultimately,unitperformance?Or,ifyoureduceturnoveramongkeytechnicalstaffinR&Dby10percent,howlongbeforethatactionbeginstoimprovethenew-product-developmentcycletime?Ameasurementsystemthatcanprovidethiskindofspecificityisnoteasytodevelopand,indeed,maybebeyondthereachofsomefirms.Butmeasurementqualityisacontinuum,notanabsolute.Aswithmostdecisions,developingastrategicHRmeasurementsysteminvolvestrade-offs.Tomakethecorrecttrade-off,youneedtochoosethepointalongthemeasurement-qualitycontinuumthatyouthinkyourfirmcanreasonablyachieve.

MEASURINGCAUSATION

Whyareaccountingnumbersandfinancialmeasuressocompelling?It’snotsomuchthattheyguidedecisionmaking,butthattheyareexpressedinunitsthatdirectlyreflectthebottomline—dollars.Wecanobjecttothesupposedshortsightednessofthe“beancounters,”butthereisstillsomethingtotheadagethat“adollarsavedisadollarearned.”Aswe’veseen,thischaracteristicmakesitparticularlychallengingtomanageintangibleassets(suchashumancapital),forwhichyoucanquantifycostsmuchmoreeasilythanbenefits.Forexample,howwouldyoumeasurethevalueofdevelopingandimplementinganewcompetencymodel?Aswithmanylargeinvestments,youmaynotrealizethebenefitsforseveralyears,andeventhentheymightmanifestthemselvesonlyindirectly,throughimprovedlevelsofperformancedriverselsewhereinthefirm.SinceHRwillalwaystendtobefurtherupstreaminthevalue-creationprocess,measuringthevalueofhumanresourcedecisionsmeansassessingtheirimpactonstrategicdriversthatarelinkedmoreclosely—ifnotdirectly—tothebottomline.

Quantifyingtheserelationshipsisbynomeansaneasytask.However,evenifyoucan’tempiricallyverifyafive-linkchainofcausationfromHRtofirmperformanceinyourorganization,establishingHR’sinfluenceonkeyinterimperformancedrivers(suchascustomerretentionorR&Dcycletime)hasclearfinancialimplications.AsHRmanagersvalidateanincreasingnumberofsuchlinks,theybegintoestablishthecentralconnectionsbetweenHRandfirmperformance.Havingsystematicandquantifiableevidenceof

HR’scontributiontosevenoutoftwentystrategicperformancedrivers,forexample,isnotthecompletestoryofHR’sstrategicinfluence,butitisasignificantimprovementoverzerooutoftwenty!

Butwhatdoes“measuringarelationship”actuallymean?Termssuchasassociation,correlation,orcausationmightcometomind—thoughtheyaresometimesusedtoolooselyandaren’talwayshelpful.Twovariablesarerelatedwhentheyvarytogether,butyoumaynotknowforsurethatoneactuallycausestheother.Youdon’thavetheluxuryofarguingoversuchnuances,though.Youhavetomakedecisions,andyourcolleaguesexpectthosedecisionstoproduceresults.Atsomepoint,yourjobrequiresyoutodrawacausalinferenceabouttherelationshipbetweenadecisionanditsresult.Afterall,you’renotinterestedinwhetheramere“association”existsbetweenaparticularincentivesystemandemployeeperformance.Youneedtoknowwhetherthesysteminquestionwillproduceachangeinemployeeperformanceand,ifso,byhowmuch.

Inshort,youneedrelationshipmeasuresthatare“actionable.”Oneofthemostcommonmeasuresofastatisticalrelationshipisthecorrelationcoefficient.Rangingfrom–1.00to+1.00,correlationcoefficientsdescribetheextenttowhichtwovariableschangetogether.Unfortunately,correlationcoefficientshavelittleactionablevalue.First,theyarenotexpressedinunitsthathaveanyinherentmeaning.Toillustrate,howwouldyouinterpretacorrelationcoefficientof.35?HasyourCEOeveraskedyoutodescribeHR’scontributionintermsofcorrelation,oritsequivalentstatisticalterm“explainedvariance”?Second,correlationcoefficientstypicallydescribetherelationshipsbetweenjusttwovariables.Sincemostbusinessoutcomeshavemorethanonecause,thesemeasuressimplycan’tcapturethecomplexityofreal-worldquestions.Forexample,supposeyou’retheheadofHRatamajorretailer,andyou’reinterestedintherelationshipbetweenhoursofsalestrainingandthecustomerbuyingexperience.Inaddition,storeoutletsofferingmoretraininghaveimplementedanewcomputersystemthatreducedcustomertransactiontimeby30percent.Thevariables“trainingtime”and“customersatisfaction”mightwellshowastrongpositivecorrelation.However,muchofitmaybeduetotheinfluenceofthenewtechnology!

Sowhatarethealternatives?Therearemanytochoosefrom—butallofthemhaveacoupleofimportantfeatures.Foronething,unlikethesimplecorrelationsjustdescribed,theyallmeasurerelationshipsfromamultivariate,ratherthanbivariate,perspective.ThismeansthatifyouwereinterestedinunderstandingtheindividualeffectofaparticularHRdeliverableonaperformancedriver,themeasureofthatrelationshipwouldaccuratelyreflect

theindependenteffectofthatindividualHRdeliverable.Moreover,thesecausalmodelsmeasurerelationshipsinactionableterms.Forexample,youneedtoknowthata20-percentchangeincompetencyAwillincreaseemployeecross-sellingperformanceby$300peremployeeperweek,notthatthetwoare“positivelyandsignificantlycorrelated.”

So,youcanoperationalizeyourcausalinferences—youjustneedtocarefullyconsidertheplausiblealternativestotheHReffectyouareinterestedin.Forxtobeacauseofy,forexample,youhavetobeconfidentthattheeffectonyisnotduetosomeinfluenceotherthanx.Ifyoucankeepthoseotherinfluencesfromvarying,yourconfidenceinyourcausalinferencewillincrease.Youwillalsobeabletoexpressyourinferenceinactionableterms.

MeasuringCausalLinkagesinPracticeLet’stakealookathowsomefirmsdevisedwaystomeasurecausallinkages.

THEEXPERIENCEATGTE

GTEprovidesaveryinterestingillustrationofhowanorganizationcanestimatelinkagesacrossseveralperformancedriversinastrategymap.GTE’sNetworkServicesunit(approximately60,000employees)“hypothesized”thatmarketsharewasdrivenbycustomervaluationofitsservice,whichinturnwasdrivenbycustomerservicequality,brandadvertising,andinflation.Thedriver(theleadingindicator)forcustomerservicewasasetofstrategicemployeebehaviorsfocusingbroadlyonemployeeengagement.GTEHRcreatedwhatitcalledthe“employeeengagementindex”(EEI)basedonasubsetofsevenquestionsfromtheGTEemployeesurveyasameasureofthesestrategicbehaviors.

TheanalysissupportedthehypothesisanddemonstratedthewisdomofHR’s“balanced”approachtoperformancemeasurementandmanagement.Forexample,GTEfoundthata1percentincreaseintheEEIresultedinnearlya½percentincreaseincustomersatisfactionwithservice.Inotherwords,GTEexaminedakeysectionofits“strategymap”andexplicitlytesteditshypothesisthatemployeebehaviorsareindirectleadingindicatorsofkeystrategicmeasures(marketshare).

GTEwasabletodothisforthreereasons.First,unlikeatHiTech,theHRdepartmenthadaclearstoryinmindofhowemployeebehaviorsactualdrive

strategyinitsorganization.Second,HRrecognizedtheneedtocollectandmergeinformationfrommultiplesourcesandmultipletimeperiods.Third,ithadaccesstothetechnicalexpertisenecessarytomakethesestatisticalestimates.2

THEEXPERIENCEATSEARS

Searswasoneofthefirstcompaniestoactuallyquantifythehypothesesinastrategymap.Ithasfurtherrefineditsfirmwidework-shop-investmodeltoincludeafocusonspecificrelationshipswithinstores(seefigure2-6inchapter2foranexampleoftheirfull-linestorestrategymap).Forexample,atSearstheBrandCentraldepartmentspecializesinconsumerdurables(TVs,refrigerators,etc.).Theseitemstendtobeexpensiveandcomplex,arepurchasedinfrequently,andrequirehighlevelsofprepurchaseadvicefromsalespeople,whoarepaidoncommission.Incontrast,intheWomen’sReadytoWear(RTW)/IntimateAppareldepartment,productstendtobeinexpensiveanduncomplicated,customersgenerallymaketheirownselectionswithlimitedinputfromsalespeople,andcustomerstendtopurchaseitemsmorefrequently.Herethesalesassociatesarepaidonanhourlybasis.

SteveKirn,VPforinnovationandorganizationaldevelopment,andhisstaffwantedtoknow:DotherelationshipsdifferamongtheWork,Shop,andInvestcategoriesbetweenthesetwodepartments?BecauseSearscollectsdataoneachoftheseelementsbydepartment,theywereabletogeneratesomesurprisinganswers.ThewillingnessofcustomerstorecommendSearsasaplacetoshoptoothers(whichtheycallcustomeradvocacy)isakeydriverofprofitability.Forexample,inWomen’sRTW/IntimateApparel,a1percentincreaseincustomeradvocacywaslinkedtoa7.4percentincreaseinrevenue,andinBrandCentraltoa4percentincrease.However,thedriversofcustomeradvocacydifferedacrossdepartments.IntheRTW/Intimatecategory,workingconditionsandabeliefthatthecompany’spricingisacompetitivestrengthsignificantlyaffectedoverallattitudetowardSearsandhadafavorableimpactoncustomeradvocacy.InBrandCentral(acommission-basedcategory),payandawillingnesstorecommendBrandCentralemergedassignificantdrivers.Thepresenceofattentiveandresponsivemanagerswasacoredriverofsalesassociateattitudesand,ultimately,economicvalueacrossallofthedepartmentsstudied.SuchanalysesarecriticalforhelpingSearstogainanincreasinglysophisticatedunderstandingofitsstrategymapandtohelpimplementthatstrategyfaster.

DRILLINGDEEPERATSEARS

Afullerunderstandingoftherelationshipsbetweenpeople,strategy,andperformancemayalsorequiresomeinnovativethinkingintheanalysisofdata.AtSears,customersatisfactionisakeydriverofstoreperformance,notonlybecausesatisfiedcustomersaremorelikelytobecomerepeatcustomers,butalsobecausetheyaremorelikelytorecommendSearstoothersasagoodplacetoshop.Thus,aswedescribedinthischapter,customeradvocacyisakeydriverofprofitabilityatSears.ButasSearsfound,therelationshipbetweencustomersatisfactionandadvocacyisnonlinear.Forexample,whencustomersratedtheiroverallsatisfactionwiththeshoppingexperienceasa“10”onascaleof1through10,82percentofthemwerelikelytorecommendSearstofriendsorfamily—akeydriverofbusinesssuccessinretailing.However,whencustomersratedSearsa“9,”only33percentwerelikelytorecommendSearsasaplacetoshop.WhileSearsmanagersinitiallybelievedthata“9”ona10-pointscalewasahighratingoncustomersatisfaction,analysesshowedotherwise.Thus,satisfiedcustomerswerenotenough—whattheyneededwereenthusiasticcustomerstodrivereferrals.UnderstandingtheserelationshipshelpedSearsmanagersunderstandhowmuchcustomersatisfactionwas“enough.”

IncreasingYourConfidenceinCausalRelationshipsDespitethewiderangeofinfluencesonanymanagementphenomenon,thequestionremains:IsitreallypossibletoisolatetheeffectofaparticularHRmanagementpolicyorpracticeonfirmperformance?Whenyou’redealingwithcomplex,livingsystemsintherealworld,it’snotpossibletocompletelyisolatevariables.Ineventhemostrigoroussocial-sciencelaboratoryexperiments,certainfactorsstilllieoutsidetheresearchers’control.Thebestyoucandoistoimproveyourconfidenceinsuchjudgments.Herearesomepointsofencouragementtokeepinmind:

Justbecauseitcan,doesn’tmeanitdoes.Justbecauseanorganizationaloutcomecanbeinfluencedbyawiderangeofotherinfluencesdoesn’tnecessarilymeanthatitis.Inmostcases,thereareonlyafewkeyinfluencesonyouroutcomeofinterest.Ifyouunderstandyourbusiness,youcaneasilyidentifythesevitalfew.Inourexampleoftherelationshipbetweencross-sellingskills(anHRdeliverable)andcross-sellingsalesperformance(adriverforthefirm’sstrategicgoalofincreasedrevenuegrowth),cross-sellingsales

performancemayalsobestronglyinfluencedbytheavailabilityoftimelyproductinformationtoemployees.Doesthismeanthattherelationshipbetweenskillsandperformancemightbecontaminatedbytheinfluenceofproductinformationavailability?No,ifallemployeeshavethesameproductinformationavailabletothem.Yes,ifproductinformationavailabilityvarieswithbothemployeeskillsandcross-sellingperformance.Inthiscase,itdoesn’tvarywitheither.Ontheotherhand,ifitturnedoutthat,forsomereason,employeeswithbetterskillsalsohadbetterproductinformation,thenitwouldbemoredifficulttoisolatetheindependentinfluenceofskillsonperformance.

Ifitcanbemeasured,it’smuchlessofaproblem.Sowhatcanwedoifthereisanotherinfluence,suchasproductinformationavailability,thatwethinkmightbeconfoundingourestimateoftherelationshipbetweenskillsandemployeeperformance?Fortunately,ifyoucanmeasurethisotherinfluence—forexample,ifyoucanassessthelevelofproductinformationavailability—youcanthenuseavarietyoftechniquestoestimatetheseparate(orindependent)effectsofbothskillsandproductinformationavailabilityonemployeeperformance.3Asamanager,youdon’tneedtobeanexpertinthosetechniques,butyoushouldunderstandthecircumstancesunderwhichtheymayhavevalue.

Allothercausesarenotcreatedequal.Apotentialothercausebecomesmoreofaconcernwhenitaffectsbothvariablesofinterest.Thinkofthisothercauseasajointinfluence.Forexample,productinformationavailabilitymightconfoundtherelationshipbetweenskillsandperformanceonlywhenitcanbeshowntoinfluenceboth.Ifitaffectsjustcross-sellingperformancebutdoesnotvarywithskills,thenitwon’taffecttheestimatedrelationship.Likewise,ifitvarieswithemployeeskillsonlybuthasnoapparenteffectonsalesperformance,itwillnotaffecttherelationshipbetweenthetwovariables.

Youcanaccountforjointinfluences.Clearly,therealchallengeinmeasuringcausalrelationshipsliesinhandlingjointinfluencesthatyoucan’tmeasure.Ifyoucouldmeasurethem,youcouldcontroltheirconfoundingeffectsusingstatisticaltechniques.However,simplybyunderstandingthelogicbehindyourcausalmodelandthebasicprinciplesofmeasurement,youwillhaveamuchbettergraspofthemagnitudeoftheproblemand,infact,whethertherereallyisaproblem.

IMPLEMENTINGYOURMEASUREMENTSYSTEM:

COMMONCHALLENGES

Nowthatyouhaveanoverviewofthefoundationsofgoodmeasurement,let’shighlightsomecommonproblemsmanagersencounterwhentheyattempttoimplementtheseideas.Theseproblemsfocusonthemoretechnicalchallengessurroundingtheimplementationofthesesystems,ratherthantheorganizationalhurdlesassociatedwithchangeeffortsingeneral.Weleaveadiscussionoftheselatterchallengesforchapter8.

OutwiththeOld,InwiththeNewMuchofthechallengesurroundingtheintroductionofamorestrategicallyfocusedmeasurementsysteminvolvesthecomplexityofintroducinganynewITsystem.Yourcurrentsystemandmeasuresarecomfortable,andchangingthemcanproveexpensive.Thisisparticularlytrueformeasurementsystemsthatletyouassessrelationshipsaswellaslevels.Inaddition,managerstendtobecomeveryattachedtothemetricstheycreate,andwehavefrequentlyseenfirmscontinuetousetheselegacymetricslongaftertheyhavebecomeinappropriate.Unfortunately,aswe’veseen,thereisprobablyaninverserelationshipbetweentheaccessibilityofyourcurrentmeasuresandtheirvalueinastrategicmeasurementsystem.Recallourearlierargument:Ifyourmeasuresdon’tfullycapturetheunderlyingorganizationalprocessoroutcomethatreallydrivesstrategy,theywillhavelittlevalue.ThismeansyoureallyhavetounderstandthestoryofvaluecreationinyourorganizationandaccuratelymeasuretheHRdriversinthatprocess.Thisprocesstakestimeandresources,butiftheorganizationisn’twillingtomakethatinvestment,itwillhavenothingmorethan“garbagein,garbageout.”

HRmanagersmayoftenfindthemselvesattheheadofthischangeeffort,andwediscussthesechallengesinsomedetailinchapter8.Butoneofthefirsthurdlessuchmanagersmightfaceissimplybuildingconsensusthatsuchchangeisnecessary.WhilefortunatetohavethestrongsupportofCEOArthurMartinezatSears,TonyRucci,theformervicepresidentforadministration,hasobservedthatCHROsmustlearntobuildtheirsupportwhereverpossible.Inhisexperience,abouttwo-thirdsoftheemployeesinanyorganizationaregoingtobeindifferentoractivelyopposedtosuch

initiatives.4Heargues,however,thateffectivechangecomesthroughtimeandenergydevotedtotheone-thirdwhosupportchangeratherthanattemptingtoconvertthetwo-thirdswhoarenotsupportive.

TheTemptationtoMeasureItAllDon’tletthefactthatitmaybeimpossibletomeasureeveryrelationshippreventyoufrommakingwiseuseofavailabledata.Forexample,Searswasabletopreciselyexpresstherelationshipsamongemployees,customers,andprofitabilityinpartbecauseitisintheretailserviceindustry.Thecausallinkbetweenfront-lineemployeesandprofitabilitywasnotonlyrelativelydirectforthisfirm,itwasalsorelativelyshort.Inotherwords,therewasnotanoverwhelmingnumberoflinksbetweenemployeebehaviorsandfinancialperformance.

Inmanufacturingorotherindustrieswherethelinksinthevaluechainaremorecomplexandprobablymorenumerous,HRmanagersmaywanttobeginwitheasilymeasuredrelationships.Forexample,evenifthelargercompanyinformationsystemisunabletolinknew-productcycletimetocustomersatisfactionandultimatelyprofitability,establishingthefirstseverallinksbetweentheHRsystemandR&DcycletimewouldsayalotaboutHR’sstrategicinfluence(seefigure5-4).Byestablishingevenjustthefewlinksshowninthefigure,HRmanagerscouldbegintotalkaboutdeliverablesthatmakeadifferenceinthebusiness.

Figure5-4AnExampleofEstablishingLinksbetweentheHRSystem

andPerformanceDriversinaStrategyMap

MatchingDatatotheAppropriateLevelofAnalysis

Tomeasurerelationships,youhavetoassesscauseandeffectatthesamelevelofanalysis.Examplesoflevelsofanalysisincludetheemployee,teamorgroup,project,unit,branch,division,andSBU.TheproblemisthatHRmeasuresmightbeavailableatjustonelevelofanalysis(theemployee),whilehigher-orderperformancedrivers,suchascustomersatisfaction,mightbeavailableonlyattheleveloftheunitorlargerorganizationaldivision.Or,certainprocessordevelopmentmeasuresmightbeavailableattheteamorprojectlevel,butprofitabilityismeasuredatahigherlevel.

Thisiswhereunderstandingthevalue-creationstorycomesin.Ifyoucangrasphowstrategyisreallyimplementedinyourfirm,youshouldbeabletocreateparallelmeasuresattheappropriatelevelofanalysis.Forexample,aninternationalpackagedeliveryserviceusesacomplex“timeintransit”indextomeasureoperationalperformanceatthelevelofthefirm.Thiscalculationmeansnothingatthelevelofthetruckdriver.However,atthatindividuallevel,“numberofoff-routemiles”isoneofmanymeasuresthatcumulatetothe“timeintransit”index.HRdecisionsthatinfluence“numberofoff-routemiles,”suchastrainingorrewardstrategies,havestrategicvaluebecausethisvariabledrivestheultimate“timeintransit”index.

Alternatively,youmayneedtoaggregatelower-levelmeasurestohigherlevelsofanalysis.So,forexample,iffinancialorcustomersatisfactiondataareavailableonlyattheleveloftheunitordivision,individual-levelHRmeasurescanbeaggregatedtothatlevel.Thatis,youcouldcumulatetheindividual-levelmeasuresintoasummarymeasureattheunitordivisionlevel—inthisexample,themeanofallindividualemployeemeasurescouldrepresentthe“team”measure.Ultimately,youhavetothinkaboutwhatyouaregoingtodowiththeresultsandaskyourselfwhethertheoutcomesofaparticularlevelofanalysiswillreallygiveyoutheanswersyouneed.Otherwise,youmaybedivertedbymeasurementconvenience,attheexpenseofmeasurementeffectiveness.

SeparatingLeadingfromLaggingIndicatorsYoucanlogicallydistinguishleadingfromlaggingindicatorsasyoudevelopacausalmodelofyourfirm’sstrategyimplementationprocess.However,toidentifyandquantifyrelationshipswithinthemodel,youneedtoknowmorethanjustthat“HR”isaleadingvariableand“customersatisfaction”isalaggingvariable.Accuratelygaugingtherelationshipbetweenthetworequiressomesenseofthemagnitudeofthetimelagbetweenchangesinthe

leadingindicatorandsubsequentchangesinthelaggingindicator.Don’tworryaboutcalculatinganexactfigureforthedelay,butdounderstandtheimplicationsofleadsandlagswhendevelopingyourmeasurementsystem.Thekeyistocollectmeasuresovermultipletimeperiods,sothatyoucanevaluatetherelationshipbetweenHRattimeT-2withperformancedriverxattimeT+1.Youwillprobablyhavetocollectsomedatamoreoftenthanyouhaveinthepast.Employeesurveys,forexample,havelittlevaluewhencollectedonlyannually.

SUMMARY:THINKINGSTRATEGICALLYABOUTMEASUREMENT

ThinkingstrategicallyaboutmeasurementmeansunderstandingwhetherthemeasurementsystemyouareconsideringwillprovideyouwiththekindsofinformationthatwillhelpyoumanagetheHRfunctionstrategically.Thislessonisthesamethemewe’vebeenreinforcingthroughouttheentirebook.Inaddition,“thinktopdown,notbottomup”shouldguidethetechnicaldecisionsunderlyingyourmeasurementsystem.Understandingthevalue-creationprocessanddevelopingconstruct-validmeasuresofthatprocessforma“top-down”approach.Startingwithavailablemeasuresandmakingthebestofabadsituationisa“bottom-up”approachthatinmostcaseswillbeawasteoftimeand,inthelongrun,willonlyundermineHR’sstrategiccredibility.Thischaptershouldprovideyouwiththeessentialprinciplesofmeasurementthatwillenableyoutomovebeyondthelimitsofthe“bestavailable”approach.Inthenextchapter,we’llapplytheseprinciplestotheproblemofmeasuringHRalignmentwiththefirm’sstrategyimplementationsystem.

6

MEASURINGHRALIGNMENT

THROUGHOUTTHISBOOKwehaveemphasizedthatforhumanresourceslegitimatelytobeconsideredastrategicasset,theHRarchitecturemustbealignedwiththerequirementsofthefirm’sstrategyimplementationprocess.We’vealsodevelopedanHRperformancemeasurementsystemthathelpsorganizationstomanagethisstrategicassetandevaluateitscontributiontooverallfirmsuccess.Thisperformancemeasurementsystemalsorequiresanattentiontoalignment—first,toshiftfocusawayfromtraditionaloperationalmeasurestomorestrategicmeasuresand,second,todevelopalignmentmeasuresthatmightserveasleadingindicatorsinyourHRScorecard.

TWODIMENSIONSOFALIGNMENT

Figure6-1depictsthetwodimensionsofalignmentthatyourHRarchitecturemustachieveinordertobecomeastrategicasset.Thesedimensionsprovidethefoundationandfocusfordevelopingactualalignmentmetrics.

Thefirst,andperhapsmostcritical,ofthesetwodimensionsisalignmentbetweenstrategyimplementationandtheHRsystem.Youcanseethisdimensionontheverticalaxisofthediagram.Toachievethisalignment,yourorganizationmustemphasizestrategyimplementationandrecognizeitasasourceofcompetitiveadvantage.TouseKaplanandNorton’sterm,youneedtobea“strategyfocusedorganization.”Thisfurtherrequiresthatthe

companyunderstandstrategyimplementationasabalancedprocessofvaluecreationratherthansimplyasanexerciseinfinancialcontrol.Aswesawearlier,thismeansbeingabletotellthestoryof“howthefirmmakesmoney.”Italsomeansincorporatingbothfinancialandnonfinancialvariables,aswellasleadingandlaggingindicators.

The“strategic”HRsystemisdesignednotfromthebottomup(i.e.,“bestpractices”)butfromthetopdown.Infigure6.1,HRdeliverablesrepresentthoseproductsoftheHRarchitecturethatareintegrallylinkedtothesuccessfulimplementationofthefirm’sstrategy.Theuniquerequirementsofanorganization’sstrategyimplementationdeterminetheparticularHRdeliverables,whichinturnshapetheHRsystem.

ThehorizontalaxisdepictsadimensionofalignmentwithintheHRarchitecturethatinfluencestheoveralldevelopmentofhumanresourcesasastrategicasset.ThisisthealignmentbetweenthestrategicroletheHRfunctioncanplayandthelevelandmixofhumanresourcecompetenciesavailableamongHRprofessionalsandlinemanagers.Infigure6-1,“HRRole”designatesthedegreetowhichHRprofessionalsinanorganizationperceivethemselvesasstrategicpartnersandtheextenttowhichmanagersoutsideHRsharethesameview.AlignmentrequiresthathumanresourceandlinemanagersdevelopasharedviewofHR’srole.HRcanthencrystallizethatsharedviewbydevelopingabusinesscaseforitspartinvaluecreationthroughoutthecompany(Step2inthemodeldescribedinchapter2).

Figure6-1HRAlignment

ImplementingHR’sstrategicroleoftenrequirestheinvolvementofboth

humanresourceprofessionalsandlinemanagers.Indeed,manyfirmsrelyontheparticipationoflinemanagerstoimplementtheHRsysteminawaythatreflectsthebusinessdemandsoftheenterprise.Atthesametime,anorganizationisnotlikelytoviewHRasastrategicassetifthefirmlacksacoregroupofhumanresourceprofessionalswhohavethecompetenciestodeliveronthatrole.Therefore,alignmentalongthehorizontalaxisfocusesonthecompetenciesneededtoimplementasharedviewofHR’sstrategicpotential.

Insum,figure6-1tellsusthatifanorganizationexpectstodevelopHRasastrategicasset,itneedstothinkaboutalignmentintwoways.ThefirstisthealignmentbetweentheHRsystemthatproduceskeyHRdeliverablesandtherequirementsofthefirm’sstrategyimplementationsystem.Thischaptershowsyouhowyourorganizationcanmeasurethiskindofalignment.ThesecondisthealignmentbetweentheroleexpectationsfortheHRfunctionandtheindividualcompetenciesrequiredtoputthatroleintoaction.Chapter7describesthosecompetenciesinconsiderabledetail.Together,bothtypesofalignmentproduceastrategicallyfocusedworkforce,whichdrivessuperiorstrategyexecutionand,ultimately,shareholdervalue.

ASSESSINGINTERNALALIGNMENT

Measurementsystemscanserveanumberofpurposes.Aswe’veseen,theycanguidemanagementofHR’scontributiontostrategyimplementation.Theyalsoprovidea“scorecard”thatvalidatesHR’scontributiontofirmperformance.Measurementcanserveanotherpurposeaswell.Formanagerswhowanttoquicklyassessthepotentialoftheirfirm’sHRsystemasastrategicasset,asimplemeasureoftheinternalalignmentofthatsystemcanhelp.

TheCaseofStilwellManufacturingTheexampleofStilwellManufacturingisacompositeofourexperienceatanumberoffirms.ThiscasedescribesarelativelysimplediagnosticprocessforevaluatingtheinternalalignmentoftheHRsystem—thatis,whetherelementsoftheHRsystemreinforceeachotherratherthanworkatcross-purposes.TheStilwellstoryalsoshedslightonthedestructiveimpactofmisalignmentonanorganization’slaborforce.

Stilwellisadiversifiedmanufacturerwithaninternationalproductionanddistributionsystem.Whilethecompanyhasbeenverysuccessfulinrecentyears(itgenerated$2billioninrevenuesin2000),theseniormanagementteamhasdevelopedanewstrategicplanforthebusinessthatforecastsdouble-digitincreasesinbothrevenuesandcashflowoverthenextthreeyears.Mostmembersoftheorganizationconsiderthisplanextremelyaggressive,especiallyinlightofthefragmentedandhighlycompetitivenatureofStilwell’sindustry.Moreover,theseprojectionshavecomeatatimewhenStilwellhasfacedconsiderabledifficultyinhiringandretainingthebestworkers(especiallyinR&Dcapacities).

Toachievetheirtwooptimisticfinancialgoals,Stilwell’stopmanagementteamhasidentifiedfourstrategicdriverstheybelieveshouldguidethebusinessduringthenextfiveyears:

•Shortennew-productdevelopmenttimes.

•Enhancecustomerfocusandresponsiveness.

•Enhanceproductivity.

•Developandsuccessfullymanageseveraljointventures.

WecancharacterizeStilwell’scurrentorganizationalstructureandHRMsystemasfollows:

•Theorganizationalstructureconsistsofmanyfunctional“silos,”withlittlecross-functionalcommunicationorcoordination.

•TheHRfunctionhasasilostructureaswell.Recruiting,selection,performancemanagement,compensation,andHRplanningandstrategygenerallyoperateautonomouslyandefficiently.

•HRmanagersreliablyandproperlyadministercompensationandbenefitprogramsandhirepeopleasrequested,butlinemanagersfrequentlydescribethemasoverfocusedoncomplianceandcostreductionattheexpenseofbusiness-problemresolution.

•Jobsreflecttraditional(i.e.,narrow)definitions;forexample,machiniststendtoworkononlyonemachineortypeofpart.Thecompanyhasfewteam-basedworkstructuresanddecisionprocesses.

•Recruitingandselectioneffortscenteronfillingcurrentopenings.Thecompanygiveslittleconsiderationtohiringforpotentialor“promotability.”Managersmakehiringdecisionsonthebasisofresumescreeningandinterviews;theyusenoformallyvalidatedselectiontests.

•Theorganizationdevotesconsiderableresourcestoskillsdevelopmentfornewandcontinuingemployees.Trainingsystemsemphasizegeneralskillsandareprovidedtoallemployees.

•Performance-appraisalandmanagement-developmentsystemshaveexistedformanyyearsatStilwell.However,manyemployeesdescribetheperformance-managementprocessas“routinized”andnotparticularlyinfluentialonindividual,team,orbusiness-unitbehavior.Inaddition,linemanagersfrequentlycomplainaboutthetimerequiredtocompletetheseevaluations.

•Compensationisgenerallynotcontingentonindividual,workgroup,orfirmperformance.Anypayincreasesgoproportionallytoallworkers.Asarule,thecompanydoesnotdifferentiatepaybetweenthelowest-andhighest-performingworkersinanygivenjob.

DiagnosingStilwell’sInternalHRFitWhatconclusionscanwedrawabouttheinternalalignmentofStilwell’sHRsystem?Measuresofinternalalignmentarebestfocusedonthosewho“livewith”theHRsystemandthosewhosebehaviorsthatsystemisdesignedtoinfluence—linemanagersandfront-lineemployees.ToassessinternalalignmentwithinStilwell’sHRsystem,wegenerallyaskindividualsfromthesetwogroupstoestimatethedegreetowhichthevariousHRmanagementsubsystemsworktogether.Here’sasimplewaytobeginthisprocess:Thinkofthedegreeof“fit”andinternalconsistencyasacontinuumfrom–100to+100,andassignavalueinthatrangetoeachrelationshipusingthemeasurementtoolshownintable6-1.(We’veaddedsomeresponsestotheboxestoshowhowStilwellmightassessitsinternalHRalignment.)Thedatainthechartcanbecollectedinavarietyofways.However,inmostcompaniesashortsurveyof100orsoindividuals,followedbyoneortwofocusgroupsofmid-andsenior-levelemployees,givesacomprehensivepictureofthecurrentinternalalignmentofthecompany’sHRsystem.

IfwetakeacloselookatStilwell’sentriesinthechart,wecanseethatseveralelementsintheHRsystemareinternallyinconsistent.Forexample,boththeselectionandperformance-appraisalprocessesareoutdatedanddonotgeneratethekindofcompetenciesStilwellneedsnoworwillrequireinthefuture.Similarly,Stilwelldoesnothavethelevelandmixofcompensationtoattracttherequisitetalent,norisitscompensationstructure

designedtoreflectthecurrentteamstructure.WhiletheHRsystemprovidestheVPofHRwiththekindofefficiencynumbersshehastraditionallybeenaskedtoprovidetheCEO,thehumanresourcesystemisunderminingHR’sabilitytocontributetovaluecreation.TheprocessoffillingoutthischartwouldsendaveryclearmessagethattheStilwellHRsystemisnotcurrentlyconfiguredtoimplementthecompany’sproposedstrategy,orperhapsanystrategy.

TheSourcesofInternalMisalignmentEvenasimplediagnosticprocesssuchastheonejustdescribedcanbeasurprisingwake-upcallformanyhumanresourcemanagers.ItcanrevealthattheHRsystemissendingconflictingsignalsaboutwhattheorganizationvaluesandthatithasfailedtosupportastrategicfocusamongemployees.

Howdoessuchmisalignmentdevelop,evenincompanieswhereHRprofessionalsareknowledgeable,perhapsevenexpert,incurrenthumanresourcepractices?ThemostcommonexplanationwehearisthatHRmanagerssimplyhavenotthoughtmuchintheseterms.Theirfocustraditionallyhasbeenoperational,notstrategicandsystemic.Afunctionalspecializationincompensationordevelopmentthatplaceslittleattentiononlinkagesandthatconflictswithotherpoliciesonlyworsensthesituation.What’smore,anoperationalemphasisonconsistencyanduniformityoftenoverridesanyconcernsaboutthepotentialimpactofinternalmisalignment.Attheextreme,managersdismisssuchconcernswithacasual“Comeon—howbadcoulditbe?”HRhasatraditionoftellinglinemanagerswhattheycan’tdo,andthereisalong-heldbeliefthatHR’sproblemsdon’taffectanythingimportantinthefirm.Today,eventhoughmanyoftheseprofessionalshaveembracedtheideaofplayingastrategicrole,theyfindthemselvesburdenedwithamisalignedHRsystem—aremnantofanearlierperiod.

Table6-1DiagnosingInternalFit

Inthechartbelow,pleaseestimatethedegreetowhichthevariousHRmanagementsubsystemsworktogetherharmoniouslyor“fit”together.Thinkofthedegreeoffitandinternalconsistencyasacontinuumfrom-100to+100,andassignavalueinthatrangetoeachrelationship.Examplesoftheextremesandmidpointsonthatcontinuumareasfollows:

-100:Thetwosubsystemsworkatcross-purposes.

0:Thetwosubsystemshavelittleornoeffectononeanother.+100:Eachsubsystemismutuallyreinforcingandinternallyconsistent.

DNK:Don’tknoworhavenoopinoin. HR

PlanningRecruiting

andSelectionTrainingandDevelopment

PerformanceManagementand

Appraisal

CompensationandBenefits

WorkOrganization(e.g.

teams)

CommunicationSystems

HRPerformanceMeasurement

Cost ValueCreation

HRPlanning — –30 0 –20 0 0 0 0 0

RecruitingandSelection

— 0 –10 –20 –30 0 +30 –40

TrainingandDevelopment

— 0 0 0 0 +30 –10

PerformanceManagementandAppraisal

— 0 –30 –20 0 –20

CompensationandBenefits

— –50 0 +40 0

WorkOrganization(e.g.teams)

— 0 0 0

CommunicationSystems

— 0 0

HRPerformanceMeasurement

—

Interestingly,misalignmentwithintheHRsystemcanalsostemfromtoomuchemphasisonbenchmarking.Again,thestrategicelementsoftheHRsystemmustbedevelopedfromatop-downperspective—meaningfromananalysisoftheuniquerequirementsofafirm’sstrategyimplementationprocess.Whenyoubenchmark,youlooktootherfirms.Thisapproacheffectivelytreatspractices(andmeasures)ascommodities,becauseitassumesthatwhatworksinonecompanywillworkinanother.Butasyoumayrecallinourearlierdiscussionaboutsystemsthinking,removingacomponentfromitslargersystemcanhaveunexpectedconsequencesforboththecomponentandthesystem.Specifically,youdiminishthevalueofthecomponentifyouevaluateitinthecontextofanothersystemthatwasnotdesignedforthesamepurposeasyouroriginalsystem.Benchmarkingmayhelpyouunderstandprocesses,onceyoudesignyourHRsystemfromatop-downstrategicperspective.Nevertheless,toooftenitbecomestheprimaryinputtoabottom-updevelopmentprocess.

ASSESSINGEXTERNALALIGNMENT

DiagnosinginternalalignmentcanhelpyouquicklyspotpotentialproblemswithintheHRsystemandcanhighlighttheneedforaction.However,itprovideslittleremedialguidance.ThisisbecauseinternalalignmentfollowsfromtheexternalalignmentoftheHRsystem—thatis,theextenttowhichtheHRsystemisdesignedtoimplementthefirm’sstrategy.Inotherwords,youshoulddesignyourcompany’sHRsystemonlyafteryoucarefullyanalyzethefirm’sstrategicdriversandtherelevantHRdeliverablesthatcontributetothosedrivers.Bydoingthis,youcreateakindofstrategicfabricthatweavestheHRsystemtogether.Thisprocesscanevengiveyoua

rationaleforallowingoccasionalmisalignments.Forexample,therewardsanddevelopmentpracticesforonedeliverablemayrequireadifferentapproachfromthoseofanotherdeliverable.

TheHRScorecardincludesasetofmeasuresdesignedtoassessthedegreeofexternalalignmentbetweentheHRsystemandtherequirementsofthefirm’sstrategyimplementationprocess(seeSteps5and6inchapter2).Inbuildingyourfirm’sHRScorecard,youarriveatadesignforastrategicHRsystem,aswellasameasurementsystemthatwillletyoumanageHReffectively.ButtogainbothoftheseScorecardbenefits,youhavetounderstandhowHRdeliverablesdrivestrategyimplementationinyourorganizationandwhichHRsystemelementsproducethosedeliverables.

ScaleandPerspectiveInchoosingmeasurestoevaluateexternalHRalignmentinyourScorecard,youneedtoconsidertwothings:scaleandperspective.Scalereferstothespecificmeasurementtoolyouchoose.Forexample,inchapter3,wediscussedusingtogglestoindicatewhetherelementsoftheHRsystemarealignedinageneralsensewiththeHRdeliverablesrequiredbythestrategyimplementationprocess.Toggles(rank-orderscales)simplyindicatethepresenceorabsenceofalignment,ratherthanthedegreeofalignment.Ifyouconsiderdegreeofalignmentimportantinyourownorganization(forexample,duringalargechangeinitiative),youwouldwanttochooseadifferentmeasurementscale(perhapsa0to100rangetoreflectthefirm’sprogresstowardalignment).

Perspectivereferstoindividualviewpoints.Alignment,likebeauty,isintheeyeofthebeholder.ItrepresentsanexusbetweenHRandtherestoftheorganization.Itiscrucialthatjudgmentsaboutalignmentreflectbothsidesofthisdivide.Forexample,youmaywellseeyourfirm’sHRsystemasalignedwiththerequireddeliverables,butiftherestoftheorganizationdoesn’tseethingsthatway,youdon’thavealignment.Therefore,asyouconstructyourexternalalignmentmeasures,testyourassumptionsaboutalignmentagainsttheexperiencesandimpressionsofmanagersandemployeesoutsideofHR.

TheExternalAlignmentMatrix

TomeasuretheexternalalignmentofyourHRsystem,werecommendatwo-stepprocess:(1)testalignmentofHRdeliverableswithinthestrategymap,and(2)testalignmentofyourHRsystemwithHRdeliverables.Inbothsteps,youcollectinformationfromfocusgroupsorothercross-sectionsofemployees,thoughthesecondstepmightrelymoreheavilyonHR’sperspective.Asyou’llsee,thisprocesshelpsyoufindoutwhethercertainHRdeliverablesareinfactthekeyperformancedriversforeachrespectiveelementinyourfirm’sstrategyimplementationprocess.ItalsoshowsyouwhethertheHRsystemisprovidingthecorrectskills,motivation,andworkstructurestoproducethosedeliverables.(Again,reviewchapter2toseehowthesestepsrelatetothemeasurement-systemdesignprocess.)

Table6-2showsthekindofinformationyoumightsolicittotestalignmentbetweenHRdeliverablesandthefirm’sstrategyimplementationprocess.1ThischartasksrespondentstoindicatethedegreetowhicheachHRdeliverableenablestheappropriatestrategicdriver,onascaleof–100to+100.NotethatrespondentsevaluateonlythoseHRdeliverablesandstrategicperformancedriversthatyouhavelinkedbyidentifyingandlocatingHRdeliverableswithinyourfirm’sstrategymap(seeStep4inchapter2).TheactualvaluesinthematrixreflectwhatStilwellManufacturingmighthavediscoveredhadtheyanalyzedHR’sroleusingourmodelinchapter2.

StilwellManufacturinghasalotofworktodo.EventhissimpleanalysishighlightsthemisalignmentbetweenwhattheHRsystemisproducingandwhatStilwellneedstoimplementitshigh-growthstrategy.Forexample,thefirmisexperiencingconsiderableturnoveramongitsmostseniorresearchtechnicians,whichismakingitdifficulttoshortenproductdevelopmentcycles.Asitturnsout,Stilwellpaylevelshavefallenbehindthemarket,andthecompanyislosingitsmostseniorpeopletothecompetition.Inaddition,theR&Dunithasmovedtoacross-disciplinaryteam-basedsysteminanattempttoleveragenewideasacrosstheentireStilwellproductline.However,theR&Dstafflackstheteamskillstomakethiswork,causingfurtherdelays.Theonebrightspotisthatwhilerewardlevelsarebelowmarket,therewardsarestructuredtomotivatestrategicbehavior(unlikeintherestofthefirm)—inthiscasetoencourageshorterproductdevelopmenttimes.WhilethisanalysishasbeenlimitedtotheR&Dfunction,itcouldeasilybeextendedtothebroaderorganizationalfocusoftheremainingperformancedrivers.

Table6-2TestingAlignmentofHRDeliverableswithintheStrategyMapasIllustratedbyStilwellManufacturing

PleaseindicatethedegreetowhicheachHRdeliverableinthechartbelowwouldcurrentlyenableeachstrategicdriver,onascaleof–100to+100.Emptycellsindicatethisisnota“key”deliverableforaparticulardriver.Examplesoftheextremesandmidpointsonthatcontinuumareasfollows: –100:Thisdeliverableiscounterproductiveforenablingthisdriver. 0:Thisdeliverablehaslittleornoeffectonthisdriver. +100:Thisdeliverablesignificantlyenablesthisdriver. DNK:Don’tknoworhavenoopinoin. HRDELIVERABLE

StrategicPerformanceDrivers

EmploymentStabilityamongSeniorR&DStaff

Team-basedBehaviors

Strategy-focusedPerformance

High-talentStaffingLevel

1.Shortenproductdevelopmenttimes –80 –30 +30

2.Enhancecustomerfocusandresponsiveness

–20 –20

3.Enhanceproductivity –10 –50 –40

4.Developandsuccessfullymanagejointventures

–10 –50

Onceyou’veassessedthefitbetweenyourHRdeliverablesandstrategicperformancedrivers,youthenmeasuretheextenttowhichtheHRsystemisproducingtheappropriateelementsofhumanperformancerequiredforthesedeliverables.Thereareseveralwaystoapproachthisanalysis,dependingonhowfine-grainedyouwishittobe.OneapproachistolinkdeliverableswiththeirrespectiveelementsofhumanperformanceandthenexaminehowtheHRsystemisinfluencingthoseelementsofhumanperformance.Forexample,strategichumanperformanceinorganizationsisafunctionofthreeinterrelatedelements:

•EmployeeSkills:Doemployeeshavetheskillsrequiredtoperformtheirroles?

•EmployeeMotivation:Areemployeesmotivatedtoapplythoseskills?

•EmployeeStrategicFocus:Doemployeesunderstandhowtheirjobcontributestothesuccessfulimplementationofthefirm’sstrategyandhavetheopportunitytoapplythatknowledge?

Inotherwords:

StrategicHumanPerformance=EmployeeSkillsxMotivationxEmployeeStrategicFocus

Yetthisapproachrequiresasecondsteptomaketheseresults“actionable,”namely,thatthesedimensionsofhumanperformancemustbelinkedtotheelementsoftheHRsystemthatproducethem.

Amoredirectapproachisdescribedintable6-3,wherethemeasureofalignmentwouldgodirectlyfromthehumanresourcedeliverabletotheHRsystem.ThisapproachassumesthatHRhasframedtheanalysisofitsdeliverables(asintable6-2)toemphasizethedimensionsofstrategichumanperformance.Again,responsesareonascaleof–100to+100.YoucanthenusethesedatatodeterminewhethertheelementsoftheHRsystemdesigned

toproducethosedeliverablesareappropriatelyaligned.

Table6-3TestingAlignmentoftheHRSystemwithHRDeliverablesasIllustratedbyStilwellManufacturing

PleaseindicatethedegreetowhichthefollowingelementsoftheHRsystemfacilitatetheHRdeliverablesshown,onascaleof–100to+100.Examplesoftheextremesandmidpointsonthatcontinuumareasfollows:

–100:Thisdimensioniscounterproductiveforenablingthisdeliverable.0:Thisdimensionhaslittleornoeffectonthisdeliverable.+100:Thisdimensionsignificantlyenablesthisdeliverable.DNK:Don’tknoworhavenoopinion.

HRDeliverable HRPlanning

RecruitingandSelection

TrainingandDevelopment

PerformanceManagementandAppraisal

CompensationandBenefits

WorkOrganization(e.g.teams)

CommunicationSystems

Employmentstability

0 0 0 0 –50 –20 0

Team-basedbehaviors

0 0 –30 –20 –40 0 0

Strategy-focusedbehaviors

0 0 0 0 +40 0 0

High-talentstaffinglevel

0 –50 0 –50 0 0 0

Thesampledataintable6-3aredesignedtohighlightthe“vitalfew”pointsofalignmentbetweentheHRsystemandasetofHRdeliverables.ThematrixdescribesanHRsystemthatisnotexternallyalignedwiththerequirementsofthefirm’sstrategyimplementationprocess.Tocitejustafewexamples:Thehiringprocessisnotproducingthetypesandquantityoftalentrequiredbythefirm’shigh-growthstrategy.Therecentreorganizationintoateam-basedstructurehasnotbeenadequatelysupportedbyfocuseddevelopmenteffortsorchangesinthetraditionalperformancemanagementandrewardsystems.Compensationlevelsarenotsufficienttomaintainnecessarylevelsofemploymentstability.

Tosummarize,wehavedescribedonemeasureofinternalalignmentandtwomeasuresofexternalalignment.Eachcapturesadifferent,butimportant,dimensionofthealignmentprocess.Figure6-2locateseachofthesealignmentmeasuresonthecontinuumbetweentheHRsystemandthefirm’slargerstrategymap.

ASTEPUPINSOPHISTICATION:THESYSTEMSALIGNMENTMAP

Thealignmentmeasureswe’veexploredsofararebasedonverysimpleprinciplesofmeasurement.Theiradvantageliesnotsomuchintheirdegreeofsophistication,butintheirabilitytohelpyoufocusontheactivityofmeasurementingeneral.Allofthesetoolspromptyoutothinkabouthow

yourcompany’sHRsystemisalignedwiththeuniquedemandsofthefirm’sstrategyimplementationprocess.Mostimportant,thesesimplemeasures“align”yourattentionwithstrategicratherthanoperationalmatters.

Figure6-2InternalandExternalAlignmentMeasuresonContinuumbetweenHRSystemandStrategyMap

TherearemoresophisticatedmeasuresofalignmentavailablethatcapturethesubtleinterrelationshipsbetweentheHRsystemandemployeebehavior.Theearliermeasuresfocusonindividualelementsofthesystem.Theydon’tgiveyouacompletepictureoftheoverallalignmentoftheHRsystem,otherthanasasumoftheindividualelements.Asystemicperspectiveisessentialforfiguringouthowtochangethesysteminordertoimprovealignment.ThereisamyriadofinterrelationshipsbothwithintheHRsystemandbetweentheHRsystemandthefirm’sstrategy.Wheneveryoustartfine-tuninganysystem,youhavetothinkthroughthepossibleunintendedconsequencesofyourchangesandthewaysinwhichadjustmentsmayripplethroughthesystemandbeyond.

Toaddresstheseconcerns,wehavedevelopedameasurethatwecalltheSystemsAlignmentMap(SAM).Thismetricoffersseveralimportantbenefits:

•Itletsyouvisualizealignment.Howdoyourecognizealignmentwhenyouseeit?SAMfeaturesameasurementprocessthatletsyoucreatea“picture”ofyourfirm’sHRsystemanditsalignmentwiththecompany’sstrategicgoals.Visualizingstrategicalignmentletsyouseeexactlywherechangesarerequiredandwhatthenatureofthosechangesmightbe.Visualdepictionsofmultidimensionalphenomenahavelongbeenunderstoodtohavetwokeyadvantages.First,theymakeiteasierfortheobservertoseepatternsinthedata.Thisisparticularlyimportantformanagerswhoarenotfamiliarwithmoretraditionaldata-analysistechniques.Second,whendataareportrayedinthisfashion,theyaresimplymoreaccessibletothehumaneyeandthereforemoreinterpretable.2

•Itincorporatesperspectivesfromtheentireorganization.Aswe’veindicated,alignmentisverymuchamatterofperspective.ItisverydifficultforHRprofessionalstofullyunderstandtheinfluenceoftheentireHRsystemonemployeesatdifferentlevelsintheorganization.SAMincorporatesallofthoseperspectivesandletsyoudesignalignmentmeasuresforspecificemployeegroups,divisions,orprocesses.

•Itmeasuresalignmentsystemicallyandyieldsrealisticactionsteps.TheSAMmethodologyincorporatesallofthelinksthatmakeuptheexternalandinternalalignmentoftheHRsystem.Asaresult,itletsyousimulatehowchangesinoneelementinthesystemwillaffectthealignmentofthewholesystem.Moreimportant,SAMhelpsyouidentifywaystobringasingleelementintoalignment—withoutgeneratingunintendedconsequences.

•It’srelativelyeasytoadminister.TheSAMmethodologydoesnotrequireemployeestothinkoutsideoftheirownorganizationalexperience.Asaresult,thetoolgivesyouanaggregationofindividualperceptionsaboutalignment,fromeveryfacetoftheorganization.Thedata-collectionprocessisnomoreintrusivethantraditionalemployeesurveys.Indeed,itisprobablylessthreateningthantypicalsurveysbecauseitdoesnotrequiresensitiveevaluations.

•It’sbasedonbestscientificprinciplesofmeasurement.TheSAMtechniquereliesonawell-developed,multidimensionalscalingtechniquecalledGalileo.3Galileoallowsustomanagesomeverydifficultmeasurementchallenges,yetproduceactionableresults.

TheGalileomethodofmeasurementwasdevelopedtoprovidegreaterprecisionandreliabilitythantraditionalLikert-type(5-point)metrics.Becauseitgeneratesratioratherthanjustintervalmeasures(i.e.,includesanabsolutezeroandcanbepositiveornegative),itisparticularlysuitedtoourfocusonalignment,wherewewanttounderstandthatXistwiceasfarfromAasY.TheresultsofaGalileoanalysiscanberepresentedbothnumericallyandvisually.Bothareimportantforacompleteanalysisofstrategicalignment,butthevisualrepresentationtendstoprovidethebestintuitiveinsightintowhatareoftenverycomplexphenomena.ThemostcommonuseofGalileoinabusinesscontextisinmarketing,wherecustomersprovideaperceptualmapoftheproximityofvariousproductattributestotheproductinquestion.4

Galileoreliesonanaggregationofindividualperceptions.Individually,

theseperceptionsmaybeimperfectreflectionsofthelargerorganizationalexperience,buttakentogether,theyprovidearemarkablyaccuratepicture.YoucangetasenseofthepoweroftheGalileotechniquebyconsideringafamousexamplefromthefieldofcognitivepsychologycalledtheJohnson-Lairdroomdemonstration.5Inthisdemonstration,individualsaregivenadescriptionofaroom.Thetextisnecessarilyimprecise(whatJohnson-Lairdcalls“indeterminate”).Basedonthedescription,theindividualsareaskedtoestimatethedistancesbetweenpairsofobjectsthroughouttheroom(e.g.,bed,gasring,radio,wardrobe,bookcase,window,door,etc.)usingtheGalileotechnique.Whileeachperson’scognitivemapoftheroomwillbedistortedandunbalanced,whenaggregatedacrosstheentiresampleofsubjects,themanyindividualmapsresultinaroomthatisreasonable,balanced,andinproperproportions(thatis,therearenolocationsinconsistentwiththeoriginaldescription).Thus,eachindividual’smentalmodelreflectsinconsistenciesanddistortions,buttheaggregatemappingreflectstheactualphysicalpositioningofobjectsintheroomwithsurprisingaccuracy.

Thisstrategy—obtainingtheGalileorepresentationandthenreturningtotheoriginalrepresentation(asjudgedbytheindividualsandtheirperceptions)—resemblesthepracticeofmappingthevalidityofcross-culturalresearchmaterialsthroughonetranslationandthenasecondtranslationbacktotheoriginal.JustasGalileocanbeusedtoaggregateindividualmapsofphysicalimagery,soitcanbeusedtoaggregateindividuals’cognitivemapsofattitudesorbeliefsinordertoobtainafullerrepresentationofactualrelationshipsamongconcepts.Thefinalcumulativeeffortisremarkablyaccurate.Weusethesameapproachtobuildanorganizationalalignmentmap,basedonindividualemployees’perceptionsofalignmentfromtheirownlocationswithintheorganization.

UsingSAMWhyisalignmentsoimportanttostrategy?Withoutit,anorganizationcannotexpectitsemployeestohavethestrategicfocusrequiredtoimplementthefirm’sstrategy.Butemployeessharpentheirstrategicfocusonlybyexperiencingthevariousorganizationalsystemsthatguidetheirbehavior.TheSAMapproachletsyouunderstandemployees’perceptionsofthesesystems.TodevelopaSystemsAlignmentMap,werecommendthefollowingsteps:

1.Identifythekeystrategicdriversinthefirm.Driverscouldbethestrategicgoalsofthefirmorspecificperformancedriversinyour

strategymap.Thechoicewilldependonhowtheseconceptshavebeencommunicatedandunderstoodthroughouttheorganization.Inanycase,thesearethestrategic“targets”oftheHRsystemandthebasisforanyjudgmentsaboutalignment.

2.IdentifythekeyelementsoftheHRsystemexpectedtodrivestrategyimplementation.ThesearethesameelementsoftheHRsystemweusedintables6-1and6-3.Genericcategorieswouldincludecompensation,rewards,performancemanagement,careerdevelopment,competencies,hiringandselection,andtraininganddevelopment,butthespecificchoicesarelikelytovarybyorganization.

Intheprevioussection,wehighlightedthetwostagesofexternalalignment:fromHRsystemtoHRdeliverable,andfromHRdeliverabletostrategicperformancedriver(seefigure6-2).Steps1and2herehaveconsolidatedthosetwostages.However,thereisnoreasonwhyyoucan’tincludeHRdeliverablesasathirdsetofcomparisons.Doingsowouldprovidearicherpictureofalignment,butatthepriceofmakingtheanalysismoredifficultfortherespondents.

3.Askarepresentativesampleofemployeestoprovidealistofpaired“alignment”evaluationsforallelementsyouidentifiedinSteps1and2.Todothis,providerespondentswithamatrixresemblingthatshownintable6-4.We’vefilledinsomeexamplesofHRsystemelementsandstrategicgoals,alongwithsampleevaluationsinsomeoftheboxes.Unlikewiththeotheralignmentmeasures,respondentsareaskedtodescribethe“distance”betweenaseriesofpairedcomparisons,suchaspayversuscustomerservice,usinga0to100scale.Thevalue0isusedtosignify“close”or“similar,”while100means“dissimilar”or“faraway.”

Respondentsarealsoprovidedwitha“benchmark”tocalibratetheirratings.Forexample,theymightbegiventheexampleof“CEO”and“customerservice”andtoldthattheyshouldconsiderthosetwoconceptstohaveadistanceof30.Thereareseveralrulesofthumbinselectingabenchmark.First,itoughttobedrawnfromtheconceptsbeingrated.Second,youshouldselecttwoconceptsthatallemployeeswillbefamiliarwithandpreferablyabenchmarkthatmostwillagreewith.Finally,itisbettertochooseapairforwhichthedistancebenchmarkwillbetowardthemiddleofthe0to100scale.

Theratingsintable6-4illustratetheperceptionsofjustoneemployee.

Table6-4TheSAMMatrix

Thinkaboutyourworkexperienceatthiscompanyduringthelastthreemonths.Youexperienceandobserveawiderangeofpolicies,communications,andinteractionswithothermembersofthisorganization.Weareinterestedinyourjudgmentsabouthowthesedifferentexperiencesfittogether.Inotherwords,arewe“allonthesamepage”?Yourresponses,alongwiththoseofhundredsofothersinthecompany,willhelpusanswerthatquestion.Onascalefrom0to100,pleasedescribehowdifferentor“farapart”eachofthefollowingorganizationalconceptsisfromtheothers.Themoredifferent,orfartherapart,theyseemtobe,thelargerthenumberyoushouldwrite.Tohelpyoucalibrateyourratings,assumethattheCEOandcustomerserviceare30unitsapart.Iftwowordsorphrasesarenotdifferentatall,pleasewritezero(0).Ifyouhavenoidea,pleaseleavethespaceblank.

StrategicGoal1:EnhanceProductDevelopment

StrategicGoal2:Enhance

CustomerFocus

LastStrategicGoal

FirstElementofHRSystem(RecruitingandSelection)

SecondElementofHRSystem(Compensation

andBenefits)

LastElementof

HRSystem

Me MySupervisor

StrategicGoal1:EnhanceProductDevelopment

— 50 20 80

StrategicGoal2:EnhanceCustomerFocus

— 20

LastStrategicGoal —

FirstElementofHRSystem(RecruitingandSelection)

— 10

SecondElementofHRSystem(CompensationandBenefits)

—

—

LastElementofHRSystem

—

Me —

MySupervisor —

Note:Thisisatruncatedversionoftheoriginalmatrix.Shadedcellsindicatewhereportionsofthematrixhavebeenomitted.

Notethatwehavealsoincludedcolumnsfortheindividualemployeeandhisorhersupervisor.Thisstepwillgiveyouaninsightintohowemployeesperceivethealignmentoftheorganization’ssystemsandhowtheyviewthemselves(“Me”intable6-4)inrelationtothosesystems.Thislatterperspectiveisthekeytoemployeestrategicfocus.Thesupervisor/employeealignmentmeasuresprovideinsightintothekindsofmessages—intentionalornot—thatmanagersmaybesendingtoemployees.Supervisorsatanylevelhaveapowerfulinfluenceonemployeebehavior,inlargepartbecauseofthesignalstheygiveaboutwhattheorganizationconsidersappropriateandvaluable.Anall-too-commonimpedimenttoorganizationalchangeismanagerialreluctancetogetonboardwithachangeeffortbecauseitisn’tunderstoodoritthreatensmanagerspersonally.Withoutnecessarilyintendingto,supervisorscommunicatetheirreluctancetodirectreports,andthechangeeffortstallsoutasaresult.IncludingsupervisorinformationintheSystemsAlignmentMaphelpsyouaccountforthisinfluence.

MarketingandRefiningatMobilOil:AnExampleofSAM

ToillustratethepossibilitiesoftheSAMapproach,let’sconsiderthemarketingandrefining(M&R)groupwithinMobilOil.6AlthoughthisgroupdidnotexplicitlyemploytheSAMmethod,itsuseoftheBalancedScorecardhasbeenwelldocumented.Therefore,theorganization’sexperiencelendsitselftoillustratingtheSAMmethodology.

AtMobil,theM&Rgroupdevelopedanumberofstrategicthemesfortheorganization.TokeepourSAMillustrationsimple,we’llfocusonjustthesefour,asexpressedintheseslogans:

•FinanciallyStrong

•DelighttheCustomer

•SafeandReliable

•OnSpec,onTime

TouseSAM,M&Rwouldtranslatethesethemesintothestrategicdriversthatmakeupthecausalflowofabalancedperformancemeasurementsystem.ThentheywouldidentifytheHRdeliverablesandthenecessaryalignmentoftheHRsystemrequiredtoproducethosedeliverables.Let’snowimaginethatM&RidentifiedcompetenciesasthesinglemostimportantHRdeliverablerequiredtoimplementthefirm’sstrategy.Again,forsimplicity’ssake,we’lllimittheanalysistothefollowingelementsoftheHRsystem:compensation,rewards,andtraininganddevelopment.AssumingthatM&Rmightidentifythesethreefunctionsasmajorenablersofcompetencies,let’sfocusonthissubsetoftheHRsysteminoursampleanalysis.

EXAMPLE1:ASYSTEMINMISALIGNMENT

Figure6-3showsaGalileorepresentationofasomewhatmisalignedHRsystem.7(Thedatathatwentintothisgraphicwouldbeobtainedthroughanemployee-surveymatrixlikethatshownintable6-4.)Thisfiguredepictsthepossibleaggregateperceptionofallemployeessurveyedregardingthealignmentamongthecompany’sstrategicgoals,theHRdeliverable“competencies,”andtheHRsystemelementsdesignedtoproducethatdeliverable.

Howmightweinterpretthispicture?First,wecanseethatemployeesgenerallyconsidercompetenciesascloselyalignedwiththe“FinanciallyStrong”and“DelighttheCustomer”strategicgoals.Perceivedalignmentbetweenthisdeliverableandthe“SafeandReliable”and“OnSpec,OnTime”goalsisnotasstrong.Inthiscase,ifthecompanyexpects

competenciestoequallyinfluenceeachofthefourstatedstrategicgoals,itwillneedtostrengthenthosecompetenciesthatspecificallysupport“OnSpec,OnTime”and“SafeandReliable.”

Figure6-3GalileoMapofMisalignedHRSystem

Second,considerthelocationof“Me”(theaggregateofallindividualrespondents)relativetothefirm’sstrategicgoals.Thispositioningindicatestheextentofemployeestrategicfocuswedescribedearlier.Ifyoucanimaginetheaverageemployeeinthisexample,heorshestandssomedistanceawayfromthefirm’sstrategicgoals.Thisfindingprobablyreflectsthecombinedimpactofthecompensationsystem,thefirm’sdevelopmentpolicies,andtheemployee’ssupervisor—noneofwhicharealignedwiththosestrategicgoals.Forexample,perhapstraininganddevelopmentpoliciesreflectanearlierstrategyorgenerictrainingthatisnotconsideredrelevanttothenewstrategicgoals.Similarly,theimmediatesupervisorsformostemployeesaresimplyreinforcingtheimportanceofthosegoals.ThisisoneofthemostvaluableinsightsaSystemsAlignmentMapcanoffer.Itnotonlyprovidesanimageofemployeestrategicfocusbutalsohighlightstheconflictingsignalsthatlieatthecoreofanymisalignment.Itdoesn’texplainthereasonforaparticularmisalignment,butithighlightsthepresenceofaproblemthatcanpromptfurtherinvestigation.

HowmightSAMprovideactionableresults?Foronething,itgivesavisualandintuitivesummaryofhowthehumandimensionoftheorganizationisalignedwiththefirm’slargerstrategicgoalsandtheHRsystem.Itthusalertsyoutoanyalignmentproblemsandprovidessomeguidanceforhowyoumightaddresstheseproblems.Note,though,thatbecausethisisaperceptualmap,itdoesn’ttellyouwhethertheHRsystemelementsareinfactoutofalignment;itjustshowsemployees’understandingofthoseelements.You,theHRprofessional,havetodeterminewhetherthemisalignmentisstructuralorjustmisunderstoodbytheemployees.Inourexperience,once

HRprofessionalsidentifyamisalignment,theyhavenotroublesupplyingthemotivationandskillrequiredtoresolveit.Thebighurdle,whichtheSystemsAlignmentMappinghelpstosurmount,iscapturingthenatureofthealignmentproblembypinpointingthosepartsoftheorganizationthatareinalignmentandthosethatarenot.

TheSAMapproachleadstoactionableresultsinanotherwayaswell.Specifically,themethodologyisbasedonprecisemeasuresofthe“distances”andinterrelationshipsamongtheperceptionsdepictedintheGalileographic.Ineffect,theseperceptionsofalignmentsomewhatresembletheplanetsinasolarsystem.Liketheplanets,theconceptsintheGalileodepictionexertagravitationalpullononeanother.Shiftingoneconcepttowardasecondwillnotonlyinfluencetherelationshipbetweenthembutalsochangetheirrelationshiptootherelementsinthesystem.Forinstance,intheexampleofmisalignmentjustdescribed,itmaybethattrainingprioritiesarelargelybasedonfeedbackfromlinemanagers.Iflinemanagersbecomemore“strategicallyfocused,”thiswilldrawthetraininganddevelopmentpoliciesclosertothestrategicgoals,whichwillfurtherreinforcethemovementoftheaverageemployeetowardthosesamegoals.Byunderstandingthepotentialimpactofthis“gravitationalpull”amongthemanydifferentelementswithintheHRsystemandtherestofthefirm,youcancraftwiserinterventionstoresolvealignmentproblems.

EXAMPLE2:ASYSTEMINALIGNMENT

Figure6-4illustratesrelativelygoodalignmentbetweenemployeesandtheelementsofthestrategyimplementationprocess.AnyGalileopicturenecessarilydescribestherelativepositionofvariouselementswithinthelargersystem.Inthiscase,bothrewardsandtraininganddevelopmentaresomewhatoutofalignment.However,incontrasttofigure6-3,youcanseethatthestrategyimplementationsystemofthisorganizationisfairlywellalignedinternally.

OneadvantageoftheGalileomethodologyisthatyoudon’thavetorelyonjustthegraphicsincomparingtwoalignmentmaps.Themethodprovidesnumericalestimatesthatletyoupreciselycomparethedegreeofalignmentbetweentwomaps.(ThisaspectofGalileoisbeyondthescopeofthischapter,butyoucanlearnmoreaboutitintheworkscited.)GalileoisthusparticularlyusefulformeasuringchangesinstrategicalignmentovertimewithinyourfirmasyouimplementHRinterventions.ItisveryeasytothenincorporatethesemeasuresintothealignmentdimensionoftheHR

Scorecard.OneofthemosteffectivewaystoreinforceHR’sstrategicroleisbyconductingamonthlyorquarterlyalignment-reviewsession—withaSystemsAlignmentMapasthefocusofdiscussion.

Figure6-4GalileoMapofAlignedHRSystem

EMPLOYEESTRATEGICFOCUSASAPERFORMANCEDRIVER:USINGSAM

METRICSTOMANAGEPERFORMANCE

TheSAMresultsprovideseveralmetricsthatyoucantrack.OneisoverallHRalignment.YoucancalculateaggregatedistancebetweentheHRsystemandstrategicgoals.Moreimportant,youcanmeasurechangesinthiskindofalignmentovertime.Youcanalsousetheaggregate“me”relativetoeachstrategicgoalasanothermeasureof“employeestrategicfocus.”Again,measuringchangesintheserelationshipsovertimeisparticularlyvaluable.Finally,youcancalculateESF(employeestrategicfocus)measuresatlowerorganizationallevels,includingattheindividuallevel,tohelpanalyzeperformanceproblems.Wedon’trecommendusingresponsestoSAMmetricstojudgeemployees’performance,however.SAMmetricsareself-reporteddataandhingeonemployees’providinghonestopinionsaboutstrategicalignmentwithinthefirm.Ifthesemeasuresbecamepartofindividualperformanceevaluations,itwouldbetooeasyforemployeestoreportthesedatainaself-servingway.Nevertheless,muchassomemanagersareheldaccountablefortheemployeesurveyresultsoftheirsubordinates,ESFmetricscouldbeusedasameasureofperformanceformanagersresponsibleforimprovingtheESFofothers.

SUMMARY:APORTFOLIOOFMETRICS

Thewordalignmentseemstobeoneveryone’slipsinthebusinessworldthesedays.Asatheme,itrunsthroughoutthisbookaswell.WehavetriedtodemonstratewhyalignmentissoimportanttoHR’sroleasastrategicasset.Wehavealsoemphasizedtheimportanceofmeasurementasafoundationalcapabilityforrealizingthatrole.

Theneedforbettermeasuresbecomesparticularlyacuteinevaluatingalignment.Inthischapter,weintroducedseveraldifferentapproachestothemeasureofalignment.First,wediscussedalignmentmeasuresasdiagnostictools.TheemphasisherewasoninternalalignmentasanindicatorofthemorefundamentalalignmentbetweenHRandthefirm’sstrategy.Next,weexploredatwo-stepprocessforassessingexternalalignment.ThisprocessinvolvedgaugingboththeHRdeliverable–strategicdriverfitandtheHRdeliverable–HRsystemfit.Finally,wedescribedauniqueapproachtocapturingtheentireHR-strategyfitthroughavisualdepictionofalignment.Eachofthesemetricscontributesanimportantpieceofthepuzzleandenrichesyouroverallview.Weencourageyoutobuildonalloftheseideasandtoadaptthemtotheuniquechallengesofyourownorganization.

7

COMPETENCIESFORHRPROFESSIONALS

NOWTHATYOU’VEworkedwithatemplatefordesigningastrategicHRarchitectureinyourfirmandexploredameasurementsystemformanagingthatarchitecture,howdoyoumakesureyouhavetheskillstoactuallyimplementthisstrategicperspective?Doingsorequirescompetenciesthatmaybenewtoyou.Inthischapter,wediscusstheskillsyou’llneedtoforgeastrategicpartnershipwithlinemanagement.We’llalsoreviewexamplesfromcompaniesthathavesuccessfullyhonedthosecompetencies.

TRANSFORMINGTHEPROFESSION

Allprofessionsestablishstandardsthatdetermineentréeandcertifyproficiency.Inthelastdecade,thoseinterestedinthedisciplineofhumanresourceshavemovedaggressivelyandboldlytodefineitasaprofession.ThesemoveshaveincludedtheremarkablegrowthofthenationalSocietyforHumanResourceManagement(SHRM),whichnowboastsmorethan150,000worldwidemembers;acertificationassessmentsanctionedbySHRM,whichenablesentrantstodemonstrateknowledgeoffundamentalprinciples;andspecializedgraduatedegreesinhumanresources(e.g.,atCornell,UniversityofIllinois,MichiganState,UniversityofMinnesota,OhioState,Rutgers,UniversityofWisconsin,andanumberofotheruniversities).Underlyingthismovementtowardprofessionalismareabodyofknowledge,asetofexpectedbehaviors,andspecificoutcomesforthosedoingHRwork.

Wecanthinkoftheseexpectedknowledgeandbehaviorsascompetencies.Toserveasvaluablebusinesspartners,HRprofessionalsneedtodefineandmeasurethesecompetenciessystematically.

WHATISHRCOMPETENCE?

Competencereferstoanindividual’sknowledge,skills,abilities,orpersonalitycharacteristicsthatdirectlyinfluencehisorherjobperformance.Theconceptofindividualcompetencehasalongtraditioninthemanagerialfield.Mostofthisworkhasfocusedonleadersandgeneralmanagers.1OtherresearchhassoughttospecifyHRcompetenciesthroughinterviewswithexecutiveswithinasinglefirmorfromalimitedsetoffirms.2ManycompanieshavetriedtoidentifycriticalHRcompetenciesbyaskinglinemanagerswithinthecompanywhattheyexpectfromHRandthekindsofcompetenciesHRprofessionalsshouldexemplify(e.g.,whatlinemanagersneedfromHR).Thisapproachassumesthateachcompanymayhaveuniqueexpectationsofitshumanresourceprofessionalsandthat,asclients,linemanagersplayacentralroleindefiningthoseexpectations.

DefiningHRcompetenciescompanybycompanythroughexecutiveinterviewshassomeadvantages.Foronething,itanchorsthefindingsinbehaviors,becausethequestionsaskedintheinterviewscantargetactualcasesinwhichHRprofessionalswithinthecompanydemonstratedcompetence.Italsotailorstheprocesstothespecificneedsofthecompaniesinquestion.However,thedangeristhatexecutivesmaynotknowwhattheydon’tknow.Thatis,theymayidentifyonlythosecompetenciestheyhaveseen,wheninfactotherHRcompetenciesmayhavemoreimportancefortheirfirmiftheyonlyknewaboutthem.Thisapproachmayalsoleadtobiasedresults,dependingonthesampleofexecutiveschosenforinterviews.Executives’managerialorientation,ratherthantheactualneedsofthebusiness,mayinfluencetheirexpectationsofHR.Forexample,linemanagersthathaveneverseenHRprofessionalsinastrategicrolemaynotbeabletothinkofHRasanythingotherthanadministrativeoverhead.Firmsgenerallyhaveidiosyncraticrequirementsforimplementingstrategy.Therefore,whilefirm-specificstudiesmayyieldsomeinterestingexamples,thesecasestudiesalonewillnotprovideanoverallcompetencymodelfortheHRprofession.

Threelarge-scaleHRcompetencystudies,conductedinthe1990s,haveshedsomeinterestinglightonthestatusofthisprofession.Inthefirststudy,

TowersPerrincollaboratedwithIBMtosurvey3,000HRprofessionals,consultants,lineexecutives,andacademiciansaboutabroadrangeofHRissues.3TheworkrevealedaratherdiverseperspectiveonHRcompetencies.Amongthefourgroupssurveyed,themostcommonlyidentifiedcompetenciesincludedthefollowing:

•Computerliteracy(lineexecutives)

•BroadknowledgeofandvisionforHR(academics)

•Abilitytoanticipatetheeffectsofchange(consultants)

•HR’seducationofandinfluenceonlinemanagers(HRexecutives)

ThesecondstudywasrecentlysponsoredbytheSocietyofHumanResourceManagementFoundation.4ThisworkfocusedonthefuturecompetencyrequirementsofHRprofessionals.Basedondatafrom300HRprofessionalsfromdifferentindustriesandcompaniesofdifferentsizes,thisstudyconcludedthatcorehumanresourcecompetenciescenteronleadership,management,functional,andpersonalattributesthatmustbeaugmentedbylevel-androle-specificcompetencies.

ThethirdandmostextensiveoftheHRcompetencysurveyswasconductedattheUniversityofMichiganSchoolofBusinessinthreeroundsoveraten-yearperiod(1988to1998).Thisworkinvolvedmorethan20,000HRandlineprofessionalsandidentifiedhumanresourcecompetenciesacrossHRfunctionalspecialties,industries,firms,andtime.ThestudyaimedtocreateacompetencytemplatefortheentireHRprofession,notjustforasinglefirm.Let’stakeacloserlookatthisresearch.

Michigan’sHRCompetencyResearchTheMichiganresearchteam,ledbyWayneBrockbank,DaleLake,DaveUlrich,andArthurYeung,initiallydevelopedandpilot-testedanHRcompetencymodelbasedonacarefulreviewoftheliterature.Next,theyfield-testedthismodelinawidevarietyofindustries,HRfunctions,andregions.Theirfirstroundofdatacollection,in1988,includedmorethan10,000individualsin91firms.5TheteamconcludedthatHRcompetenciescouldbedividedintothreedistinctdomains:knowledgeofthebusiness,deliveryofHRpractices,andabilitytomanagechange.Interestingly,theresultsatthispointindicatedthat,ofthesethreeareas,theabilitytomanagechangerankedhighestinimportanceinpredictingtheoveralleffectivenessof

HRprofessionals.

Asthisprojectprogressed,theresearcherscontinuedtoexplorecompetenciesforHRprofessionalsonacompany-specificbasis.Asthefindingsfromthesecasestudiesaccumulatedoverseveralyears,aclearpatternofanevolvingchangeincompetencyrequirementsemerged:HRprofessionalswereeffectiveiftheyalsodemonstratedpersonalcredibility,iftheyallocatedtheirtimetokeystrategicissuesmorethanadministrativeprocesses,andiftheymasteredrapidchange.Thesefindingspromptedasecondroundofsurveysin1992and1993thatfocusedonglobalfirmsandincludedmorethan5,000participants.TheresultsunderscoredHR’snewstrategicroleatthecloseofthetwentiethcentury.Specifically,theresearchersobservedadramaticincreaseintheamountoftimethatHRprofessionalsdevotedtostrategicissues,andarelativedeclineinthetimetheyallocatedtomoretraditionalissues.6Forexample,HRprofessionalsneededtobemoreknowledgeablethaneveraboutfinancialmanagementandexternalcompetitiveandcustomerdemands.Theyalsohadtobeabletoworkwithlineexecutivestosendclearandconsistentmessagesabouttheirfirm’sgoalsanddirections.7Finally,thisresearchfoundthatthehighest-performingfirmsreducedtimeandeffortspentonHRtransactionalissuesbyoutsourcing,automating,andreengineeringtheirHRactivities.

ThethirdphaseoftheprojectcontinuedtofocusontheevolutionofHRcompetenciesandculminatedinthemostrecentsurveyof5,000HRprofessionalsin1997and1998.Theseresultsdescribedacontinuallychangingprofessionthatisincreasinglytakingonastrategicroleinorganizationallife.Thedatacontinuedtosupporttheimportanceofthecompetencydomainsasoriginallydefined—knowledgeofthebusiness,professionalmasteryofHR,andchangemanagement.However,theyalsopointedtotwoadditionaldomains:culturemanagementandpersonalcredibility.8Wewillbrieflydescribeeachofthesefivedomains:

KNOWLEDGEOFTHEBUSINESS

HRprofessionalsaddvaluetoanorganizationwhentheyunderstandhowthebusinessoperates.Why?BecausethatunderstandingallowsthemtoadaptHRandorganizationalactivitiestochangingbusinessconditions.Onlybyknowingthefinancial,strategic,technological,andorganizationalcapabilitiesofyourorganizationcanyouplayavaluableroleinanystrategicdiscussion.HRprofessionalswhohavemasteredindustrial,employee,orhumanrelationsmaybefullycompetentintheirdisciplinebutstillfailtograsptheessentials

ofthebusinessinwhichtheirfirmscompete.Forexample,someHRprofessionalsknowhowtousehumanresourcetechnologysuchasmultipleraterperformanceappraisalsystemsbutnothowtoadaptthattechnologytospecific,changingbusinessconditions.SomefirmsarenowdoingperformanceappraisalovertheWebandincludecustomersandsuppliersaswellassupervisors,peers,andsubordinatesintheappraisalprocess.Businessacumenrequiresknowledge,ifnotdirectoperationalexperience,infunctionalareassuchasmarketing,finance,strategy,technology,andsales,inadditiontohumanresources.By“knowledgeofthebusiness”wedon’tmeantheabilitytomanageallthesebusinessfunctions,buttheabilitytounderstandthem.Toimplementthemodelwedescribedinchapter2,HRprofessionalsneedtocomprehendbothsidesofthenexusbetweenHRdeliverablesandbusiness/strategicproblems.Inshort,tobevaluablebusinesspartners,HRprofessionalsneedtoknowmuchmoreaboutthebusinessthanlinemanagersneedtoknowaboutHR.

DELIVERYOFHRPRACTICES

Likeanyotherstaffmembers,HRprofessionalsattheveryleastmustbeexpertsintheirspecialty.Knowingandbeingabletodeliverstate-of-theart,innovativeHRpracticesbuildstheseprofessionals’credibilityandearnsthemrespectfromtherestoftheorganization.Itisthesinequanonforcultivatingaprofessional“brand”forHR.However,aswe’vediscussedinearlierchaptersofthisbook,thedimensionsofthisprofessionalexpertiseareshiftingrapidlyovertime.Therefore,HRprofessionalsmustbededicatedenoughtocontinuallymastertheunderlyingtheoryofHRandagileenoughtoadaptthattheorytotheiruniquesituation.Forexample,wespokeatachieflearningofficerconferencerecentlyandspentsometimetalkingabouthowsomeofthefoundationalconceptsbyChrisArgyrishelpedorganizationsbuildlearningdisciplines.Attheendofoursession,somechieflearningofficersfromlargefirmsapproachedusandaskedhowtospell“Argyris.”TheirquestionsindicatedlittleunderstandingofArgyris’sseminalwork—abitsurprisinggiventhatthesewerethepeopletaskedwithhelpingtotransformtheirfirmsintolearningorganizations.Totheextentsuchquestionsdemonstratealackofknowledgeaboutthetheoriesbehindlearning,andhowtobuildonthosetheories,HRprofessionalsmayhavesomeworktodo.

MANAGEMENTOFCHANGE

ThiscompetencyisanotherexampleoftheincreasingroleofHRasbusinesspartner.PerhapsthemostcompellingchallengefacingmostCEOsistheneed

torefocustheorganizationinresponsetonewstrategicdirections.Humanresourceprofessionalsarewellpositionedtodrivethatchange—iftheyareprepared.AnHRprofessionalwhocanorchestratechangeprocessesdemonstratesthefollowingabilities:theabilitytodiagnoseproblems,buildrelationshipswithclients,articulateavision,setaleadershipagenda,solveproblems,andimplementgoals.Thiscompetencyinvolvesknowledge(ofchangeprocesses),skills(aschangeagents),andabilities(todeliverchange)essentialformovingthe“people”sideoftheorganization.

MANAGEMENTOFCULTURE

ManagementresearchersJohnKotterandJamesHeskettfoundthatfirmswith“stronger”cultures(asmeasuredbytheextenttowhichemployeessharethevaluesofthefirm)tendtoachievehigherperformance.9WehavedescribedthestrategicroleofHRarchitectureandemphasizedtheroleofsystems.Ultimately,theemployeebehaviorsproducedbythesesystemsbecomewovenintothecultureofthecompany.Inthatsense,ahigh-performanceHRstrategyisaleadingindicatorofahigh-performanceculture.HRprofessionalsneedtounderstandthattheyarethe“keepersoftheculture”andthattheirimpactreacheswellbeyondtheirfunctionalboundaries.10

PERSONALCREDIBILITY

IftheotherfourdomainscanbethoughtofasthepillarsofHRcompetence,personalcredibilitymightbedescribedasthefoundationonwhichthosepillarsrest.TheMichiganresearchprojectfoundthatsuccessfulHRprofessionalswereseenaspersonallycrediblebothinsideandoutsidetheirfunction.Butwhatdoescredibilitymean?Webelievethatitcomprisesthreedimensions.First,itrequiresthathumanresourceprofessionals“live”thefirm’svalues.This,ofcourse,goeshandinhandwithbeingthe“keepersoftheculture.”WeoncevisitedafirmwheretheheadofHRwasbeingsuedforsexualharassmentbasedoncompellingevidenceagainsthim.Inthiscase,nomatterhowmuchthisexecutiveknewaboutbusiness,HR,culture,andchange,heutterlylackedpersonalcredibility.OrganizationalvaluesthatoftentripupHRexecutivesareopenness,candor,abilitytobeateamplayer,capacitytotreatindividualswithrespect,concernfordueprocess,andinsistenceonthehighestperformanceforHRexecutivesthemselvesandtheirstaff.IftheHRprofessionalsdonotlivethesevaluesintheirwork,theycanhardlyexpectotherstogivethemmuchcredibility.

Second,HRprofessionalsbuildcredibilitywhentheirrelationshipswith

colleaguesarefoundedontrust.TrustingrelationshipsemergewhenHRprofessionalsserveasvaluedpartnersonmanagementteams,whentheyhave“chemistry”withthemanagementteamandareabletoworkwellasteammembersandexertinfluencewithoutauthority,andwhentheyskillfullysupportbusinessobjectives.

Third,HRprofessionalsearntherespectoftheircolleagueswhentheyact“withanattitude.”11Whatwemeanby“withanattitude”ishavingapointofviewabouthowthebusinesscanwin,backingupthatopinionwithevidence(aprimarypurposeofthisbook),presentinginnovativeandunsolicitedideasandsolutions,andencouragingdebateaboutkeyissues.HumanresourceleadersespeciallyneedthatattitudewhenengaginginStep2ofourmodelinchapter2—buildingabusinesscaseforwhyandhowHRmattersinstrategyimplementation.

PrioritizingCompetenciesInthemostrecentroundofresearchintheMichiganproject,theresearchersanalyzedtherelativeimpactofthefivedomainsjustdiscussedontheoveralleffectivenessoftheHRprofessional.Table7-1describesthebehavioralindicatorsofthesecompetenciesandshowshowtheyrankintheirperceivedcontributiontotheeffectivenessofHRprofessionals.AllofthesedomainsareconsideredimportantcompetenciesfortheHRprofessional.However,researchindicatesthattheyrangefromleasttomostimportantasfollows:knowingthebusiness(allowsHRprofessionalstojointhemanagementteam),masteringHRpractices(letsthemdefineandaccessbestpracticeswithinHR),managingculture(helpsthemtoshapethefirm’sidentity),orchestratingchange(allowsthemto“makethingshappen”),anddemonstratingpersonalcredibility(earnsthemrespectandgoodwill).Thisrankingholdstrueacrossindustry,levelofHRprofessional,andspecialtyarea.

Table7-1DescriptionandRelativeImportanceofHRCompetencyDomains

CompetencyDomain

ImportanceRank(1=

highest)

SpecificCompetencies(inorderofimportance)

PersonalCredibility 1 Hastrackrecordofsuccess. Hasearnedtrust.

Instillsconfidenceinothers. Has“chemistry”withkeyconstituents. Demonstrateshighintegrity. Asksimportantquestions. Framescomplexideasinusefulways. Takesappropriaterisks. Providescandidobservations. Providesalternativeinsightsonbusinessissues.AbilitytoManageChange

2 Establishestrustandcredibilityinrelatingtoothers.

Isvisionary. Takesaproactiveroleinbringingaboutchange. Buildssupportiverelationshipswithothers. Encouragesotherstobecreative. Putsspecificproblemsincontextofthelargersystem. Identifiesproblemscentraltobusinesssuccess.AbilitytoManageCulture

3 Sharesknowledgeacrossorganizationalboundaries.

Championsculture-transformationprocess. Translatesdesiredcultureintospecificbehaviors. Challengesthestatusquo. Identifiestheculturerequiredtomeetthefirm’sbusiness

strategyandframescultureinawaythatexcitesemployees.

Encouragesexecutivestobehaveconsistentlywiththedesiredculture.

Focusestheinternalcultureonmeetingtheneedsofexternalcustomers.

DeliveryofHumanResourcePractices

4 Expresseseffectiveverbalcommunication.

Workswithmanagerstosendclearandconsistentmessages.

Expresseseffectivewrittencommunication. Facilitatestheprocessofrestructuringtheorganization. Designsdevelopmentprogramsthatfacilitatechange. Facilitatesdesignofinternalcommunicationprocesses. Attractsappropriateemployees. Designscompensationsystems. Facilitatesdisseminationofcustomerinformation.UnderstandingoftheBusiness

5 Understandsthefollowing:•humanresourcepractices•organizationalstructure•competitoranalysis•finance•marketingandsales•computerinformationsystems

TheMichiganresearchissupportedbyevidencefromothercompanies

thathavedevelopedtheirowncompetencymodels.Astable7-2shows,theexperienceofGeneralElectric,andotherFortune500companiesisconsistentwiththeMichiganmodel.

Table7-2HRCompetenciesbyCompany

GeneralElectric

LargeConsumerProducts

Manufacturer

InternationalPharmaceuticalManufacturer

Generalcategoriesofcompetenciesidentifiedbycompany

1.KnowledgeofBusiness2.DeliveryofHR3.ManagementofChange4.PersonalCredibility

1.Leadership2.KnowledgeoftheBusiness3.HRStrategicThinking4.ProcessSkills5.HRTechnologies

1.KnowedgeofBusiness2.IndividualLeadership3.ProcessPractices4.HRPractices5.OtherStrategicPlanning

Competenciesrelatedtoknowledgeofthebusiness

•Businessacumen:knowsbusinessobjectives,cycle,globaldevelopments.•Customerorientation:knowswhocustomersareandhowtheymakebuyingdecisions.•Externalrelations:workswithkeyconstituents(media,schools,government)andpublicpolicy.

•Understandscorporatebusiness(structure,vision,values,strategies,financialandperformancemeasures).•Understandsinternalandexternalcustomers.•Understandskeybusinessdisciplines,value-basedmanagement,HRimplicationsofglobalbusiness,informationtechnology.•Understandsthestrategy-andbusiness-planningprocess.•UnderstandsandisabletoapplyasystematicHRplanningprocess.

•Understandscorporateanddivisionvision,mission,culture,goals,values,strategies,andfinancialandperformancemeasures.•Knowscompanyproducts.•Understandsthehealth-careindustryandcurrentchallengesitisfacing.•Understandscompany’skeypolicies•Understandsthestrategyandbusiness-planningprocess.•AppliessystematicHRplanningprocess.

Competenciesrelatedtomanagingculture

•Continuallyassessesorganizationissuesandtrendsforimprovement.•ChampionsWork-Outaswaytosupportsustainedchange.•Consultingandcoaching:leveragesresourcestomeetbusinessneeds.•Introducesnewwaysofthinking.

•Understandstheenvironment(externalandinternal)ofcorporationandindividualbusinesses.•Selects,designs,andintegratesHRsystemsorpracticestobuildorganizationalmind-set,capability,andcompetitiveadvantageforrespectivebusiness.•DevelopsandintegratesbusinessHRstrategieswithinframeworkofcorporateHRstrategies.•Hasknowledgeofmanagementprocessesinbusiness.

•Demonstrateseffectiveprojectmanagementskills.•Understandsandappliesprinciplesoforganizationdesign.•Displayssystemsandprocessthinking;workstobuildintegratedprocedures.

CompetenciesrelatedtoHRtechnicalexpertise

•Organizationdesign:knowsstructure,workteams.•Selectionandstaffing:knowssuccessionplanning,encouragesdiversity,identifiesandassessestalent,conductsorientation,encouragesretention.•Measurementandreward:managesperformance,compensation,feedback.•Negotiationandconflictresolution:manageslaborrelations.•Learninganddevelopment:supportsindividualandteamdevelopment,careerdevelopment,training,experience-basedlearning.•Employeerelations:handlesemployeeissues,HRpoliciesandpractices.•Communication:buildscommunicationplan,sharesinformation.

•HasageneralistperspectiveonHRsystemsandpracticesastheyrelatetoachievementofbusinesscompetitiveadvantage.•Designs,integrates,andimplementsHRsystemstobuildorganizationalcapability.•Designsanddeliversleading-edgepracticestomeetcompetitivebusinessneeds.•MeasureseffectivenessofHRsystemsandpractices.

•DisplaystechnicalexpertiseinHRdisciplines.•Isknowledgeableabout“bestinclass”HRpractices.•Designsanddeliversleading-edgepractices.•MeasureseffectivenessofHRsystemsandpractices.

Competenciesrelatedtopersonalcredibility

•Credibility:maintainsconfidentiality,meetscommitments.•Judgment:setspriorities,actsonkeyissues,makesdatabaseddecisions.•Courage:standsupforbeliefs,delivershonestnews.•GEvalues:advocatesandmodelsGEvalues.

•Understandsthenatureandstylesofleadershipanddisplaysappropriateleadershipcharacteristics.•Demonstratesleadershipatmultipleperformancelevels:individual,team,unit.

•Buildspartnershipsandcollaborativerelationshipswithclientsbyworkingtowardmutualgoals.•InitiatesdiscussionsandtakesactionontheHRimplicationsofbusinessstrategy.•SellsideasandHRapproachestolinemanagersinamannerthatbuildscommitment.

Competenciesrelatedtobeingabletomakechangehappen

•Changeadvocacy:encouragessupportfornewideas,seeksnewideas.•Facilitation:managespersonalconflicts,encouragescreativity.

•Hascompetenceincompany’sprocesses.•Understandskeyprocessskillssuchasconsulting,problem-solving,evaluation/diagnosis,workshopdesign,andfacilitation.•Understandstheprinciplesandprocessesoforganizationalchangeanddevelopment.•Balances,integrates,andmanagesunderconditionsofuncertaintyandparadox.

•Demonstrateseffectiveconsultingskills:workstounderstandneeds,engagesinconstructiveproblemsolving,clarifiesrolesandresponsibilities,partnerswithclient,followsthroughoncommitments.•Demonstrateseffectivefacilitationskills:facilitatesteams,tasksforces,etc.;designsprocessestoaccomplishgoalsatameetingorotherforum.•Designsandfacilitatesorganizationchange:understandsprocessoforganizationchange,initiatesandleadschange,designsplansforchange,isabletomanagechangeunderconditionsofparadox.•Demonstratesanalyticalandproblemsolvingskills.•Displaysverbalandwrittencommunicationskills.

Wecandrawseverallessonsfromthecompetenciesdescribedintable7-2.Foronething,eventhoughthelarge-scaleMichiganstudiesnecessarilyreliedonrelativelygenericcompetencylabels,theycloselymaptotheexperienceofthecompaniesinthistable.ThisgivesusconfidencethattheunderlyingmodelaccuratelyreflectsthechallengesthatHRprofessionalstypicallyface.Moreover,theinformationintable7-2makesthecompetencymodelmoreactionablebecauseitrevealsbehaviorsrequiredforeachcompetencydomain.

Finally,theseresultshighlightwhathasbecomeanongoingdebateintheHRprofession.ThedebatecentersonhowmuchoneneedstomasterHRtechnicalcompetencies(suchastheintricaciesofteam-basedincentivesystems)tobeatrulyeffectivehumanresourceprofessional.Mostfirmsexpecttechnicalproficiency,thoughsomegiveitrelativelylittleweightoverall.Inourview,technicalcompetenciesmustberepresentedinacompany’sHR-competencyportfolio.However,suchcompetenciesareprobablynotessentialtoHRprofessionals’abilitytoserveasbusinesspartnersandstrategicarchitects.Intheseroles,itismoreimportanttounderstandtheimplicationsforHRofthefirm’sstrategy,ingeneral,andtheappropriatestrategicdrivers,inparticular.Thisunderstandingmaywellrequireasixthcompetency:strategicHRperformancemanagement.

STRATEGICHRPERFORMANCEMANAGEMENT:

ANEWCOMPETENCY

ThisbookisnotprimarilyaboutanewroleforHR;thenotionofHRasastrategicpartnerwaswithusformuchofthe1990s.However,itdoesimplyanewcompetency—instrategicHRperformancemanagement—whichwemightaddtothosefivealreadyenumerated.Whatdowemeanbystrategicperformancemanagement?Wemeantheprocessoforchestratingthefirm’sstrategyimplementationthroughbalancedperformancemeasurementsystems.Noticethatweusethetermmanagementratherthanmeasurementindefiningthiscompetency.That’sbecausethepurposeofthemeasurementsystemswe’vediscussedinthisbookismoreeffectiveorganizationalmanagement.Nevertheless,theabilitytoimplementbalancedperformancemeasurementsystems,suchastheBalancedScorecard,isalsoessentialforthiscompetency.

Increasingly,firmsthatunderstandtheimportanceofstrategyexecutiontotheirlong-termsuccessareadoptingstrategicperformancemanagementasakeycompetencyandemphasizingmeasurement-ledmanagement.Yetthisemergingtrendalsorepresentsachallenge.Ontheonehand,itholdsouthopethatHRwillindeedbecomealegitimatestrategicasset.Ontheother,aswe’veseenfromtherecenthistorywiththeBalancedScorecard,HRtraditionallyhasbeentheweaklinkintheperformancemeasurementsystem.Webelievethatthisweaknesscanbetransformedintoastrength,ifHR

professionalsdevelopacompetencyinstrategicperformancemanagement.

Tobuildthiscompetency,humanresourcemanagersmustunderstandstrategicmeasurementalongtwodimensions:whattomeasureandhowtomeasureit.Whatreferstostrategyimplementation,emphasizedthroughoutthisbook.AfocusonstrategyimplementationprovidesthebedrockforthestrategicmanagementofHR.Aswesawinchapter5,thehowofmeasurementcanbesomewhatmoretechnical.Youmaynotneedtomastereachnuance,butyoushouldatleastappreciatethemanyaspectsofmeasurementinordertomakeinformeddecisionsregardingtheirresults.

TheDimensionsofStrategicPerformanceManagement

ThedimensionsofacompetencyinstrategicperformancemanagementareprobablyalittledifferentfromthoseofmostcompetenciesthatHRprofessionalshaveconsideredinthepast.TheystronglysupportourargumentthathumanresourcemanagersmustlearntothinkdifferentlyaboutHR.Moreover,theyconfirmtheideathattheseleadershavetobeabletodemonstrateHR’sstrategicinfluencetoseniorlinemanagers.Wedividethestrategicperformancemanagementcompetencyintofourdimensionsdiscussedinthefollowingsections.

CRITICALCAUSALTHINKING

Inchapter2,wenotedthatthestrategiclinkbetweenHRarchitectureandfirmperformanceisthestrategymapthatdescribesthefirm’sstrategyimplementationprocess.Rememberthatthismapisacollectionofhypothesesaboutwhatcreatesvalueinthefirm.HRprofessionalsmustbegintothinkinthesecausaltermsinordertoevaluatehowHRisdrivingfirmperformance.ThisabilityisespeciallyimportantbecauseHRdeliverablesareoftenpositionedupstreaminthosecausallinkages.ThelineofsightbetweenHRandfirmperformanceislongenoughthatifHRdoesn’texplicatetheconnectionsbetweenthem,othersmightnoteither.

UNDERSTANDINGPRINCIPLESOFGOODMEASUREMENT

Akeyfoundationofanymanagementcompetencyisarelianceonbettermeasures.Aswesawinchapter5,HRprofessionalsneedtobecomfortabledistinguishingbetweentheconceptualconstructsthatliebehindthedrivers

showninastrategymap,andthemeasuresthatreflectthoseconstructs.Inparticular,themeasuresmustappropriatelydescribethoseconstructs.Aswe’veseen,youcan’tmeasureAandhopeforB.

ESTIMATINGCAUSALRELATIONSHIPS

ThinkingcausallyandunderstandingmeasurementprincipleshelpyouestimatecausalrelationshipsbetweenHRandfirmperformance.Inpractice,suchestimatescanrangefromjudgmentaltoquantitativeinferences.WhilemostHRprofessionalsweworkwithwouldliketomovebeyondjudgmentalassertionsaboutHR’sstrategicimpact,don’tunderestimatethepowerofthosearguments.Evenifyou’representingyourcaseonjustahypotheticalbasis,yourargumentwillcarryweightifyoubaseitonthelogicbehindyourfirm’svalue-creationstory.Ideally,youwillalsoeventuallyhavequantitativeestimatesofthelinkbetweenHRandfirmperformance,oratleastbeabletopointtospecificlinksinthestrategymap.However,yourmostimportanttasksaretorealizethatthoseestimatesarepossibleandtocalculatethemasopportunitiesarise.

Forexample,imaginethatyou’retheheadofHRatapipelinecompanyinwhichmaintenancetendstobereactiveratherthanpredictive.Asaresultofthisreactivestance,thecompanysuffersfrequentshutdowns,highmaintenancecosts,lowcustomersatisfaction,and,ultimately,reducedprofitability.Youproposeapossiblechangeinthetrainingandrewardsystemforpipelinemaintenanceworkersasawaytoreversetheseproblems.Toassessthepotentialofthisintervention,youcouldsimplycalculatetheexpenseoftheproposedprogramandcompareitwiththatofothertraining/rewardprogramsinthecompany.Orperhapsyoucalculatethecostpertraineeandfindthatyourcostis20percentbelowtheaveragetrainingcostintheindustry.However,ifyouhadacompetencyinstrategicperformancemanagement,youwouldtacklethischallengeverydifferently.Youwould(1)recognizethestrategicimplicationsofachangeinHRarchitecturearoundthemaintenanceworkers,(2)identifytheopportunitytolinkHRchangesinmaintenancetochangesinpipelinereliability,maintenancecosts,and,ultimately,customersatisfactionandprofitability,and(3)understandthemeasuresrequiredtoestimatethoserelationships.

HRprofessionalsmustalsobeabletoseepatternsinseeminglyunrelateddata.Asitturnsout,commonthemesoftenemergewhenyouexaminetrendsusingdifferentanalyses.Forexample,aspartofourHRassessments,weoftencollectdatafrommultiplesources(interviews,observations,surveys,

reports).Asateam,weidentifywhatweobservedinthedatawecollected,postthatobservation,andseewhetherotherswhocollecteddatafromadifferentsourcemadesimilarobservations.Thistechnique,calledtriangulationofanalyses,letsyoudrawricherandmoreconfidentinferencesfromthedata.12

COMMUNICATINGHRSTRATEGICPERFORMANCERESULTSTOSENIORLINEMANAGERS

TomanagethestrategicperformanceofHRinyourfirm,youhavetobeabletoeffectivelycommunicateyourunderstandingofHR’sstrategicimpacttoseniorexecutivesandlinemanagers.Thiscontinuesourthemeoftop-downthinking.Specifically,youneedtounderstandwhatquestionsmanagersoutsideHRwantansweredandhowtheresultsofyourstrategicHRmeasurementsystemwillsupplytheanswerstothosequestions.Don’tgetdistractedbythearrayofavailablemeasuresandthemechanicsofdatacollection.Insteadaskyourself,“WhatamIgoingtodowiththesemeasureswhentheybecomeavailable?HowwillIusethemtomanageHR’sstrategicperformance?HowwillIusethemtodemonstrateHR’sstrategicimpact?”Alternatively,asnewstrategicissuescometotheattentionofseniormanagers,thinkabouthowthemeasuresyou’recurrentlyusingmightbestructuredinfreshwaystoshednewlightonthoseissues.

IntegratingStrategicPerformanceManagementwiththeFiveCoreHRCompetencies

HowmightyouintegratethisnewcompetencyinstrategicperformancemeasurementwiththefivecoreHRcompetenciesdescribedearlier?Weoffersomeideasinthenextfewsections.

KNOWLEDGEOFTHEBUSINESS

Asacompetency,strategicperformancemanagementmustleveragetheothercorecompetencies.AnyeffectiveHRprofessionalneedstounderstandthefinancialindicatorsofbusinesssuccess(shareholdervalue,profits,balance-sheetmanagement,earnings,returnonassets),customersuccessmeasures(customersatisfactionandcommitmentsurveys,segmentationcriteria,buyingcriteria,marketandcustomersharedata),competitoranalysis(industrytrends,competitorstrengthsandweaknesses),andprocessimprovement.All

HRprofessionalsshouldalsobeabletotranslatetheirworkintothesamefinancialandcustomer-focusedlanguageusedtodescribetherestofthebusiness.ThisdoesnotmeanthateveryHRdecisionhasdirectlinkstoshareholderreturnonequity,butyoushouldknowhowHRdecisionsdriveshareholdervalueinprinciple.Inshort,youneedtobeabletodescribeyourworkfromtheperspectiveoftheCFOorCEO.Forexample,chapter4showsyouhowtousebasicfinancial-analysisprinciplestoevaluateHRdecisions.

Aswe’veseen,HRprofessionalstoooftenwanttomeasuretheirsuccessbytheiractivitiesratherthanbybusinessresults.Withastrongercompetencyinstrategicperformancemanagement,youcanhypothesizehowaninvestmentintheHRsystemmightinfluenceyourfirm’sfinancialoutcomes,customervalueproposition,orcompetitiveadvantage.However,whenweaskHRprofessionalstoillustratetherelationshipbetweenanHRinvestmentandasubsequentstrategicimpact,usingatwo-axisgraph,manyhavetroubledoingso.TheyareunclearabouthowtomeasuretheHRinvestment(i.e.,labelthex-axis)andhowtodeterminewhattheinvestmentwillinfluence(i.e.,labelthey-axis).Further,theydon’tknowhowtodepictthepotentialrelationshipbetweenthetwovariablesonthegraph(i.e.,determinewhetherthelineonthegraphwouldbelinearorcurvilinear).Inshort,theycan’tdescribeHR’sstrategicimpactcrisplyandsuccinctlyintermsthatlinemanagerswillfindpersuasive.

WesawthisdifficultyfirsthandinafirmwherethelinemanagersresistedinvestmentsinHR.Theydidn’tbelievethatHRhadadirectinfluenceonbusinessperformance,andtheHRmanagerscouldn’tmakeapersuasivecaseotherwise.TogetthelinemanagersthinkingdifferentlyaboutHR,weaskedeachofthemtoplottheexpectedimpactofimprovedqualityofmanagementonbusinessresults.Weposedthequestion,“Ifthequalityofmanagementinthisorganizationwentup10percent,whatwouldtheimpactonbusinessresultsbe?”Asthemanagersthoughtaboutthisandthenplottedtheirscores,theysoonrealizedthatthebusinesscaseforHRwasnothardtomake.Allofthemagreedthatimprovedmanagementqualitywouldultimatelydrivebetterbusinessresults.Therangestheyanticipatedwentfrom10:3to10:10,withanaverageof10:7.Inotherwords,forevery10unitsofmanagement-qualityincrease,thisgroupofotherwisecynicalmanagersbelievedthat7unitsofbusinessresultswouldfollow.AswebecamemorespecificaboutwhichHRinitiativeswouldimprovemanagementquality,andwhatkindsofbusinessresultsthemanagerscouldexpect,theseleadersbecamefarmoresupportiveofHRinvestments.

DELIVERYOFHUMANRESOURCEPRACTICES

Astrategicperformancemanagementcompetencystronglyemphasizesmeasurement.ThisemphasisinturnsupportsHRprofessionalswhoneedtomakeinformedchoicesaboutwhichHRsystemsshouldreceivemoreorlessinvestment.Astheexamplesinchapter4showed,arigorousassessmentsystemcomparesthepotentialoutcomesofonepayprogramortrainingopportunityoveranother.HRmeasurementletsyoudefinethequantifiabletrade-offsassociatedwithparticularHRinvestments.Inotherwords,noteverythingworthdoingisworthdoingsuperbly.Atsomepoint,diminishingreturnswillsetin.MeasuringthevaluecreatedbydifferentHRpracticeshelpsyouidentifywhichpracticesofferthehighestreturnoninvestment,whichhavethegreatestemployeeorfinancialimpact,andwhichshouldreceivethemostmanagementattention.Withinafunctionalareasuchastraining,thiskindofassessmentiscrucial.Afirmwitha$4,000-per-employeetrainingbudgetmighthaveanumberofchoices—externalprograms,technologyprograms,technicaltraining,managerialtraining,coaching,etc.—forhowtoallocatethismoney.Usingstrategicperformancemeasurement,humanresourceexecutivescanevaluatethetrade-offsforeachofthesechoicesandgetthehighestpossiblereturnsontheirultimateinvestmentdecision.

MANAGEMENTOFCULTURE

Weknowthatwhatgetsmeasured,getsmanaged.Butwhatgetsmeasuredalsodefinesacompany’sculture.Why?Becauseitdescribeswhatisvalued.Forexample,aglobalinsurancefirmwasembarkingonastrategicshiftfromsellingproductstodesigningcustomersolutions.Thetopmanagers’goalwastocreateintimacywithtargetcustomersandinspirethosecustomerstobuyabroaderarrayoffinancialserviceproducts.Inotherwords,theirgoalwaslargercustomer“shareofwallet.”Tomakethisstrategicshift,theorganization’sculturehadtomovefromonefocusedonproductsandcosttoonefocusedoncustomerservice.Thismoverequiredasignificantchangeintheperformancemeasuresusedthroughoutthecompany.Also,someonehadtotellthestoryofhowthisnewstrategymightbeimplemented.Thatjobfelltothefirm’sHRprofessionals,whobecauseoftheircompetencyinstrategicperformancemanagementprovedquitesuccessfulatthistask.Theywereabletoarticulatehowanewcultureandvaluesetcouldburnishthecompany’sreputationwithinvestorsandcustomers.Theyalsogavecredibleexplanationsforwhyemployeecommitmenttothisnewculturewascriticalforsuccess.Perhapsmostimportant,theyunderstoodhownewmeasuresofemployee

performancewouldplayacentralpartinimplementationofthisnewstrategy.Atthesametime,theycouldexplainthesechangestoemployeesinanonthreateningway.Finally,theHRprofessionalswereabletocommunicatehowandwhyanextensiveteam-basedlearningexperiencecouldkick-startthisculturalchange.Theyrecommendedthatcustomersbeinvolvedinthelearningexperience—asdesigners,participants,andpresenters.Theyalsosuggestedcustomer-focusedprojectsforthesessionandshowedhowtheprojectsmightbestbeallocatedamongthesessionparticipants.Last,theyproposedusingcustomer-solutionsperformanceindicatorsasabasisforcompensation.

MANAGEMENTOFCHANGE

HRprofessionalswithastrategicperformancemanagementcompetencyarewellpositionedtofacilitatethepaceandextentofchangeintheirorganizations.HRsystemscanbeimpedimentsorenablersofrapidorganizationalchange,butHRprofessionalswiththiscompetencywillatleastunderstandthebusinesscaseforHR’sleadingthesechangeefforts.Inoneexample,theHRleadershipteaminaglobalmanufacturingfirmcreatedavisualmodelthatletthemmeasurevariousmanifestationsof“speed.”Themodelresembledahubsurroundedbyspokes,with“individualcommitment”atthecenter.TheHRprofessionalssuggestedthatifemployeescouldridthemselvesofimpedimentstotheirwork,theircommitmentanddiscretionaryenergywouldgoup.Their“speed,”orabilitytorespondquicklytonewsituations,dependedinpartonHR-createdforumsinwhichemployeescouldidentifyandridthemselvesofbureaucraticcontrols,whichimpededtheirwork.Thespokesofthismodelrepresentedotherkeyprocessesthatthefirmhadtomanage,forexample,orderdeliverytime,productinnovationcycletime,andhiringofkeytalent.TheHRteammeasuredsuccessbydefiningaworld-classspeedstandardforeachprocess(e.g.,theorderdeliverytimeof48hourswasworld-class,butthefirmwasoperatingat96hours).Inshort,thefirmconsideredorganizational“speed”astrategiccapabilitythatdroveotherkeyprocesses.HRledtheefforttobringthatcapabilitytoworld-classstandards.Furthermore,itsmodelturnedtheconceptof“speed”intoasetofmeasurableresults(morecommittedemployeesandfasterkeyprocesses)thatthefirmcouldthencompareovertimeandlinktootherstrategicoutcomes.

PERSONALCREDIBILITY

We’veseenthatthepersonalcredibilityofHRprofessionalsholdsthekeytotheacceptanceoftheirroleasbusinesspartners.HRprofessionalswitha

strategicperformancemanagementcompetencywillincreasinglybesoughtoutfortheiradviceandcounselonbusinessissuesthathaveastrong“people”component.Becausethesemanagerswillbelivingthefirm’svalues,theircolleagueswillviewthemastrustworthy,dependable,andalignedwiththerestoftheorganization’smanagement.

MANAGINGHRCOMPETENCIES

DevelopingcompetencymodelsforHRprofessionalsisanimportantfirststepintheevolutionoftheprofession.Nevertheless,thewayinwhichthosecompetenciesaremanagedandnurturedinpracticewillultimatelydeterminewhethertheprofessionadvancesfurther.ManagingthosecompetenciesincludescultivatingtheperformanceofHRprofessionals,assessingHRperformanceandrewardingitappropriately,anddesigningHRdevelopmentprograms.Let’sbrieflyrevieweachofthese.

PerformanceManagementofHRProfessionalsAnoldadagethatwehopeisquicklyburiedforeverholdsthatsomeonewhocan’tmakeitelsewhereinbusinessendsupinHR.ThisperceptionofHRchangesonlywhenHRmanagersbeginto“makeadifference”intheirorganizations.ThistransformationofHR’sroleiscloselytiedtotransformationofHRasaprofession.Asaprofession,HRrestsonalegitimatebodyofknowledge,apredictablesetofoutcomes,andamodelofcompetencies.Thesethree“pillars”shapewhoishiredintoHR,howtheirperformanceisassessed,andhowtheyarecompensated.

WhenhiringHRstaff,humanresourceexecutivescanchoosefromamonganumberofcandidatesources.Newhiresmaycomedirectlyfromcollegeandthenbepromotedthroughaninternal,HR-successionsystem.Theymightalsotransferfromotherfunctionswithinthefirmorbehiredawayfromotherfirms.DecisionsaboutwheretosourcetalentmayvarydependingonhowmuchanHRfunctionwantstomaintainorchangeitsidentity.Forexample,anHRfunctionthatwantstobuildonitspastmayhiremoreinternalcandidatesthananHRfunctionthatfeelsaneedtocreateanewfuture.However,thecompetencyframeworkrequiredforHRprofessionalsshouldremainconstant.

Toillustrate,usingthefive-dimensioncompetencymodeldescribedearlier,seniorlineexecutivesofaglobalfinancialserviceinstitutiondecidedtodramaticallyshiftthedirectionofthefirm’sHRfunction.TheychoseanexecutivefromoutsideHRtoheadthefunction.Sheinturnreplaced60percentofherdirectreportswithindividualsfromoutsideHR.Shetookcaretoensurethattheentirenewteamhadoutstandingbusinessacumen,anabilitytoshapethefirm’scultureandmanagechange,andpersonalcredibility.But,sherealizedthattheteamlackeddeeptechnicalexpertise.Accordingly,sheencouragedherstafftosurroundthemselveswithtalentedHRprofessionals,thentoaggressivelyhonethegeneralbusinessskillstheyneededtomeetHR’srequirements.ThismeantthatnewmembersofherstafffromoutsideHRassuredthemselvesthattheirdirectreportsweretechnicallyproficientandthenworkeddiligentlytomasterthetheoriesunderlyingHRforthemselves.Byadoptingthisapproach,sheimprovedthecredibilityofthefunction,craftedamorebusiness-orientedHRplan,andempoweredthefunctiontogenerateinnovativeHRpractices.Inthisexample,thestrategicperformancemanagementcompetencydevelopedovertimethroughtheinformalsynergybetweenmanagerswithgeneralbusinessskillsandthenewHRstaff.

AssessmentofHRPerformanceAnHRcompetenceframeworkalsoservesasatoolforassessingHRperformance.JackWelch,CEOatGeneralElectric,tookauniqueapproachtothisbyadvocatingmeasurementofresultsaccordingtoamanager’sabilityto“live”thefirm’svalues.HearguedthatsuccessfulGEleadershadtoscorehighinbothachievingresultsandembodyingthecorevaluesthattheorganizationhadidentified.Thegreatestchallenge,heconceded,layinclarifyingthosevaluessothatthecompanycouldmeasurethedegreetowhicheachofitsleadersdemonstratedthevaluesintheirdailybehavior.

Likeotherorganizationalleaders,HRprofessionalsshouldbeassessedonboththeresultstheyachieveandthebehaviorstheyexhibit.Inthisbook,we’veexploredamodelformeasuringHR’sstrategicimpact.Behaviorscomefromcompetencies,whichwe’veexploredinthischapter.ButhowdoyouactuallymeasureHRcompetencies?Anumberofassessmenttoolsexist.AspartoftheMichiganstudydiscussedearlier,theresearchersdevelopedaninstrumentforgaugingtheperformanceofHRprofessionals.Thisinstrumentconsistsofaboutsixtybehaviorallyanchoredquestionsthatexploretheextent

towhichanHRprofessionaldemonstratesacompetence.IthasbeenusedinmorethanthirtyfirmsandhasgeneratedvaluablefeedbackfortheHRprofessionals,theirimmediatesupervisors,andHRexecutiveswithinthosefirms.Trackedannually,thisinformationcanhelpfirmsdesigndevelopmentplansattheindividualandoverallHRfunctionlevel.Othersimilarassessmenttoolsexist(e.g.,theSocietyforHumanResourceManagementhasanassessmenttool),orfirmscanandhavedevelopedtheirowntools.Ineachcase,thetoolbecomesavisibleguidetothecompetenciesHRprofessionalsshoulddemonstrateandamechanismtoassesstheextenttowhichtheydo.

InassessingitsHRcompetencies,acompanymustalsotierewardstodemonstratedcompetence.Astheadagestates,“Thatwhichgetsrewardedgetsdone.”But,itishardtorewardsomethingifyoucan’tmeasureit.And,itishardtomeasuresomethingunlessyoucanclearlyoperationalizeanddefineit.BydefiningHRcompetenciesinbehavioralterms,acompanycanuseanynumberofassessmenttools(suchasthe360-degreefeedbacktechnique)tojudgetheextenttowhichanindividualdemonstratesthecompetencyinquestion.Then,thefirmcanallocaterewardsbasedonoverallcompetence,improvementincompetencescores,orcompetencecomparedtothatofotherHRprofessionalsinagroup.

DevelopmentofHRProfessionalsTobuildthetalentsofitsHRprofessionals,afirmcanuseanynumberofinternalandexternaltrainingprograms,aswellasspecificdevelopmentexperiences.In-houseprogramsgenerallyareattendedbyalargepercentageoftheHRcommunity.Theymayrangefromone-dayworkshopstotwo-weekseminars.Table7-3showstheprototypicaldesignforaone-weekseminar.Asthetableindicates,programstypicallyincludemodulesonbusinessstrategy,HR’srole,strategicHR,bestHRpractices(staffing,development,measuresandrewards,organizationdesign,communication),consultingorchangeskills,andinteractionswithlinemanagers.

Severalcompanieshavedevelopedtheirowninnovationstothisbasicdesign.Forexample,EastmanKodak’sHR-developmentprogramconsistedoffiveone-daysessionsspreadovereightweeks.Eachparticipantwasaskedtobringaclient(eitheralinemanagerservedbyageneralistoranHRgeneralistservedbyanHRspecialist)totheafternoonofthefirstdayandtotheclosingsessiononthefifthday.Ondayone,participantsaskedtheir

clientstolisttheirexpectationsofHRprofessionalsatKodak.ThisactivitygeneratedfeedbackaboutwhatclientswantedandwhatHRcouldprovide.Onthelastafternoon,clientsreturnedandmetagainwiththeirHRprofessional.Duringthisencounter,theyformedacontractaboutexpectations,standards,anddeliverablesforthefuture.

Asanotherillustration,GeneralElectricranatwo-weekHRprogram.Priortotheprogram,thethreeseniorHRexecutiveswhosponsoredthecourseprovidedtheprogramcoordinatorwithabusiness/HRchallengetheywerecurrentlyfacing(e.g.,teamrewards,globalorganization,productcycletime).Duringtheprogram,participantsformedteams,whothenvisitedtherelevantsponsoringHRexecutive,collecteddata,formedrecommendations,andprovidedadviceonhowtoresolvetheproblem.Inthisvividexampleofactionlearning,participantsappliedtheirknowledgetorealissues.Moreover,inthisprogram,seniorHRexecutivesandtheirline-managerclientsoftenmadejointpresentations.Theseteampresentationsprovidedparticipantswithrolemodelsandpracticalexamplesofline/HRcoordination.

Othercompanyexamplesrevealtherichnessoftheseprograms.AtDigitalandAmoco,forinstance,HRprofessionalsreceivedasequentialdevelopmentexperience.Inbothcompanies,thefirstweekoftrainingfocusedonstate-of-the-artHRpractices.ThesecondweekemphasizedstrategicandbusinessthinkingasitappliedtoHR.Inbothcompanies,thecoursesponsorwastheseniorHRexecutivewhoattended,presentedhisvisionofHR,andansweredquestions.GeneralMills,foritspart,askedparticipantstodoa360-feedbacksessionontherolesofHRbeforeattendingtheprogram.Duringtheprogram,thisdatahelpedparticipantstoidentifyHR’sstrengthsandweaknessesandarriveatspecificactionitems.AtSaudiAramco,anHR-rolesurveywasadministeredtoclientsandparticipantsandthenusedasabenchmarkforHRquality.Sixmonthsaftertheprogram,thecompanymeasuredprogressbyreadministeringthesurveytoclientsandparticipants.

Table7-3PrototypeofaOne-WeekHRSeminar

Day1 Day2 Day3 Day4 Day5A.M. Welcomeby

seniorHRexecutiveBusinesschallengesHRvision

StrategicHR:turningbusinessgoalsintoHRpriorities,withafocusonsharedmind-setandorganizationdiagnosis

HRbestpractice:measuresandrewards

BeingachangeagentorconsultantinHR:learningandapplyingachangemodel

Personalleadership:buildingcredibility

P.M. HRrolesanddeliverablesCompetenciesforHRprofessionals

HRbestpractice:staffinganddevelopment

HRbestpractice:organizationdesignandcommunication

MeasuringHReffectiveness

Actionplanningforthebusiness,theHRfunction,andtheindividualMakingcommitmentstoact

InadditiontointernalHR-developmentopportunities,numerousexternallearningopportunitiesexist.TheseprogramsmayemphasizegeneralHRknowledgeortechnicalskills.Forexample,WorldatWorkoffersprogramsoncompensationtrends.Theymaybeofferedthroughassociations,universities,consultingfirms,consortia(e.g.,CornellUniversity’sSchoolofIndustrialandLaborRelations),orpublicofferings(e.g.,theUniversityofMichigan’sHumanResourceExecutiveprograms).13Theseexternalprogramsparallelcloselytheinternalprograms,excepttheyallowparticipantstoexperiencehowothercompaniesdealwithsimilarissues.Forexample,inarecentMichigantwo-weekHRexecutiveprogram,theforty-twoparticipantswerefromtwelvecountries,variedindustries(consumerproducts,financialservices,utilities,hightech),anddifferentfirmcultures.Theparticipantswereabletoseehowacoresetofprinciplesappliedtoeachuniquesetting.Theywerealsoabletolearnfromeachother.Forexample,anumberoftheparticipantshadbeenthroughmergersandacquisitionsanddistributedtotheentireclasstheir“HRduediligence”checklistinpre-andpost-mergeractivity.Thefivecheckliststhatweresharedallowedparticipantswhohadnotbeendirectlyinvolvedinamergertolearnfromothersandcreatetheirownchecklistifrequiredfortheirbusiness.

Finally,HRprofessionalscanalsodeveloptheirskillsthroughspecificassignmentsandexperiences.Forexample,atPPGIndustries,topleadersbelievethatthecompany’sHRprofessionalscanbuildcriticalcompetenciesthroughon-the-jobresponsibilitiesandexperiences,throughclassroomexperience,orboth.Table7-4showsPPG’sdevelopmentguidelinesaccordingtothefollowingtimeframes:firstyear,2to4years,and5to9years.ThiscompanybelievesthathoningtheindicatedcompetencieswithinthesetimeframesisthejointresponsibilityoftheindividualHRprofessionalandhisorhersupervisor.(PPG’stimeframesareprovidedasaguideandmightwellvaryinotherfirmsbasedonindividualandorganizationalcircumstances.)

Table7-4PPGIndustries’DevelopmentGuideforHRProfessionals

Function FirstYear 2–4Years 5–9YearsRecruitingandselection •Selectiontechniques •Collegerecruiting

•Nonexempthiring•Reductionsinforce

•Internalconsultingonstaffingandstructure•Hiringexperiencedprofessionals

Traininganddevelopment •Qualityprocesstraining•Corporatetrainingandeducation

•Programdevelopmentandpresentation•Meetingleadership•Teammanagement,empowerment,self-directedworkteams,etc.•Trainingofoperatorsandmaintenancepersonnel

•Leadershiptraining•Individualdevelopmentplanningprocess

Compensationandbenefits •Benefitprogramcontent•Corporatebenefits•HRIS/PCtraining

•Jobdescriptionpreparation •Jobevaluationandcompensationadministration

Laborandindustrialrelations •“Floor”skills •Contractadministrationandgrievanceinvestigation•Preventivelabor-relationspractices

•Arbitration•Negotiationpreparationandparticipation•Laborrelations(NLRB)process

•Strikepreparation

Personneladministrationandsystems

•Policyandadministration•Regulatoryareas(EEO/AAP,ADA,WageandHour)

•Recognitionsystems•Workforcediversityissues•Compliancereviewsanddiscriminationcharges

•Performancemanagementandappraisalsystemsandpractices

Safety,health,andenvironment

•OSHAandworkers’comp•Plantoperationsandoperatinghazards

•AmericanswithDisabilitiesAct •Securityissues

Communications •Employeepublicationsandmeetings

Governmentandcommunityrelations

•Communityrelationsinitiatives •Governmentrelationspractices

Businessmanagementskills •Budgetingandfinancialreporting•Businessstrategyandplanningprocess

GeneralElectricisanotheraptexample.ThiscompanyhasidentifiedtwentydevelopmentalexperiencesthatitconsidersimportantforbuildingHRcompetency(seesidebar“GE’sHR-DevelopmentOpportunities”).AsGEseesit,HRprofessionalscanhonetheirtalentsthroughjobassignments,jobrotation,task-forceassignments,andnetworkingwithothermanagers.Inadditiontothesedevelopmentexperiences,GEhaspreparedareadinglisttoreinforcespecificdevelopmentactivitieswithworkfromleadingHRtheoristssuchasChrisArgyris,RichardBeatty,WayneBrockbank,LeeDyer,EdwardLawler,GeorgeMilkovich,JeffreyPfeffer,andCraigSchneier.

SUMMARY:NEWPROFESSIONALCOMPETENCIES

ThisbookbringssomenewperspectivesandmethodologiestothemostpressingproblemsfacingHRmanagers.WebelievethattheideasexploredhereinareespeciallyappropriateatthispointinthedevelopmentoftheHRprofession.Specifically,wefeelconfidentthattheseperspectivesandtoolswillhelptomovetheprofessionalongtheexcitingandrapidlychangingcourseithastakeninrecentyears.Inthischapter,wearguethatifHRprofessionalsaregoingtosuccessfullynavigatethisnewcourseandtakefulladvantageoftheideasinthisbook,theywillhavetobroadentheirprofessionalcompetenciestoincludewhatwecallstrategicperformancemanagement.However,theotherfivedimensionsofHRcompetencydiscussedearlierarealsoessentialforHRtoserveasalegitimatestrategicpartner.PairedwithanunderstandingofhowtomanagetheseHRcompetencies,thissix-dimensionmodelcanserveasadevelopmenttemplateforHRprofessionalsinthefuture.

GE’SHR-DEVELOPMENTOPPORTUNITIES

1.Employee-relationsproblem-solvingassignment

2.HR-generalistassignment

3.Technical-specializationassignment

4.Organization-effectivenessinterventionexperience

5.Process-consultingexperience

6.Community-relationshipexperience

7.Stretchjobassignment

8.Exposuretoglobalissues

9.Staffassignment

10.Cross-functionalexperience

11.Fix-itassignment

12.Start-upassignment

13.Large-scalechangeeffort

14.Organization-structuringassignment

15.Corporateassignment

16.HRfunctional-leadershipassignment

17.Business-teampartnershipexperience

18.Business-leadersupportassignment

19.Exposuretorolemodels

20.Extendedprofessionalnetwork

8

GUIDELINESFORIMPLEMENTINGANHRSCORECARD

DEVELOPINGANHRSCORECARDandactuallyimplementingonearetwodifferentthings.AsourcolleagueSteveKerrpointsout,anychangeefforthastwogenericelementsdefinedbythisequation:

EffectiveChange=QualityxAcceptance(orEC=QxA).

Qualitymeansthatthetechnicalaspectsofthechangehavebeenclearlydefined.Inthepreviouschapters,wedefinedthetechnicalelementsofanHRScorecard.WeshowedyouhowtheScorecardmustlinktoyourfirm’sstrategy,becongruentwiththecompany’sHRarchitecture(HRfunction,HRsystems,andemployeebehaviors),andpassvalidityandreliabilitytests.Howeverahigh-qualityHRScorecardisnotenoughtoensuresuccess.Withoutacceptance,thischangeeffortmightbeginwithenthusiasmandexcitementbutwillquicklyfizzleout.

ThischapterexplainshowtobuildtheacceptanceelementofyourHRScorecard,thatis,howtobedisciplinedinapplyinglessonsofchangemanagementtotheimplementationoftheBalancedScorecardyoudevelop.ItserveslessasaroadmaptowhatisontheScorecardandmoreasaguidetoimplementingtheScorecard.ThischaptergivesthosechargedwithimplementinganHRScorecardablueprintforaction.

GENERALLESSONSOFCHANGE

Mosteffortsatchangefallshortoftheirgoals.AsPeterSengeandhiscolleaguesreport,manyoftheireffortstocreatelearningorganizationsdidnotaccomplishtheintendedresults.1RonAshkenaswritesthatonly25to30percentofchangeeffortsactuallysucceed.2JamesChampysharessimilarfindingsabouthisworkonreengineering,reportingsuccessratesofabout25to33percent.3Clearly,interventions—nomatterhowwellintentionedandcarefullythoughtout—arefarmoredifficulttoputintoactionthanwemaythink.

Likewise,wehavevisitedmanycompaniesthatbelievethatHRmeasurementmattersandthatgenuinelywanttocreateanduseanHRScorecard.Oftenthesecompaniesexpressenormousinitialinterestinthisapproach,conductaworkshoportwoabouthowtouseScorecards,begintosortoutwhichHRmeasuresmattermost,andtrackthemonceortwice.Soon,however,theydiscoverthatthecommitmenttotheHRmeasurementworkwasmorerhetoricandhopethanrealityandaction.Inmostcases,the“Q,”ortechnicalaspect,oftheScorecardismanageable.(Executivescanidentifytherightmeasuresandcreateindicestoassessthem.)Buthigh-qualitythinkingabouttheHRScorecardasachangeprogramneveroccurs.Thesecompaniesfailtoapplychange-managementlessonstotheirimplementationoftheScorecard.

Muchhasbeenwrittenabouthowtoensurethatdesiredchangesactuallyhappen.InworkatGeneralElectric,SteveKerr,DaveUlrich,andtheircolleaguesdrewonanaptmetaphorforeffectingsuccessfulchange.Theysuggestedthinkingaboutchangeasapilot’schecklist.Anypilotpreparingforaflightrigorouslyfollowsachecklisttoensurethattheaircraftisreadytofly.Thischecklistisnotmeanttobeateachingtool.Indeed,mostofuswouldrefuseeventoclimbintotheairplaneifwediscoveredthatthechecklistwasteachingthepilot.Inotherwords,thechecklistshouldcontainfewsurprises.Inaddition,thepilotshouldcompleteeachandeveryactiononthelist,withoutfail,everytimesheorhepreparestogoforaflight.Likeseasonedpilots,mostmanagersknowfrombothexperienceandresearchhowtomakechangehappen.Thechallengeistofigureouthowtoturnwhattheyknowintowhattheydo.AtGeneralElectric,KerrandUlrichcreateda“pilot’schecklist”formakingchangehappenandthenhelpedmanagersdeveloptheequivalentofapilot’sdisciplinetoapplythischecklisttochangeprojects.

JeffreyPfefferandRobertSuttonpickeduponthisthemeintheirworkon

avoidingthe“smarttrap”(thisveryproblemofnotknowinghowtotranslateknowledgeintoeffectiveaction).4ToavoidthistrapahumanresourceexecutivewhowantstoimplementanHRScorecardshouldrigorouslyfollowachangechecklist.ThiswillincreasedramaticallytheprobabilitythatthecompanywillnotonlydesignbutalsousetheScorecard.

Ofcourse,extensivedebatehasarisenonhowtodefinethecriticalfeaturesofsuccessfulchange.DouglasSmithidentifiestencharacteristicsofchangeleaders;JohnKottersuggestseightkeystosuccessfulleadershipofchange;MichaelBeer’schangemodelfeaturesfivecorefactors.5Butwewouldarguethatusingachecklist—anychecklist—ismoreimportantthanchoosingoneparticularchecklistoveranother.Troubleinimplementingchangecomesnotfrommisunderstandingwhattodo,butfromalackofdisciplineabouthowtodowhatneedsdoing.

BecausewehavehadexperiencewiththechangechecklistusedatGeneralElectric,let’susethislisttosketchoutsomeguidelinesforcreatingandsustaininganHRScorecard.6AteamofinternalandexternalchangeagentsdesignedtheGEchangechecklist.7Theyreviewedmorethan100articlesandbooksonindividual,team,organizational,andsocietychangeandthensynthesizedthefindingsintosevenkeyfactors.Thesefactorshaveconvergentvalidityinthattheyareconsistentwiththeresearchonotherchangemodels;infact,theyaredrawnfromthem.Moreover,thesefactorshavefacevalidity—inotherwords,managersatGEhaveconfirmedthatthesefactorshelpmakechangehappen.Finally,thefactorsalsohavedeploymentvalidity.Theyhavebeenusedintheirpresentoradaptedformforthousandsofchangeprojectsathundredsofcompanies.Table8-1showsthesesevenfactorsandtheirdefinitions.8

Thesevenfactorsintable8-1havebeenappliedinmultiplesettingsandthusoffersomegenerallessonsforsuccessfulimplementationofanHRScorecard.First,theorganizationmustattendtoallsevenfactorsinorderfortheScorecardtosucceed.TheprocessofinitiatingandsustainingtheScorecardmaybeiterative,thatis,youmayneedtocyclebackthroughsomeoftheearlierstepsseveraltimes.But,ingeneral,theprocessunfoldsinthesequenceshowninthetable.

Second,youcanusethesefactorstocreateaprofileofyourfirm’spresentcapacityforchangeonanygivenproject,notjusttheHRScorecard.Youcangeneratethisprofilebyscoringtheextenttowhicheachofthesevenfactorsexists,usingarangeof0through100,andplottingthosescoresasshowninfigure8-1.Werecommendthatchangeleadersroutinelyassesstheprogress

theyaremakingoneachofthedimensionsofthechangeprocessusingasimpleprofilingsystemsuchastheoneillustratedinfigure8-1.Duringtheplanningphase,theprofilecouldbeusedtoinventorythestrengthsandweaknessesofyourcompany’scurrentchangeprocess.Whenyouconsiderpastchangeefforts,wherehasthecompanybeenparticularlyeffectiveandwherehavethoseeffortsfallenshort?Thiswillgiveyouachancetoconcentrateonthoseareaswhereremediationisrequired.

Table8-1KeysandProcessesforMakingChangeHappen

KeySuccessFactorsforChange QuestionsforAssessingandAccomplishingChange1.Leadingchange(whoisresponsible) Dowehavealeader…

•whoownsandchampionsthechange?•whodemonstratespubliccommitmenttomakingithappen?•whowillgarnerresourcestosustainit?•whowillinvestpersonaltimeandattentiontofollowingitthrough?

2.Creatingasharedneed(whydoit) Doemployees…•seethereasonforthechange?•understandwhythechangeisimportant?•seehowitwillhelpthemand/orthebusinessintheshortandlongterm?

3.Shapingavision(whatwillitlooklikewhenwearedone) Doemployees…•seetheoutcomesofthechangeinbehavioralterms(thatis,whattheywilldodifferentlyasaresultofthechange)?•getexcitedabouttheseoutcomes?•understandhowthechangewillbenefitcustomersandotherstakeholders?

4.Mobilizingcommitment(whoelseneedstobeinvolved) Dothesponsorsofthechange…•recognizewhoelseneedstobecommittedtothechangeforittohappen?•knowhowtobuildacoalitionofsupportforthechange?•havetheabilitytoenlistthesupportofkeyindividualsintheorganization?•havetheabilitytobuildaresponsibilitymatrixtomakethechangehappen?

5.Buildingenablingsystems(howwillitbeinstitutionalized)

Dothesponsorsofthechange…•understandhowtosustainthechangethroughmodifyingHRsystems(e.g.,staffing,training,appraisal,rewards,structure,communication)?•recognizethetechnologyinvestmentrequiredtoimplementthechange?•haveaccesstofinancialresourcestosustainthechange?

6.Monitoringanddemonstratingprogress(howwillitbemeasured)

Dothesponsorsofthechange…•haveameansofmeasuringthesuccessofthechange?•plantobenchmarkprogressonboththeresultsofthechangeandtheimplementationprocess?

7.Makingitlast(howwillitbeinitiatedandsustained) Dothesponsorsofthechange…•recognizethefirststepsneededtogetstarted?•haveashort-andlong-termplantokeepattentionfocusedonthechange?•haveaplanforadaptingthechangeovertimetoshiftingcircumstances?

Forexample,theexperiencereflectedinfigure8-1isprobablytypicalofmanycompanies.Thereisareasonablyenthusiasticcadreofchangeleaders,buttheyareonlymodestlysuccessfulatcreatingasharedsenseofurgencyaroundtheneedforchangeandcommunicatingacoherentvisionofthefutureifthechangeissuccessful.Thechangeleadersunderstandtheneedforchangeandwhatthefuturemightlooklike,buttheyhaven’tbeeneffectiveatarticulatingthatvisiontotherestoftheorganization.Becausethefoundationalelementsarenotaseffectiveastheyshouldbe,therestofthechangeprocessisundermined.Itisverydifficulttomobilizecommitmenttochangeoutsidethecoregroupbecausethemessageforchangeisnotpersuasive.Asaresult,thereislittlesupportforchangingotherinstitutionallevers,suchasrewardsystems,thatwillreinforceandprovidemomentumforchange.Notsurprisingly,therearenoearlysuccessestodemonstrateprogress,andultimatelythechangeeffortneverreallytakesholdandbecomesjustanother“flavorofthemonth.”Recommendationsforsuccessfullyaccomplishingeachofthestepsintheprofilearesummarizedin

table8-2.

Figure8-1ProfilingtheChangeProcess

RATETHEQUALITYOFYOURCHANGEEFFORTONEACHDIMENSION.

Third,thechangechecklistprovidesadisciplinedapproachtomonitoringthekeyfactorsthatneedmoreattention.Forexample,inmanyHRmeasurementinitiatives,thereasonforusingthemeasurementiscleartoabroadrangeofpeople(thatis,theneedisalreadyhigh),butthevisionofwhatthemeasurementwillentailisvague.Inthesecases,insteadofrollingoutspeeches,conferences,andworkshopsabouttheneedforthemeasurement,theorganizationwouldbewisertofocusonclarifyingandcommunicatingthevisionbehindtheHRScorecard.

Finally,thechangechecklistcanserveasapowerfulnewlanguagefortalkingabouthowthecompanymightactuallyimplementitsHRScorecard.Toillustrate,atGeneralMills,humanresourceprofessionalswhoworkaschangeagentshelptheirclientsthroughtheprofilingexerciseshowninfigure8-1onanarrayofinitiatives.Indoingso,theyfamiliarizethesemanagerswithanewwaytothinkaboutanddiscusschange.Theycanthentalkwiththeseclientsabouthowtoensurethatgoodideastranslateintoeffective,enduringchange.

APPLYINGCHANGEMANAGEMENTLESSONSTOTHEHRSCORECARD

WhenacompanyconceivesofitsHRScorecardasaninitiativeorproject,itcanapplyeachofthesevenfactorstoimprovetheproject’schances.Let’slookatsomehintsforhowtomanageeachfactor.

Table8-2GuidelinesforImplementinganHRScorecard

ChangeChecklistItem

GuidingQuestionsforChangeSponsors

SuggestedGuidelinesforImplementation

1.Leadingchange Whoisinchargeoftheeffort?Whosponsors?Whochampions?

1.Needtwosponsors(linemanager,headofHR).2.Requiremeasurementchampion:someonespecializinginHRmeasurement.3.Needadvisoryteamtosupervisework.

2.Creatingasharedneed WhydotheHRScorecard?Howdoesitfitwithourbusiness?

1.CreatebusinesscaseforHRandforHRmeasurement.2.SharethiscasewithlinemanagementandHR.3.Allocate3to5%ofHRbudgettomeasurement.

3.Shapingavision WhatisthedesiredoutcomeoftheScorecard? 1.DefinedesiredoutcomesoftheHRScorecard.2.Preparethekeymeasuresthatwillbetrackedandmonitored,andclarifyhowtheywillbetracked.3.Definedecisionsthatwillbemadeusingthesemeasures.4.Createamechanismtocollectthedatabehindthemeasures.

4.Mobilizingcommitment Whoneedstosupporttheproject? 1.Identifykeyplayerswhosesupporttheprojectrequires.2.Figureouthowtoengagethesekeyplayerssotheywillsupportit.

5.Buildingenablingsystems Howdowebuildsystemstosustainthechange? 1.Puttherightpeopleontheproject.2.Ensurethatwehavetherightincentivestodoit.3.MakesurethattheHRmeasurementgroupreportstotherightpeople.4.CreateacommunicationplanforHRmeasurement.5.InvestintechnologyrequirementstoexecutetheHRScorecard.6.Makethefinancialinvestmentsrequired.

6.Monitoringanddemonstratingprogress

Whatwillweusetotracktheimplementationprocess?

DevelopaprojectplanforHRmeasurement.

7.Makingitlast Howwillwesustaintheeffort? 1.Startwithsimplemeasures.2.Makethemeasuresvisibleandapplicable.3.Postthemeasures.4.Changethemeasuresovertimeifrequired.

LeadingChangeChangeismorelikelytohappenwhenleaders—intheformofsponsorsandchampions—supportit.Asponsoradvocatesforthechange,seesthevalueinthechange,andcommitsresourcestomakingthechangehappen.Often,anHRScorecardhastwosponsors.TheprimarysponsorisgenerallytheheadofHR.ThisindividualcallsforanHRScorecard,assignsataskforcetotheinitiative,ensuresthattheScorecardalignswithbusinessstrategy,andallocatesresourcestothetaskforce.

AtGTE,executiveVPforHRRandyMacDonaldactivelysoughtthebuy-inofothersandheldthemaccountableforperformance.HeemphasizedthattheintentoftheHRScorecardwastodevelophighlyeffectiveprocessesinHR,ratherthantoidentifypoorperformers.Asthechangeleader,hemodeledacommitmenttodeliverthebestpossibleservicetoGTEemployees,thecustomersofHR,aswellastoincreasethevalueofHRtothebottomline.MacDonaldwasabletousetheHRScorecardtodrivethevaluepropositionofHRwithinthebusiness.Hedidn’tjusthaveaseatatthetable;hehadinfluenceonstrategicplanningforthebusiness.Inthisway,seniorexecutivesupportoftheperformancemeasurementinitiativewaskeytothesuccessfulrolloutofGTE’sHRScorecard.

Thesecondarysponsorisoftentheheadofthebusinessorofadivision.ThispersonishighlyfocusedonhowthecompanycanaccomplishitsbusinessstrategiesandunderstandstheimportantrolethattheHRarchitectureplaysinstrategyimplementation.Sheorheknowsthatmeasuringafirm’sHRarchitecturewillimprovethefirm’schancesofachievingitsgoals.Moreover,thesecondarysponsorisconcernedaboutthewiseinvestmentofHRresources.Giventhescarcityofresources—inmarketing,productdesign,oremployeedevelopment—thatmanyorganizationsface,awisebusinessleaderusestheHRScorecardtodeterminehowmuchtoinvestintheHRarchitecture.ThissponsorencouragestheHRScorecardinitiative,usestheinformationcollectedtomakedecisionsandpublicstatementsabout

thebusiness,andholdsotherlinemanagersaccountablefordeliveringontheScorecard.

ThechampionfortheScorecardhasprimaryresponsibilityformakingithappen.ThispersonisgenerallyaseasonedhumanresourceprofessionalwithaccountabilityforthedevelopmentofHR.ThechampionoftenformsateamortaskforcetocreatetheScorecard.SometimesthechampionisresponsibleforotherHRstaffareas.Forexample,atGeneralMills,thechampionisalsotheheadofcompensationforthecompany.AndatPrudential,thechieflearningofficerhastakentheleadroleinthecompany’screationofanHRScorecard.AtGTE,thechampionisthedirectorofHRPlanning,Measurement,andAnalysis.Atothertimes,thechampionischargedprimarilywith“HRforHR,”applyingHRlessonstotheHRfunction,andisresponsibleforgovernanceofHRaswellastheScorecard.

Thechampionlikelydedicatesatleast20percentofhisorhertimetothecreationoftheScorecard.HeorsheoftenassemblesateamcomprisingHRprofessionalsfromcorporatestaffandbusinesslines,businessleaders,andfinanceoraccountingstaffgroups.ThisteambuildsthebusinesscaseforHRmeasurement,craftstheHRscorecard,andoverseesitsapplication.Thechampionrequiresthestrategyperformancecompetenciesoutlinedinchapter7.HeorshereportsfrequentlytotheseniorHRteamaboutprogressontheScorecard,tracksearlyadopterstoassesssuccessesandfailures,andadaptstheScorecardtouniquebusinessrequirements.

CreatingaSharedNeedforChangeChangeismorelikelytohappenwhenaclearreasonforitexists.Moreover,thereasonforthechangehastocarrymoreweightthananyresistancetothechange.Thereasonforachangemayberelatedtodanger(“we’reintroubleifwedon’tchange”)oropportunity(“goodthingswillhappenifwedochange”).Anychangeeffortalsooffersbothshort-andlong-termimpact.Itisimportanttosharethereasonsforchangewiththosewhowillbeaffected.

CreatingasharedneedforanHRScorecardrequiresunderstandingtheimportanceofHRmeasuresandhowthesemetricssupportthebusiness’sstrategyimplementation.InvestinginHRmeasurementbecauseothercompaniesaredoingitorbecauseitispopularwillnotmaketheScorecardsustainable.Aswe’vediscussedthroughoutthisbook,HRmeasurementmustbelinkedtobusinessresults.TheHRScorecardchampionshouldthusbeable

toarticulatethepotentialoutcomesofinvestmentintheinitiative.TheseoutcomesmightincludebetterallocationoftimeandmoneyspentonHR,ahigherprobabilityofimplementingthefirm’soverallstrategy,moreproductiveandcommittedemployees,amorecompetitiveorganization,andincreasedshareholdervalue.Sometimes,pointingtotheneedforanHRScorecardmeansasking,“Howdoweknowifwe’vedoneagoodjobinHR?”WithoutaScorecard,thisquestionoftenpromptsvagueanswersbasedonrespondents’personalexperienceandassumptionsaboutwhat“good”means.AnHRScorecardgivescontextandconcretenesstotheseassumptionsandpersonalperceptions,andanchorstheminharddata.

GarrettWalkernotesthatGTE’smotivationtodevelopanHRScorecardwasprimarilydrivenbyacceleratingchangesinitsbusinessenvironment.Deregulation,theTelecomAct,emergingcustomerneeds,globalopportunities,pricecompetition,andmultinationalreachwerecreatinganewcompetitivelandscapethathighlightedanewemphasisonhumancapitalandanewfocusforHR.AccordingtoWalker,

Theseniormanagementteambelievedthatthecompetitiveabilityoftheirworkforcewasacriticalfactorindeterminingtheirabilitytocompeteeffectively.Inresponsetothissituation,wedevelopedaHumanCapitalStrategythatfocusedonmatchingemployeecapabilitieswiththeneedsofthebusiness.Thekeyelementsofthisstrategyfocusedontalent,leadership,workforcedevelopmentandcustomerservice.Wehadagoodmissionstatementandvision,anexcellentstrategyandnoquantitativewayofmeasuringhoweffectivewewereatexecutingonthestrategy.SimplyspendingmoneyandbeingbusywerenotpartofthearchitectureofsuccessforHRinourcurrentbusinessenvironment.Weneededawaytofocusonperformance,clarifyvisionandreinforcebusinessstrategywhileallowingforlearningandchange.9

InclarifyingtheneedtoinvestinanHRScorecard,championsshouldavoidsomecommonpitfallsthatwillcreateresistancetoit.Forexample,iftheScorecardmeasuresonlypartofHR’seffectiveness,itmayleavelinemanagerswithdistortedviewsofhowvalueiscreatedintheorganization.Thesedistortedviewscaninturnpromptunwisedecisions.OnecompanybuiltaScorecardbasedprimarilyonemployeeproductivityandefficiencyindices(e.g.,revenue/employee,laborcosts/revenue,andhead-count/margin).Managersinthissalesorganizationthusfocusedonemployeeefficiency,notcompetence.Accordingly,theydecidedtoreduceheadcountinordertocontrollaborcosts.Asitturnedout,theirlackofattentiontothequalityofthe

peopleonstaffultimatelyhurtthebusiness.Why?Becausemoreseasonedandexpensiveemployeeswouldhaveproducedmorelong-termrevenuethanthekindsofemployeeswhosurvivedthestaffreductions.AnHRScorecardchampioncanavoidthissortofpitfallbyusingmeasureswithamoreeffectivefocus.

ScorecardchampionsalsofacepotentialresistancefromHRprofessionalsthemselves.Asinanyotherfunction,someoftheseindividualsdon’twanttheirperformancemeasured.BeinginHRwithoutmeasurementcanbeasafe,nonthreateningcareer.Withmeasurementcomesaccountability,andsomeoftheseemployeesmaylacktheconfidenceorcompetencetobeaccountablefortheworktheyperform.AScorecardchampioncanovercometheirresistancethroughextensivetrainingandinvestmenttoensurethattheyhavethecompetenciestodeliveragainsthigherexpectations.

WiththetrendtowardoutsourcingmanyHRfunctions,measurementofeffectiveHRbecomesevenmoreimportant.Theshort-termefficienciesthatoutsourcingmayyieldmightnotbesustainableasthelonger-termcosts—suchassingle-sourcesuppliers,lackofparityinoutsourcedHRwork,andlackofuniquecapabilitieswithintheorganization—kickin.

Forallthesereasons,HRScorecardchampionsneedtobuildacogentbusinesscaseforinitiatingandimplementingtheScorecard.Skillfullycrafted,thisbusinessrationalewillinformlinemanagers,helpHRexecutivesmakesmartchoices,andguideandinspireHRprofessionalsthroughoutthefirm.

ShapingaVisionChangeisalsomorelikelytohappenwhentheoutcomeofthechangeisclearlyunderstood,articulated,andsharedinbothaspirationalandbehavioralterms.Aspirationsenergizeandexcitethoseaffectedbytheproposedinitiative’soutcome;definitionsofbehaviorscommunicateexpectedactions.Bothbecomepartsofasuccessfulvisionstatement.

ThevisionforanHRScorecarddefinesthedesiredoutcomesoftheScorecard,stateswhatwillbemeasured,anddescribesthedata-collectionprocess.ThedesiredoutcomesaretomakeinformedHRinvestmentchoices,identifyhigh-versuslow-impactHRpractices,documentrelationshipsbetweentheHRarchitectureandbusinessresults,andhelpimplementstrategy.Theseoutcomeshelplinemanagerstoaccomplishbusinessgoals

throughHR,andhumanresourceexecutivestogoverntheelementsoftheHRarchitecture.

AtGTE,HRprofessionalsrespondedtotheimperativesoftheNewEconomybyarticulatinganewvisionforHR.TheHRScorecarddevelopedbyGTE’sHRbothcommunicatesandreinforcesthatvisiontoallHRmanagers.GarrettWalkersummarizedthisvisionasfollows:

Weseetalentastheemergingsinglesustainablecompetitiveadvantageinthefuture.Tocapitalizeonthisopportunity,HRmustevolvefromaBusinessPartnertoacritical“assetmanager”forhumancapitalwithinthebusiness.TheHRScorecardisdesignedtotranslateBusinessStrategydirectlytoHRobjectivesandactions.WecommunicatestrategicintentwhilemotivatingandtrackingperformanceagainstHRandbusinessgoals.ThisallowseachHRemployeetobealignedwithbusinessstrategyandlinkeverydayactionswithbusinessoutcomes.10

Awell-designedHRScorecardcollectsandmonitorstheinformationneededtoachievetheseoutcomes.Inchapter3,wereviewedboththeadministrativeandvalue-creatingmeasuresthatmightmakeupanHRScorecard.TheHRScorecardteamshouldbeginbyidentifyingthebusinessstrategyoutlinedbytheorganization.Then,byselectingkeyitemsfromthechoicesavailableinchapter3,theteammaybeginconstructingtheScorecard.Aswe’veseen,theScorecardgenerallyincludesindicatorsforallthreecomponentsoftheHRarchitecture:employeebehavior,HRsystem,andHRfunction.Itshouldbeabletopassasimple,butrobusttest.Simplyaskyourselftwoquestions:TowhatextentdoesthisScorecardlinkHRperformancetofirmperformance?Wouldseniorlinemanagersdrawthesameconclusions?

MobilizingCommitmentChangeismorelikelytohappenwhenthoseaffectedbythechangearecommittedtoit.Commitmentcomeswhentheseindividualshaveinformationaboutthechangeprocess,participateinshapingtheprocess,andbehaveasiftheyarecommitted.Researchoncommitmentsuggeststhatwhenpeoplebehaveasiftheyarecommittedtoaninitiative,inapublicforumandbychoice,theyactuallybecomemorecommittedtotheinitiative.11

HRScorecardsrequirecommitmentfrombothlinemanagersandHR

professionals.Linemanagers’commitmentintensifieswhentheyseethealignmentbetweentheHRmeasuresandtheachievementoftheirownbusinessgoals.HRprocessesthusbecomeearlyleadingindicatorsofsuccessfulstrategyimplementationthroughouttherestoftheorganization.Linemanagers’commitmenttotheHRScorecardalsostrengthenswhentheyareheldaccountableforthemeasurestracked.Anorganizationinturncanencourageaccountabilitybytyingaportionofthemanager’ssalaryand/orbonustotheHRScorecard.AtSears,employeeattitudes,asmeasuredbyacommitmentsurvey,accountedfor33percentofmanagers’bonuses.Formanagerswhohadthepotentialtomakesix-figurebonuses,compensationlinkedtoindicatorsintheHRarchitecturecapturedtheirattentionandchangedtheirbehavior.Asanotherexample,onerestaurantchainbegantotrackaveragetenureofemployeesafternoticingthatfront-lineworkerseniorityseemedtocorrelatewiththequalityofservicethatcustomersreceived.Managersinthisorganizationwereheldaccountablefortheirrestaurantresultsandbegantohirepeoplewhowouldbemorelikelytostay.Thesemanagersalsofocusedonbuildingmorepositiverelationshipswithemployeesandsharpeningtheirretentionstrategies.

Attimes,merelymakingHRScorecarddatapublicbuildscommitmentfromlinemanagers.Oneconsumer-productsfirmwashavingtroublekeepingfuturebrandmanagers.Theleadershipteamdecidedthateachofthefifteenmembersoftheexecutivecommitteewouldbecomesponsorsoffivenewlyhiredpotentialbrandmanagersperyearforfiveyears.Overtime,eachofthefifteenseniorexecutiveshadtwenty-fiverelativelynewemployeeswhomtheymentored.Thisstrategyentailedmeetingregularlywiththeemployees,providingthemwithcareeradviceandcounsel,andpayingattentiontothem.Althoughthementoringprogramwasnotincorporatedintothefifteenexecutives’formalperformancereviews,themanagersprovidedannualreportsonhowmanyoftheirtwenty-fivechargesleftthefirmeachyear.Thisinformalpressurepromptedeachofthefifteenexecutivestoreachoutespeciallytothoseemployeeswhowouldmostlikelyleavethefirm.TheseexecutivesmadeasolidcommitmenttotheHRScorecardsimplybecauseitsimportanceandvisibilitywerecrystalclear.

HRmanagersalsomustbecommittedtotheScorecard.IftheitemsthatittracksarenotcentraltotheperformancemanagementoftheHRprofessional,thereisaproblemwitheithertheScorecardortheperformancemanagementprocess.WetestedthisassumptionwiththeheadofHRinahigh-techfirm.Weaskedher,“WhenyourCEOengagesyouinseriousconversation,whatissuesishemostworriedabout?”SherespondedthattheCEOwantedherto

helpattractthoughtleadersinthebusiness,buildthenextgenerationofleadershipforthefirm,andholdleadersaccountableforresults.WethenaskedhertoshowusherHRScorecardandpersonalperformancemetrics.Theymatchedthethreestrategiesthatshehadcited.Clearly,shewaspersonallyaccountableforwhattheCEOwantedfromherHRfunction.ThealignmentoftheCEO’sexpectations,theHRScorecardforherfunction,andherpersonalobjectivesensuredthatheractionsreflectedandsupportedthefirm’sgoals.

ThecommitmenttotheHRScorecardacceleratedatGTEasHRmanagerslearnedmoreaboutthebusinessstrategy,howittranslatedintoHRstrategy,andhowitultimatelylinkedtobusinessoutcomes.Usingstrategymapsandleadingandlaggingindicators,theywereabletohelpemployees“connectthedots”andthinkacrosstheorganizationandthebusiness.BycommunicatingbusinessvaluechainswhereHRactionsaresimplypartofthetransformationprocess,HRmanagerswereabletounderstandmorethantheirfunctionalsilos.Theycouldseethebigpicture.

Inspiteofthisattentiontochangemanagementissues,someresistanceisinevitable.GarrettWalkernotesthefollowing:

MuchoftheearlyresistancefromHRcamefromthereleaseofinformation.Informationispowerandlosingthatpowercoupledwiththepossibilityof“lookingbad”wasarealobstacleearlyon.However,eachquarterthattheScorecardwasinplacemoreinformationwasavailable.TheScorecardexposedHRmanagersaswellasbusinessleaderstoworkforceissuesoutsideoftheirexpertiseandillustratedlinkagestootherpartsofthebusiness.Now,HRprofessionalsandlinemanagersdiscussorganizationalandworkforceissuesoutsidetheirimmediateresponsibility.TheHRScorecardhascreatedadistinction,acommonlanguage,forcommunicatingcriticalhumancapitalissues.

WerolledtheentireHRScorecardoutatonce;however,wecommunicatedandpublishedinformationinaphasedapproach.WebeganwithseniorHRleadersandbusinessleaders,introducingthemtotheconceptsandmeasurementmodel.TheseniorHRleadersthencommunicatedtotheirorganizations.TosupplementhighlevelstaffbriefingstheHRScorecardteamprovidedon-sitebriefingstodepartmentsfocusingonlinkagesbetweenthedepartmentalactionsandbusinessoutcomes(causeandeffectmappings).Wealsohad“lunchandlearnsessions”whereinformalQ&AfromtheHRScorecardteamwassupplementedwithsuccessstoriesfromHR

practitionerswhohadusedtheScorecardtopositivelyimpactthebusiness.

TheScorecardwasalsoimmediatelytiedtoincentivecompensationatalllevelsoftheHRorganization.Thiswassomewhatcontroversialatthetime,butcertainlykepttheorganization’seyeontheball.Inhindsight,thisactioneliminatedmuchoftheresistancetotheScorecard.12

CommitmentfrombothlinemanagersandHRprofessionalsincreaseswhenafirmfrequentlytrackstheindicatorsontheHRScorecardandsharestheinformationopenly.Forinstance,abankcreatedanHRreportcardtomeasurethefirm’ssuccessatincreasingitsshareoftargetedcustomers.BysharingthereportquarterlyamongallHRprofessionalsandseniorlinemanagers,thefirmensuredthattheScorecardinfluencedbehavior.

BuildingEnablingSystemsChangeismorelikelytohappenwhenacompanymakesthefinancial,technological,andHRinvestmentsrequiredtosupportthechange.TheexperienceatInteloffersanaptexampleoffinancialsupportfortheHRScorecard.PattyMurray,thevicepresidentofHR,investsinongoingresearchtoidentifythekeyHRdriversofbusinesssuccess.ShehasanR&DfunctionthatischargedwithidentifyingwhichHRpracticesaremostcriticaltoIntel’sfuturesuccess.Forexample,asIntelmovedintotheInternetbusiness,Murray’sR&Dteamidentifiedthetalentsrequiredforthefirmtomakethisbusinesstransition.Theteamnotonlybuiltatalent-acquisitionstrategy,butalsodesignedmeasuresformonitoringthisstrategy.

HRScorecardsalsorequiretechnologicalinvestmentstosupportthecollection,tracking,anduseofdata.Cisco,forexample,gathersemployeeattitudedatathroughitsintranetWebsite.Organizationscanalsocollectsuchdatafromasubsetofemployeesmonthlyorquarterlyandthenquicklycodifyittoinformmanagersaboutemployeecommitmentinsubunitsthroughoutthefirm.Useofdata-collectionandanalysistechnologyensuresthattheScorecardremainstimelyandaccurate.

BuildingenablingsystemsalsomeansthattheresultsoftheScorecardneedtobecommunicatedwidelythroughoutthebusiness.GTEhasdevelopedawiderangeofintegratedtoolstocommunicateitsHRScorecardandtohelpmanagersmakegooddecisionsusingthedata.Attheheartofthissystemis

anintranetlinkedtoadatawarehouse.Previously,GTEhadseventy-fivedifferentinformationsystems,whichwerecombinedintoasinglesystemattheoutsetofthisprocess.Thissystemnowplacestimelyandrelevantdataonmanagers’desktops,whichtheycanaccessusingspecialsoftwarethatenablesthemtosetgoalsandtrackperformance.GTEhasalsodevelopedaninteractiveCD-ROMsimulationthatshowsmanagershowtousethesystemtoimprovetheirdecisionmaking.Finally,GTEhaspreparedawiderangeofreportsandbackgroundmaterial(availableinhardcopyorontheintranet)thatemployeescanaccessatanytime.

IntheGTEHRBalancedScorecardenvironment,therearedifferentmeasuresformajorfunctions,suchasstaffingforeachbusinessunit,whichareaccessibleviaInternettechnology.ThismakestheBalancedScorecardahighlyeffectivesystemforcommunicatingstrategicgoals.HRleaderscanviewavirtualbriefingbookontheirdesktopcomputersthatdisplaystheperformanceresultsforthekeypeformanceindicatorstheyaremostinterestedin.Iftheyhaveaquestionaboutameasureorresult,theycandrilldownbyclickingonittorevealmoreandmoredetail.Muchofthedetailcomesfromindividualemployees,whoenterdataandnotesaboutwhat’shappeningonthefrontlinesintoanHRScorecardsystem.Thesedesktopbriefingbooksalsotellthemhowtheirperformancematchestheirgoals.AccordingtoGarrettWalker,

TheHRBalancedScorecardhelpsourHRprofessionalsreactmorequicklyasawhole,fromtheexecutivesuitestothefrontlines.Evenmoreimportantinabusinessenvironmentofrapidlychangingmarketsandacceleratingtechnologyadvances,ithelpsmanagementteamsanticipateworkforceissuessotheycanplanratherthanreact.Inourpreviousbusinessenvironmentweoftenhadweekstomakedecisions.TheHRBalancedScorecardsystemallowsustorapidlyadjusttochangesaffectingourbusinessinrealtime.13

Inessence,GTEusesitsScorecardasateachingtoolandasakeymechanismforhelpingtoimplementitsstrategy.Andthelevelofresourcesandvisibilitydevotedtotheprojecthelptodemonstratethefirm’scommitmenttothemeasurementproject.TheendresultoftheseeffortsisamuchmoreeffectiveHRmeasurementsystemandconsiderablevisibilityfortheproject—bothinsideandoutsideofthefirm.AtGTE,theScorecardhashelpedtobuildinternalandexternalcredibilityforboththeHRfunctionandthefirmasawhole.

TheHRScorecardhasalsoprovedofconsiderablebenefitinfacilitating

GTEandBellAtlantic’srecentmergerintoVerizon.TheHRBalancedScorecardisanevolvingandhighlyvaluabletoolforboththeHRmanagementteamaswellasthebusinessleaders.ItskeyvalueinmergerintegrationwastopulltogethertheformerlyseparatemanagementteamsofBellAtlanticandGTE.GTEhumanresourcesreliedonacentralizedmodel,whichdeliveredHRproductsandservicesbyastrongcentralstaff.BellAtlantic,ontheotherhand,reliedonamoredecentralizedapproach.Thedifferencesinstyleandapproachnaturallygaverisetotugofwarsafterthemerger.

Intheearlydaysfollowingthemerger,theHRBalancedScorecardprovidedaprocessfortheVerizonhumanresourceleadershipteam(HRLT)tofocusoncommonobjectivesandthefutureofthenewbusiness.TheprimaryfocusoftheHRBalancedScorecardforumswastotranslatebusinessstrategyintoHRstrategyandactions.TheprocessallowedtheHRLTtoovercometheirdifferencesinmanagementstyleandcometogetherasateam.AsharedsenseofHRstrategyandfocusemergedfromtheearlymeetings.TheVerizonHRBalancedScorecardemphasizesacorecommonfocusonthecustomer,especiallytheneedtoimproveservice,toattractandretaintalent,andtoincreasevaluecreatedforthebusiness.

Buildingenablingsystemsalsomeanshelpingtocommunicatethefirm’sstrategymapandresultingHRScorecardtotheworkforce.Likemanyfirms,Searsfoundthatmanyemployeesdidnotcompletelyunderstandthecompany’sstrategy,businessenvironment,orevenkeybusinessprocesses.Searsrespondedbycommunicatingitsstrategytotheworkforcevia“townhall”meetingsandLearningMaps.14LearningMapsarelarge(forty-inch-by-sixty-inch)image-ladendepictionsofafirm’sstrategyorotherkeybusinessprocesses.Thefigureinthecenterofthemapissurroundedbyaseriesofquestionsandlearningobjectives,onwhichemployeesworktogetherinsmallgroupsinordertoincreasetheirunderstanding.Employeesthengobackintotheirworkgroupsandrepeattheprocesswithanewgroupofemployees.TheauthorsoftheSearsstudydescribetheprocessasfollows:

Thegoaloflearningmapsiseconomicandbusinessliteracy—butbusinessliteracyintheserviceofthelargergoalofbehavioralchange.Wewantmanagerstochangetheirbehaviortowardemployees,tocommunicatethecompany’sgoalsandvisionmoreeffectively,andtolearntomakebettercustomer-orienteddecisions,becausewecannotdowellfinanciallyunlesswedowellintheeyesofthecustomer.Wewantfrontlineemployeestochangetheirbehaviortowardcustomers—tobecomemoreresponsive,takemoreinitiative,andprovidebetter

service.15

SearshasdevelopedseveralLearningMapstodate,withmoreontheway.Thecompanyhasfoundthemtobeahighlyeffectivewaytocommunicatewiththeworkforce.Sears’smostrecentmap,“Ownership,”describestheirtotalperformanceindicators(TPIs)andshowsemployeeshowmeasurementcanhelpthemtocreatevalue.Usingthemetaphorofwaterrunningdownstream,the“Ownership”mapshowsnotonlythekeybusinessprocessesaroundWork,Shop,andInvest,butalsohowtheTPImetricsmapontotheseprocesses(seefigure8-2).

Finally,HRScorecardsrequireinvestmentsinhumanresourcesystems.HiringHRemployeeswiththecompetencieswesuggestedinchapter7,communicatingtheScorecardthroughouttheorganization,andweavingHRresultsintorewardandrecognitionsystemsallhelptosustaintheScorecard.SuchsystemsshouldensurethatHRmeasureschangebehaviorintherightways.Forexample,anHRScorecardcouldcollectdataonthecostofturnoverandthusshowtheimportanceofretention.Butifthesedataarenotusedaspartofamanager’sperformancereview(inwhichquestionssuchas,“Whatistheturnoverrateofkeypeopleinyourunit?”areasked),thenthedataisunlikelytochangebehavior.Or,ifthedataiscollectedbutmanagerswhohavehighturnoverareconsistentlypromotedtonewpositions,theHRScorecardwilllosecredibilityandimpact.AtSears,fullyone-thirdofamanager’sbonusislinkedtohisorherabilitytomanagepeople.Prudentialties20percentofmanagerialcompensationtoitsHRScorecard.ManyotherfirmsarebeginningtousetheleadingindicatorsembeddedintheirHRScorecardsasacomponentofmanagerialcompensation.

Figure8-2SearsTotalPerformanceIndicators

Source:ReprintedwithpermissionofSearsandRootLearning,Inc.

MonitoringandDemonstratingProgressChangeismorelikelytohappenwhenafirmmonitorsprogresstowardthechange.Wethusrecommendcreating—andstickingto—aplanforimplementingyourHRScorecard.Dividingtheplanintomilestonescanhelp;forexample:

•Namingthechampion.Thiswillbethepersonwhowillleadtheeffort,investtimeandenergyinit,andultimatelybeheldaccountableforsuccess.

•CreatingtheScorecardteam.TheteamwilllikelyincludeHRprofessionalsfrombothcorporateandfield,linemanagerswhobringthebusinessperspective,financialand/orstrategystaffwhoensurethatthemeasuresareconsistentwithcorporategoals,andpossiblyexternalexpertswhodrawonexperiencesfromothercompanies.

•Selectingtargetedmeasures.Basedontheprocessdescribedinchapter3,theScorecardteammaychooseappropriatemeasuresforallelementsoftheHRarchitecture.Thesemeasuresshouldbekeyedtothefirm’sstrategyimplementationplanandreflectinformedinvestmentinHRpractices.

•Validatingthemeasures.Hypothesizingtherightmeasuresandtestingtheirimpactonbusinessresultsrequiredifferentskills.Youcandosomehypothesistestingretrospectivelyifhistoricalmeasuresofyourfirm’sHRarchitectureandbusinessresultsexist.Forexample,Sears’sworkshowedrelationshipsamongemployeecommitment,customerloyalty,andfirmperformance,withtwentyyearsofhistoricaldatacollectedateachstore.Thisreservoirofdataletmanagerstestvalidmeasures.Othervalidationmaycomefrompilottests,wherebyyoucancollectdatafromlimitedsitestoensurethattheselectedmeasureswillsupportdesiredbusinessresults.

•Collectingdata.Onceyouvalidateyourmeasures,youcancollecttheHRdatayouneedtotrackkeyitems.Thesedatamaycomefromemployeesurveys,existingcorporatereports,orreportsgeneratedtotrackkeyindicators.

•Monitoringandupdatingdata.Asyoucollectdata,youcantracktrendstocreatealongitudinalHRScorecardthatwillhighlightpatternsandtrendsovertime.Withvaliddata,youcanthenassesstheimpactofHRandmakedecisionsaboutwhichHRinvestmentswillhelpimprovethefirm’sbusinessresults.

Dataneedtobeupdatedinaccordancewiththeirlevelofactualvariability.Relativelystabledatacanbeupdatedannually—morevariable(orurgent)attributesshouldbeupdatedquarterly,monthly,orevenweekly,asappropriate.

MonitoringyourprogressateachstageofcreatingandusingtheHRScorecardensuresthattheprojectunfoldsasplanned.PeriodicallyrevisitingtheScorecarditselfalsohelpsyouassesshowwellitishelpingyouimproveHRinvestmentdecisionsandhowwellitissupportingtheorganization’sstrategyimplementationefforts.

MakingItLastChangeismorelikelytohappenwhenachangeeffortgarnersearlysuccess,buildsincontinuouslearningaboutwhatisworkingandwhatisnot,adaptstochangingconditions,celebratesprogress,andcanbeintegratedwithotherwork.Todoallofthis,youmustmakeongoinginvestmentsinyourHRScorecard.Herearesomehintsformakingthescorecardlast:

ENSUREEARLYSUCCESSES

Manycompaniesfaceadilemma:Shouldtheyinvestindevelopingacomplete,fullyresearched,andcomprehensiveHRScorecardthattakesmonthstodevelop?Orshouldtheylimittheefforttojustthosemeasuresthatletthemevaluatecriticalcapabilitiesrightaway,basedonavailabledata?Wesuggestchoosingtheoptionthatletsyourackupsomeearlysuccesses,evenifthey’rerelativelysmallinscope.Forsomefirms,thismightmeanrunningsimultaneousexperimentstoidentifywhichHRdataexertthemostimpactonbusinessresults.Itmightalsomeanexperimentingwithvarioustrackingmethods(e.g.,shouldyoumeasureemployeecommitmentbyapulsecheck,retention,orproductivity?)andseeingwhichmethodbestpredictsbusinessresults.HavinginternalcasestudiesthatspecificallydemonstratewhichHRdatainfluencebusinesssuccessbuildscredibilityfortheentireScorecardprocess.

MAINTAININVESTMENTINTHESCORECARD

OncetheyestablishtheHRScorecard,theinitiativeteamshouldremainintact.AsthecompanycontinuestousetheScorecard,theseteammemberswillneedtocontinuetoupdateandmodifyit.Inaddition,thefirmshouldmakeregularinvestments,intheformofdatacollection,people,andmoneyinordertoensurethattheScorecardremainsrobust,uptodate,andrelevant.

INTEGRATETHESCORECARDWITHOTHERWORK

TheBalancedScorecardworksbecauseitmeasuresallthedimensionsrelevanttoafirm’ssuccess.Likewise,theHRScorecardshouldbeintegratedwithothermeasuresofmanagerialsuccess.Toillustrate,ameetinginwhichparticipantsexaminethelinksamongHR,customer,investor,andbusinessprocessmeasuresisfarmorevaluablethanoneinwhichattendeesfocusonlyonHRmeasures.ThemoreacompanycanintegrateitsHRScorecardwithexistingandongoingmeasurementefforts,themoresustainabletheScorecardwillbe.

LEARNFROMEXPERIENCE

Withanychangeeffort,youneedtoconductperiodiccheck-upstoexaminewhatisandwhatisnotworking.Likewise,makeacommitmenttoexamineyourHRScorecardefforteverysixortwelvemonths.Duringtheseassessments,theScorecardteamshouldanswerquestionssuchasthefollowing:

•WhathasworkedintheHRScorecardinitiativetodate?

•Whathasn’tworked?Whatexplainsanylackofsuccess?Weredatanotavailable,notcollected,nottiedtoresults,notmonitored,notpartofexistingmanagementpractices?

•Whatcanwedodifferently,basedonourexperiencessofarwiththisinitiative?

Asyouaddressthesequestionsonaregularbasis,theHRScorecardwillbecomeincreasinglyingrainedinthemanagementprocess.

SUMMARY:DOINGIT

HRScorecardsarenotpanaceas.TheywillnotcureapoorlyrunHRfunction.However,theydoprovideameansbywhichyoucancollectrigorous,predictable,andregulardatathatwillhelpdirectyourfirm’sattentiontothemostimportantelementsoftheHRarchitecture.Constructedthoughtfully,theHRScorecardwillhelpyourorganizationdeliverincreasedvaluetoitsemployees,customers,andinvestors.Byapplyingthesevenstepswesuggestinthischapter,youcanintegratethethinkingbehindtheHRScorecardintoeverykeyaspectofyourfirm’smanagement.

OurbookhaslaidoutthetheoryandtoolsforcraftinganHRScorecard.UsingtheseideasandtoolswillhelpHRprofessionalsbecomefullpartnersintheirfirms.WhilemuchoftheworkofanHRScorecardistechnical,thedeliveryoftheScorecardispersonal.ItrequiresthatHRprofessionalsdesiretomakeadifference,aligntheirworktobusinessstrategy,applythescienceofresearchtotheartofHR,andcommittolearningfromconstantexperimentation.WhenyoucreatetheHRScorecard,usingtheapproachwedescribe,youareactuallylinkingHRtofirmperformance.ButyouwillalsodevelopanewperspectiveonyourHRfunction,practices,andprofessionaldevelopment.Inmeasurementterms,thebenefitswillfaroutweighthecosts.

Appendix:ResearchandResults

THISBOOKISPREMISEDontheviewthatafirm’sHRarchitecturehasthepotentialtobecomeastrategicassetwithdirectbenefitsforthebottomline.WearguethatinadditiontoHRcontributiontotheoverallqualityofhumancapital,thebasisofthatstrategicinfluenceisthroughHR’salignmentwiththefirm’sstrategyimplementationprocess.Finally,weemphasizetheimportanceofanappropriatelyfocusedmeasurementsystemtoguideandevaluatethisstrategicHRrole.

RESEARCHONTHESTRATEGICIMPACTOFHR

Throughoutthe1990sMarkHuselidandBrianBeckerengagedinaprogramofresearchthathadseveraldefiningfeatures.First,itwaspremisedontheimportanceofHRsystemsratherthanindividualHRpractices.Second,ittookasgiventhat,forHRtobeastrategicasset,thoseHRsystemshadtohaveademonstratedinfluenceonthemeasuresthatmattertoCEOs,namely,firmprofitabilityandshareholdervalue.Byusingmeasuresofshareholdervalue,thisresearchwasalsouniqueinthatitfocusedonthelevelofthefirm,asopposedtoindividualemployeesorworkgroups.

ThefoundationofthisresearchefforthasbeenanongoingbiannualsurveyofHRsystemsbeginningin1992thattargetsabroadcross-sectionofpubliclytradedfirms:firmswithsalesgreaterthan$5millionandmorethan100employees.Thesedataarethenmatchedwithpubliclyavailableinformationonfinancialperformance.Todatewehavecollecteddataonmorethan2,800respondentsoverthecourseoffoursurveys.Whiletheresponserateforthesesurveyswastypicalforsuchresearch,averagingnearly20percent,it’sclearfromtableA-1thatourrespondentswererepresentativeofthemajorindustrygroupsinourtargetpopulation.

AsourunderstandingofthestrategicinfluenceofHRdeveloped,sodidthebreadthandcomplexityofourmeasuresoftheHRsystem.Theinitial1992survey(focusingonthe1991HRsystem)waslimitedtothe

fundamentalelementsofaprofessional,developedHRsystemdesignedtodevelopandmaintainahigh-performanceworkforce.Thesethirteenitemsmeasuredthepercentageoftheworkforce,bothexemptandnonexempt,thatwascoveredbysuchpoliciesasvalidatedselectionprocedures,promotionfromwithin,annualperformanceappraisals,merit-basedpromotions,incentivepayplans,hoursoftraining,andinformationsharingsystems.1

Thismeasurewasbroadenedconsiderablyforthe1994and1996surveys,whichwereexpandedtoincludetheextenttowhichfirmsuseddifferenttypesofincentivecompensationplans,thedegreetowhichHRandbusinessstrategieswerealigned,andhowwellthefirm’sstrategywascommunicatedandunderstoodthroughoutthefirm.Inaddition,wecollectedindicatorsonothercharacteristicsthatmightcomplementaHigh-PerformanceWorkSystem(HPWS).TheseincludedtheprofessionalcompetencieswithintheHRfunctionasreflectedintheireffectivenessacrossdifferentfunctionalactivities,aswellasseniorleadershipstylesthatemphasizemotivationandvision,ratherthancommandandcontrol.Finally,inthe1998survey,wefocusedonhowtwoothersystemsthatsupportstrategyimplementation(knowledgemanagementandbusinessperformancemeasurement)mightalsoleveragetheinfluenceoftheHRstrategy.

TableA-1IndustryDistributionofFirmPopulationandResearchSample

SICCode ShortIndustryTitleWeightedAverageofPopulation

WeightedAverage

ofResponse

000–999 Agriculture,Forestry,Fishing 0.2 0.11000–1999

MiningandConstruction 3.3 3.8

2000–2999

Mfg:Food,Tobacco,Chemicals,Printing 13.0 11.4

3000–3999

Mfg:MetalIndustries,IndustrialEquip.,Elect.,Transport

28.5 31.6

4000–4999

TransportationandPublicUtilities 10.5 10.1

5000–5999

WholesaleandRetailTrade 12.5 10.6

6000–6999

Finance,Insurance,andRealEstate 18.0 19.0

7000–7999

ServiceIndustries 8.9 8.3

8000–8999

Health,Legal,Social,andEngineeringServices 5.3 5.2

9000–9999

PublicAdministration 0.0 0.0

Totals 100.0 100.0

EachsurveyenabledustoconstructanHPWSindexthatmeasurestheextenttowhichafirm’sHRsystemisconsistentwiththeprinciplesofahigh-performanceHRstrategy.TheseindicesareadditivemeasuresacrosstheelementsoftheHRsystem.Thus,overthebroadmiddlerangeoftheindex,afirmcanincreaseitsindexvalueinanynumberofways,dependingonitscircumstances.However,wehavefoundevidencethatthebenefitsofthesesystemsincreaseasafirmimprovesitssystemacrosstheboard.Thisisconsistentwiththeimportanceofinternalfitwithinasystemsframework.Whilechangingsurveyformatshaveallowedustoexplorevariationsinthisindex,thecoreelementssupportinganHRstrategythatemphasizesemployeeperformancehaveremainedconstant.Theyalsoshowaconsistentrelationshipwithotherorganizationaloutcomesandsystemsthatwouldbepartofahigh-performanceculture.

Consistentwithourthemesthatsystemsmatterandthatsuccessfulstrategyimplementationrequiresthesupportofvariousintellectualcapitalsystems,wefindthatfirmsscoringhigheronourHPWSindexarealsoratedhigherontheirusageofknowledgemanagementsystemsandBalancedScorecard–stylebusinessperformancesystems.Seniormanagementinthesehigh-performancefirmslikewiseadoptsaphilosophythatsupportsthisapproachbyviewingtheorganization’semployeesasasourceofvaluecreation.Finally,thefirmsinthesetwogroupsalsodifferonsomeobjectivebenchmarksthatwewouldanticipatetoberelatedtotheadoptionofaHigh-PerformanceWorkSystem.Wefindthatfirmsinthehigh-performancegrouphavemuchlowerturnoverratesandmuchlowerlevelsofunionization.TheaverageratioofmarkettobookvalueofequityisalsomorethantwiceashighinthegroupwithHigh-PerformanceWorkSystems.

ComprehensiveAnalysisoftheEffectsofHRonFirmPerformance

EstimatingtheeffectsofHRsystemsonfirmperformancebycomparingexperiencesacrosshundredsoffirmsischallengingformanyofthesamereasonsitisdifficulttomeasuretheseeffectswithinasinglefirm.Inbothcases,itisdifficulttoisolatetheindependenteffectsofHRonthefirm’sfinancialperformancegiventhemultipleinfluencesonfirmperformanceatanypointintime.Insomerespects,thisisaneasiertaskwhencomparing

experiencesacrossfirmsbecause,ifonecanmeasurethoseotherinfluences,theirimpactontheHR-firmperformancerelationshipcanbecontrolledstatistically.Thisistheapproachweusedinourresearch.Weestimatethestatisticalrelationshipbetweenafirm’sHRsystemandfirmperformance,forfirmsofthesamesizeandassetclass,inthesameindustry,withthesamehistoricalgrowthrate,investmentinR&D,unionizationrate,andriskprofile(beta).2

Theseestimateshavebeencalculatedoverfourdifferentnationalsamplesthroughthe1990s.Ineachinstance,wefindverypowerfulsupportforapositiverelationshipbetweenaHigh-PerformanceWorkSystemandfirmfinancialperformance.TableA-2providesarepresentativeillustrationofthemagnitudeoftheseeffectsacrossseveraloutcomemeasuresofinterest.AsanindicatorofthestrategicimpactofHR,webelievethebestreflectionofthisinfluenceistheeffectonshareholdervalue,ormarket-to-bookvalue.ThefirsttwocolumnsintableA-2reflectdifferentapproachestomeasuringsuchaneffect.TheyindicatethatiftheaveragefirmweretoimproveitsHRsystemby33percent(onestandarddeviation),shareholdervaluewouldincreasebyapproximately20percent.ThoughwebelievetheultimatetestofHRasastrategicassetisitsrelationshipwithshareholdervalue,itisalsoclearthattheseHRsystemshavebeneficialeffectsonaccountingprofits,employeeproductivity,andturnoveraswell.

TableA-2EffectsofOneStandardDeviationIncreasein24-Item

HPWSIndexa

InMarketValue

InMarketValue/BookValue

GrossRateofReturnonAssets

SalesperEmployee

TurnoverRate

PercentageofeffectofonestandarddeviationincreaseintheHRsystemindex

24%*** 17%*** 25%** 4.8%* –7.6%**

***=p<.001,**=p<.01,*=p<.05

aThemodelusedtoestimatetheseresultsincludesascontrolvariables:firmemployment,percentageunionization,R&Dexpenses/sales,firmspecificrisk(beta),five-yearpercentagesalesgrowth.WhenlnMarketValueorGrossRateofReturnisthedependentvariable,lnBookValueofthePlantandEquipmentisanindependentvariableinthemodel.Source:BrianE.BeckerandMarkA.Huselid,“HighPerformanceWorkSystemsandFirmPerformance:ASynthesis

ofResearchandManagerialImplications,”inResearchinPersonnelandHumanResourcesManagement,vol.16(Greenwich,CT:JAIPress,1998),53–101.

TheEvolutionofaHigh-PerformanceStrategyWhilewehavedescribedHRsystemsasiftheyexistonasimplecontinuum,theircharacterisobviouslymorecomplex.Forexample,dofirmssystematicallyemphasizecertainelementsofanHRsystem,anddoesthiskindofemphasishaveanyeffectonfirmperformance?Inotherwords,ifwebelievethatdifferentHRsystemswillhavedifferenteffectsonfirmperformance,weoughttoseesomeevidencethattherearesystematicallydifferentapproachestohowfirmsstructuretheirHRsystems.IfdifferentHRsystemsareindeedpresentinourdata,thenextquestioniswhetherthesedifferentapproacheshavedifferenteffectsonfirmperformance.Or,perhapstherearesimplydifferentapproachestothesameobjective,andnosingleHigh-PerformanceWorkSystemreallyexists.Theseresultsarebrieflysummarizedinchapter1.

Toexaminethisquestion,wecomparedoursampleoffirmsonfortycharacteristics.Twenty-fourofthesecharacteristicsfocusedspecificallyontheHRsystem(selection,appraisal,development,compensation,communication,etc.).AnothersixteenmeasuredothercharacteristicsofthefirmthatwouldbeexpectedtofacilitatetheimplementationofaHigh-PerformanceWorkSystem.TheseincludedtheabilityofHRprofessionalstoeffectivelymanagedifferentelementsoftheHRsystem,thealignmentbetweentheHRsystemandlargerfirmstrategy,theclarityandcommunicationofthefirm’smission,andtheleadershipstyleoftheseniormanagement.Wedescribetheselattercharacteristicsasimplementationalignment.

Usingatechniquecalledclusteranalysis,thefirmsinthesamplewerecomparedbasedonhowtheystructuredthesefortycharacteristicsintoanoverallHRstrategy.Thisapproachwasappropriate,givenouremphasisontheimportanceofsystems.Ineffect,thistypeofanalysiswillindicatewhetherthefirmsinoursamplecanbecategorizedbythewayinwhichtheystructuretheirHRarchitecture.Wediscoveredfoursuchsystems,whichareillustratedinfigureA-1:

•High-PerformanceWorkSystems:FirmsinthisgroupscorewellaboveaverageonboththeHRsystemandimplementationalignmentdimensions.

•Compensation-BasedSystems:FirmsinthisgroupscoreaboveaverageontheHRsystemindexbutbelowaverageonimplementation

alignment.Werefertothisgroupascompensation-basedbecausetheonlyreasontheyscorewellontheHRsystemindexistheirveryhighratingsonthecompensationdimensions.

•AlignmentSystems:Theseareanunusualsetoffirms.Theyareslightlyaboveaverageonimplementationalignment,buttheyscoreamongthelowestontheHRsystem.ThesefirmsapproachstrategicHRfromthetopdownbutdon’tfinishthejob.Seniormanagerssaytherightthings,andHRisconsideredtobepartofthestrategicplanningprocess,butmanagershavenevermadetheinvestmentintheinfrastructureofaHigh-PerformanceWorkSystem.

•PersonnelSystems:ThesefirmsarecharacterizedbyscoresthatarewellbelowaverageonboththeHRsystemandimplementationalignmentdimensions.SuchorganizationsapproachtheirHRsystemsinaverytraditionalwayandappeartomakenoefforttoexploitHRasastrategicasset.

DoesitmatterwhichHRarchitectureafirmadopts?Arethereanydifferencesinfirmperformanceamongthesefirms?Thedatashowveryclearlythatthereare.Controllingforotherfirmandindustrycharacteristics,afirmpursuingaHigh-Performancestrategyhada65percenthighermarketvalue(foragivenbookvalue)thanafirmusingeitherthePersonnelorAlignmentstrategy.FirmsusingonlytheCompensationstrategyhada39percenthighermarketvaluethansimilarfirmsusingthePersonnelstrategy.TherewasnostatisticallysignificantdifferencebetweentheexperienceoffirmsusingtheAlignmentstrategyandthePersonnelstrategies.

FigureA-1TypologiesofHRArchitectures

MORERECENTRESEARCHONTHEFINANCIALIMPACTOFHRM

Inthissection,wehighlightseveralkeyfindingsfromthemostrecentsurvey

byMarkHuselidandBrianBecker.Theseresultsaresummarizedinfigure2-5inchapter2anddescribeapatternofrelationshipsamongseveralintangibleassetsthatareinfluencedbytheHRarchitectureandstrategicallyfocusedmeasurementsystems.3

Wecansummarizetheresultsofthisstudyasfollows:

•Strategyimplementationismoreimportantthanstrategycontent.A35percentimprovementinthequalityofstrategyimplementation,fortheaveragefirm,wasassociatedwitha30percentimprovementinshareholdervalue.Asimilarimprovementinthesuitabilityofthestrategyitselfhadnoeffectonfirmperformance.

•Strategyimplementationhasthreedrivers:employeestrategicfocus,HRstrategicalignment,andeffectiveknowledgemanagement.HRstrategicalignmentandtheknowledgemanagementsystemalsodriveemployeestrategicfocus.

•Abalancedperformancemanagementsystemaffectsfirmperformancethroughitsimpactonemployeestrategicfocus,whichinturndriveseffectivestrategyimplementation.

Inadditiontotheeffectsthatdrivethestrategyimplementationprocess,BeckerandHuselidhavefocusedspecificallyontherelationshipbetweentheHigh-PerformanceWorkSystemdescribedinchapters1and2andshareholdervalueinearlierstudies.Ourresultsindicatethatfortheaveragefirm,a35percentimprovementinourhigh-performanceHRindexisassociatedwithjustovera20percentincreaseinshareholdervalue.ThesefindingsarepartofalargerresearchliteraturedemonstratingHR’simpactonfirmperformance.4

Weanalyzedemployeestrategicfocusasaresponsetothreeunderlyingmanagementsystems,lookingspecificallyatthefollowingrelationships:

•theextenttowhichafirmhasaligneditsHRsystemwiththedemandsofthestrategyimplementationprocess;

•thepresenceofacomprehensiveknowledgemanagementsystemthatbothgeneratesandeffectivelydistributesknowledgethroughoutthefirm;and

•thepresenceofabusinessperformancemeasurementsystemthatreflectsboththeleadingandlaggingindicatorsofsuccessfulstrategyimplementation.

Ourdatashowthateachofthethreesystemswouldhavetobeimproved

by50percenttorealizethegainsfromemployeestrategicfocusdescribedearlier.Inshort,thereareampleeconomicrewardsassociatedwithsuperiorhumancapitalmanagement,buttherearenoquickfixes.Developingsuchanapproachrequiresasystematicmethodandcommitmenttothelong-rundevelopmentofpeople.

Notes

FOREWORD

1.RobertS.KaplanandDavidP.Norton,“TheBalancedScorecard—MeasuresThatDrivePerformance,”HarvardBusinessReview70,no.1(January–February1992):71–79.

CHAPTER1

1.RaphaelAmitandPaulJ.H.Shoemaker,“StrategicAssetsandOrganizationalRents,”StrategicManagementJournal14(1993):33–46.

2.StevenP.Kirn,AnthonyJ.Rucci,MarkA.Huselid,andBrianE.Becker,“StrategicHumanResourceManagementatSears,”HumanResourceManagement38,no.4:329–336;andAnthonyJ.Rucci,StevenP.Kirn,andRichardT.Quinn,“TheEmployee-Customer-ProfitChainatSears,”HarvardBusinessReview76,no.1(January–February1998):pp.82–97.

3.Rucci,Kirn,andQuinn,“TheEmployee-Customer-ProfitChainatSears,”89.

4.RobertMcLean,PerformanceMeasuresintheNewEconomy(ThePremier’sCouncilofOntario,OntarioCanada,1995),3.

5.ThomasStewart,“RealAssets,UnrealReporting,”Fortune,6July1998,207.

6.LawrenceR.Whitman,GTECorporation,fromatranscriptofaninterviewconductedbyGTEemployeesforanarticleinCFOmagazine,whichwasprovidedtotheauthorsofthisbook.

7.J.R.Morris,W.F.Cascio,andC.E.Young.“DownsizingafterAllTheseYears:QuestionsandAnswersaboutWhoDidIt,HowManyDidIt,andWhoBenefitedfromIt,”OrganizationalDynamics27,no.3(Winter1999):78–87.

8.ForfurtherdiscussionoftheconceptofanHRArchitecture,seeMarkA.

HuselidandBrianE.Becker,“TheStrategicImpactofHighPerformanceWorkSystems,”paperpresentedattheAcademyofManagementAnnualMeeting,1995;andBrianBeckerandMarkHuselid,“HighPerformanceWorkSystemsandFirmPerformance:ASynthesisofResearchandManagerialImplications,”ResearchinPersonnelandHumanResourcesManagement,vol.16(Greenwich,CT:JAIPress,1998),53–101.

9.MarkA.Huselid,SusanE.Jackson,andRandallS.Schuler,“TechnicalandStrategicHumanResourceManagementEffectivenessasDeterminantsofFirmPerformance,”AcademyofManagementJournal40,no.1(1997):171–188.

10.Thefifthwaveofthisstudyisbeingconductedasofthiswriting(Summer2000).

11.OurentireresearchprogramisdescribedinmoredetailintheappendixandinBeckerandHuselid,“HighPerformanceWorkSystemsandFirmPerformance.”

12.RobertS.KaplanandDavidP.Norton,“HavingTroublewithYourStrategy?ThenMapIt,”HarvardBusinessReview78,no.5(September–October2000):167–176.

13.RobertS.KaplanandDavidP.Norton,TheBalancedScorecard:TranslatingStrategyintoAction(Boston,MA:HarvardBusinessSchoolPress,1996).

14.GaryHamelandC.K.Prahalad.CompetingfortheFuture(Boston,MA:HarvardBusinessSchoolPress,1994),11.

15.KaplanandNorton,TheBalancedScorecard,144–145.

CHAPTER2

1.AnthonyJ.Rucci,StevenP.Kirn,andRichardT.Quinn,“TheEmployee-Customer-ProfitChainatSears,”HarvardBusinessReview76,no.1(1998):90.

2.Ibid.,91.

3.RobertS.KaplanandDavidP.Norton,TheBalancedScorecard:TranslatingStrategyintoAction(Boston,MA:HarvardBusinessSchoolPress,1996).

4.AmoredetaileddescriptionoftheQuantumexperienceisavailableinDeborahBarber,MarkA.Huselid,andBrianE.Becker,“StrategicHumanResourcesManagementatQuantum,”HumanResourcesManagement38,

no.4(Winter1999):321–328.

5.RobertS.KaplanandNicoleTempest,“WellsFargoOnlineFinancialServices(A),”Case9-198-146(Boston,MA:HarvardBusinessSchool,1998,rev.1999);andRobertS.KaplanandNicoleTempest,“WellsFargoOnlineFinancialServices(B),”Case9-199-019(Boston,MA:HarvardBusinessSchool,1998).

6.TheseresultsarepartofanongoingresearchprogrambyMarkHuselidandBrianBeckerlinkingHRtofirmperformance.

7.ThisresearchalsosupportsthefundamentalpremiseofthenewworkbyRobertKaplanandDavidNorton,TheStrategy-FocusedOrganization(Boston:HarvardBusinessSchoolPress,2000).

8.MichaelE.Porter,CompetitiveAdvantage:CreatingandSustainingSuperiorPerformance(NewYork:TheFreePress,1985).

9.RobertS.KaplanandDavidP.Norton,“HavingTroublewithYourStrategy?ThenMapIt,”HarvardBusinessReview78,no.5(September–October2000):167–176.

10.GarrettWalker,HRdirector,GTECorporation,interviewbyauthor(BrianBecker)August2000;andGeorgeDonnelly,“Recruiting,RetentionandReturns,”CFO16(March2000):68–73.

CHAPTER3

1.JeffreyPfeffer,CompetitiveAdvantagethroughPeople:UnleashingthePoweroftheWorkforce(Boston,MA:HarvardBusinessSchoolPress,1994).

2.Forfurtherworkonefficiencyandeffectivenessmetrics,seealsoJacFitz-enz,HowtoMeasureHumanResourcesManagement(NewYork:McGraw-Hill,1995),andDaveUlrich,“MeasuringHumanResources:AnOverviewofPracticeandaPrescriptionforResults,”HumanResourceManagement36,no.4(1997):303–320.

3.DaveUlrichandDaleLake,OrganizationalCapabilities(NewYork:JohnWiley&Sons,1990).

4.SeealsoUlrich,MeasuringHumanResources.

5.DaveUlrich,HumanResourceChampions:TheNextAgendaforAddingValueandDeliveringResults(Boston,MA:HarvardBusinessSchoolPress,1997).

CHAPTER4

1.SeeWayneF.Cascio,CostingHumanResources:TheFinancialImpactofBehaviorinOrganizations,4thed.(Boston,MA:PWS-KentPublishing,2000),foraseriesofdetailedexamples.

2.Thisquestionhasreceivedaconsiderableamountofattentioninthefieldofutilityanalysis.Forseminalcontributions,seeF.L.Schmidt,J.E.Hunter,andT.W.Muldrow,“ImpactofValidSelectionProceduresonWork-ForceProductivity,”JournalofAppliedPsychology64(1979):609–626;andJohnBoudreau,“UtilityAnalysisinHumanResourceManagementDecisions,”inHandbookofIndustrialandOrganizationalPsychology,vol.2,ed.M.D.DunnetteandL.M.Hough(PaloAlto,CA:ConsultingPsychologistsPress,1991),621–745.

3.Schmidt,Hunter,andMuldrow,“ImpactofValidSelectionProceduresonWork-ForceProductivity,”andBoudreau,“UtilityAnalysisinHumanResourceManagementDecisions.”

4.ThomasD.CookandDonaldT.Campbell,Quasi-experimentalDesignandAnalysisforFieldSettings(Boston,MA:Houghton-Mifflin,1979).

5.Afunctionallyequivalentprocedure,knownastheinternalrateofreturn(IRR),discountscostsandbenefitsbackintotoday’sdollars,butsolvesfortheinterestrateyieldedbythestreamofcashflowslessbenefits.NPVanalysessolveforthedollarvaluebenefitsoftheinvestment.

6.SeeCascio,CostingHumanResources.

7.RobertS.KaplanandRobinCooper,Cost&Effect:UsingIntegratedCostSystemstoDriveProfitabilityandPerformance(Boston,MA:HarvardBusinessSchoolPress,1998).

CHAPTER5

1.ThisfamousquoteistakenfromSteveKerr,“OntheFollyofRewardingAWhileHopingforB,”AcademyofManagementJournal18(December1975):769.

2.Therelationshipsdescribedinthisanalysiswerebasedonmoresophisticatedandcomplexmodelsthanthoseincludedinourdescription.ThepurposeofthesemodelswastoruleoutalternativeexplanationsfortheestimatedeffectoftheEmployeeEngagementIndex.

3.Thereareexceptionsattheextremes.Ifproductinformationavailabilityandskillsareveryhighlycorrelated,itbecomesmoredifficulttoisolatetheseparateeffectsofeach.

4.MarkA.HuselidandBrianE.Becker,“AnInterviewwithMikeLosey,TonyRucciandDaveUlrich:ThreeExpertsRespondtoHRMJ’sSpecialIssueonHRStrategyinFiveLeadingFirms,”HumanResourceManagement38(Winter1999):360.

CHAPTER6

1.SeealsoJeffreyPfeffer,TheHumanEquation:BuildingProfitsbyPuttingPeopleFirst(Boston:HarvardBusinessSchoolPress,1998),forasimilarapproach.

2.SeeR.N.Shepard,“Introduction,”inMultidimensionalScaling:TheoryandApplicationsintheBehavioralSciences,vol.1,ed.R.N.Shepard,A.Romney,andS.Nerlove(NewYork:SeminarPress,1972),1–20.

3.SeeJ.WoelfelandE.Fink,TheMeasurementofCommunicationProcesses:GalileoTheoryandMethod(NewYork:AcademicPress,1980);andJ.WoelfelandJ.E.Danes,“MultidimensionalScalingModelsforCommunicationsResearch,”inMultivariateTechniquesinHumanCommunicationsResearch,ed.P.R.MongeandJ.N.Capella(NewYork:AcademicPress,1980),333–364,foradiscussionoftheacademicresearchsurroundingGalileo.Perceptualmapshavebeenwidelyusedinmarketingtounderstandconsumerpreferencesandtoguideadvertisingstrategies(seeJ.Woelfel,What’sWrongwithThisPicture?HowtoSpotaBadPerceptualMap[Amherst,NY:RAHBooks,1995]).Wehaveadaptedthistechniquetocreateperceptualmapsofstrategicalignment.

4.Woelfel,What’sWrongwithThisPicture?

5.SeeP.N.Johnson-Laird,MentalModels:TowardsaCognitiveScienceofLanguage,InferenceandConsciousness(Cambridge,MA:HarvardUniversityPress,1983).

6.ThestrategicgoalsforthisexamplearedrawnfromtheexperienceofMobil’sNorthAmericanMarketingandRefiningGroup.SeeRobertS.Kaplan,“MobilUSM&R(A):LinkingtheBalancedScorecard,”Case9-197-025(Boston,MA:HarvardBusinessSchool,1996,rev.1999),16,exhibit7.

7.ThemostcompletedescriptionoftheprogramsonwhichthesefiguresarebasedisJosephK.Woelfel,GalileoCATPAC:UserManualandTutorial(Amherst,NY:TheGalileoCompany,1990).

CHAPTER7

1.Anumberofconsultingfirmshavebeeninstrumentalindeveloping

competencemodelsformanagerialbehavior.Inthe1930s,theHaygroupworkedtocalculatehowmuchtopayworkersbasedontheirdemonstratedcompetence.Theirmodelwasbuiltaroundknow-how,accountability,andproblemsolving.BuildingonworkbyDaveMcClelland,theMcBerconsultingfirmhasbeeninstrumentalincreatingandpropagatingcompetencymodels.MuchofthisworkissummarizedinR.E.Boyatzis,TheCompetentManager(NewYork:Wiley,1982).

2.ArthurYeung,PatriciaWoolcock,andJohnSullivan,“IdentifyingandDevelopingHRCompetenciesfortheFuture:KeystoSustainingtheTransformationofHRFunctions,”HumanResourcePlanning19(Spring1996):48–58.

3.IBMandTowersPerrin,PrioritiesforCompetitiveAdvantage(NewYork:IBMandTowersPerrin,1991).

4.StephenC.Schoonover,CompetenciesfortheYear2000:TheWakeUpCall!(Washington,D.C.:SHRMFoundation,1998).

5.DaveUlrich,WayneBrockbank,ArthurYeung,andDaleLake,“HumanResourceCompetencies:AnEmpiricalAssessment,”HumanResourceManagement34(Winter1995):473–495.

6.Ibid.

7.Ibid.

8.ConnieJamesworkedasprojectmanagerforthethirdroundofdatacollection.Herconceptualandprojectmanagementworkisacknowledgedandmuchappreciated.

9.JohnP.KotterandJamesL.Heskett,CorporateCultureandPerformance(NewYork:FreePress,1992).

10.Ulrich,Brockbank,Yeung,andLake,“HumanResourceCompetencies.”

11.DaveUlrichandRobertEichinger,“DeliveringwithanAttitude,”HRMagazine43(June1998):154–160.

12.ToddD.Jick,“MixingQualitativeandQuantitativeMethods:TriangulationinAction,”AdministrativeScienceQuarterly24,no.4(1979):602–611.

13.WayneBrockbank,DaveUlrich,andDickBeatty,“HRProfessionalDevelopment:CreatingtheFutureCreatorsattheUniversityofMichiganBusinessSchool,”HumanResourceManagement38(Summer1999):111–117.

CHAPTER8

1.P.M.Senge,A.Kleiner,C.Roberts,R.Ross,G.Rother,andB.Smith,TheDanceofChange:TheChallengesofSustainingMomentuminLearningOrganizations(NewYork:CurrencyDoubleday,1999).

2.RonAshkenas,“BeyondtheFads:HowLeadersDriveChangewithResults,”HumanResourcePlanning17,no.2(1994):25–44.

3.JamesChampy,ReengineeringManagement:TheNewMandateforLeadership(NewYork:HarperBusiness,1995).

4.JeffreyPfefferandRobertI.Sutton,TheKnowing-DoingGap(Boston:HarvardBusinessSchoolPress,2000).

5.SeeDouglasSmith,TakingChargeofChange:TenPrinciplesforManagingPeopleandPerformance(Reading,MA:AddisonWesley,1996);JohnKotter,LeadingChange(Boston,MA:HarvardBusinessSchoolPress,1996);andMichaelBeer,RussellEisenstat,andBertSpector,“WhyChangeProgramsDon’tProduceChange,”HarvardBusinessReview68,no.6(November–December1990):158–166.

6.DaveUlrich,HumanResourceChampions(Boston,MA:HarvardBusinessSchoolPress,1997).

7.ThisdesignteamincludedSteveKerr,DaveUlrich,CraigSchneier,JonBiel,RonGager,andMaryAnneDevanna(outsiderstoGE)andJacquieVierling,CathyFriarson,andAmyHoward(GEemployees).

8.ThismaterialhasbeenadaptedfromUlrich,HumanResourceChampions,chapter6.

9.GarrettWalker,DirectorHRStrategicPerformanceManagement,GTE,telephoneinterviewwithauthor(MarkHuselid),August2000.

10.Ibid.

11.G.R.Salancik,“CommitmentandtheControlofOrganizationalBehaviorandBelief,”inNewDirectionsinOrganizationalBehavior,ed.B.M.StawandG.R.Salancik(Malabar,FL:RobertE.Drieger,1977):1–54;B.M.StawandJ.Ross,“CommitmenttoaPolicyDecision:AMulti-TheoreticalPerspective,”AdministrativeScienceQuarterly23(1978):40–64;B.M.StawandJ.Ross,“UnderstandingEscalationSituations:Antecedents,Prototypes,andSolutions,”inResearchinOrganizationalBehavior,vol.9,ed.B.M.StawandL.L.Cummings(Greenwich,CT:JAIPress,1987);B.M.Staw,“TheExperimentingOrganization,”OrganizationalDynamics

6(1977):2–18;B.M.Staw,“Knee-DeepintheBigMuddy:AStudyofEscalatingCommitmenttoaChosenCourseofAction,”OrganizationalBehaviorandHumanPerformance16(1976):27–44.

12.GarrettWalker,interviewbyauthor.

13.Ibid.

14.LearningMapisatrademarkofRootLearning,Inc.ofPerrysburg,Ohio.LearningMapproductsaresolelyownedbyRootLearningandcannotbereproducedormodifiedinanyformwithoutthecompany’sexpresswrittenpermission.

15.AnthonyJ.Rucci,StevenP.Kirn,andRichardT.Quinn,“TheEmployee-Customer-ProfitChainatSears,”HarvardBusinessReview76,1(January–February1998):95.

APPENDIX

1.OurentireresearchprogramisdescribedinmoredetailinBrianBeckerandMarkHuselid,“HighPerformanceWorkSystemsandFirmPerformance:ASynthesisofResearchandManagerialImplications,”inResearchinPersonnelandHumanResourcesManagement,vol.16,ed.GeraldR.Ferris(Greenwich,CT:JAIPress,1998),53–101.SeealsoMarkA.Huselid,“TheImpactofHumanResourceManagementPracticesonTurnover,Productivity,andCorporateFinancialPerformance,”AcademyofManagementJournal38(1995):635–672.

2.Wehavealsotestedseveralspecificalternativeexplanationsforourresults.Onepossibilityisreversecausation.Forexampleitmightbethatmoreprofitablefirmsweremorelikelytodevelopsuchpoliciesbecauseonlythesefirmscouldaffordtodoso.Anotherpossibilityisthattheresultsareduetothenatureofthefirmsrespondingtooursurvey.Huselid(in“TheImpactofHumanResourceManagementPractices”)foundnosupportforthesehypotheses.

3.Firmperformanceismeasuredastheratioofmarketvaluetobookvalueofshareholderequity.Theserelationshipsarepartofabroadermodelperformancethatincludesindustry,priorsalesgrowth,size,investmentinR&D,andunionization.

4.Overthepastdecadetherehasbeenavirtualexplosionofinterestinthistopic,withscoresofstudieshavingbeenconductedintheUnitedStates,Canada,theUnitedKingdom,Germany,France,HongKong,Singapore,andJapan.Takenasawhole,thenewbodyofresearchalsosupportsthe

basicassertionthat“HRmatters.”InterestedreaderscancontactMarkHuselidforabibliography.

AbouttheAuthors

BrianBeckerisProfessorofHumanResourcesandChairmanoftheDepartmentofOrganizationandHumanResourcesintheSchoolofManagementattheStateUniversityofNewYorkatBuffalo.ProfessorBeckerhaspublishedwidelyonthefinancialeffectsofemploymentsystemsinbothunionandnonunionorganizations.Hiscurrentresearchandconsultinginterestsfocusontherelationshipsbetweenhumanresourcessystems,strategyimplementation,andfirmperformance.

MarkHuselidisAssociateProfessorofHRStrategyintheSchoolofManagementandLaborRelations(SMLR)atRutgersUniversity.Hisresearchfocusesonthelinkagesbetweenhumanresourcemanagementsystems,corporatestrategy,andfirmperformance,andhasearnedhimnumerousprofessionalawards.ProfessorHuselidisEditoroftheHumanResourcesManagementJournalandconsultswidelyinmeasurementandhumanresourcesstrategy.

DaveUlrichisProfessorofBusinessattheUniversityofMichigan.Hehaspublishednumerousbooksandarticlesonhumanresourceandorganizationissues.Heconsultswidelywithmanyfirmsonbuildingleadershipbrand,creatingorganizationalcapability,ensuringspeed,developingasharedmind-set,andshapinganHRagenda.Hehasreceivedlifetimecontributionawardsfromfiveprofessionalassociationsandhasservedonanumberofeditorialboards.