MEASURING HR STRATEGIC ALIGNMENT THROUGH THE HR SCORECARD

Juan I. Sanchez, Ph.D. Florida International University

ORGANIZATIONS OFTEN CLAIM THAT:

People are our most important asset

But do people understand how the HR function influences firm performance? Do HR people feel like they play an important role in implementing the organizations strategy? Does HR really matter?

Whats the perception of the HR function?

List the events that most often trigger the words lets ask human resources:
Event Perceived HR Role

Discipline problems Personal problems Companys party Bureaucratic obstacles

The police The counselor The entertainer The aparatchik

WHAT DOES HR STRATEGIC ALIGNMENT MEAN?

HR as an administrative function vs. HR as a strategic partner capable of enhancing the organizations performance

Measuring HRs influence on the organization

Traditional HR Focus: the individual employee

Select the best employee Find benefits that satisfy the employee Identify incentives that do motivate the employee Solve individual skill deficiencies through training Improving individual employee performance Does it automatically enhance organizational performance?

HR as a strategic asset

New HR Focus: multiple levels of analysis: individual, team, organization Alignment of HR systems with the companys strategy How can HR play a central role in implementing the organizations vision & strategy? How do people create value for the organization? Ho do we measure such value-creation process?

HR as an investment, not an expense

Conventional accounting was created at a time when tangible capital (financial & physical) was the primary source of profits. Today: Intangibles such as human capital are the primary source of profits.

HR as an investment, not an expense

Conventional accounting generates short-term thinking regarding intangibles, because intangiblerelated expenditures are treated as expenses vs. tangible-related expenditures, which are treated as asset investments (and therefore depreciated over their useful lives). Managers whose salaries are tied to earnings obviously prefer expenditures that can be depreciated over time rather than people-related expenditures than are expensed in their entirety during the current year.

HR as a source of competitive advantage

Widening in the ratio of market value to book value (based on intangible assets) HR is key to flexibility, innovation, and speed to market HR as competitive advantage: barriers of entry, difficult to imitate. HR managers can become NUMERATOR managers (contributing to revenue & growth) rather than just DENOMINATOR managers (cutting costs & reducing overhead). Link performance measurement with strategy implementation: facilitates communication with stakeholders.

HR architecture as a strategic asset

Goal of corporate strategy: create sustained competitive advantage. Goal of HR strategy: maximize the contribution of HR towards that same goal.
HR FUNCTION HR professionals with strategic competencies (delivery of HR services in a way that supports the implementation of the firms strategy

HR ARCHITECTURE
HR SYSTEM High-performance, strategically aligned HR policies & practices EMPLOYEE BEHAVIORS Strategically focused competencies, motivations, and associated behaviors

Strategic HRM requires systems thinking

Systems thinking emphasizes the interrelationships of the HR system components AND the link between HR and the larger strategy implementation system. Interactions among components make a system more than just the sum of its parts. The laws of systems thinking
Todays problems come from yesterdays solutions (e.g., downsizing) The easy way out usually leads back in (example: _________) Cause and effect are not closely related in time & space (HR effects are indirect) (example of indirect HR effect: __________) Cutting an elephant in half doesnt get you two smaller elephants. (e.g., reorganizations due to mergers acquisitions).

Best HR Practices help almost every business

HR Practice
No. of training hrs. for new employees Percentage of employees receiving a performance appraisal No. of employees per HR professional Percentage hired based on a validated selection test

Bottom 10% 35 41%

Top 10% 117 95%

254 4%

140 30%

From Huselid et al., 2000, AMJ

But strategic HR goes beyond best practices

HR alignment

Results

_ _ Behaviors +

What does HR alignment take?

It requires a clear understanding of the value chain: What kind of value the organization generates and exactly how that value is created. Be able to describe how ultimate financial goals are linked to key success factors at the levels of customers, operations, people, and IT systems. With this shared understanding of the value-creation process, the organization can design a strategy implementation model that specifies needed competencies and employee behaviors. The HR system can be geared toward the generation of these competencies and behaviors.

VALUE CREATION EXAMPLE Nordstrom

Financial
ROI CUSTOMER RETENTION

Customer
SUPERIOR CUSTOMER SERVICE UNIQUE INVENTORY KNOWLEDGEABLE AND CUSTOMER-ORIENTED EMPLOYEES

Internal/business process Learning and growth

VALUE CREATION EXAMPLE Wal-Mart

Financial Customer
ROI CUSTOMER SATISFACTION

CONVENIENCE

Internal/business process Learning and growth

SUPPLY-CHAIN MGMT.

PRICING

RELIABLE EMPLOYEES
TRUSTWORTHY SUPPLIERS

Inadequacy of Traditional Measurement Systems

1. Financial measures as lagging indicators, not leading indicators of value creation (Kaplan & Nortons Balanced Scorecard). 2. Too much attention to financial dimensions of performance, and not enough attention to the performance drivers that determine those results. 3. Uncover the firms value-creation chain (story): business model. 4. By specifying and assessing the vital process measures of the value chain, and regularly communicating the firms performance on these measures, the balanced scorecard makes strategy everyones business.

BALANCING COST CONTROL AND VALUE CREATION: THE HR SCORECARD 1. Do you want HR to be perceived as a cost control or as a value creation unit? 2. What gets measured gets managed. 3. If you measure only HR costs, your unit will be treated as a commodity without strategic value. 4. HR must control costs, but also create value. 5. Examples of instances where value was lost due to costcontrol efforts? (throw the baby with the bath water)

INTEGRATING HR INTO THE VALUE CREATION STORY Is the HR function providing the company with the employee competencies and behaviors necessary to achieve the organizations strategic objectives? 1.HR deliverables: Outcomes of the HR architecture that serve to
execute the firms strategy.

2.HR doables: HR efficiency & activity counts. 3.HR performance drivers: core people-related capabilities or
assets.

4.HR enablers reinforce performance drivers (moderators whose

presence activates the HR performance drivers).

MAPPING THE HR VALUE CREATION STORY

HR enablers
HR performance drivers
HR Deliverables

Strategy implementation

HR Doables

Impact

DISTINGUSHING AMONG HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), ENABLERS (EN)
SURVEY SAYS

Measure
Average time for dispute resolution Cost per trainee hour Cost per hire Time spent on new employee orientation Troubleshooting skills Ability to think out-of-the-box Knowledge of sexual harassment legislation Number of sexual harassment complaints Sexual harassment awareness training Risk-taking culture Number of customer complaints High evaluations on teamwork

PD DE DO EN

An example of HR Value Creation Story

Honesty testing Random drug testing Employee theft What percent of your coworkers are honest? Cost of missing items What percent of the items missing in the inventory are stolen by employees? Cost per quarter (efficiency) Inventory shrinkage Pricing Honest workforce

Cost per hire (efficiency)

Competency Models by Strategy Exercise

Cost-driven organization
Vigorous pursuit of production/delivery efficiencies. Tight control over cost of materials, resources, & overhead. Minimal expenditure in R&D, marketing, sales, & service. Emphasis on large accounts & economies of scale. Low-cost distribution system

WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD DE DO EN 1 2 4 5 7 8 10 11

Competency Models by Strategy Exercise

Value-driven organization
Focus on developing best-inclass capabilities in selected activities. Promote reputation for technological leadership & brand image. Emphasize product engineering or service integration. Maintain an active basic research contingent. Partner with industry, universities, & research organizations for mutual benefit.
WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD DE DO EN 1 2 4 5 7 8 10 11

Competency Models by Strategy Exercise

Quality-driven organization
Aggressive pursuit of information on customer careabouts, including customer involvement in product/service design. Efforts to instill a continuous improvement orientation. Strict monitoring & screening of subcontractors, franchises, and suppliers. Some investment in R&D, marketing, service, & training.
WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD DE DO EN 1 2 4 5 7 8 10 11

Competency Models by Strategy Exercise

Service-driven organization
Value investments in people. Close monitoring of metrics tracking service responsiveness. Cultivate good working relationships among associates, subcontractors, and suppliers. Creative involvement of R&D and manufacturing groups in aftersales support. Emphasis on customer service and sales ranks contact with customers.
WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD DE DO EN 1 2 4 5 7 8 10 11

Competency Models by Strategy Exercise

Speed-driven organization
Willingness to accept risks associated with delivering product/service to market ahead of competitors. Analysis of market trends. Aggressive management of new product development cycles. Engage in joint ventures to speed entry in emerging markets. Create geographical & technological partnerships to augment organizational capabilities.
DE DO EN

WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD 1 2 4 5 7 8 10 11

Competency Models by Strategy Exercise

Focus-driven organization
Emphasis on market research & micromarket proclivities. Risk averse & focus on customer careabouts. Intense management of product/service modifications to match profiled customer needs. Active involvement of targeted customers in product/service development.
WRITE HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), AND ENABLERS (EN) FOR THIS STRATEGY

Type No. Measure

PD DE DO EN 1 2 4 5 7 8 10 11

IN CONCLUSION
People can be our most important asset if we make the HR function our strategic partner

To download a copy of this presentation, visit http://cba.fiu.edu/mgmt/sanchezj

Click on HR-ROI presentation, USF Embassy Suites, 1/17/03