Human Resource Excellence: An Assessment of Strategies and Trends

CHAPTER 1

What HR Needs to Do

A changing workforce, global competition, advances in information technology, new knowledge, demands for sustainable organizational performance, and a host of other changes are forcing organizations to constantly examine and change how they operate. They are using new technologies, changing their structures, redesigning work, relocating their workforces, and improving work processes to respond to an increasingly demanding, unpredictable, and global competitive environment (Worley, Williams, and Lawler 2014). These important changes have significant implications for how their human capital can and should be managed and how their human resource functions can and should be designed and operated (Lawler 2017). But are organizations changing their human capital management policies, practices, and processes? Are they redesigning their HR functions?

Over the past decade, it has been difficult to find a management book or business magazine that does not point out how many of the changes in the business world have made human capital—people—an organization’s most important asset. Human capital management has been the focus of a great deal of writing on finding, motivating, developing, and monitoring talent. The annual reports of many corporations in North America, Europe, Asia, and Australia argue that their human capital and intellectual property are their most important assets. In many organizations, compensation is one of the largest costs, if not the largest one. In service organizations, it often represents 70 to 80 percent of the total cost of doing business. Even when compensation accounts for very little of the cost of doing business, human capital has a significant impact on an organization’s performance (Cascio 2000; Cascio and Boudreau 2011). Without effective human capital, organizations are likely to have little or no revenue. Even the most automated production facilities require skilled, motivated employees to operate and maintain them. Knowledge work organizations depend on employees to develop, use, and manage their most important asset: knowledge. Thus, although human capital does not appear on the balance sheet of corporations, it represents an increasingly large percentage of many organizations’ market valuation (Lev 2001; Huselid, Becker, and Beatty 2005).

In an increasing number of organizations, having the best talent and talent management processes can be a continuing and difference-making source of competitive advantage. It can make companies more innovative and agile, better able to develop superior products and customer knowledge, and offer superior services (Worley, Williams, and Lawler 2014).

Role of the HR Organization

Because of the way that the business environment has changed, there are more and more ways the HR function can add value to an organization. For decades, it has added value primarily by performing administrative tasks. But two other roles that it can play make it possible for it to add greater value. Lawler (1995) has developed this line of thought by describing three roles HR can take on. The first is the familiar HR management role (figure 1.1).

The second is the role of business partner (figure 1.2). It emphasizes developing systems and practices to ensure that a company’s human resources have the needed competencies and motivation to perform effectively. In this approach, HR has a seat at the table when business issues are discussed and brings an HR perspective to these discussions. When it comes to designing HR systems and practices, this approach explores creating systems and practices that support the business strategy. HR focuses on the effectiveness of the human capital management practices and process improvements in them, and it is expected to help implement changes and help managers effectively deal with people issues.

The business partner approach positions the HR function as a value-added part of an organization so that it can contribute to business performance by effectively managing what is the most important capital of most organizations: their human capital (Ulrich, Younger, Brockbank, and Ulrich 2011; Ulrich and Brockbank 2005; Lawler 2008). But this approach may not be one that enables the HR function to add the greatest value given the increasingly important role that talent plays in determining organizational performance. By becoming a strategic contributor, the third role (see figure 1.3), HR has the potential to add more value in situations where human capital performance can have a major impact on organizational performance (Lawler and Boudreau 2015).

Acting as a strategic contributor means that HR helps the organization develop its strategy. Not only does HR have a seat at the strategy table, it helps to set the table with information about organizational capabilities, talent analytics, and the labor market. It helps shape and enhance strategies by bringing human capital decision science to strategy discussions. It helps organizations operate in ways that help it perform well financially, socially, and environmentally.

A firm’s strategy must be closely linked to its talent. Thus, the HR function needs to be positioned to play a major role in both strategy formulation and implementation. Expertise in attracting, retaining, developing, deploying, motivating, and organizing human capital is critical to both. Ideally the HR function should be knowledgeable not just about the business and talent; it should also be the expert in organizational and work design issues so that it can help develop needed organizational capabilities and facilitate organizational change.

Figure 1.1. HR management

Figure 1.2. Business partner

Figure 1.3. Strategic contributor

To be a strategic contributor, HR executives need, in addition to knowing HR, to have an in-depth knowledge of business strategy, organizational design, and change management, and they need to understand how integrated HR practices and strategies can support organizational designs and strategies. This role requires extending their focus beyond delivery of the HR services and practices that are associated with being a business partner to a focus on making decisions about talent, organizational design, and business strategy.

To be an effective strategic contributor, HR needs to offer a perspective that is often missing in discussions of business strategy and change: knowledge of the human capital factors and the organizational changes that are critical in determining whether a strategy can be effectively implemented. Many more strategies fail in execution than in their conception (Lawler and Worley 2006). What sounds good often cannot be implemented for a variety of reasons having to do with talent management and organizational design.

Despite compelling arguments in support of HR management as a key strategic issue in most organizations, our research and that of others finds that HR executives usually are not strategic partners and do not use data to guide their decision making (Lawler 1995; Brockbank 1999; Lawler, Boudreau, and Mohrman 2006; Lawler and Boudreau 2009, 2012, 2015). All too often, HR is largely an administrative function headed by individuals whose roles focus on cost control and administrative activities (Ulrich 1997; Lawler and Mohrman 2003; Boudreau and Ramstad 2005a; Lawler and Boudreau 2009, 2012, 2015). Missing almost entirely from the list of HR focuses in our global surveys of HR in large corporations are such key organizational challenges as improving productivity, increasing quality, facilitating mergers and acquisitions, managing knowledge, implementing change, developing business strategies, and improving the ability of the organization to execute strategies (Lawler and Boudreau 2015). Since these areas are critical determinants of organizational performance, the HR function has been missing a great opportunity to add value.

There is some evidence that the HR function is beginning to redefine its role in order to increase the value it adds. The first seven phases of this research program collected data in 1995, 1998, 2001, 2004, 2007, 2010, and 2013. The results showed evidence of some change in large U.S. corporations, but there was more discussion of change than actual change (Lawler and Mohrman 2003; Lawler et al. 2006; Lawler and Boudreau 2009, 2012, 2015).

Creating Change

Describing the new role of HR is only the first step in transitioning the HR function to a role of business partner who contributes to organizational effectiveness. For decades, the HR function has been organized and staffed to carry out administrative activities. Changing that role will require a different mix of activities and people. It necessitates reconfiguring the HR function to support changing business strategies and organizational designs. It also requires the employees in the HR function to have very different competencies from those they traditionally have had (Ulrich, Younger, Brockbank, and Ulrich 2012).

It is clear that information technology is playing an increasingly important role in the future of the HR function (Lawler, Ulrich, Fitz-enz, and Madden 2004; Boudreau 2010). Administrative tasks that have been traditionally performed by the HR function can be done by employees and managers on a self-service basis. Today’s information technology–based HR systems simplify and speed up virtually every administrative HR task: salary administration, job posting and placement, address changes, family changes, and benefits administration, for example. What is more, HR systems are increasingly cloud based, and with personal device technology, they can be accessed from virtually anywhere by anyone, thus making self-service possible, convenient, and efficient.

Perhaps the greatest value of the new HR systems results from enabling the integration and analysis of HR activities, thus guiding strategy development and implementation. Metrics can be easily tracked and analyses performed that make it possible for organizations to develop and allocate their human capital more effectively (Boudreau and Ramstad 2007; Lawler, Levenson, and Boudreau 2004).

It is increasingly possible to measure and analyze the effectiveness of many HR policies and practices. With big data and a strategic mind-set, HR can be a data-driven function that practices evidence-based management (Boudreau and Jesuthasan 2011). Business leaders can now be held accountable for HR results based on measures of turnover, employee attitudes, bench strength, and performance distributions.

A strong case can be made that HR needs to develop much better metrics and analytics capabilities. Our previous studies identified metrics as one of four characteristics of HR systems that lead to HR’s being a strategic partner. Managers want measurement systems that inform their decisions about human capital. All too often, however, HR focuses on the traditional paradigm of delivering HR services quickly, cheaply, and in ways that satisfy their clients but fail to make a true strategic difference in an organization’s performance (Boudreau and Ramstad 1997, 2003). The issue is how to use HR measures to make a true strategic difference in an organization’s performance.

Boudreau and Ramstad (2007) have identified four critical components of a measurement system that drives strategic change and organizational effectiveness: logic, analysis, measures, and process. Measures certainly are essential, but without the other three components, they are destined to remain isolated from the true purpose of the HR measurement systems. Boudreau and Ramstad (1997) have also proposed that HR can make great strides by learning how more mature and powerful decision sciences have evolved their measurement systems in order to improve decision making. They identify three anchor points—efficiency, effectiveness, and impact—that connect decisions about resources such as money and customers to organizational effectiveness and that can similarly be used to understand HR measurement:

Efficiency asks, What resources are used to produce our HR policies and practices? Typical indicators are cost-per-hire and time to fill vacancies.

Effectiveness asks, How do our HR policies and practices affect the talent pools and organizational structures to which they are directed? It thus refers to the effects of HR policies and practices on human capacity (a combination of capability, opportunity, and motivation) and the resulting aligned actions of the target talent pools. Effectiveness includes trainees’ increased knowledge, better-selected applicants, stronger qualifications, and performance ratings of those receiving incentives.

Impact poses the hardest question of the three: How do differences in the quality or availability of different talent pools affect strategic success? This question is a component of talent segmentation, just as a component of market segmentation concerns is for marketers: How do differences in the buying behavior of different customer groups affect strategic success?

Most HR measurement systems largely reflect the question of efficiency, though there is some attention to effectiveness as well through focusing on such things as turnover, attitudes and bench strength (Gates 2004). Rarely do organizations consider impact (such as the relative effect of different talent pools on organizational effectiveness). More important, it is rare that HR measurement is specifically directed toward where it is most likely to have the greatest effect: on key talent. Attention to nonfinancial outcomes and sustainability also needs to be increased, and strategic HR can affect these as well (Boudreau and Ramstad 2005a; Mohrman, O’Toole, and Lawler 2015).

The Emerging HR Decision Science

The majority of HR practices, benchmarks, and measures still reflect the traditional HR paradigm of excellence, defined as delivering high-quality HR services in response to client needs. Even as the field advocates more strategic HR, it is often defined as delivering the HR services that are important to executive clients: leadership development, competency systems, performance management systems, and so on. But this traditional service delivery paradigm is fundamentally limited because it assumes that clients know what they need. Market-based HR and accountability for business results should also be recognized as important (Gubman 2004). All too often, however, they amount to merely using marketing techniques or business results to assess the popularity of traditional HR services and their association with financial outcomes.

Fields such as finance have a different approach. They have augmented their service delivery paradigm with a decision science paradigm that teaches clients frameworks to make good choices. Significant improvements in HR decisions will be attained not by applying finance and accounting formulas to HR programs and processes, but by learning how these fields evolved into the powerful, decision-supporting functions they are today. Their evolution provides a blueprint for what should be next for HR. The answer lies not just in benchmarking HR in other organizations, but in evolving to be similar to more strategic functions such as finance and marketing.

In marketing, decision science informs decisions about customers. In finance, it informs decisions about money. In human capital, a decision science should inform decisions about organizational talent and decisions made within and outside the HR function. Boudreau and Ramstad (2005a, 2007) have labeled this emerging decision science talentship because it focuses on decisions that improve the stewardship of the hidden and apparent talents of current and potential employees.

We see some evidence that perspectives are changing. In the past, discussions of HR systems and measures often focused on providing elegant scorecards or showing the return on investment of HR programs. Today, HR systems and measures are more frequently described as supporting decisions and honing strategy. Of course, reality often remains far different from the hype, but the evolution is promising.

Strategic Focuses

Human resource organizations often exist in organizational environments that are as turbulent as the competitive environments in which organizations find themselves. As companies take measures to survive and prosper, they make changes and introduce strategic initiatives that change the organization, the competencies it has, the way it manages its human resources, and its expectations of and relationships to its employees (Boudreau, Jesuthasan, and Creelman 2015; Boudreau and Jesuthasan 2011; Lawler and Worley 2011). A key driver of an organization’s approach to organizing and performing is its business strategy. Thus, in order to understand how the HR function operates and what makes it effective, it is important to examine how its characteristics are related to the strategic focuses of the organization in which it operates. We have done this in our past studies and do it in this study as well.

Table 1.1 shows the prevalence of seven strategic focuses that are often part of a company’s business strategy. It also shows that in our U.S. sample, the items measuring strategic focus statistically factor into five types: growth, information, knowledge, sustainability, and innovation. The focus concerned with information was rated the highest strategy in all of our surveys, and the item on customer focus was the most highly rated single item in all of the surveys. There are a few significant differences in the data from the different surveys; however, there is no overall trend that shows some focuses consistently increasing and others decreasing. Instead the results suggest that the focuses vary in importance based on what is happening during a particular time period.

Table 1.2 presents the strategic focus data for each country in our 2016 study. Building a global presence is the focus that shows the largest differences. The European and U.S. companies have the greatest focus on it and Australia the least. Australia is the country that is the most different, with the lowest ratings in many areas. This differs from our previous survey. One explanation for this may be change in the nature of the Australian sample: it includes fewer large global corporations for the 2016 study.

The highest-rated focus in almost every country is customer, and growth is rated the lowest. The others vary from country to country.

On balance, the strategic focus data support the point that organizations exist in complex, dynamic environments and need a variety of strategic and organizational initiatives to position themselves to perform successfully. In order to add value and act as a strategic contributor, the HR function needs to help ensure that the organizational capabilities and competencies exist to cope with a dynamic environment and changing organizational focuses. It is important to look at how the HR function is performing and changing, as well as how it is being driven by companies’ strategies.

Table 1.1. Strategic focuses, United States

Note: Bold numbers are scale