The HR Scorecard: Linking People, Strategy, and Performance - Hardcover

Ulrich, Dave; Huselid, Mark A.; Becker, Brian E.

Hardcover

ISBN 10: 1578511364 ISBN 13: 9781578511365

Publisher: Harvard Business Review Press, 2001

Synopsis

Three experts in Human Resources introduce a measurement system that convincingly showcases how HR impacts business performance.

Drawing from the authors' ongoing study of nearly 3,000 firms, this book describes a seven-step process for embedding HR systems within the firm's overall strategy—what the authors describe as an HR Scorecard—and measuring its activities in terms that line managers and CEOs will find compelling. Analyzing how each element of the HR system can be designed to enhance firm performance and maximize the overall quality of human capital, this important book heralds the emergence of HR as a strategic powerhouse in today's organizations.

About this title

About the Author

Mark Huselid is an Associate Professor of Human Resource Management at Rutgers University. 

Brian Becker is a Professor and Department Chair of Organizations and Human Resources at the State University of New York at Buffalo. 

Dave Ulrich is a Professor at the University of Michigan School of Business.

From the Back Cover

"A compelling way to define and measure HR's effect on the bottom line. The book constitutes a breakthrough in thinking for the HR function."
-Paul McKinnon, Senior Vice President of HR, Dell Computer Corporation

"At the root of every business challenge or opportunity is a human issue. If you believe that, you must take seriously the challenge of strategically planning for, and measuring the results of, human resource work. The HR Scorecard will both challenge your thinking in this area and provide options that you can use today."
-Ralph Christensen, Senior Vice President of Human Resources, Hallmark Cards, Inc.

"A must-read primer for human resources professionals who view HR as critical to the success of their companies."
-Mike Tindall, Vice President of Strategic Measures, Prudential

"This fact-filled, thoughtful, well-researched book provides valuable insights on the most pressing issue facing organizations today: how to measure their human resource performance. In an economy increasingly based on knowledge and people, no executive can afford not to read this book."
-Jeffrey Pfeffer, Thomas D. Dee II Professor of Organizational Behavior at the Stanford Business School and Author of The Human Equation

"The HR Scorecard provides a language for HR professionals and line managers working together to really nail the connection between HR interventions and the firm's success."
-Susan Bowick, Vice President and Director of Human Resources, Hewlett-Packard

"The HR Scorecard demonstrates how improved measurements play a vital role in linking human resource initiatives to business strategies and to significant increases in shareholder value."
-Robert Kaplan, Marvin Bower Professor of Leadership Development, Harvard Business School and Coauthor of The Balanced Scorecard and The Strategy-Focused Organization

"This book serves as a tremendous strategic tool for HR functions to showcase their impact on the business. If you want to succeed in the new economy as a high-performing HR strategic partner, I recommend you read this book."
-Robyn Ewing, Senior Vice President of HR, Energy Services, Williams

"A must-read for all HR executives. Full of useful findings, methods, measures and examples."
-Edward E. Lawler III, Author of Rewarding Excellence

"The HR Scorecard is the definitive guide for today's human resource professional. It provides perfect insight into a field that has been under much scrutiny and in great need of change."
-Milano Reyna, Worldwide Human Interests Director, Saatchi & Saatchi

Excerpt. © Reprinted by permission. All rights reserved.

THE HR SCORECARD
Linking People, Strategy, and Performance
By Brian E. Becker - Mark A. Huselid - Dave Ulrich

HARVARD BUSINESS SCHOOL PRESS

Copyright © 2001 President and Fellows of Harvard College.
All rights reserved.
ISBN: 1-57851-136-4

Chapter One

HR AS A STRATEGIC PARTNER

The Measurement Challenge

How can we ensure that HR is at the table?and
not on the table?

As you begin to read this book, take a moment to reflect on your firm's human resources "architecture"?the sum of the HR function, the broader HR system, and the resulting employee behaviors. Why are these three features important? How does the HR architecture help your company to excel in the marketplace?

    If your organization is like most, you're probably finding it difficult to answer these questions. In our experience, many HR management teams have a well-developed vision of their department's strategic value (at least from the perspective of HR), but the CEO and senior line managers are at best skeptical of HR's role in the firm's success. Worse, in many firms, executives want to believe that "people are our most important asset," but they just can't understand how the HR function makes that vision a reality.

    What explains this situation? We believe that these problems have the same root cause: HR's influence on firm performance is difficult to measure. Consider the elements and outcomes of your firm's human resources architecture that are tracked on a regular basis. You might have included total compensation, employee turnover, cost per hire, the percentage of employees who had a performance appraisal in the last twelve months, and employee attitudes such as job satisfaction. Now consider those HR attributes that you believe are crucial to the implementation of your firm's competitive strategy. Here you might mention a capable and committed workforce, development of essential employee competencies, or a training system that helps your employees learn faster than your competitors.

    How well do your existing HR measures capture the "strategic HR drivers" that you identified in your second list? For most firms there won't be a very close match. More important, even in firms where HR professionals think there is a close match, frequently the senior executives do not agree that this second list actually describes how HR creates value. In either case, there is a disconnect between what is measured and what is important.

    These questions are fundamental, because new economic realities are putting pressure on HR to widen its focus from the administrative role it has traditionally played to a broader, strategic role. As the primary source of production in our economy has shifted from physical to intellectual capital, senior HR managers have come under fire to demonstrate exactly how they create value for their organizations. More important, they have been challenged to serve increasingly as strategic partners in running the business.

    But what does it mean to be a strategic asset? The literature defines the term as "the set of difficult to trade and imitate, scarce, appropriable, and specialized resources and capabilities that bestow the firm's competitive advantage." Think about the difference between the ability to align every employee's efforts with the company's overall vision, and an innovative policy such as 360-degree performance appraisals. The first is a strategic capability whose cause is largely invisible to competitors; the second is a policy that, although initially innovative, is visible to competitors?and thus quickly copied. Simply put, strategic assets keep a firm's competitive edge sharp for the long haul?but by definition they are difficult to copy.

    Thus HR's problem?that its impact on firm strategy is difficult to see?is the very quality that also makes it a prime source of sustainable competitive potential. But to realize this potential, human resource managers must understand the firm's strategy; that is, its plan for developing and sustaining an advantage in the marketplace. Then, they must grasp the implications of that strategy for HR. In short, they must move from a "bottom-up" perspective (emphasizing compliance and traditional HR) to a "top-down" perspective (emphasizing the implementation of strategy). Finally, they need innovative assessment systems that will let them demonstrate their influence on measures that matter to CEOs, namely, firm profitability and shareholder value.

THE EVOLVING PICTURE OF HR:
FROM PROFESSIONAL TO STRATEGIC PARTNER

Recent decades have witnessed dramatic shifts in the role of HR. Traditionally, managers saw the human resource function as primarily administrative and professional. HR staff focused on administering benefits and other payroll and operational functions and didn't think of themselves as playing a part in the firm's overall strategy.

    Efforts to measure HR's influence on the firm's performance reflected this mind-set. Specifically, theorists examined methodologies and practices that are focused at the level of the individual employee, the individual job, and the individual practice (such as employee selection, incentive compensation, and so forth). The idea was that improvements in individual employee performance would automatically enhance the organization's performance.

    Although such research attempted to extend the range of HR's influence, it did little to advance HR as a new source of competitive advantage. It provided scant insight into the complexities of a strategic HR architecture. And simply put, it didn't encourage HR managers to think differently about their role.

    In the 1990s, a new emphasis on strategy and the importance of HR systems emerged. Researchers and practitioners alike began to recognize the impact of aligning those systems with the company's larger strategy implementation effort?and assessing the quality of that fit. Indeed, although many kinds of HR models are in use today, we can think of them as representing the following evolution of human resources as a strategic asset:

The personnel perspective: The firm hires and pays people but doesn't focus on hiring the very best or developing exceptional employees.

The compensation perspective: The firm uses bonuses, incentive pay, and meaningful distinctions in pay to reward high and low performers.

This is a first step toward relying on people as a source of competitive advantage, but it doesn't fully exploit the benefits of HR as a strategic asset.

The alignment perspective: Senior managers see employees as strategic assets, but they don't invest in overhauling HR's capabilities. Therefore, the HR system can't leverage management's perspective.

The high-performance perspective: HR and other executives view HR as a system embedded within the larger system of the firm's strategy implementation. The firm manages and measures the relationship between these two systems and firm performance.

    We're living in a time when a new economic paradigm?characterized by speed, innovation, short cycle times, quality, and customer satisfaction?is highlighting the importance of intangible assets, such as brand recognition, knowledge, innovation, and particularly human capital. This new paradigm can mark the beginning of a golden age for HR. Yet even when human resource professionals and senior line managers grasp this potential, many of them don't know how to take the first steps toward realizing it.

    In our view, the most potent action HR managers can take to ensure their strategic contribution is to develop a measurement system that convincingly showcases HR's impact on business performance. To design such a measurement system, HR managers must adopt a dramatically different perspective, one that focuses on how human resources can play a central role in implementing the firm's strategy. With a properly developed strategic HR architecture, managers throughout the firm can understand exactly how people create value and how to measure the value-creation process.

    Learning to serve as strategic partners isn't just a way for HR practitioners to justify their existence or defend their turf. It has implications for their very survival and for the survival of the firm as a whole. If the HR function can't show that it adds value, it risks being outsourced. In itself, this isn't necessarily a bad thing; outsourcing inefficient functions can actually enhance a firm's overall bottom line. However, it can waste much-needed potential. With the right mind-set and measurement tools, the HR architecture can mean the difference between a company that's just keeping pace with the competition and one that is surging ahead.

    A recent experience of ours graphically illustrates this principle. In a company we visited, we asked the president what most worded him. He quickly responded that the financial market was valuing his firm's earnings at half that of his competitors'. In simple terms, his firm's $100 of cash flow had a market value of $2,000, while his largest competitor's $100 of cash flow had a market value of $4,000. He worded that unless he could change the market's perception of the long-term value of his organization's earnings, his firm would remain undervalued and possibly become a takeover target. He also had a large portion of his personal net worth in the firm, and he worried that it was not valued as highly as it could be.

    When we asked him how he was involving his HR executive in grappling with this problem, he dismissed the question with a wave of his hand and said, "My head of HR is very talented. But this is business, not HR." He acknowledged that his HR department had launched innovative recruiting techniques, performance-based pay systems, and extensive employee communications. Nevertheless, he didn't see those functions' relevance to his problem of how to change investors' perceptions of his firm's market value.

    Six months after our meeting, a competitor acquired the firm.

    The sad truth is that the HR executive in this story missed a valuable opportunity. If he had understood and known how to measure the connection between investments in HR architecture and shareholder value, things might have turned out differently. Armed with an awareness of how investors value intangibles, he might have helped his president build the economic case for increased shareholder value.

    The story of Sears, Roebuck and Co.'s recent transformation stands in stark contrast to this anecdote and shows what companies can achieve when they do align HR with the larger organization's strategy. After struggling with lack of focus and losses in the billions in the early 1990s, Sears completely overhauled its strategy implementation process. Led by Arthur Martinez, a senior management team incorporated the full range of performance drivers into the process, from the employee through financial performance. Then, they articulated a new, inspiring vision: For Sears to be a compelling place for investors, they said, the company must first become a compelling place to shop. For it to be a compelling place to shop, it must become a compelling place to work.

    But Sears didn't just leave this strategic vision in the executive suite or type it up on little cards for employees to put in their wallets. It actually validated the vision with hard data. Sears then designed a way to manage this strategy with a measurement system that reflected this vision in all its richness. Specifically, the team developed objective measures for each of the three "compellings." For example, "support for ideas and innovation" helped establish Sears as a "compelling place to work." Similarly, by focusing on being a "fun place to shop," Sears became a more "compelling place to shop." The team extended this approach further by developing an associated series of required employee competencies and identifying behavioral objectives for each of the "3-Cs" at several levels through the organization. These competencies then became the foundation on which the firm built its job design, recruiting, selection, performance management, compensation, and promotion activities. Sears even created Sears University in order to train employees to achieve the newly defined competencies. The result was a significant financial turnaround that reflected not only a "strategic" influence for HR but one that could be measured directly.

    Few firms have taken such a comprehensive approach to the measurement of strategy implementation as Sears has. Granted, retail service industries are characterized by a clear "line of sight" between employees and customers. Thus their value-creation story is easier to articulate. But that doesn't mean that other industries can't accomplish this feat. The challenges may be greater?but so are the rewards.

WHY HR? WHY NOW?

Consider the following:

In most industries, it is now possible to buy on the international marketplace machinery and equipment that is comparable to that in place by the leading global firms. Access to machinery and equipment is not the differentiating factor. Ability to use it effectively is. A company that lost all of its equipment but kept the skills and know-how of its workforce could be back in business relatively quickly. A company that lost its workforce, while keeping its equipment, would never recover.

    This excerpt captures the difference between physical and intellectual capital?and reveals the unique advantages of the latter. The Coca-Cola Company's experience testifies to this reality. According to then-CFO James Chestnut, after transferring the bulk of its tangible assets to its bottlers, Coke's $150 billion market value derived largely from its brand and management systems.

    The evidence is unmistakable: HR's emerging strategic potential hinges on the increasingly central role of intangible assets and intellectual capital in today's economy. Sustained, superior business performance requires a firm to continually hone its competitive edge. Traditionally, this effort took the form of industry-level barriers to entry, patent protections, and governmental regulations. But technological change, rapid innovation, and deregulation have largely eliminated those barriers. Because enduring, superior performance now requires flexibility, innovation, and speed to market, competitive advantage today stems primarily from the internal resources and capabilities of individual organizations?including a firm's ability to develop and retain a capable and committed workforce. As the key enabler of human capital, HR is in a prime position to leverage many other intangibles as well, such as goodwill, research and development, and advertising.

    Table 1-1 takes a closer look at the major differences between tangible and intangible assets. It also suggests that managing HR requires vastly different skills from those needed to manage tangible assets. In particular, the benefits of HR as an asset are not always visible?they come to light only when the HR role is skillfully aligned with another intangible asset: the organization's strategy implementation system.

(Continues...)

Excerpted from THE HR SCORECARD by Brian E. Becker - Mark A. Huselid - Dave Ulrich. Copyright © 2001 by President and Fellows of Harvard College. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Edition details

• Publisher: Harvard Business Review Press
• Publication date: 2001
• Language: English
• ISBN 10: 1578511364
• ISBN 13: 9781578511365
• Binding: Hardcover
• Edition number: 1
• Number of pages: 235