Human capital management: how important is HCM?

Section two of the Personnel Today Management Resources one stop guide on human capital management (HCM), covering: making a business case for HCM; understanding the concepts and principles of HCM; and assessing people management within an organisation. Other sections .

Use this section to Get tips on how to make the business case for HCM Understand the key concepts and principles behind HCM Learn the 'killer questions' every organisation should ask Gain insights into counter-productive HR practices

HCM is no universal panacea, and at any point in an organisation's life cycle, HCM might not be the most pressing priority. However, it should bring significant benefits to every organisation that uses it and, in some cases, it will mean the difference between long-term survival and failure.

Regardless of when it might be introduced, anyone talking HCM has to talk in terms of hard cash value. This is something that most HR directors find incredibly difficult to do, but it is not as hard as it might seem. It is something that every other board director has been doing for years. Sales directors forecast sales, research and development directors talk about drug pipelines, and marketing directors talk about market share. Not one of them can guarantee any of this will happen anymore than an HR director could guarantee HCM will generate an extra £10m, but it does not stop them presenting their case in this way. This is an important lesson for any HR professional that wants to move up to HCM.

So what is HCM worth in pounds?

The best example of the value of HCM is Toyota. Toyota's results for managing its people better than any of its competitors are startling. On 12 May 2004, it was reported in The Times that Toyota became "the first Japanese company to report full year profits of more than a trillion yen" (£5.74bn). These figures are making financial and investment analysts sit up in astonishment as shown in these comments by Koji Endo, an auto analyst.

"Little by little, over the last 30 years, Japanese carmakers have been conquering the US market and now account for 28 per cent of the roughly 17 million cars sold each year in the world's biggest market, which is now the key to their fortunes. The fact is the Japanese are making record high profits out of this 28 per cent of the market share, and the Big Three are making absolutely no profits from their 60 per cent market share," said Endo, referring to US auto giants General Motors (GM), Ford and DaimlerChrysler.

So, how did Toyota do so well against competitors that had such an enormous head start from the beginning of the 20th century? Maybe part of the answer is its obsession with cost reduction. Eight years ago, Toyota predicted that it was going to reduce its cost base by 50 per cent over three years, and it succeeded. Ford would love to be able to make the same prediction but would really struggle. The key difference between the two companies? Toyota knew 50 per cent was achievable because it had already spent the previous 40 years ensuring that all of its people were doing their best to reduce costs. This behavioural obsession is also intertwined with its long-term business strategy to produce vehicles at a lower cost than its rivals. This is how far they have moved ahead: the unit cost of production for US car averages about $3,500 (£1,900) more than for a Japanese car (http://quickstart.clari.net/qs_se/webnews/wed/df/Qjapan-auto-us-show.RoEy_DOJ.html ).

This is a classic example of turning an operational advantage into a strategic advantage by pursuing these policies religiously over many years. But what should be even more worrying for the US auto giants is that Toyota's best is yet to come. The following is from an advertisement for new graduates in The Times: "At Toyota we've launched '2010 Global Vision' - a mission to secure 15 pr cent of the world's passenger car market within the next eight years, a growth rate of 50 per cent".

It is only this long-term picture that truly illustrates what HCM has to offer. Toyota now has a market capitalisation of $110bn (as at October 2003), which is nearly four times that of General Motors ($24bn) and more than the total for GM, Ford and Daimler Chrysler combined. This does not necessarily mean Toyota has the best HR function, it just means it literally gets more dollars returned on its investment in people compared to all of its competitors. Toyota has been aiming to maximise the value of its human capital long before the term was ever coined.

Of course, Toyota is probably doing many things differently to Ford and GM. It invented the lean production system, it lives and breathes a philosophy of kaizen (continuous improvement), and it develops very close, long-term relationships with its suppliers. It also recruits people who want long-term, stable employment, and encourages them to produce as many ideas as they can to improve the way the company works. However, Toyota also demands hard work from its people. HCM is not about giving employees an easy ride.

Putting a value on your HCM strategy

So, HCM has to adopt this same approach of making clear and causal connections between HCM practices and hard cash value otherwise its 'strategies' will never be taken as seriously as those of it more commercially-focused colleagues. You could start with an ambition to improve the value of your organisation by at least 10 per cent over the next three years through HCM. Don't forget, Toyota managed to reduce its existing cost base, which was already highly efficient, by 50 per cent in three years.

But what would this actually mean?

HCM is about innovation. What would a 10 per cent improvement in your rate of successful innovations be worth? How many new products to market would that represent? What is your best-selling product? What are the profit margins and sales volumes on these? So, what would another of those be worth?

HCM is about being super-efficient. What would a 10 per cent improvement in efficiency look like? What is your current cost base in pounds? What is average productivity per employee and what would a 10 per cent increase in that be worth?

HCM is about improving customer value by passing on some of the benefits from the improvements you make. What difference would a 10 per cent improvement in delivery times mean to customers who are waiting for four weeks? What about a 10 per cent reduction in complaints or problems with after sales? How about passing on 5 per cent of cost savings through a 5 per cent drop in prices? Of course, all of these benefits should result in an improvement in your own customer base, sales and market share, so what might they look like?

HCM projections and forecasts

Any HCM director who is confident they can achieve significant gains from HCM should start by producing a long-term picture of exactly what these gains might look like.

In Figure 2 (see below), there is a very simple but highly graphic case for what an HCM strategy could be worth (but note the number of years on the x-axis). Of course, anyone thinking of producing such a graph would have to have some convincing data to support it. In particular, the cost and revenue lines have to be tracked over, say, three previous years, and then projected on top of future forecasts already produced by the sales team. HCM is not an act of faith; it is a clear-headed strategy to achieve significant and tangible benefits. If the board do not buy-in to this chart, HCM will never be a credible alternative to their existing management model.

Articulating how HCM strategy can add value is a new language for most HR professionals, and the only way to build your confidence in this critical skill is to start with a very fresh perspective on the value of people.

Business case for human capital measurement and management

Let us start with a very simple example. Imagine that your sales team are already well motivated, well rewarded and performing well in relation to their current sales targets and projections. If you suddenly brought HCM into the equation, what difference would it make? If you are not sure about the answer to that, why would you pursue it any further?

So let's at least decide on our baseline, which would be the profit on the sales that they achieve - that is, the ultimate value of the salesforce. It is also one measure of the ultimate value of the whole company, but we will broaden the definition of 'value' later. For now, we will use an accountant's definition of value, where: value = sales - cost of sales = profit. For example: Value = £100m - £90m = £10m.

The whole point of introducing HCM would be to improve this figure. If you had no way of increasing this figure then HCM would be worthless. So HCM has to have a clear understanding of how it is going to add value before it starts. Immediately, therefore, we start to see a difference between conventional human resource management (HRM) and HCM. HRM tends to be based on the idea of following best practice. HCM is only concerned with value; a subtle but significant distinction.

So HCM assessment is based on much tougher success criteria than you are probably used to in the HR department. Rates of sickness and absenteeism, staff turnover and even employee attitude surveys will cut no ice with HCM analysts if there is no clear, causal connection to a corresponding improvement in organisational and market value. The currency of HCM is added value per employee (in £/$'s) not their number of training days per year, or even how much of your salary bill that is committed in the training budget, unless you can show the ROI on this spend.

That is, of course, unless you plan to argue that much of what HR does is concerned with the intangibles in organisations and, as such, the benefits cannot be measured. As we have already seen, this argument does not hold much water but we need to look at this question again in a little more detail because it is still a key area for debate in HCM circles. (see 'Intangibles tend to confuse the issue of added value').

Valuing 'intangibles'

If you do regard what HR does as 'intangible' then you are not alone. In fact, much of the debate around intangibles comes from the field of HCM. Indeed, it is the very fact that the people resource and its capabilities (intellect, skills, motivation) are deemed to be intangibles and therefore difficult to measure, yet so obviously linked to value, that is at the core of the HCM debate.

As a result of research by academics such as Baruch Lev, it is estimated that such intangibles account for up to 75 per cent of the difference in market valuations of companies. In the US in particular, this has led to many HRM practices being designed to influence such intangibles, hence the focus on 'employee satisfaction' in the Sears Roebuck case study, and the model of 'employee champion' espoused by HR guru Dave Ulrich. This has also tended to support many HR teams in their efforts to seek to measure employee attitudes and satisfaction levels in the belief that this will help provide a solid foundation for better organisational performance.

Whether HCM focuses on tangibles or intangibles is not the point. HCM can only be seen to be working effectively if the result is real, measurable, tangible value. Moreover, if it has made this much difference to Toyota's fortunes, what could it do for a whole nation, where the Government adopts these practices? So what could it do for the future of UK plc?

That is precisely what Tony Blair and secretary of state for trade and industry, Patricia Hewitt, are thinking. They would be very keen, especially with our apparently persistent productivity gap, to know how to help businesses (and the public sector) in the UK to perform like Toyota.

Regardless of the impact it might have in the commercial sector though, what if the NHS adopted Toyota's supply chain philosophy and practices? How about if local authorities and police forces managed to get much more value out of their enormous investment in 'human capital'?

The potential value and worth of HCM is obvious and huge. Hence the enormous interest in the subject. However, to start to realise all of this value will require a fundamental and significant shift in management thinking and practice.

The greatest revolution in management thinking?

It is hard to over-estimate the potential shift in management thinking that HCM requires, not just in HR management but in general management as well. Organisations that want to adopt the tenets of HCM will have to completely re-think the way they operate. After all, Ford and GM are probably doing as much, if not more, as any other company to try to manage their people as well as they can with their current management methods. They do their best to recruit and select the best, they want to develop their people and encourage them to bring new ideas to the workplace, and they have probably tried every 'best HR practice' in the book, including performance management and sophisticated reward systems. Yet all of this effort still leaves them trailing far behind their main competitor. So they will have to try something else if they want to close the gap.

In reality, the advent of HCM marks the end of a management era. What might have to change if management teams want to adopt an HCM philosophy? It will probably mean the end of:

Command and control

The collapse of communism experienced in the former Soviet Union was as much to do with the failure of the state to be able to provide what the people needed as it was to do with a failure in the philosophy of communism. It was probably the best example of how centrally-controlled organisations fail to respond to customers' needs. The same principle applies in large organisations, where all of the decisions are made at the centre and managers are then expected to enforce these decisions in the workplace.

Very few organisations would admit to still being based on a command and control model, but the same organisations would struggle to produce evidence that they allow and enable decisions to be made at the lowest possible level in order to make the organisation as responsive as possible. Organisations that want to get the best out of HCM have to take the reins off their people and allow them to use their detailed knowledge and judgement to make decisions that are in the best interests of generating value.

'Act of faith' HR practices

In recent years, the notion of the employee-customer profit chain has suggested that increased employee satisfaction should lead to increased customer satisfaction and, ultimately improved sales.¹ This theory has encouraged HR directors to set up annual employee attitude and satisfaction surveys in the belief that this will help to improve performance.

This could be called the 'act of faith' school of HR management. That is, 'do the right things and business performance will inevitably follow'. Until the advent of HCM, this approach was widely accepted in HR and management circles, but under HCM, much clearer links have to be made to actual value creation.

In practice, this means always tying HR practices directly to value indicators. If there is a correlation between employee satisfaction, customer satisfaction and sales, then the sales figures should be shown on the same chart as the attitude survey results. If a 360° feedback scheme is in place, the performance of the managers put through the scheme has to be monitored. If you are putting a new reward scheme together, you need to produce some data that says this will help to create value through retaining the best and improving the performance of the rest.

A culture that seeks to blame

HR professionals have been talking for many years about the problems associated with the ubiquitous organisational cultures of blame. This inhibits risk taking, creativity and innovation, because no one wants to stick their head above the parapet for fear of having it blown off. Without innovation, the organisation cannot increase its value.

Blame cultures should be seen for what they are - a drain on potential value. This is how the board should see them, otherwise they will not attract the attention and remedial action they deserve. The failure of a pharmaceutical company to produce a continuous pipeline of new drugs would spell disaster. Yet the very development of the new drugs that will ensure the company's future may be jeopardised by a fear of taking risks or being blamed if something goes wrong.

HCM can only thrive in a culture that allows mistakes to be made, but it can also only thrive where people learn from their mistakes and do not continue to make the same ones. So HCM is about getting the balance right. Both innovation and errors have to be measured, monitored and acted on. This then has to be translated into value (for example, cost of errors, delays in getting new products to market, new product innovations).

Silo organisations

The inherent weaknesses in silo organisations (those structured along simplistic functional/departmental demarcation lines) have been recognised for many years, and the concept of matrix organisations was intended to produce a much more co-operative and constructive working environment.

HCM works best in flexible, adaptable, mutually supportive organisations, regardless of how the organisation chart is actually drawn. One key element of HCM that helps to create this type of environment is that value can only be created if the whole organisation is working well together. If the production team produce goods very efficiently but the marketing team fails to market them effectively, no value is created. The drive for value brings everyone into the same loop (see Section 3).

Conventional business measurement

Of course, the biggest change comes with the end of conventional business measurement and information systems as we know them. It was because accounting conventions were unable to realise untapped potential and failed to predict future value creation that the subject of HCM grew in the first place. There are several problems with current methods of accounting and financial control:

They treat many of the organisation's people as overheads, not value adders

They tend to be more concerned with controlling costs rather than unleashing value

They are generally historical figures

Performance measures are on a very narrow definition rather than ultimate value

Accounts, themselves, are not as user-friendly as we need them to be if we want employees to search for value indicators.

Of course, any board of directors that wants to consider HCM as a management discipline has to be made fully aware of these implications. You will see immediately that this will present a challenge for existing directors, especially the finance director, but they should be happy enough to work with the HR team in this simply because they should already understand the issues and realise that their own profession has yet to provide any answers.

Just a new language or a new reality?

You should be getting a clear picture now of how much a departure HCM is from conventional HRM thinking. However, you might not be convinced yet. Perhaps a more sceptical view is that this is more about a change of language than a change in substance, and that we have been down this road before when HR outsourced much of its transactional work to allow it more time to concentrate on the strategic end of the HR spectrum. Here are some of the key ideas that underpin HCM - is there is any difference?

Key HCM concepts and principles

Value

Definitely the number one concept and principle in HCM is the search for value. HCM asks how all the effort in organisations is distilled down to just one measure - value. Everything done in the name of HCM is done in the name of value.

Line of sight

In HCM, there is no point in an organisation producing lots of value if no one can show the logical connection to HCM practices. In Figure 3 (see below), the HCM thinker works out that one benefit of teaching managers to analyse processes is that the processes should become more efficient as a result and this will have a pound sign benefit.

People as capital

What's in a name? There may be very little but just calling your people 'capital' is not HCM. If people are truly regarded as capital, the organisation should be 'leveraging' that capital, as the US investment banks would say; that is, getting as much return on it as possible. Treating people as capital is a whole mindset or it is meaningless.

Reporting

Reporting is more to do with the Government and governance agenda than an inherent part of an HCM strategy. However, there is definitely a perceived need to produce some results in HCM, whereas HRM was never really an integral part of a company's reporting requirements.

Measurement

The need for measurement underpins everything in HCM but the measures themselves are only one part of the complete equation. Measurement has to follow the principle of a before picture (the baseline) and an after picture (results), and relate to outputs (goods/services delivered) and value (£'s).

When we talk 'inputs' and 'outputs', we need to be crystal clear about the distinction. The only meaningful HCM 'outputs' (better staff retention, for example) are those that improve business outputs (better quality products and services from loyal and trusted staff, for example). So the measure of 'retention' will only be meaningful if it is associated with an improvement in service levels.

This view of HCM measurement means those who work in HCM will immediately share accountability for ultimate business performance.

But measurement has an even more important role to play in HCM. What gets measured gets done so choosing the right measures (customer satisfaction) encourages the right behaviours (better customer service). Intelligent use of measures will produce intelligent behaviour among employees. The wrong measures, used in the wrong way (number of days training per annum) will encourage stupid behaviour (it doesn't matter what course I send my staff on as long as they get their right number of training days this year).

Strategic, holistic, systemic

Perhaps the best way to sum up the real difference that HCM brings to management thinking is that value is only created when every part of the organisation works well. This not only means that HCM has to be strategic, but it has to be holistic and have systems that ensure the right results happen. We will re-visit this again in Section 4 .

Personnel, human resources, assets or capital?

In among this evolutionary shift in thinking has been an on-going and rather tiresome debate about the language we use. Are employees to be referred to as 'personnel', 'human resources', 'assets' or, as HCM analysts would suggest, 'capital'?

The term 'personnel' had too many administrative connotations, while 'human resources' sounded more progressive and sexy. But to this day, different personnel/HR departments are identical in every way except name.

Academics have tried to draw a distinction between personnel and HR but it has remained, by and large, an academic debate rather than of any practical use. Although many traditionalists who worked in the people management profession still preferred the term personnel director, it did not stop the term HR from reaching pre-eminence in the marketplace. Very few personnel directors still exist.

The term 'assets' never caught on though and was only ever really referred to by the accounting profession when they were trying to produce methodologies for HAV (human asset valuation) and HAA (human asset accounting). One fundamental problem with describing employees as assets is simply the fact that they are not assets: they are not owned by the company and can leave whenever they choose (within certain minimal constraints).

The use of the term capital, however, is starting to stick and gain currency because it attaches the right level of importance to the value of people and also describes the relationship with the employer more accurately. While you have people capital at your disposal, you should be making as much value of it as you can. You do not have to own capital to make good use of it, in the same way that you might give an investment manager your own savings and ask for the best return. The title capital also suits many individuals who can now talk about the development of their own capital worth through their own personal development and acquisition of new skills, knowledge and expertise. Personal capital is a much more marketable commodity. Human resources sounded like victims - human capital is a much more attractive proposition from both the employer's and the individual's perspective, and puts people much more in the driving seat of their own destiny. So, hopefully we will have a term that is commonly agreed and accepted.

In addition to this diversion, there were distinctions made between HRM and strategic HRM. Such differences, if they ever existed, should have been much more obvious and observable than they are. It is difficult to see how strategic HR can be if it is not represented at a strategic level (on the board) but then just because there is an HR director on the board does not guarantee that it is making a strategic contribution.

However, the differences between HCM and HRM are striking. At last, this can be seen as a significant shift forward. If you are unsure whether your present HR strategy would satisfy any HCM criteria, you can use the following 'killer questions' to gauge where you are and the challenges ahead.

Killer questions on HCM

These questions are intended to set a very tough standard because external observers and assessors of human capital set a very tough standard. They are meant to sort the real HCM professionals from the HR pretenders. They have been built up over the last 12 years from my own experience of working as a strategic, HR measurement specialist with a wide range of organisations. All of these questions search for clues and indicators about how well organisations have been managing their people to maximise their real £ value.

However, before you attempt to answer the killer questions, you should consider whether your own organisation is in a position to start down the HCM road. Are you above the HCM line or below it?

Above and below the HCM line indicators

Perceptions about the value of people and the role of the HR function vary enormously from one organisation to another. These perceptions tend to be moulded by a combination of the board's preconceived ideas about how best to manage people and the role of the HR function adopted by the HR director.

The least mature organisations only perceive a need for a purely administrative HR function while the most mature are constantly searching for ways to add value and gain a competitive edge through innovative people management practices (HR Strategy: Business Focused, Individually Centred, see Resources). This range of different perspectives can be neatly split into two camps. Those organisations that see the people resource primarily as a cost, and those that see it as a means for adding value (as human capital). The two camps in question are shown in Figure 4, and are divided by a dotted line.

Above the line	Below the line
People add value - they provide a competitive edge because the organisation manages them better than their competitors	People are a cost and a potential source of risk (legal obligations, liability, unfair dismissal)
HR is innovative and well respected for helping the organisation move forward	HR is a maintenance and support function with a limited remit
HR uses direct business measures (profit, margin, ROI) to gauge its effectiveness	HR measures HR activity - training days, recruitment costs etc
HR is integral to business strategy	HR reacts to the business plan

The line delineates two fundamentally different perceptions of the value of people. This is a crucial demarcation line; organisations above the line are consciously seeking value - a very positive and ambitious stance, while those below the line are only seeking to minimise costs and risk. HR functions already operating above the line can start to design effective HR strategies and move on to HCM strategy to fully develop human performance potential. While those below the line will always be restricted to reactive, transactional and primarily low value, administrative, HR activity.

In order to help you answer the question of whether you are above or below the line, here are some additional indicators.

Figure 4 (see above) also identifies five different stages of HR function development, which inevitably reflect the organisation's perception of what it expects from its people.

In ascending order the stages are:

1. HR administration

A very limited, minimal role where every-thing is done administratively to make sure people are employed legally and safely. This is a risk-avoidance role and totally reactive to any change in circumstances. Its value is very limited even though it keeps the organisation out of trouble.

2. Professional HR

In this type of organisation, the board expects and receives a professional HR support service, with the emphasis on support. The accountability of the HR team starts and ends with giving good, professional advice. However, HR is not integrated with the way the organisation operates. The HR team offers what it believes to be best HR practices, but these are installed in a very perfunctory manner and are only as effective as the line managers who have to use them. Without board level commitment to value through people, line managers make limited use of such practices, tools and techniques.

3. Effective HRM

A more effective HRM role only starts to happen when the HR team shifts from being reactive to proactive. It also accepts shared responsibility for getting the right person for the right job at a reasonable performance level. So selection decisions are made between HR and the line manager. HR starts to be more accountable but the value it can create increases by virtue of this. HR makes sure only the best candidates get through the selection process and it checks that they are performing.

4. Integrated HR

HR is only above the line when managers and HR work together as business partners. HR business partners are involved in all business planning discussions because they understand their business intimately. They are all as aware of the key performance metrics as any line manager. They start to highlight performance gaps and deficiencies that operational managers have missed. They target rewards and training to plug these gaps.

5. Strategic HR

True HCM only can happen at a strategic level and is only likely to happen if a strategic HCM thinker is on the board. The sole purpose of strategic HCM is to do everything possible, systematically, to get the maximum value from people (this is where strategic HR starts to pick up the HCM mantle).

Once you have decided that your organisation is above the line, you should start trying to answer the other killer questions. These have been divided into the following categories:

1. Business strategy and value

Does your CEO have a clear vision of what the future holds? If so, what is it and how far into the future does it look? Who will know how the organisation or its people need to be developed if there is no clear vision? If you do not know what organisational developments are required, how can you develop the people? Business vision and HCM go hand in hand.

What do the CEO and the board value? Do they value customer service or short-term profit? Are they venture capitalists looking to sell-out as soon as possible to the highest bidder or do they value the service the organisation provides to society? The former is more likely to suit mercenaries than employees who like to be totally engaged with their employer's purpose. HCM demands a high degree of employee engagement.

How do your CEO and finance director define added value? Is it just the difference between sales and cost of sales? A simple definition of profit? If so, they will always be more interested in reducing cost than generating value. Or do they see that there is much more to the basic concept of value? Could added value be defined as an 'enhanced reputation' for good service, for example? Do they accept that lower short-term profit could be a small price to pay for longer-term business development? HCM is concerned with long-term market value development, not short-term share price.

Do you have a business strategy? If so, what are the key objectives and timeframe? How has it changed in the past 12 months? Does it seem to constantly change with changing market circumstances? The best business strategies send clear and consistent signals to both customers and employees. A well-conceived business strategy, communicated clearly to all employees, provides a very solid foundation for HCM.

What are the main steps and sequence in the business planning and budgeting cycle? What comes first, the budgeting or the business planning process? How is the budget for HR and training decided? An HCM strategy might require significant funds in its early stages. Will traditional planning and budgeting allow for this and ensure that the necessary resources are dedicated to the task?

2. HRM and HCM strategy

Do you treat your people as a source of strategic, competitive advantage? The purpose of human capital strategy, as with any business strategies such as marketing or product development strategies, is to gain a competitive advantage. So does Tesco manage its employees better than Asda? If it does, it gains a competitive edge and the extra value that creates. So is this the way you, your chief executive and the board view your people? Or are they just a cost or resource to be managed? Of course, if you do not know how your competitors manage their people, how can you hope to compete with them on this?

Do you already have an HR strategy? If so, what are the key objectives? Are those objectives 'HR' objectives or is the strategy directly wired into the business strategy (for example, is HR strategy planning to deliver sales improvement?). Who is the owner of this strategy and do they accept the accountability for its implementation and success?

Who presents and represents HR strategy at board level? Are they HR strategy specialists? Are they fully cognisant of the latest developments in HCM, and will they ensure that it receives a full and convincing hearing? They have to be highly persuasive, influential and with a level of business credibility that is acknowledged and respected by external financial and HCM analysts.

Who is going to be the architect and prime mover on HCM strategy? This might not be the HR director. Whoever it is, they will need to understand how much potential value is on offer and believe that it is achievable. They will need to be fully conversant with the business strategy, probably have some in-depth management experience and also fully appreciate the complexities and practices of HRM. They will then have to convince the board that HCM strategy is a new and powerful weapon in the competitive armoury.

3. Organisation design

Do you help to design your organisation? Who makes the decisions about the organisation structure? Who designs the organisation chart, and how often does it change? Have you ever had any input into new systems or processes? All of these elements together make up organisation design. How the organisation is designed is crucial to how well people can perform and how much value the organisation can generate. For example, if you have four layers of management, and no innovations can be introduced without the agreement of all four levels, do not be surprised if your organisation finds it difficult to innovate.

HR teams may recruit and select candidates, but if this is only after all the big decisions have already been made elsewhere, about what roles are required, then the added value from the HR team is much less than it could be. HC managers will be the instigators of new organisation designs because they see that as a clear source of future value.

Are you satisfied with the existing organisation structure? Which part is the least satisfactory? What changes are planned? What obstacles are there to bringing about the necessary changes - ego, status, personal allegiances taking precedence over business performance? These will all be obstacles to successful HCM.

How many organisation chart changes have there been in the last 12 months? If the organisation chart is constantly changing, what does this tell you about the lack of vision and coherent strategy in your organisation? Does anyone on the management team realise what damage constant change is doing? Have you measured the damage in terms of delayed projects or product development cycles?

What questions are you asking about your organisation for which you currently have no answers? What plans do you have to start providing these answers? Do you have the right people in the right roles for the future? Where are they going to come from?

Do you know what a system is and could you provide one example from your own organisation? Do you know the difference between open and closed-loop systems? Do you have any closed-loop systems in your organisation?

Closed-loop and learning systems are very similar, so do you have an organisational learning system? In other words, if someone makes a mistake or causes an error, is there a system in place to make sure it does not happen again and everyone learns from the experience?

Are you aware of the PDCA (Plan, Do, Check, Act) cycle or even the EFQM model? Does your organisation use it to continuously improve what it does? If so, try to provide at least one example.

Do you know what a process is? Can you show the key steps in one of your core business processes (for example, product development, sales, inventory control)? If so, can you give one example of a systematic process improvement? What did that improvement look like (such as shorter time, lower cost, better output?) and what was it worth in pounds?

Do you have systems for value creation, employee engagement and recognition?

4. How effective is your performance measurement and management system?

Do you see HCM as an explicit and determined effort to get the best performance out of all of your employees, regardless of the level at which they work?

Have your previous attempts at measuring and managing employee performance met with fierce resistance, apathy or even subterfuge by employees who see the whole subject as a big stick rather than a juicy carrot?

Does your organisation perpetuate a culture that seeks to blame, and does this turn performance management into a cause of division between employees and departments rather than a platform for unifying purpose and effort?

Have you learned from all of these experiences and will you ensure that it is the positive aspects of performance management that come to the fore, even though you fully accept that there will always be a need to deal with underperformance?

Do you measure and monitor the performance of your people at all levels and, if so, how? Does your performance review system have a rating scale and does it allow enough room to reveal small improvements? Is the performance assessment credible and valid?

Is your performance management system open and honest? Does it scare managers and their staff, or does everyone perceive it as a positive and supportive developmental tool?

How do you deal with those who are assessed as being underperformers? Do they receive enough support and attention to help them or are they immediately treated as potential dismissal cases?

When you have identified an underperformer, who is unwilling or incapable of improving, do you turn a blind eye or grasp the nettle so as to send a signal to all employees that the organisation cannot accept passengers?

How do you deal with those who are assessed as being superior performers? Do you have special schemes to identify and nurture talent, high-fliers and future leadership potential? Is every effort made to give them room to grow and to set them challenges that keep them motivated?

Do you know the key distinctions between activity, performance and added value measures or metrics? Are you eliminating activity measures and turning performance indicators in to added value measures?

Do you have minimum standards of performance in terms of knowledge and skills levels in all roles? How do you assess this? What percentage have you achieved so far? What do you do if the standard slips? Does the role description of managers include specific responsibility for staff development and performance? Is time specifically built into budgets to allow for this to happen?

Do you have an EPMIS (employee performance management information system)? Who designed it? What percentage of this information is used?

Have you asked anyone which parts of the present management information system (MIS) are most useful? Have you ceased producing any information that was not used? Has anyone from the HR team been instrumental in re-designing the MIS?

All of these questions should help to give you some understanding of the scale of the challenges facing those who want to make HCM a reality. However, if you find answering them very difficult and it deters you from wanting to venture into the HCM arena, you should at least try to avoid some of the contra-indicators.

HCM contra-indicators

What is a strategic HR contra-indicator? It is a sign of HR activity that is not directly integrated with the business strategy. An activity that is not specifically designed to generate some value. Some of the easiest to spot and most telling are in the training and development area. Measurements of the number of training days or target hours/days of training per employee clearly indicate an organisation that is more concerned with training cost and time (inputs) than applied learning (output). Similarly, having a fixed percentage of salary bill for training spend or, worse still, a fixed monetary amount each year are contra-indicators.

Equally, rigid pay and reward policies and tightly controlled job evaluation schemes indicate an organisation that does not want to encourage maximum value or contribution from its employees. Silo organisation design (rigid demarcation between functions and departments) suggests in-built organisational rigidities and barriers to human capital realisation. Probably the worst contra-indicators of all are generic HR activities, such as putting everyone through 360° feedback or trying to develop a generic set of competencies, for example. These are organisations that treat all their human capital as a homogeneous group, rather than as a pool of individual talent waiting to be harnessed, fully developed and turned into real value on the bottom line.

Here are a few of the key contra-indicators. If you manifest any of these, you will have a serious problem with HCM.

Rigid adherence to a proprietary strategic planning system (for example, BBS, EFQM) that is not tailored or fully adapted to the organisational context in which it is being applied (but see 'How to get a triple AAA HCM rating' in Section 4). These systems can be made to work but only if everyone in the organisation thinks about what they are doing, why they are doing it and what it is meant to achieve. In other words, the systems are used intelligently, not robotically.

No philosophy of continuous improvement. If your organisation is not hungry for improvement, the people will be under-utilised and their own ambitions thwarted. Certainly, you will never maximise value, from human capital or any other resource for that matter.

No HCM strategist present on the board. If no one understands the full strategic implications and potential value of HCM, how can it be adopted as an organisation-wide philosophy and management methodology?

Participation in an existing HR benchmarking database. This is a two-pronged problem. First, the existing database will have no HCM data on it. Second, HCM is organisation-specific. There is no point in trying to compare one organisation's approach to another in a simplistic comparison of numbers.

An unhealthy preoccupation by the HR department with trying to measure its own efficiency and costs rather than focusing on what really matters, value.

References

¹The Employee-Customer Profit Chain at Sears, Harvard Business Review, January-February 1998