Stand and deliver: can HR do the business?
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Debate over how the HR function should be positioned within organisations and what difference it can make to overall business success is not new to the profession. For some years, the discussion focused on the need for HR to have a seat on the board. More recently, there have been calls for HR directors to take their place as "business partners" and contribute to wider corporate goals on an equal footing with other functional heads.
In the US, it seems that the debate has moved on another stage, with the Society for Human Resource Management (SHRM) in its HR Magazine1 pointing to the trend of HR directors taking on even greater leadership roles within their companies, including that of chief executive. As David Hutchins, chair of SHRM's board of directors and chief administration officer for US Federal Credit Union, comments: "HR is increasingly a top priority for senior executives, regardless of company size and reporting structure. Senior executives today, perhaps more than at any other time, see the real value of people to the success of their organisations."
A strategic contribution?
One consistent mantra that echoes throughout HR circles is the need for HR to "be more strategic". Generally, this is taken to mean less emphasis on the more traditional and transactional elements of HR - such as pay, recruitment and training - and greater focus on how the effective management of an organisation's human resources can contribute to business objectives and, ultimately, the bottom line.
According to a recent survey on the state of the HR function by the Chartered Institute of Personnel and Development (CIPD)2, the tide has already turned in favour of an HR profession that is focused on strategic alignment with corporate goals. As the CIPD states: "The survey shows that HR influence is rising in the boardroom, the majority reporting that their CEOs believe HR has a key role in achieving business outcomes."
The statement is backed up by some of the research findings: 72% of the 1,000-plus survey respondents felt they have more influence in relation to senior colleagues compared with three years ago; and seven out of 10 said their executive board frequently discusses HR issues and that HR managers are comfortable discussing business issues. Three-quarters reported ownership of a written HR strategy and more than 80% felt that improving their employees' focus on achieving business goals is a priority. The study also revealed some inconsistencies. For example, a crucial gap emerges between senior HR professionals' strategic aims and what happens in practice. Two-thirds of survey respondents would like to spend most of their time on business strategy issues but, in reality, only 17% are able to do so because of day-to-day pressures such as administration.
The findings are consistent with those of an IRS survey, which established that HR professionals overwhelmingly felt that they had increased their influence in recent years (see HR goes strategic ). In part, this higher profile was a response to mounting business and legal pressures on organisations to get their people strategies right. But there were also a significant number of respondents who highlighted the role of particular individuals or groups of individuals in raising the standing of HR in their organisation.
The same study suggested that while HR professionals believe a strategic approach is important, they found themselves engaged for the most part in other activities. Among the 85 HR departments participating in the survey, almost three-quarters allocated less than 20% of their time - that is to say, less than one day a week - to strategic activities, with the remainder of the working week divided almost equally between providing a consultancy service and administrative work.
The growing conviction that HR will soon have its role firmly placed in the strategic camp is not one that is shared by all commentators on the subject. Richard Finn is managing director of Penna Consulting and has done a lot of work on corporate and HR strategy. He believes that the overall people mandate is much bigger than the typical HR agenda of most HR departments. "In the majority of organisations, a large part of the people strategy is not owned at all," says Finn. "The chief executive and the board should have ownership of the HR strategy and give it top-level commitment. The reason this tends not to happen is that the people agenda is often not really understood by either the board or HR itself. This means that HR issues do not even make it on to the agenda of board meetings."
Finn describes a simple box model to illustrate the role that HR typically plays (see figure 1), with the average HR function focusing on the activities placed below the line. "It is usually only the HR departments in the bigger companies that have the resources to release themselves enough from a transactional role, for example, by installing a sophisticated HR system, to focus on higher-value strategic activities," advises Finn. He is quick to point out, however, that this does not mean that HR can forget the basics. "The transactional side still needs to be done well, but there are other options that reduce cost and release resources for doing more strategic work, such as outsourcing responsibility for administrative tasks or implementing a self-service option," he adds.
Finn uses a "tiering" model to visualise the way in which the relationship between HR and the rest of the business changes according to the value HR gives to the business once it has started utilising technology (see figure 2). As the value of the input provided by HR increases, so the level and strategic value of the interface between HR and its business partners increases. For example, at level zero an HR function typically has the technology in place so that HR can be delivered through some level of self-service provision, resulting in a minimum level of interaction between HR and the business. By the third tier, the HR function is supplying high-value advice, perhaps in the form of organisational development and change management consultancy. At this higher level, the amount of business interface has increased dramatically, encouraging a business partner approach between HR and the rest of the organisation. The model also shows how HR can organise itself to deliver the greatest value to the organisation.
"HR should be aiming for the top in both diagrams and focus on the whole people strategy, how it can accelerate that strategy or change the strategy," says Finn. "A good HR strategy will identify who HR needs to partner with to deliver each part of the strategy. In order to deliver that strategy, HR needs the support of the board and its recognition that people have a significant contribution to make to the business."
Joined at the hip
David Smith, HR director of supermarket chain Asda, believes that an organisation's corporate strategy and HR strategy should be developed in tandem to optimise the effectiveness of both. "There is a misconception that the two strategies are separate, but at Asda the development of the HR strategy is an intrinsic part of formulating the business strategy," says Smith. "HR's strategic aims are not therefore downstream from the overarching corporate plan, but integral to it."
It is an approach that has reaped considerable commercial success for the giant retailer that several years ago faced financial crisis. "Ten years ago we developed a new mission and values with the focus on people and creating a great place to work, a vision that is not all that common in the retail sector," explains Smith. "It is easy to copy products, but it is not easy to copy the direct link between people and service; people are therefore our unique selling point." Smith likens Asda's belief in the importance of people issues to Blackpool rock - meaning that it runs right through the business. And "right through" means to the very top, to the chief executive Tony de Nunzio, for whom HR is a "natural priority". According to Smith, he and de Nunzio share "a mutual interest to make Asda a great place to work", and speak to each other on a regular basis about HR-related issues.
Smith is not convinced of the need for HR to reduce its focus on transactional activities to develop more of a transformational role, and is wary of the "many and varied fads" circulating within the profession. As he comments: "It is too simplistic to think that the operational side of HR can simply be handled by a third party or outsourced in order for the function to be more strategic. Of course the 'top stuff' is important, but it is also vital to HR's credibility that the basics are carried out effectively. For example, recruitment is the lifeblood of our company and we need to recruit people with the right talent who will fit with our culture. We would never pass on responsibility for such a crucial activity to a third party."
Keith Jones, HR director of London-based property firm Lambert Smith Hampton, also believes that it is "all very well talking about strategy", but a strategic outlook is meaningless if HR does not get the basics right first. "Of course HR has to demonstrate that it can add value at a strategic level," says Jones. "But a critical part of our role is also to ensure that employees are recruited and inducted properly, that they are fairly remunerated and so on." HR has a prominent position in the property firm and was last year allocated a place on the board, a development that has enhanced its position in the company. "Having a seat at the top table makes a big difference to how HR is perceived by its peers," says Jones. "HR now has the opportunity to influence the whole business and be seen as having a key part to play in its success." In his view, developing a productive relationship with the chief executive means HR striking a balance between dealing with the day-to-day issues, so that the chief executive is not bothered by them, and contributing at a higher level to the overall business plan.
Failing to meet expectations?
The CIPD survey is based solely on the views of senior HR professionals, so cannot provide any insight into whether the other key players in the business, in particular chief executive officers (CEOs), think that HR is delivering on what matters most. Recent research by Deloitte & Touche3 sheds some interesting light on CEOs' expectations of their HR directors (HRDs). The study reveals that CEOs in nearly 80 surveyed companies are not convinced that their HRDs are producing the goods on what, in their view, are the crucial HR issues.
That is not to say that CEOs do not believe that HR is critical to business success: chief executives ranked investment in people of equal importance to having an overall business strategy, and more important than developing new products or services. Internal communication emerges as the top priority for HR in the eyes of CEOs, but just 22% think that their HR departments are very effective in this respect. On their second priority, maximising return on investment (RoI) in people, only 20% rate HR as very effective. It gets worse. Only 17% of CEOs believe that HR is successful in developing leaders within the organisation and 15% think that they are effective in motivating and developing the senior management team.
When HRDs were asked to rank their own HR priorities, employee relations emerged as the favourite, followed by retaining the organisation's best talent. Interestingly, HRDs also appear less than impressed with their own performance, both in relation to what they view as the key HR issues and on CEOs' priorities. Just under half (47%) felt that they were very strong on employee relations, while only 19% believe that they were very good at internal communications.
The key message from the research seems to be one of poor delivery, a finding that is echoed in the CIPD research. Apart from the slight mismatch in what the key focus should be for HR, neither CEOs nor HRDs are confident that HR is succeeding where it matters most.
David Hutchins also shares the view that, for HR to increase its influence, they must be able to deliver. As he comments: "HR professionals must develop and demonstrate not only their HR leadership credibility, but also their business leadership credibility. Senior HR people must contribute strategic foresight and anticipation of business impacts and drivers. There is a need to develop HR delivery systems in alignment with business strategy. Critical to developing the requisite credibility will be demonstration of business knowledge, having a collaborative and service orientation and delivering on commitments, with an ability to get things done."
On a more encouraging note, the CEO research shows that chief executives do not view HR primarily as an administrative function, but want HR strategies that contribute to organisational success. They also want HR directors who understand the business and can "speak the language of the board". Over half (52%) said they recognised the critical importance of strategic HR, but there were insufficient top quality senior HR managers to follow the strategy through.
Overall, the study indicates that CEOs' expectations of the HR function are rising; they still expect the operational side of the role to be effective, but also want more strategic support. This is old news, but what is also emerging is a more complex - and still confused - picture of the HR director's role that cannot simply be labelled "strategic". In the view of Deloitte & Touche, it does mean HR directors should be "clearing their desks of some of the high-volume, low-value transactional stuff" that is eating away at their time.
Poles apart?
Another interesting angle to the whole HR debate is the emerging relationship between the finance and HR functions. These two areas of the business have traditionally been viewed as not having much in common, one being concerned with the hard, bottom line issues such as balance sheets and cash flow, the other more focused on the softer, "human" aspects of organisational activity. Now, it seems, the two disciplines may not be quite as incompatible as first thought, a development that has moved centre stage with the advent of human capital management (HCM).
Roger Adams is technical executive director at the Association of Chartered Certified Accountants. He believes that there is definitely greater awareness among senior finance people that corporate value depends on a wider range of information than is available in financial statements. "At the moment, no accounting methodologies exist that pretend to be able to measure the return on investment of human capital," says Adams. "Every expense relating to employees, be it location costs or share options, is written off. It is possible, however, to put a value on a company's brand, and often it is the workforce that forms the most precious intangible asset. It would be possible to take a range of HR efficiency measures, such as turnover and retention, and apply a financial variable such as value-added in order to produce a set of comparable statistics."
It is not just the case that HR needs support from finance to better understand the figures on the balance sheet. There is a growing realisation on the part of finance people that they need to develop a better grasp of human resources if they are to put a figure on their value. The two functions also now speak more of a common language, the HR profession having been concerned for some time with proving its contribution to the bottom line by the use of hard indicators. Collaboration between the two can range from day-to-day teamwork on small projects - for example, the co-operation between finance and HR on a number of reward-related projects at Bupa, featured as a case study here - to interdisciplinary coordination at a more senior or board level.
Take it up a step
In the view of SHRM's David Hutchins, it is critical to the success of the organisation that there is effective collaboration between the CEO, CFO and CHRO (chief human resources officer). "Together, these three must establish a critical collaborative relationship focused on enhancing organisational effectiveness," says Hutchins. "HR leaders must be business leaders. They must demonstrate how HR contributions directly impact on key business issues, such as revenue generation and the customer experience."
A recent study by CFO Research Services and Mercer Human Resource Consulting4 investigates the attitudes of senior finance people to HR. The research reveals some mixed findings, but does indicate a growing respect for HR from a section of the business that has traditionally been viewed as its polar opposite. The report - based on a survey of 180 senior financial executives in large US and multinational companies - found that the majority of survey respondents view HR as "a key value driver", with 92% believing that human capital has a great effect on the company's ability to achieve customer satisfaction. The study also revealed that 39% of CFOs view their HR counterparts as a strategic partner, with 33% regarding them as being equally a partner and a cost centre.
A more disappointing result is that only 16% of senior finance people thought they understood the return they are getting on their investment in human capital, even though companies spend more than 36% of their revenues on employees. The finding that 62% of financial executives want to be more involved in human capital decisions raises some interesting issues about the form any closer involvement could take. Although such a development could be viewed as a threat from some quarters of the HR profession, with the advent of human capital management and measurement in the UK looming ever nearer, there will also be the opportunity for a more productive collaboration between finance and HR. As the report states: "Interviews indicate that involvement might include designing some HR metrics, adding a financial perspective to HR decisions, and helping link HR policy to corporate strategy."
Jim Matthewman, worldwide partner in human capital at Mercer, thinks the research is encouraging but finds CFOs' lack of understanding about the return on human capital investment "really worrying". "It is vital that HR is able to justify the expenditure on people," says Matthewman. "The language of human capital measurement appeals much more to finance directors and CEOs, so it is encouraging that HR is able to converse in those terms. In Mercer's experience, a lot more meetings are taking place between HR directors and finance people, which is very positive."
In his view, the most discouraging news is that the majority of HR functions have not yet mastered the skills and capabilities required to hold their own with other key business partners. "There is a whole new science out there that is developing the sorts of skills now needed by HR," says Matthewman. "In some companies, we are starting to see new job titles emerge such as 'head of organisational development', and 'head of HR and corporate systems'. A few organisations have even set up a "people insights unit" which goes beyond organising employee attitude surveys and tries to understand the complex mind-sets of employees, who must increasingly be addressed on an individual basis. There is no longer a concept of the average employee or a 'one-size-fits-all' approach."
Matthewman believes that increasing pressure on HR directors to justify expenditure on human capital and the resultant closer working relationship with senior finance executives is a positive development. "HR will be in the spotlight and become more accountable, and that's a good thing," concludes Matthewman. "Everyone wants HR to become more strategic, but the profession will only gain credibility if it uses the data it collects qualitatively and quantitatively, and in a predictive manner."
A happy medium?
It could be that the current developments influencing the debate on where HR is heading are throwing up more questions than they are answering. While there is strong pressure for HR to throw off its administrative responsibilities and assume a strategic mantle in its bid to be taken more seriously by the business, it may be that the two are not mutually exclusive. What is certain is that any HR function's strategic capability cannot be effective at the expense of its operational activities. That is not to say that HR cannot discharge ownership of the transactional side of its remit into other safe hands.
The one conclusion that can be drawn with any confidence is that the goal posts will not stand still, and that the expectations of what HR can deliver are rising. But HR practitioners can take heart from this. The message that an organisation's people are its greatest assets is one that the profession has been trying to get across for a long time and it seems that, at last, it may come to mean something more than just another empty statement in every company's annual report.
1. "From HR to the top" and "Five who have made it" in HR Magazine, June 2003, available at www.shrm.org/hrmagazine/ .
2. Where we are, where we're heading survey, available from www.cipd.co.uk/surveys .
3. Aligned at the top? A survey of CEO and HR directors' perceptions of HR, available free from www.deloitte.com .
4. Human capital management, the CFO's perspective, by CFO Research and Mercer Human Resource Consulting, available free from www.mercerhr.com .
Case study 1: BUPA puts a high value on HR
Bob Watson is HR director of private healthcare provider Bupa. He believes that the HR profession has not done itself any favours and that any senior person needs to earn their place at the top table.
"It is that individual's ability to contribute to the business that should dictate whether they deserve to be a member of the executive committee, irrespective of function," says Watson. "Unfortunately, I do not think that the HR profession yet has enough people of the same calibre who can 'punch their weight' as, say, finance."
He attributes the capability gap to HR's internalised preoccupation with its own activities instead of a clear focus on business objectives. As Watson comments: "HR is a high priority at Bupa because we have a strong business perspective. Our starting point is always what needs to be done to drive forward the business goals. It also works well because we have a chief executive who really understands the importance of people, and regards the three key priorities - employees, customers and finance - as carrying equal weight."
Watson goes on to explain the process by which Bupa's HR function has released itself from much of the day-to-day burden of administration work, to provide a higher-value service to the company.
"When I took over the group HR role, we stripped out much of the operational activity and devolved much of it to line managers, as we believe a large part of their role is people," he says. "Of course, we provide the training and support where necessary, but this move has totally changed the position of HR within Bupa. It took nearly seven years to achieve the transition, but now we are in a position to perform a professional, added-value role that helps drive forward the business."
Watson attests to an excellent working relationship between him and the senior players at Bupa, including the chief executive, Val Gooding, and finance director, Ray King. "Our expectations of HR are in complete agreement," says Watson. "Our CEO understands the difference that employees make to the success of this business, and consistently spreads that message. That goes for the finance director, too. It is vital that they have such a strong conviction, or the rhetoric will not hide the reality." As Val Gooding comments: "Our brand promise to our customers is delivered by our people. Ensuring our people are able to deliver this promise is the role of every manager in Bupa, supported by a good HR team."
The partnership with finance operates on more than one level. In the first place, great care was taken to recruit a finance director who, as well as having the technical skills, was sympathetic to the caring, value-driven culture of the organisation. This was illustrated recently when the finance director, strongly believing in the protection of Bupa's final salary pension scheme, gained board approval for a significant long-term financial commitment to meet the shortfall in the pension fund. On a day-to-day level, finance and HR increasingly collaborate on a number of projects, especially in the area of compensation and benefits.
Watson reports a productive working relationship with the senior marketing team, having worked closely with them on several projects. He comments: "The growing collaboration between HR and marketing has been a very interesting development over the last five years. We both have a role to play promoting the employer brand, and marketing people now even facilitate on our senior management programme."
Case study 2: Hertfordshire County Council gets the right balance
Hibberd believes that it is essential to get both the operational and strategic sides of HR right in order to contribute effectively to organisational success. "I prefer the David Ulrich model for HR, that positions the four main HR roles in equal corners of the square," says Hibberd. "It is vital that we get all four aspects right, including the administrative tasks, or HR can not possibly be seen as a strategic business partner."
In Hibberd's view, the role of HR has evolved at Hertfordshire County Council to become even more strategic in recent years, to be seen almost as a management tool. Although HR does have a seat on the board, Hibberd does not believe that it necessarily needs a place at the top table to be effective. "HR has a very strong leader in Alan Warner [director of people and property], and his legitimacy is unquestioned at the highest level", says Hibberd. "That in turn means that great value is attached to HR within the organisation. HR is also very focused on the contribution it can make to the bottom line."
There is an explicit and direct link between the HR strategy and corporate goals. In setting its own strategy, HR carefully analyses the business plan as well as external developments, and discusses its content in detail with other chief officers. HR uses both hard and soft measures to monitor progress against set targets and the overall value its activities are adding to the organisation.
Senior HR people work closely with the other function heads within the corporate services directorate, including the legal and finance directors. "We are all responsible for resources and all share the same corporate values and aim to add value," says Hibberd. One initiative that she envisages will help HR and finance to develop an even closer working relationship is the forthcoming implementation of an integrated payroll and procurement information system. "As well as bringing HR and finance closer together, the new system will release HR from the more transactional work to develop more of a professional, consultancy-type role," explains Hibberd.
Hibberd believes that there are two important factors that dictate the profile HR has within an organisation - the attitude of the chief executive and the personality of the senior HR person.
"Our HR director is very influential and is actually the only director from corporate services with a seat on the board, and he is relied on to both initiate and drive through major strategic change in the council," she says.
"You need to have the right individual at the top in HR, who can operate at that level, but you also need a chief executive who is enlightened about the importance of HR. If you have that mix, the results can be very dynamic."
Case study 3: top-level support at West Bromwich Building Society
West Bromwich Building Society (WBBS) employs around 800 staff in 49 branches and at its head office. In the past year alone, the building society won 22 awards for excellence in the field of HR. Senior executives work together closely in the business, convening at least once a week for "culture club" meetings. "Our weekly coaching and cultural change meetings are an important forum for collaborating on joint strategic objectives," explains Paul Turner, general manager (people).
The building society's people strategy is very much based on the corporate strategy, which is cascaded down through its VIP - Valuing Individual Performance Potential - which "starts at the top level and drills down to every employee." In Turner's view, the other main players in the organisation view HR as a "hands-on professional partnership". As he explains: "It is not HR 'doing it to the business' but HR getting behind the business leaders in a supportive and collaborative way."
The main focus for HR is to reduce its "non-added value activity" in order to focus on its strategic goals. "The administrative side of HR do's can just as easily be done by non-HR people - that is, our staff," says Turner. "HR should be there to deliver the intellectual part of the mix."
Turner reports that both his and the CEO's view of how HR should be positioned in the business, and what it should be delivering, are in perfect accord. "
Our CEO thinks that HR should be a conduit to delivering a world-class employer brand," Turner says. "HR should therefore add value by delivering on key indicators like quality and employee morale and motivation."
And as chief executive Andrew Messenger himself comments: "All people are living, breathing human beings . . . just like us. They have feelings . . . just like us. They like to feel appreciated and valued, thanked and congratulated . . . just like us. When managers realise that and act upon it, then and only then will they optimise the performance of all their people and therefore their business."
In Turner's view, WBBS has a role model in its chief executive that inspires others. "When we embarked on our executive coaching programme, he was the first to complete it and become an accredited coach," he says. "He provides a framework for HR and is very consistent and persistent in seeing it through." The high priority with which CEO Andrew Messenger regards HR's role in the business was a key factor in the building society winning the special award in the 2002 Human Resources Excellence Awards. "He's not just mouthing the words, 'my people are important'," said KPMG consulting judge David Lillystone. "He has appointed and empowered Paul Turner to take ownership of the human capital part of the business."
Turner also attests to a collaborative working relationship with the finance director. "Part of the finance director's role is to create a healthy tension to help us balance costs," he says. "With the new HR agenda increasing the pressure to cost-justify our interventions, finance plays a really big part in helping us to calculate profit-per-employee and other financial measures."
