The HR Scorecard: Linking People, Strategy, and Performance

ABOUT THE BOOK
 

Synopsis
Providing the tools and systems required for leading a "measurement managed" HR architecture, this important book heralds the emergence of human resources as a strategic powerhouse in today's organizations.

Three experts in the field outline a powerful measurement system that highlights the indisputable role HR can play as both a prime source of sustainable competitive advantage and a key driver of value creation. They draw from an ongoing study of nearly 3,000 firms to outline a seven-step process they call an HR Scorecard, specifically designed to embed human resources systems within a firm's overall strategy and manage the HR architecture as a strategic asset. Building on the proven Balanced Scorecard model, they also show how to link HR's results to measures-such as profitability and shareholder value-that line managers and senior executives will understand and respect.

The authors argue that human resources's strategic role begins with designing an HR architecture-the HR function, the HR system, and strategic employee behaviors-that relentlessly emphasizes and reinforces the implementation of the firm's strategy. Using compelling examples from a variety of leading companies, they explain how to develop and implement an HR Scorecard in order to both manage the HR architecture as a strategic asset, as well as measure the contribution of that asset to firm performance.
 

From The Publisher
As human capital takes center stage in today's economy, the HR profession has been charged with shifting its emphasis from administrative cost center to active partner in helping firms to implement strategy. But beyond recruitment and compensation, what does HR actually do to help firms succeed?

Now, three experts in the field 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.
 

Reviews
At most companies, Human Resources is still seen as a paper-pushing department that focuses on administering benefits and issuing paychecks. But that narrow view of HR can be costly, according to the trio of business-school professors who co-authored this book. "New economic realities are putting pressure on HR to widen its focus from the administrative role it has traditionally played into 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." Building on the Balanced Scorecard approach pioneered by Robert Kaplan and David Norton, this instructive book shows HR managers how to turn their departments into key weapons in their companies' competitive arsenal.

Highlights:

 

	Details a seven-step plan for transforming the HR function into a strategic asset: clearly define a business strategy; build a business case for HR as a strategic asset; create a strategy map; identify HR deliverables within that map; align the HR architecture with HR deliverables; design the strategic HR measurement system; and implement management by measurement.
	Examines the challenges associated with implementing an HR Scorecard, and explores seven key success factors for implementing that initiative, starting with "leading change (who is responsible)" and ending with "making it last (how it will be started and sustained)."

Advantages:

 

Co-authors Brian Becker, Mark Huselid, and Dave Ulrich persuasively argue that HR managers shouldn't feel threatened by their measurement-based approach. "Based on our experience, firms frequently under-invest in their people -- and, just as important, invest in the wrong ways ... The most effective way we know to change the calculus is to develop a measurement system designed to link people, strategy, and performance. That is what this book is intended to do."

This work bolsters the Balanced Scorecard approach by strengthening an aspect "that Norton and Kaplan themselves acknowledge to be its weakest feature -- the question of how best to integrate HR's role into a firm's measurement of business performance."

CHAPTER 1: HR AS A STRATEGIC PARTNER

There is a disconnect between what is measured and what is important.

Def:  Strategic Asset:  “The set of difficult to trade and imitate, scarce, appropriate, and specialized resources and capabilities that bestow the firm’s competitive advantage.”   By definition, strategic assets are difficult to copy.

  Managers must:

1.       understand the firm’s strategy

2.       grasp the implications for HR

move from a “bottom-up” perspective to a “top-down” perspective (strategic)           

Intangible assets generate tangible benefits  [8]

Its up to HR to develop measurement tools (accounting tools don’t give us what we need)  [11]

The HR Architecture as a Strategic Asset [12]

Focus of HR strategy:  “maximize the contribution of HR toward business goals, thereby creating value for stakeholders”

The HR Value Chain:  (1) function, (2) system, and (3) employee behaviors

The HR Function: HR Professionals with Strategic Competencies

HR effectiveness: 

The HR System: High-performance, strategically aligned policies and practices

The High Performance Work System (HPWS)

Table 1-3  Comparison of High/Low HR Management Quality [16]

Strategic Employee Behaviors

Def:  “Strategic Behaviors”:  “the subset of productive behaviors that directly serve to implement the firm’s strategy” [20]

How to manage strategic behaviors

We can’t affect strategic behaviors directly; they are an end result of larger HR architecture.

Why Measure?  (1) Decision-making, (2) evaluation of performance

How to Measure? 

Balanced Performance Management

1.       How to implement strategy in our firm (how the firm generates value)

2.       What to measure

Balanced

Leading AND Lagging Indicators

HR Deliverables

1.       Performance Drivers

People-related capabilities/assets (e.g. productivity, ee sat)

2.       Enablers

A value creation model  [29]

Ee skills --> process quality/cycle time --> on-time delivery -->customer delivery --> ROI

Learning --> business process     -->  customer --> financial

 The 7-Step Model for Implementing HR’s Strategic Role

1.      Clearly define the business strategy

State firms goals so (a) employees understand their roles (b) org knows how to measure success

2.      Build business case for HR as a strategic asset

Strategy implementation = $$

Strategy implementation is more important than strategy selection

3.      Create a strategy map

Map the Value Creation Process

4.      Identify HR deliverables within the strategy map

5.      Align HR Architecture with HR deliverables

-          rewards, competencies, org design, development program

6.      Design the Strategic HR Measurement System

7.      Implement Management by Measurement

Stage 1 Measurement:  traditional

e.g. cost per hire, counting activities

Stage 2 Measurement:  no clear strategic linkage

                e.g.  ee sat

Stage 3 Measurement:  measurement-led management

1.                 Acting on measures

2.                 Creation of a strategy map

Stage 4 Measurement:  Profit relationship measures

Why a scorecard? 

1. manage HR as a strategic asset

2. demonstrates commitment to firm’s financial success

Scorecard Themes

1.       Key HR Deliverables  (leading)

2.       High-Performance Work System (HPWS) (leading)

3.       Extent HPWS is aligned to firm’s strategy  (lagging)

4.       Efficiency with which deliverables are generated  (lagging)

The HR Scorecard emphasizes HR value-creation tempered by attention to efficiency [58]

Most of the scorecard should be value-creation

Focus on strategic high ROI

Aligned goals:

1.       The High Performance Work System

2.       The HR system alignment

3.       HR efficiency:  core vs. strategic measures

Measures that encourage cost savings

2 kinds

a.       core.  Significant HR expense but little strategy

(e.g. benefits, accuracy of HRIS)

b.       strategic.  Investments (e.g. cost per hire, training)

4.       HR deliverables;  Ways HR system generates value for firm

Organizational Capabilities:   [68]

“combine individual competencies with org systems that add value throughout the firm’s value chain”

not all deliverables are organizational capabilities nor do they have to be

not all the HR deliverables are directly linked to firm’s success.  Sometimes there is just a “casual logical” link [69]

Include these kinds of deliverables

1.       Performance drivers

2.       HR enablers

3.       If appropriate:  org capabilities

4.       Estimated impact of each deliverable (hypothetical or actual)

Benefits of HR Scorecard

1.       Distinguishes between HR doables and HR deliverables

Deliverables = strategic,   doables = not strategic

2.       Controls cost while creating value

3.       Measures leading indicators

4.       Assess HR contribution to strategy and to bottom line

5.       Makes HR more strategically responsible and focused

6.       Encourages flexibility and change (view numbers as means to end, not the end itself) [77]

Operational vs Strategic Cost-Benefit Analysis

Which HR Activities should you cost and why?

1.       First ask what types/categories of activities to cost

2.       Should have these attributes

a.       Strategic importance (directly influences strategy) (use value-driver analysis Chapter 3)

b.       Financial significance (significant and ongoing investment)

c.        Widespread impact

d.       Links to a business element of considerable variability in outcomes or performance levels (e.g. some perform good, others poor)

e.        Focus on a key issue, problem, or decision facing line managers (provides answers to key questions or problems)

Determining the ROI in HR:  A 3-step Process

1.       Identify potential costs

2.       Identify potential benefits

3.       Calculate the ROI of the program using an appropriate index

Identifying Costs and Benefits

1.       Costs are easy… benefits are harder

a.       Benefits are future, not 100% guaranteed

                                                               i.     Indicate the estimated benefit (e.g.  +/- x%)

                                                             ii.     Develop a strawman, potential cost/benefit categories

                                                           iii.     Ask experts for estimated benefits and costs

Understanding the financial impact of employee performance

                Managers know the performance levels differ between employees, but don’t know how much difference better employees make.  What is the relative contribution of an average employee compared to an above average employee?

Three Levels of HR Measures   Fig 4-1

1.       Level 1.   Don’t measure ROI

2.       Level 2.  Intuitive or estimate ROI.  Measure cost

3.       Regularly measure ROI and NPV

Why better measurement?   [110]

1.       Improves decision-making by concentrating on aspects that create value.  Provides feedback

2.       Justification for resource allocation

Using HPWS

Creates “black box” between where we are and where we want to be.

                                Black box contains strategic HR architecture and strategy implementation process

Measure level and relationship of measures not just  A-->B-->C    as there is limited use to this kind of diagram

Numbers with meaning

Measures vs concepts/visions

a.       concepts/visions are important for strategy, but are not the strategy, as they don’t guide decisions nor evaluation

b.       concepts/visions (AKA constructs) are used to determine measures

a.       sometimes several measures per construct

                 i.     example:  “retain best employees” (through development, C&B, supervisory skills)

Kinds of Measures

1.     Nominal Measures

a.     Categorize only  (e.g. male-female)

2.     Ordinal measures

a.     Rank order   (e.g. meets, exceeds, far excceds)

b.     Says it is better, but not how much better

              i.   The difference between not acceptable and meets is not the same as the difference between meets and exceeds

3.     Interval measures

a.     Assumes intervals equal between measures (e.g. likert scale)

4.     Ratios

a.     Have a zero point, allow comparisons

b.     Units have inherent meaning ($, hours, etc)

c.     Easy to collect

Ideally, measures show how much to change X in order to make Y change in Z

Most hold on to legacy measures:  what you always measure

Valuable measures are often hardest to measure

1.       Strategic Implementation  (top down)

2.       HR Systems… ability to deliver

3.       HR Competencies… in HR professionals and in line managers

4.       HR role… degree of partnership

a.       Internally and externally viewed as partners (shared view)

Diagnosing Internal Fit of HR

Source of Misalignment

1.       Operational focus

2.       Focus on consistency-uniformity (tell others what they can and can’t do)

3.       Too much benchmarking (bottom up focus)

Alignment of HR Systems