MEASURING HR STRATEGIC ALIGNMENT THROUGH THE HR SCORECARD Juan I. Sanchez, Ph.D. Florida International University

1. MEASURING HR STRATEGIC ALIGNMENT THROUGH THE HR SCORECARDJuan I. Sanchez, Ph.D.Florida International University ORGANIZATIONS OFTEN CLAIM THAT: “People are our most important asset” But do people understand how the HR function influences firm performance? Do HR people feel like they play an important role in implementing the organization’s strategy? Does HR really matter?

2. What’s the perception of the HR function? List the events that most often trigger the words “let’s ask human resources”:

3. WHAT DOES HR STRATEGIC ALIGNMENT MEAN? HR as an administrative function vs. HR as a strategic partner capable of enhancing the organization’s performance

4. Traditional HR Focus: the individual employee • Select the best employee • Find benefits that satisfy the employee • Identify incentives that do motivate the employee • Solve individual skill deficiencies through training Measuring HR’s influence on the organization Improving individual employee performance Does it automatically enhance organizational performance?

5. New HR Focus: multiple levels of analysis: • individual, team, organization… • Alignment of HR systems with the company’s strategy • How can HR play a central role in implementing the organization’s vision & strategy? • How do people create value for the organization? • Ho do we measure such value-creation process? HR as a strategic asset

6. HR as an investment, not an expense • Conventional accounting was created at a time when tangible capital (financial & physical) was the primary source of profits. • Today: Intangibles such as human capital are the primary source of profits.

7. Conventional accounting generates short-term thinking regarding intangibles, because intangible-related expenditures are treated as expenses vs. tangible-related expenditures, which are treated as asset investments (and therefore depreciated over their useful lives). • Managers whose salaries are tied to earnings obviously prefer expenditures that can be depreciated over time rather than people-related expenditures than are expensed in their entirety during the current year. HR as an investment, not an expense

8. Widening in the ratio of market value to book value (based on intangible assets) • HR is key to flexibility, innovation, and speed to market • HR as competitive advantage: barriers of entry, difficult to imitate. • HR managers can become NUMERATOR managers (contributing to revenue & growth) rather than just DENOMINATOR managers (cutting costs & reducing overhead). • Link performance measurement with strategy implementation: facilitates communication with stakeholders. HR as a source of competitive advantage

9. Goal of corporate strategy: create sustained competitive advantage. • Goal of HR strategy: maximize the contribution of HR towards that same goal. HR architecture as a strategic asset HR ARCHITECTURE HR FUNCTION HR professionals with strategic competencies (delivery of HR services in a way that supports the implementation of the firm’s strategy HR SYSTEM High-performance, strategically aligned HR policies & practices EMPLOYEE BEHAVIORS Strategically focused competencies, motivations, and associated behaviors

10. Systems thinking emphasizes the interrelationships of the HR system components AND the link between HR and the larger strategy implementation system. • Interactions among components make a system more than just the sum of its parts. Strategic HRM requires systems thinking… • The laws of systems thinking • Today’s problems come from yesterday’s solutions (e.g., downsizing) • The easy way out usually leads back in (example: _________) • Cause and effect are not closely related in time & space (HR effects are indirect) (example of indirect HR effect: __________) • Cutting an elephant in half doesn’t get you two smaller elephants. (e.g., reorganizations due to mergers acquisitions).

11. Best HR Practices help almost every business… From Huselid et al., 2000, AMJ

12. But strategic HR goes beyond “best practices”… + HR alignment Results _ _ + Behaviors

13. It requires a clear understanding of the value chain: What kind of value the organization generates and exactly how that value is created. • Be able to describe how ultimate financial goals are linked to key success factors at the levels of customers, operations, people, and IT systems. • With this shared understanding of the value-creation process, the organization can design a strategy implementation model that specifies needed competencies and employee behaviors. • The HR system can be geared toward the generation of these competencies and behaviors. What does HR alignment take?

14. VALUE CREATION EXAMPLENordstrom Financial ROI CUSTOMER RETENTION Customer SUPERIOR CUSTOMER SERVICE Internal/business process UNIQUE INVENTORY KNOWLEDGEABLE AND CUSTOMER-ORIENTED EMPLOYEES Learning and growth

15. VALUE CREATION EXAMPLEWal-Mart Financial ROI Customer CUSTOMER SATISFACTION CONVENIENCE Internal/business process SUPPLY-CHAIN MGMT. PRICING Learning and growth RELIABLE EMPLOYEES TRUSTWORTHY SUPPLIERS

16. Inadequacy of Traditional Measurement Systems • Financial measures as lagging indicators, not leading indicators of value creation (Kaplan & Norton’s Balanced Scorecard). • Too much attention to financial dimensions of performance, and not enough attention to the performance drivers that determine those results. • Uncover the firm’s value-creation chain (story): “business model.” • By specifying and assessing the vital process measures of the value chain, and regularly communicating the firm’s performance on these measures, the balanced scorecard makes strategy everyone’s business.

17. BALANCING COST CONTROL AND VALUE CREATION:THE HR SCORECARD • Do you want HR to be perceived as a “cost control” or as a “value creation unit? • What gets measured gets managed. • If you measure only HR costs, your unit will be treated as a commodity without strategic value. • HR must control costs, but also create value. • Examples of instances where value was lost due to cost-control efforts? (“throw the baby with the bath water”)

18. INTEGRATING HR INTO THE VALUE CREATION STORY • Is the HR function providing the company with the employee competencies and behaviors necessary to achieve the organization’s strategic objectives? • HR deliverables: Outcomes of the HR architecture that serve to execute the firm’s strategy. • HR doables: HR efficiency & activity counts. • HR performance drivers: core people-related capabilities or assets. • HR enablers reinforce performance drivers (moderators whose presence activates the HR performance drivers).

19. MAPPING THE HR VALUE CREATION STORY HR enablers HR performance drivers Strategy implementation HR Deliverables Impact HR Doables

20. DISTINGUSHING AMONG HR PERFORMANCE DRIVERS (PD), DELIVERABLES (DE), DOABLES (DO), ENABLERS (EN)SURVEY SAYS…

21. An example of HR Value Creation Story… Honesty testing Random drug testing Cost per quarter (efficiency) Inventory shrinkage Employee theft Pricing Honest workforce What percent of your coworkers are honest? Cost per hire (efficiency) Cost of missing items What percent of the items missing in the inventory are stolen by employees?

22. Competency Models by Strategy Exercise • Cost-driven organization • Vigorous pursuit of production/delivery efficiencies. • Tight control over cost of materials, resources, & overhead. • Minimal expenditure in R&D, marketing, sales, & service. • Emphasis on large accounts & economies of scale. • Low-cost distribution system

23. Competency Models by Strategy Exercise • Value-driven organization • Focus on developing best-in-class capabilities in selected activities. • Promote reputation for technological leadership & brand image. • Emphasize product engineering or service integration. • Maintain an active basic research contingent. • Partner with industry, universities, & research organizations for mutual benefit.

24. Competency Models by Strategy Exercise • Quality-driven organization • Aggressive pursuit of information on customer careabouts, including customer involvement in product/service design. • Efforts to instill a continuous improvement orientation. • Strict monitoring & screening of subcontractors, franchises, and suppliers. • Some investment in R&D, marketing, service, & training.

25. Competency Models by Strategy Exercise • Service-driven organization • Value investments in people. • Close monitoring of metrics tracking service responsiveness. • Cultivate good working relationships among associates, subcontractors, and suppliers. • Creative involvement of R&D and manufacturing groups in after-sales support. • Emphasis on customer service and sales ranks’ contact with customers.

26. Competency Models by Strategy Exercise • Speed-driven organization • Willingness to accept risks associated with delivering product/service to market ahead of competitors. • Analysis of market trends. • Aggressive management of new product development cycles. • Engage in joint ventures to speed entry in emerging markets. • Create geographical & technological partnerships to augment organizational capabilities.

27. Competency Models by Strategy Exercise • Focus-driven organization • Emphasis on market research & micromarket proclivities. • Risk averse & focus on customer careabouts. • Intense management of product/service modifications to match profiled customer needs. • Active involvement of targeted customers in product/service development.

28. IN CONCLUSION… “People can be our most important asset if we make the HR function our strategic partner” To download a copy of this presentation, visit http://cba.fiu.edu/mgmt/sanchezj Click on “HR-ROI presentation, USF Embassy Suites, 1/17/03”