Marsha on 03 9245 5799, or Karen on 02 8272 6319
Email: marsha.sussman@mercer.com
Email: karen.isely@mercer.com
Imagine your finance function 30 years ago. Then responsibility for sophisticated financial strategies rested with the same part of the organisation as the day-to-day transactions. To deliver what the business needed, the function was transformed - bisected, so to speak, so that financial strategy could be created and executed (the CFO role), while operations could be managed (the Controller role). That's what needs to happen in HR - because our research shows that there is a gap between what CEOs need and what HR is delivering.
The good news is that many HR functions in Australia have begun this journey. To be effective - and to deliver the value to the business that the function must demonstrate - the transformation needs to focus on the people in HR and the way they deliver service. This article, the first of two, looks at the transformation currently being undertaken by HR and the factors that will contribute to its being able to deliver what the business needs. In the next article in this series (to be published in coming months), we will take a closer look at the issues involved in developing and expanding HR capability and in measuring HR - moving from cost to value.
How and why is HR transforming?
A recent study1
by Mercer Human Resource Consulting (Mercer) has found that HR executives
recognise the need to transform their functions if they are going to help
their organisations meet the ambitious people management goals they have
set.
Our 2001 research study, Transforming HR: understanding the human resource evolution, interviewed and surveyed HR executives from over 100 Australian and 33 New Zealand organisations.
The research clearly shows that the need for HR transformation in Australia is well recognised - and is being acted upon.
Source: © Mercer Human Resource Consulting Pty Ltd (2001), 'Transforming HR: understanding the human resources evolution'
The HR executives interviewed report that this transformation is being driven by the top goals HR functions must strive to achieve:
- develop leaders
- recruit and retain a quality work force
- manage performance systematically
- develop culture
Given these business goals, however, it is surprising to see how HR executives see their roles, and how their functions are spending time.
How HR executives see their role
HR functions typically operate across four roles2:
- administrative expert
- employee champion
- change agent
- strategic partner
In the Mercer studies (both global and Australian) when asked in which roles they perceived the HR function as being successful, a greater proportion of HR executives nominate 'administrative expert' over that of 'strategic partner'. This makes sense, given (a) where the function has been, and (b) that HR only earns the right to operate on a more strategic stage once the basic 'nuts and bolts' have been attended to. In the global study, line managers were also asked to rate the success of HR in each of these roles. It is disquieting that a smaller proportion of line managers rate HR as successfully as the HR function rates itself - this is particularly the case for the role of strategic partner.
Source: William M. Mercer-sponsored Conference Board Study, 1998
What does HR need to do differently?
Not surprisingly, HR executives indicate that HR staff are spending the bulk of their time delivering HR services and processing transactions - and that what they want to be doing is partnering with the business to deliver results.
For this transformation to occur, HR executives believe
- and we concur - that three things must happen:
- HR staff must upgrade their skills and competencies;
- Companies must invest in process redesign and enabling
technology to streamline, consolidate, automate and/or eliminate HR
work that is not required by the business;
- Senior managers must demonstrate their belief in the value of people in their organisations - by investing in the HR function to deliver the programs, tools, and information that the business needs to better manage its workforce.
An overwhelming majority (94%) of the respondents in
the Australian study indicate that they intend to invest in the skill
development of their existing HR staff. They recognise that they are notably
weaker in those skill sets identified as being required for HR to step
effectively into the change agent and strategic partner roles, including:
- business understanding
- cross-functional experience
- leadership
- consulting
Remarkably, these respondents also thought that they were weaker in record keeping skills - however this response may be more a reflection of the processes/technology being used rather than the skills of their staff.
A recent study in the United States3 drew attention to the five competencies that are required of successful HR professionals. Knowledge of HR and of the business represented just under 30% of the total competency contribution. The remainder (approximately 70%) related to the key competencies required for the strategic partner and change agent roles: ability to manage the culture, ability to drive change and personal credibility. This is what HR executives must focus on, if they want to be real business partners, and deliver on the key goals their organisations expect of them.
Addressing the HR service delivery challenge
Successful contribution to the business from the HR
function requires an optimal blend of business and human capital strategy,
that is, what services HR should provide to support the business; and
understanding of internal customer needs, that is, what services internal
customers want HR to provide.
In addition though, HR must determine how best to deliver these services. It must determine the optimal service delivery model - the framework by which the HR function will deliver the human capital-related programs, services and information required by the business.
What is the optimal service delivery model?
Mercer's experience is that every organisation has an HR service delivery strategy - whether implicit or explicit - but not necessarily one that supports the business strategy. An effectively designed HR service delivery model is one that ensures that customer needs are met, investments are prioritised, and value is delivered to the business.
Mercer defines four quadrants in the HR service delivery model:
| Structure: | Is the function organised to enable effective customer focus, collaboration and workflow? To what extent has outsourcing been explored as a possible approach to delivering better or more cost-effective services? |
| Process: | How will work and information flow? Are outcomes in line with customer expectations? What opportunities exist for greater efficiency and/or effectiveness? |
| Technology: | What are the most feasible, cost-effective and enabling technology solutions? How will they adapt to business and operational needs that change over time? What is the ROI for HR technology? |
| People: | Does the function have the right resource levels, skills and competencies to deliver needed services, programs and information? |
What does this mean for the business?
To effectively transform, HR executives must look at the HR service delivery model, assess its strengths and weaknesses, and take action appropriately. But why should it make a difference to CEOs whether or not the HR function is transformed?
The answer is, because it can make a difference to your bottom line profits. When HR successfully contributes to an organisation's execution of business strategy it can ultimately influence shareholder value.
Recent research by Huselid and Becker4 indicates, in fact, that more sophisticated HR functions deliver greater market value per employee than less sophisticated ones. As seen in the chart below, there is an initial burst of value when the HR function first improves its efficiency - but then it reaches a plateau. It is only with a well-focussed, well-energised transformation that HR can deliver greater value to the company - both in terms of organisation capability as well as market value per employee.
Source: Huselid & Becker,
'High performance work systems and organisational performance' 1995
There is also evidence that financial analysts take non-financial factors into account in a significant way when they make investment recommendations. In a study of financial analysts and portfolio managers, it was found that an average weighting of 35% or more was applied to non-financial information in the investment decision process5. Management credibility, quality of corporate strategy, innovation, ability to attract and retain talented people, management expertise and alignment of compensation with shareholder interests are all in the top ten non financial variables evaluated to make investment decisions.
In concluding, while organisations have traditionally looked to non-human capital variables when seeking to influence business growth and shareholder value, the pendulum is swinging as more businesses recognise that the management of people issues will directly impact the bottom line.
In our next article, we will look more closely at the issues involved in developing your HR function's capabilities and measuring the value they deliver to the business.
1 Over the past five years, Mercer Human Resource Consulting (Mercer) companies have been studying HR transformation. In this article, we refer to our most recent 2001 research on this topic in Australia and New Zealand. We compare these findings with one of our earlier studies: the 1998 Mercer/Conference Board global study 'Transforming the HR Function for Business Success,' which analysed information from over 500 executives in nearly 400 global organisations.
2
Ulrich, D (1997), Human Resource Champions,
Harvard Business School Press
3 Conducted by the University of Michigan from 1988 to 1998. See Brian E Becker, Mark A Huselid and David Ulrich (2001) The HR Scorecard: Linking people, strategy and performance, Harvard Business School Press
4 Becker, BE, Huselid MA, Pickus PS & Spratt MF (1997), HR as a source of shareholder value: research and recommendations, Human Resource Management, Vol 36 (1), pp39-47
5 Low, J and Siesfield, T (1988) 'Measures that Matter', in Brian E Becker, Mark A Huselid and David Ulrich (2001) The HR Scorecard: Linking people, strategy, and performance, Harvard Business School Press
