Achieving Strategic Excellence: An Assessment of Human Resource Organizations

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Overview


“Achieving Strategic Excellence offers a unique and practical perspective based on solid research on how HR impacts business success. The inclusion of data from senior line managers adds a dose of reality to how the HR function has actually changed. This important work is a must-read for HR professionals as well as business leaders seeking to maximize human capital.”—Daryl D. David, Executive Vice President, Human Resources, Washington Mutual, Inc.
“This latest update of CEO's longitudinal HR study provides almost a decade of perspective on the challenges and changes in the HR function. HR leaders in all industries and stages of career experience will find Lawler, Mohrman, and Boudreau's conclusions insightful and provocative with some interesting twists. The strategic HR journey continues . . .”—Mary Eckenrod, Chair Elect, The Human Resource Planning Society; Vice President, Global Talent Management, Kraft Foods
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Editorial Reviews

From the Publisher

"Achieving Strategic Excellence offers a unique and practical perspective based on solid research on how HR impacts business success. The inclusion of data from senior line managers adds a dose of reality to how the HR function has actually changed. This important work is a must-read for HR professionals as well as business leaders seeking to maximize human capital."—Daryl D. David, Executive Vice President, Human Resources, Washington Mutual, Inc.

"This latest update of CEO's longitudinal HR study provides almost a decade of perspective on the challenges and changes in the HR function. HR leaders in all industries and stages of career experience will find Lawler, Mohrman, and Boudreau's conclusions insightful and provocative with some interesting twists. The strategic HR journey continues . . ."—Mary Eckenrod, Chair Elect, The Human Resource Planning Society; Vice President, Global Talent Management, Kraft Foods

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Product Details

  • ISBN-13: 9780804753319
  • Publisher: Stanford University Press
  • Publication date: 4/13/2006
  • Edition description: 1
  • Pages: 160
  • Product dimensions: 8.50 (w) x 11.00 (h) x 0.50 (d)

Meet the Author


Edward E. Lawler III is Distinguished Professor of Business and Director of the Center for Effective Organizations in the Marshall School of Business at the University of Southern California. His most recent books include Creating a Strategic Human Resources Organization (Stanford University Press, 2003), and Human Resources Business Process Outsourcing (2004). John W. Boudreau is Professor of Management and Organization and Research Director of the Center for Effective Organizations, at the Marshall School of Business, University of Southern California. Susan Albers Mohrman is Senior Research Scientist at the Center for Effective Organizations at the Marshall School of Business, University of Southern California.
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Achieving Strategic Excellence

An Assessment of Human Resource Organizations


By Edward E. Lawler III John W. Boudreau Susan Albers Mohrman Alice Yee Mark Beth Neilson Nora Osganian
STANFORD UNIVERSITY PRESS
Copyright © 2006

Board of Trustees of the Leland Stanford Junior University
All right reserved.



ISBN: 978-0-8047-5331-9



Chapter One How HR Can Add Value

Global competition, information technology, new knowledge, the increase in knowledge workers, and a host of other business environment changes are forcing organizations to constantly evaluate how they operate. In many cases they have embraced new strategic initiatives and significantly changed how they operate. They are utilizing new technologies, changing their structures, and improving their work processes to respond to an increasingly demanding and global customer base. These initiatives involve fundamental changes that have significant implications for their human capital and their human resources functions.

Human capital management should be an important part of the strategy of any corporation. The annual reports of many corporations argue that their human capital and intellectual property are their most important assets. In many organizations, compensation is one of the largest, if not the largest, cost. In service organizations compensation often represents 70 to 80 percent of the total cost of doing business. Adding the costs of training and other human resources management activities to the compensation costs, we can see that the human resources function often has responsibility for a large portion of an organization's total expenditures.

But the compensation cost of human capital is not the only, or even the most important, consideration. Even when compensation accounts for very little of the cost of doing business, human capital has a significant impact on the performance of an organization (Cascio, 2000). In essence, without effective human capital, organizations are likely to have little or no revenue. Even the most automated production facilities require skilled, motivated employees to operate them. Knowledge work organizations depend on employees to develop, use, and manage their most important asset, knowledge. Thus, although the human capital of a company does not appear on the balance sheet of corporations, it represents an increasingly large percentage of many organizations' market valuation (Lev, 2001).

A growing body of evidence affirms that HR practices can be a value-added function in an organization. The initial work on the relationship between a firm's performance and its HR practices was conducted by Becker and Huselid (1998). In their study of 740 corporations, they found that firms with the greatest intensity of HR practices that reinforce performance had the highest market value per employee. They argued that HR practices are critical in determining the market value of a corporation and that improvements in HR practices can lead to significant increases in the market value of corporations. They concluded that the best firms are able to achieve both operational and strategic excellence in their HR systems.

Role of the Human Resources Organization

The HR function can add value by adopting a control-and-audit role. But two other roles that it can take on allow it to add still greater value. Lawler (1995) has developed this line of thought by describing the three roles it can take on. The first is the familiar human resources management role (Exhibit 1.1).

The second is the role of business partner (Exhibit 1.2). It emphasizes developing systems and practices to ensure that a company's human resources have the needed competencies and motivation to perform effectively. In this approach, HR has a seat at the table when business issues are discussed and brings an HR perspective to these discussions. When it comes to designing HR systems and practices, this approach focuses on creating systems and practices that support the business strategy. HR also measures the effectiveness of the human capital management practices and focuses on process improvements.

The business partner approach positions the HR function as a value-added part of an organization. It is positioned to contribute to business performance by effectively managing what is the most important capital of most organizations, their human capital. But, this approach may not be one that enables the HR function to add the greatest value. By becoming a strategic partner, HR has the potential to add more value (see Exhibit 1.3).

In acting as a strategic partner, HR plays a role that includes helping the organization develop its strategy. Here, not only does HR have a seat at the strategy table, HR helps to set the table. Boudreau and Ramstad (2005a, 2005b) support this idea by suggesting that strategies can be shaped and enhanced by bringing a human capital decision science to HR's role in strategy.

In the knowledge economy, a firm's strategy must be closely linked to its human talent. Thus, the human resources function must be positioned and designed as a strategic partner that participates in both strategy formulation and implementation. Its expertise in attracting, retaining, developing, deploying, motivating, and organizing human capital is critical to both. Ideally, the HR function should be knowledgeable about the business and expert in organizational and work design issues so that it can help develop needed organizational capabilities and facilitate organizational change as new opportunities become available.

To be a strategic partner, HR executives need an expert understanding of business strategy, organizational design, and change management, and need to know how integrated human resources practices and strategies can support organizational designs and strategies. This role requires extending HR's focus beyond delivery of HR services and practices to a focus on the quality of decisions about talent, organization, and human capital.

As a strategic partner, HR brings to the table a perspective that is often missing in discussions of business strategy and change-a knowledge of the human capital factors and the organizational changes that are critical to determining whether a strategy can be implemented. Many more strategies fail in execution than in their conception.

Despite compelling arguments supporting human resources management as a key strategic issue in most organizations, human resource executives often are not strategic partners (Lawler, 1995; Brockbank, 1999). All too often, the human resources function is largely an administrative function headed by individuals whose roles are focused on cost control and administrative activities (Ulrich, 1997; Lawler and Mohrman, 2003a; Boudreau and Ramstad, 2005a). Missing almost entirely from the list of HR focuses are key organizational challenges such as improving productivity, increasing quality, facilitating mergers and acquisitions, managing knowledge, implementing change, developing business strategies, and improving the ability of the organization to execute strategies. Since organizations do see these areas as important, the HR function is missing a great opportunity to add value.

There is some evidence that this situation is changing, and that the human resources function is beginning to redefine its role in order to increase the value it adds. The first three phases of the present study (in 1995, 1998, and 2001) found evidence of some change, but notably there was more discussion of change than actual change (Lawler and Mohrman, 2003a).

One possible view of the human resources function of the future is presented in a study of business process outsourcing by Lawler, Ulrich, Fitz-enz, and Madden (2004). It shows how four large corporations (British Petroleum, International Paper, Prudential, and Bank of America) transferred many HR administrative activities to the line, to outside vendors, and to highly efficient processing centers. The HR function was left to focus almost exclusively on business consulting and managing the organization's core competencies. This model is consistent with Ulrich's argument that the HR function needs to be redesigned to operate as a business partner (Ulrich, 1997; Ulrich, Losey, and Lake, 1997). Recently, Ulrich and Brockbank (2005) have argued that the HR function needs to develop a compelling value proposition that focuses on how it can increase the intangible assets that drive the market value of organizations. Boudreau and Ramstad (1997) note that the HR profession could mature in a way similar to finance and marketing.

A number of recent studies have addressed the new competencies required when the human resources function strives to be a strategic business partner (e.g., Smith and Riley, 1994; Csoka, 1995; Eichinger and Ulrich, 1995; Ulrich, 1997; Csoka and Hackett, 1998; Brockbank and Ulrich, 2003). Identifying these competencies needs to be followed by reorganizing the HR function to develop these competencies and to provide services in a manner that adds value as organizations change their overall architecture and strategy.

Creating Change

Describing the new human resources role and the new competencies HR needs is only the first step in transitioning the HR function to a strategic business partner. For decades, the human resources function has been organized and staffed to carry out administrative activities. Changing that role will require a different mix of activities and will necessitate reconfiguring the HR function to support changing business strategies and organizational designs. It also will require the employees in the HR function to have very different competencies than they traditionally have had.

It is becoming increasingly clear that information technology will play a very important role in the future of the HR function (Lawler, Ulrich, Fitz-enz and Madden, 2004). With HR information technology (IT), administrative tasks that have been traditionally performed by the HR function can be done by employees and managers on a self-service basis. Today's HR IT systems simplify and speed up HR activities such as salary administration, job posting and placement, address changes, family changes, and benefits administration; they can handle virtually every administrative HR task. What is more, these systems are available around the clock and can be accessed from virtually anywhere.

Perhaps the greatest value of HR IT systems will result from enabling the integration and analysis of the HR activities. They have the potential to make HR information much more accessible so that it can be used to guide strategy development and implementation. Metrics can be easily tracked and analyses performed that make it possible for organizations to develop and allocate their human capital more effectively (Boudreau and Ramstad, 2006; Lawler, Levenson, and Boudreau, 2004).

A strong case can be made that HR needs to develop much better metrics and analytics capabilities. Our previous three studies identified metrics as one of four characteristics that lead to HR's being a strategic partner. The constituents of HR want measurement systems that enhance their decisions about human capital. All too often, however, HR focuses on the traditional paradigm of delivering HR services quickly, cheaply, and in ways that satisfy clients (Boudreau and Ramstad, 1997, 2003).

HR has become more sophisticated in its measurement, yet this doesn't seem to be leading to increases in organizational effectiveness. Business leaders can now be held accountable for HR measures such as turnover, employee attitudes, bench strength, and performance appraisal distributions; however, this is not the same as creating an effective organization. The issue is how to use HR measures to make a true strategic difference in the organization.

Boudreau and Ramstad (2006) have identified four critical components of a measurement system that drive strategic change and organizational effectiveness: logic, analysis, measures, and process. Measures represent only one component of this system. Though measures are essential, without the other three components they are destined to remain isolated from the true purpose of the HR measurement systems.

Boudreau and Ramstad have also proposed that HR can make great strides by learning how more mature and powerful decision sciences have evolved their measurement systems (Boudreau and Ramstad, 1997). They identify three anchor points-efficiency, effectiveness, and impact-that connect decisions about resources such as money and customers to organizational effectiveness and that can similarly be used to understand HR measurement.

1. Efficiency asks, "What resources are used to produce our HR practices?" Typical indicators of efficiency are cost-per-hire and time-to-fill-vacancies.

2. Effectiveness asks, "How do our HR policies and practices affect the talent pools and organization structures to which they are directed?" Effectiveness refers to the effects of HR policies and practices on human capacity (a combination of capability, opportunity, and motivation), and the resulting "aligned actions" of the target talent pools. Effectiveness includes trainees' increased knowledge, better-selected applicants' enhanced qualifications or performance ratings of those receiving incentives.

3. Impact reflects the hardest question of the three. Impact asks, "How do differences in the quality or availability of different talent pools affect strategic success?" This question is a component of talent segmentation, just as for marketers a component of market segmentation concerns, "How do differences in the buying behavior of different customer groups affect strategic success?"

Today's HR measurement systems largely reflect the question of efficiency (Gates, 2004), though there is some attention to effectiveness as well, through focusing on such things as turnover, attitudes, and bench strength. Rarely do organizations consider impact (such as the relative effect of different talent pools on organizational effectiveness). More important, it is rare that HR measurement is specifically directed toward where it is most likely to have the greatest effect on key talent. Attention to non-financial outcomes and "sustainability" also needs to be increased, because strategic HR can affect these as well (Boudreau and Ramstad, 2005a).

The Emerging HR Decision Science

The majority of today's HR practices, benchmarks, and measures still reflect the traditional paradigm of excellence defined as delivering high-quality HR services in response to client needs. Even as the field advocates more "strategic" HR, it is often defined as delivering the HR services that are important to executive clients (leadership development, competency systems, board governance, etc.). This traditional service-delivery paradigm is fundamentally limited, because it assumes that clients know what they need. Market-based HR and accountability for business results are now recognized as important (Gubman, 2004). However, it often amounts merely to using marketing techniques or business results to assess the popularity of traditional HR services, or their association with financial outcomes.

Fields such as finance have taken a different approach. They have augmented their service delivery paradigm with a "decision science" paradigm, which teaches clients the frameworks to make good choices. Significant improvements in HR decisions will be attained not by applying finance and accounting formulas to HR programs and processes, but rather by learning how these fields evolved into the powerful, decision-supporting functions they are today. Their evolution provides a blueprint for what should be next for HR. The answer lies not just in benchmarking HR in other organizations, but in evolving to be similar to more strategic functions such as finance and marketing.

The marketing decision science enhances decisions about customers. The finance decision science enhances decisions about money. For human capital, a decision science should enhance decisions about organization talent, and those decisions are made both within and outside the HR function. Boudreau and Ramstad have labeled this emerging decision science "talentship," because it focuses on decisions that improve the stewardship of the hidden and apparent talents of current and potential employees (Boudreau and Ramstad, 2005a).

(Continues...)




Excerpted from Achieving Strategic Excellence by Edward E. Lawler III John W. Boudreau Susan Albers Mohrman Alice Yee Mark Beth Neilson Nora Osganian Copyright © 2006 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents Tables and Exhibits....................vii
Preface....................ix
The Authors....................xi
1 How HR Can Add Value....................1
2 Research Design....................12
3 Role of Human Resources....................20
4 Business Strategy....................24
5 HR Decision Science....................32
6 HR Organizational Design....................41
7 Human Resources Activities....................48
8 Outsourcing....................52
9 Use of Information Technology....................59
10 Effectiveness of Information Systems....................64
11 HR Analytics and Metrics....................72
12 Human Resource Skills....................80
13 Effectiveness of the HR Organization....................87
14 Determinants of HR Effectiveness....................93
15 HR Excellence....................104
References....................119
Appendixes....................123
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Recipe

This is the Center for Effective Organizations’s (CEO) fourth national study of the human resources (HR) function in large corporations. It is the only long-term national study of this important function. Like the previous studies, it focuses on measuring whether the HR function is changing and on gauging its effectiveness. The study focuses particularly on whether the HR function is changing to become an effective strategic partner. It also analyzes how organizations can more effectively manage their human capital. The present study compares data from earlier studies to data collected in 2004. The results show some important changes and indicate what HR needs to do to be effective. Practices are identified that enable HR functions to be high value-added strategic partners.

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  • Posted August 3, 2009

    more from this reviewer

    Major survey explains how HR's role is evolving

    Between 1995 and 2004, the Center for Effective Organizations conducted periodic surveys of the role of human resource departments in large U.S. corporations. Edward E. Lawler III, John W. Boudreau, Susan Albers Mohrman and other researchers, analyze that study in this useful book. Although their style can get dry and academic (perhaps since they are all university faculty members), this work is by no means purely theoretical. It includes applicable, real-world information that shows how HR managers and other corporate leaders perceive the changing role of the organizational HR department. This study says corporate leaders have come to realize that human resource work adds strategic value, given the importance of skilled personnel. It is no news to insiders that HR has become far more than a cost center, but these authors explain why. getAbstract recommends this work to HR managers and other executives who have a professional and intellectual need to stay on top of HR trends - and who will fearlessly take on tables, statistics and the halls of academe in the quest for that knowledge.

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