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A Guide for Transforming Your HR Department
"In the next few years, most HR departments will outsource some or all HR administration. In this book, the foremost thought leaders in HR have put it all together for us. This book explores the evolutionary change our profession is experiencing, gives an envisioned future, and shows how to transform once and for all into a strategic role that adds value and delivers results."
Libby Sartain, senior vice president, human resources, and chief people Yahoo, Yahoo! Inc.; former vice president of people, Southwest Airlines; and coauthor, HR From the Heart: Stories and Strategies for Building the People Side of Great Business
"This book describes the keys to reinventing the HR organization from administrative to strategic and upgrading the HR team to becoming a true strategic business partner in the process."
Susan Bowick, former head of human resources, Hewlett-Packard
"This book provides excellent insight into the exciting new thinking behind the creation of one of the most successful business process outsourcer (BPO) companies that has been created in the last five years."
Bill Pade, partner, Oak Hill Capital
"This is a really good book! I recommend it as a must-read for anyone considering HR outsourcing as well as any venture capital firm considering a BPO investment."
Dennis McGuire, founder and CEO, Technology Partners
"Faced with a real threat of living in the past, this is a collection of stories about creating a new HR future with innovation, spirit, and focus. Every HR leader can see themselves, learn from the events, and test their convictions. Whether you believe in HR outsourcing or not, the journey is compelling."
Don Packham, senior vice president of human resources, BP America
"HR can only excel if it is able to balance the strategic and the transactional agenda. Without transactional excellence HR does not deserve its seat at the table; without offering strategic value the job is less than half done. The HR profession as well as the line managers, who understand the role HR can play, can be grateful to the authors, who are holding up the mirror so that we can reflect on how to make the work of HR more supportive of the business agenda."
Hanneke C. Frese, head of group capabilities, Zurich Financial Services
1. Forces for Change.
2. New Roles for HR.
3. Evaluating the Effectiveness of HR.
4. Design of the HR Function.
7. Bank of America.
8. International Paper.
10. Lessons Learned.
11. Outsourcing and the Future of HR.
Human resources (HR) departments are at an important crossroads. Large-scale transformation of the HR function is not only desirable; it is necessary. Why? First, the traditional transactional work of HR is rapidly becoming a commodity; at many companies, there are significant cost savings to be realized by treating it in this manner. Top managers are increasingly aware of the efficiencies that new technologies can provide, and they are putting pressure on the HR function to reduce costs as never before. Second, there is a growing demand for expertise regarding the deployment and management of human capital and organizational capability; the HR function can and should provide that expertise. Managers at all levels increasingly need strategic guidance about how they deploy their workforce and build their organizations in order to fulfill company goals.
In order to respond effectively to both pressures, the HR function must simultaneously create transaction efficiencies and transformational changes. But substantive change in the nature of a staff function's work and role is rare. What's more, when such change does occur, it is usually driven by forces outside the department, such as a merger, a divestiture, a technology change, a change in the economy, or a new business strategy. Rarely do staff functions step up to reinvent themselves.
Currently, most HR leaders can still choose whether they will respond to change or whether they will lead change. HR executives still have the opportunity to shape how they and the HR function respond to the demands that their function is experiencing. To us, the path is clear. We believe that HR executives who stick with the status quo and maintain a focus on transactional work will soon become obsolete. At the same time, we believe that HR professionals who meet the need for strategic expertise concerning human capital management and organizational effectiveness will contribute value that far exceeds the past contributions of the HR function. In the process, they will make themselves indispensable to their organizations.
A Case of Supply and Demand
To assess the nature and extent of the change required of HR, imagine a simple demand-supply model for businesses and apply that model to the future of HR. Start by stepping back and considering the major factors that are placing new or shifting demands on businesses today. Since top managers grapple with these issues, HR professionals need to understand and respond to them in order to add value and establish their worth:
Customer-firm interactions are evolving. Customers have more access to information and are more informed than ever before. As a result, customer expectations are higher than ever before, and competition for customer share is greater than ever before. Customers expect-and usually get-lower cost and higher-quality goods and services; as a result, they put pressure on organizations to reduce their own costs even as they strive to improve quality.
HR directly affects operating costs because of the cost of its own operation and because it is partially responsible for a major expense: wages and benefits. In addition, the quality of HR services influences product and service costs and quality because the quality of HR services affects employee behavior and performance.
Targeting key customers is increasingly important. At eBay, 10 percent of the customers purchase 90 percent of the products; in the airline industry, 10 percent of the customers provide 40 percent of revenue and 60 percent of profit. Financial service firms strive for share of wallet; food product firms seek share of stomach. In each of these cases, new customer realities have established new rules for winning; customer share is now more important in these scenarios than market share.
To gain a critical customer share, companies must build a value proposition uniquely tailored to a particular target customer. Amazon, for example, knows the book buying patterns of those who buy more books and can tailor its offerings to those target customers. General Motors knows the car buying patterns of those who replace cars more frequently with new cars than others and can tailor its offerings to those customers.
Companies must also shift their focus from winning a single customer transaction to winning a lifetime of transactions. Amazon wants not only to sell a book, but also to build a relationship with customers so that they will spend a high portion of their lifetime book buying money with Amazon. As a result, Amazon needs to build a customer share strategy, directed at target customers, through brand loyalty and the kind of exceptional service that can be delivered only by a skilled, committed workforce.
One way to increase customer intimacy in key customer groups is to involve these customers in significant company activities that are designed to improve service levels. By involving customers in HR activities (for example, by participating in the design and delivery of training activities), HR practices may be used to create intimacy with targeted customers. When leaders worry about employees as if they are customers and customers as if they are employees, both customers and employees are more engaged and committed. When HR practices are used to align both employees and customers, both employee and customer share grows.
Information technology is continuing to evolve. As we all know, information is increasingly ubiquitous and also increasingly easier to access and manipulate. This trend has significant implications for business-to-business, business-to-supplier, and business-to-employee relationships. It is also the foundation of e-business operations. Information technology allows for warehousing the kinds of customer data that enable companies to identify specific customers and determine their buying criteria. Such data also allow customers to be targeted for life, as companies continually update their knowledge of customers' behaviors and buying criteria.
Information about employees allows companies to personalize employee rewards and better understand their employees' expertise, potential to contribute value, and likely career paths. Information warehouses can make it possible for organizations to analyze employee data to determine the costs and effectiveness of their HR practices and the degree to which they support key business strategies.
Information, in other words, increasingly is both a revenue source and a source of competitive advantage. Computer access companies like Time Warner and Yahoo increasingly make money on the information they track on their users. Firms with better information about customers, for example, can make decisions to move into new markets more quickly than their competition. Unilever tracks consumer buying patterns based on a number of demographic inputs such as household income, marital status, size of household, and household gender makeup. Using this information, Unilever targets its marketing not only to a region or geography, but also to a particular household through coupons and advertising. Consumer information becomes a source of competitive advantage because Unilever knows better than its competitors what consumers want and expect.
Similarly, firms with enhanced understanding of their employees' strengths and weaknesses are better able to make strategic decisions that will stick and succeed. A company that understands at the outset whether it has the capabilities to expand into a new market and where it needs to bolster its capabilities has a competitive advantage over companies that do not know themselves as well.
The implications of the growing importance of information for HR are obvious: HR must continue updating its systems and provide current and accurate data on employees, HR practices, and organizational outcomes. HR must also help turn information into informed choices so that data are not just warehoused but used to improve decision making. HR must help business leaders generate and use information to help their organizations compete. HR systems must support change, using technology faster and deploying it more routinely.
HR practices also need to adjust to the increasing availability of information technology. Staffing with information technology (such as computer databases and Internet screening of candidates) allows employers to identify and screen a broader array of candidates. Development with information technology (IT) allows for remote learning. Compensation management with technology allows for decisions to be made rapidly and accurately. IT-based self-service, when it comes to HR administration, can reduce the cost of HR as well as provide faster service.
Mergers, acquisitions, divestures, alliances, and partnerships are changing the shape of industry at a rapid rate. Mergers and acquisitions continue to occur, and in some significant cases, they have crossed traditional industry boundaries to create convergence across boundaries. For example, the merger and alliance activity in the airline industry has redefined the industry. Today, convergence means that airlines sometimes compete with organizations outside their industry. For example, frequent flier programs are key assets to the airlines, but now these companies play in the same competitive arena as retail stores, telephone companies, and restaurants in deploying frequent flier benefits. Similarly, financial service firms worry about customers banking through Internet firms, about supermarkets performing financial services, and about traditional manufacturing firms like General Motors and General Electric performing financing functions.
Industry consolidation also means that products that were once in the purview of only one industry now cross boundaries. Computer monitors may become televisions and vice versa; telephones are now cameras. Vehicle on-line services like General Motors's On-Star make the automotive company a player in communication services; utility firms now offer control services to manage home and commercial temperature; and the electronics inside appliances now allow washing machines, refrigerators, and the like to be directly connected to central services for maintenance and monitoring usage.
As industries evolve in this manner, leaders seek creative and alternative ways to leverage their organizations' core competencies and organizational capabilities across industry boundaries. At the heart of both are people. HR systems that help people conceive innovative ways to define and navigate industry boundaries can become an important competitive edge.
Investors are changing their assessments of value. Determining a firm's market value has always been important to investors and managers alike. Recent research on market value has shown that the tangible financial assets of a firm predict less of its total market value today than in the past. A firm's total market value thus increasingly comes from the intangible assets that a firm possesses.
In exploring intangibles, investors look behind the financial numbers to determine the market value of a firm. They examine intangibles that predict future results, and this affects the current market value of corporations. Intangibles such as quality of leadership, speed of response, ability to innovate, capacity to integrate acquisitions, accountability for results, culture, and talent are becoming a central part of a firm's total shareholder value proposition.
Leaders have the primary responsibility for creating sustainable intangible value, but HR professionals can help in shaping intangibles. The goal is to build organizations whose long-term viability is ensured by the way the organization operates internally. HR professionals can contribute by developing HR systems that are designed to attract, deploy, motivate, and engage human capital in ways that create superior intangibles.
Consider that the ethics and values of senior management are among the most critical intangibles. When senior leaders are seen as greedy and excessively self-interested, investors discount the market value of the firm's financial performance. When leaders are forthcoming with problems and honest in assessments-that is, when they operate ethically-investors award firms positive intangible value.
Ethics and integrity have become a social agenda that leaders must explicitly acknowledge and manage. This agenda has a number of dimensions. For example, it encompasses legal issues. When leaders violate the laws that govern organizations and society, either explicitly through their actions or implicitly by turning away from and ignoring others' behavior, they fall into an ethics black hole that results in lost credibility. Customers, investors, and employees lose faith.
Leaders who assume large and visible organizational roles must live to a high standard, their behavior beyond reproach. Even the appearance of misdoing often leads to an erosion of confidence from critical stakeholders. Leaders, because of their status, economic rewards, and opportunities to influence, must be cautious about their behavior and the ways in which others view that behavior.
One important way that organizations shape social values is through their HR practices. For example, rewards often communicate a social value. When the only performance metric is financial returns (such as cash flow), pay for performance becomes a way of signaling what the organization values. If performance includes a more balanced scorecard, then leaders will change their behavior to reflect what is measured.
Leaders need confidants who advise them on social issues and offer candid counsel and feedback on their behavior and on how to make informed social choices. HR professionals can be a voice for creating a social agenda and a source of candid feedback on ethical issues.
Social trends are affecting product, customer, and employee expectations. Many social trends affect how leaders and organizations act. The recent heightened emphasis on exemplary leadership behavior is one. The widening gap between the haves and have-nots is another. This bifurcation of the population has become more acute with the development of technology. The haves have access to computers and the Web, which leverages their knowledge and breadth of influence. The have-nots have little access to technology, which limits their scope of influence and thinking.
Business leaders often experience primarily the haves in their day-to-day work and may not be sensitive to the have-nots.
Excerpted from Human Resources Business Process Outsourcing by Edward E. Lawler, III David Ulrich Jac Fitz-enz James Madden V Regina Maruca Excerpted by permission.
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