MEASURING HUMAN RESOURCES: AN OVERVIEW …

1 MEASURING HUMAN RESOURCES: AN OVERVIEW OF PRACTICEAND A PRESCRIPTION FOR RESULTSDave UlrichMany talk about MEASURING HUMAN resources (HR), but get lost because the issues areconfusing. What to measure? How to measure it? When to measure? Where to measure?These questions make measurement of HR difficult. This article reviews the history ofHR measurement; summarizes how HR measures may be done for professionals, prac-tices, and functions; and offers specific guidelines for improving HR measures. 1997 John Wiley & Sons, HUMAN resources (HR) practice make adifference in business results? For HR profes-sionals to become business partners, thisquestion must be faced head-on. An old busi-ness maxim suggests, You cannot managewhat you cannot measure. Imagine the fol-lowing scenario. An HR executive is part of asenior management team in a planning set-ting. The General Manager asks for input onwhat the plans should be for the business .

2 Thefinance Vice President reports the economicrequirements of the business and talks aboutkey financial indicators, including: inventory,margins, product turnover, revenue, expenses,debt, and other financial indicators of marketing Vice President reports the cus-tomer requirements of the business and talksabout measures of customer service, marketshare, customer focus groups, customer re-tention, and other indicators of customer sat-isfaction. The technology Vice President re-ports on indicators of emerging technologies,cycle times for product introduction, and re- search and development budgets and invest-ments. The manufacturing Vice President re-ports operating efficiencies, product quality,and volume indicators. What measures doesthe Vice President of HUMAN resources bringto this table?Traditionally, the HR executive could talkabstractly and conceptually about employeemorale, turnover, and commitment.

3 To fulfillthe business partner role of HR, conceptsneed to be replaced with evidence, ideas withresults, and perceptions with article shows how and why HR adds val-ue to business decisions. First, evidence isemerging which demonstrates the impact ofHR practices on business results. Second, HRissues are being woven into business measuresaround a balanced scorecard. Third, HR as-sessments are being carried out on practices,professionals, and departments or HR and business ResultsThe 1980s: Initial Studieson HR business ResultsThe relationship between HR practices andbusiness results is built on a rather simpleHuman resource Management,Fall 1997, Vol. 36, No. 3, Pp. 303 320Q1997 John Wiley & Sons, 0090-4848/97/030303-18To fulfill the busi-ness partner roleof HR, conceptsneed to be re-placed with evi-dence, ideas withresults, and per-ceptions with 7/30/97 2:21 PM Page 303premise: better deployment and use of HRpractices should correlate with higher busi-ness results.

4 While many early strategy HRwriters assumed this relationship, relativelylittle evidence existed to actually test it2; in the 1980s a number of such test effortswere made (Devanna, Fombrun, Tichy, 1981;Dyer, 1984, 1985; Fombrun, Tichy, Dev-anna, 1984).Susan Nkomo examined the correlationbetween how much firms invested in HR plan-ning processes and business results. Shefound no correlation; investment in HR plan-ning did not correlate with business perfor-mance (Nkomo, 1987, 1986). Dave Lewin andhis colleagues (1988 1989) published similarresults from their large scale survey of HRpractices and financial results sponsored bythe Department of Commerce (Delaney,Lewin, & Ichniowski, 1989; Delaney, Lewin &Ichniowski, 1988). Both of these studies werebased on cross-sectional survey the same time, a research project calledOrganization and Strategic Information Ser-vice (OASIS) was undertaken as a joint ven-ture among Strategic Management Associates(who created the PIMS database), Hay Con-sulting, and the University of Michigan.

5 Thisproject began with the PIMS database, one ofthe world s largest and most complex databas-es on business environment and strategy, andadded organizational factors to it (Ulrich,Geller, & DeSouza, 1984; Cowherd & Kamin-ski, 1986). The results of OASIS showed somerelationships between specific HR practices( , distribution of compensation systems)and business results, but they did not produceoverall indicators of how HR practices affectbusiness large-scale surveys involving many or-ganizations were conducted to find such rela-tionships: Survey 1 between strategy andHR, and Survey 2 between HR and financialperformance. In Survey 1, Randall Schulerand Susan Jackson collected data from a largecross section of firms and showed how underdifferent strategic conditions, HR practiceswould vary (Jackson, Schuler, & Rivero, 1989;Schuler & Jackson, 1987; Schuler, 1987).This work presented empirical evidence of thestrategy-HR alignment, but did not then linkthis alignment to business results.

6 In Survey2, Arthur Yeung, Wayne Brockbank, DaleLake, and I found that HR practices not onlyvaried by strategy, but that the alignment ofHR and strategy had an impact on businessperformance (Ulrich, Brockbank, Yeung, &Lake, 1993; Yeung & Ulrich, 1990). Amongother findings, we discovered that under environmental conditions of low change, at-tention to HR practices had little impact onbusiness results, but under environmentalconditions of high change, executive attentionto HR practices had a large impact on conclusion from these studies, car-ried out and repeated in the 1980s, is equivo-cal. HR practices seem to matter; logic says itis so; survey findings confirm it. Direct rela-tionships between investment and attention toHR practices are often fuzzy, however, andvary according to the population sampled andthe measures 1990s: Extended Assessment of HRPractices and Financial PerformanceThe interest in quantifying the impact of HRpractices on financial performance has led toa number of studies which linked the impactof HR practices to specific firm , for example, has been linked to jobsecurity, presence of a union, compensationlevel, culture, and demographics (Arnold &Feldman, 1982; Baysinger & Mobley, 1983).

7 Productivity has been linked to HR practicesof transformational labor relations (thoseemphasizing cooperation), quality of work life programs, quality circles, training, exten-sive recruiting efforts, and incentive compen-sation systems (Cutcher-Gershenfeld, 1991;Katz, Kochan, & Keefe, 1987; Weitzman &Kruse, 1990). Investments in various HRpractices have been linked to firm financialperformance, such as: training (Russell, Ter-borg, & Powers, 1985), selection and staffing(Terpstra & Rozell, 1993), appraisals (Bor-man, 1991), and compensation (Gerhart &Milkovich, 1992).Other studies have focused on HR prac-tices and financial performance in specific in-dustries. Studies have shown relationships be-tween progressive HR practices and firm304 HUMANRESOURCEMANAGEMENT,Fall 7/30/97 2:21 PM Page 304 More recently,two major re- search studieshave advancedthe rigor andthinking aboutHR and in manufacturing (Delaney,1996), cooperative and innovative HR prac-tices and organizational productivity in steelplants (Ichniowski, Shaw, & Prennushi, 1993;Arthur, 1994), and bundles of integrated HRpractices and higher productivity and qualityin automotive plants (MacDuffie, 1995).

8 While this research has grown and shownrelationships between HR practices and firmresults, the bulk of the research focuses eitheron individual HR practices or on individual in-dustries. More recently, two major researchstudies have advanced the rigor and thinkingabout HR and business for HUMAN resource Management/CCH the direction of Dr. CheriOstroff, Associate Professor at the Universityof Minnesota s Industrial Relations Center,the Society for HUMAN resource Manage-ment (SHRM) and CCH Incorporated con-tracted for a study to evaluate the financial im-pact of HR practices (CCH, Inc., 1995). Thisresearch has resulted in a number of both gen-eral and specific findings about HR in gener-al and the relationship between HR and fi-nancial performance in particular. In general:(1) HR professionals see HR issues as impor-tant to business performance; (2) line man-agers should be responsible and more involvedin HR practices; and (3) use of HR practicesvaries widely.

9 An overall quality of HR indexwas also developed for each firm based on theaggregate ratings of all HR activities adoptedby the firm. This quality of HR index was re-lated to four financial measures: market/bookvalue (market value of the firm based on stockprice divided by firm s assets, which represents value added by management), productivity(dollar value of sales divided by number of em-ployees), market value (stock price 3out-standing shares), and sales. All four financialmeasures increased dramatically with thequality of HR practices (see Table I). Thesedata clearly indicate that when HR profes-sionals perceive a higher quality of HR prac-tices, these firms have higher business addition, specific results were generat-ed when firms were clustered into five groupsor types of HR users:xComprehensive HR:These firms incor-porate the full spectrum of HR HR: These firms use HRpractices for hierarchical monitoringand control of HR:These firms use HRpractices to increase skill levels, involveworkers in jobs, and increase feelings ofpersonal HR: These firms use HRpractices to increase employee identifi-cation with the HR use: These firms pay little at-tention to HR of these clusters relates to particularbusiness strategies.

10 Firms with a comprehen-sive HR system tend to have high business re-sults regardless of business strategy. Firmswith an innovation strategy are likely to bemore successful with an involvement set ofHR practices. Firms with a cost strategy arelikely to be more successful if they use com-prehensive HR Practices and Company Financial Perfor- MEASURING HUMAN Resources 305 SHRM/CCH Study of HR Quality and business of HR IndexPerformance IndexBottom 25%Second 25%Third 25%Top 25%Market/book index (output/employee) value878125020313667 Sales1017159820904420 Source: CCH Incorporated, 1995. HUMAN resource Management:Ideas and Trends in Personnel,Issue 7/30/97 2:21 PM Page comprehensive study of the rela-tionship between HUMAN resource practicesand firm performance was undertaken byMark Huselid, a Professor at Rutgers Univer-sity, and his colleagues. They drew on researchwhich identified high-performance work prac-tices across a number of firms.