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New HR Metrics: Scoring on the Business Scorecard

Available online (f)DIRuICT New HR Metrics: Scoring on theBusiness ScorecardRICHARD W. BEATTY MARK A. HUSELIDCRAIG ERIC SCHNEIERThe role of the Human Resource functionin firms has changed in parallel with theeconomic shift from agrarian to manufactur-ing to services-and now to on, HR was considered a staff function,not integral to the firm. Its role was admin-istrative or transactional, its work-productoften regarded as a commodity. One factorin changing HR's role is the increased reli-ance on knowledge workers. In our transi-tioning economy, observers, both inside andoutside of organizations, have come to view afirm's workforce as far more valuable. Thus,if one views HR's primary role as influencingworkforce mindset, competencies, and beha-vior, HR's role becomes central to the firm,for it is people who carry out itsstrategy.

Available online at wwwsciencedirect.com sCIRNC∎(f) DIRuICT• New HR Metrics: Scoring on the Business Scorecard RICHARD W. BEATTY MARK A. HUSELID CRAIG ERIC SCHNEIER

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Transcription of New HR Metrics: Scoring on the Business Scorecard

1 Available online (f)DIRuICT New HR Metrics: Scoring on theBusiness ScorecardRICHARD W. BEATTY MARK A. HUSELIDCRAIG ERIC SCHNEIERThe role of the Human Resource functionin firms has changed in parallel with theeconomic shift from agrarian to manufactur-ing to services-and now to on, HR was considered a staff function,not integral to the firm. Its role was admin-istrative or transactional, its work-productoften regarded as a commodity. One factorin changing HR's role is the increased reli-ance on knowledge workers. In our transi-tioning economy, observers, both inside andoutside of organizations, have come to view afirm's workforce as far more valuable. Thus,if one views HR's primary role as influencingworkforce mindset, competencies, and beha-vior, HR's role becomes central to the firm,for it is people who carry out itsstrategy.

2 HRprofessionals need to recognize this changeand adapt to enhance HR's organizational contri-bution, HR professionals not only will needto transform what they do but also how theyare perceived. Early in its history, the "per-sonnel" function was a refuge for line man-agers who were polite but ineffectual-employees "too nice to terminate." Threedecades ago, empowered by federal andstate legislation, HR became known as the"personnel police," often to the frustration ofline managers. In the ongoing transformationto a services and information economy, HRwanted to be seen as a strategic partner,hopefully invited to the strategic planningparty. But significant challenges await HRonce invited to the party. It must have some-thing to bring to the wish to address what and how HRcan contribute to the strategic success offirms by transforming itself from a partner(that can be removed or outsourced) to aplayer-onthe field, in the game, with theability to score.

3 The ability to score necessi-tates a new understanding of the rules of thegame-a new perspective on what HR is tocontribute, how its systems enable it to con-tribute, and how its ultimate deliverables canbe measured. The rules of the game meanthat HR should only attempt to score on anHR Scorecard integrated with the firm'sBusiness shift to a services and knowledgeeconomy has accelerated interest in the"intangibles" that have fueled market capi-talization growth in the equity markets. Bar-uch Lev and others at New York Universityoffer annual seminars on has reported on how the value ofknowledge workers in various industries canbe captured in financial terms. Several stu-dies have found that 30 to 40 percent ofmarket appreciation is due to non-tangiblefactors.

4 An Ernst & Young study has shownthat intangible factors( ,strategy execu-tion, managerial credibility, strategy quality,attracting and retaining talent, managementexperience, and compensation strategy)107 Organizational Dynamics, Vol. 32, No. 2, pp. 107-121, 2003 2003 Elsevier Science Inc. All rights 0090-2616/03/S-see (03) much of the variance in the marketvalue of firms. These factors vary acrossindustry; for example, in the computer indus-try, the quality of management explains asmuch as 13 percent of the total variance inmarket , research has demonstrated thatmany targets of HR work can and do differ-entially impact a firm's financial this notion is often given lip service byfirms, a growing body of evidence shows thatwhat HR does can have a significant bottom-line effect.

5 In a major research study, Huselidfound that firms with sophisticated HR sys-tems (also known as "high performancework systems") have a significant financialimpact on profits per employee, sales peremployee, and market value per findings have gained the attention ofother academics and executives interested inbetter assessment of HR systems, as well as inredesigning executive appraisals to ensurethat leaders are held accountable for enhan-cing their workforce's contribution to thebottom 1 Business SCORECARDR ewardsWORKFORCESUCCESS Mindset Competend Behavior108 ORGANIZATIONAL DYNAMICST8 TRATEGYNALUEPROPOSITIONaOpsrstlond ExcellenceoProducUServiceLeadershipO Customer Intimacy-11 FINANCIALS uccessOne problem has been measurementeffectiveness. A Conference Board surveyof senior executives reported, as expected,that customer, financial, operational, and peo-ple measures were all seen as important butnot equally effective.

6 The test of measurementeffectiveness was the executives' willingness"to bet their job" on the quality of the mea-sures. The survey found significant discrepan-cies among domains, with the greatestdiscrepancy in people measures. Thus, sub-stantial work is needed in the assessment ofworkforce measures in firms. Below weexplore how to measure the workforce, theHR function, and firm leadership with respectto their impact on the workforce and ulti-mately upon a firm's strategic Business SCORECARDTO HR SCORECARDOur approach starts with Kaplan & Norton'sBalanced Scorecard , a familiar concept in mostfirms. While maintaining the Scorecard 'sCUSTOMER SUCCESSBUSINESS PROCESSSUCCESSFIGURE 2HR SCORECARDHR Practices Communication'Work Design Selection Development'Measurement'RewardsHR Competencles Admin.

7 Expertise Employee Advocacy Strategy Execution Change AgencySTRATEGIC FOCUSoOperational ExcellenceO Product leadershipoCustomer IntimacyHR Systems Alignment Integration Differentiationcore by retaining the financial, customer andbusiness process success components, wehave changed the component "Learning,Innovation, Etc." to "Workforce Success."We call this new Scorecard the Business Score-card (Fig. 1). Also notice that we prefer touse the word "success" as opposed to "satis-faction." Clearly firms can go out of businesswhile satisfying customers and , the objective is to make both custo-mers and employees successful in orderto make the enterprise successful. We havealso replaced terms such as "mission" and"vision" from the center of the scorecardwith "strategic choice.

8 " For a non-diversifiedfirm or for a Business unit within a diversi-fied firm, we believe that a strategic choice(or value proposition) should be articulated,such that the workforce can understandand embrace how the unit intends to be suc-cessful in its chosen market. To simplify, wechose Tearcy & Wiersema's scheme in whichfirms pursue value propositions of low-costprovider (operational excellence), innovator(product or service leadership) or customiza-HR Deliverables Workforce Mindset'Technical Knowledge'Workforce Behaviortion/unique solutions (customer intimacy).Strategic choice significantly impacts the defi-nition of customer success, Business processsuccess, and plays an important role in asses-sing what the workforce must do to be make the workforce successful in thecontext of the Scorecard system, we mustspecify the major targets of an HR system,or HR's deliverables: workforce mindset,competencies, and behavior.

9 To producethese deliverables, components of the HRsystem must be assessed on the competenciesrequired of theHRworkforce, the HR prac-tices used to produce HR's deliverables ( ,communication, work design, selection,development, measurement, rewards, etc.),and the HR system's integration and align-ment with the strategy of the approach yields an HR Scorecard (Fig. 2) that enables the development of HRdashboards that capture HR's firms are pursuing such measure-ments systems and have made substantialprogress. Boeing, General Electric, South-109 Corp Ltd., United Distillers & Vintners andVerizon are developing on-line, real-timemetric systems to monitor HR processesand HR'SCOMPETENCIESA ssessing HR's competencies refers to thecompetencies of the HR workforce( ,thepeople who populate the HR function, theirstrengths and weakness in specific areas ofexpected HR performance).

10 We look at HRcompetencies through the lens of Ulrich,whose book,HR Champions,analyzes HR'sroles in terms of its focus on people or pro-cesses, as well as its strategic or operationalfocus. Thus, these roles can be depicted as atwo-by-two matrix. First, the HR functioncan be conceived as having a process andtactical focus on administrative efficiency inthe delivery of HR transactions. Second isHR's "employee advocacy" role (formerly"employee relations"), with an operationalfocus on serving the workforce( ,people)and the growth and retention of critical com-ponents of the workforce. HR's third role isstrategic, whereby HR better enables the firmto execute its strategy by aligning HR prac-tices with Business strategy. The fourth role isconcerned with changing the workforce-HR's "cultural change" role.


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