Drawing on their 18-year study of 33,000 HR professionals and line managers, leading HR experts Dave Ulrich and Wayne Brockbank argue in their most recent book, The HR Value Proposition that earning a seat at the executive table is only the beginning for today´s HR leaders - they need to bring value to that table. Brockbank elaborated on that call to action with Veritude´s Workforce Insights.

WI: HR has been trying to gain a strategic foothold since the 1990s. What´s new about the "HR value proposition," and how does it diff er from other methods for gaining a seat at the table?

WB: The HR Value Proposition approaches HR from two perspectives: helping HR to be grounded in external market realities and to function as an integrated system.

To be externally focused, we start from a premise that we sometimes forget in HR, that nothing that happens on the inside of HR matters unless it ultimately influences the customers and owners on the outside.

It´s simple logic - it goes back to the basic principles of economics. If you supply something for which there´s no demand, the dollar value is zero. We´re trying to get HR to focus on what do we do with our people on the inside that ultimately creates value for our customers and shareholders on the outside.

WI: How do you know that this external focus creates value?

WB: At the University of Michigan and The RBL Group, we have the largest database of around 33,000 HR professionals and line managers from around the world. Using this data, we looked at the competencies and agendas that differentiate HR professionals in high-performing firms versus those in low-performing firms.

In one of our papers, we identified three categories of business knowledge that could be possessed by HR professionals: knowledge of HR, knowledge of internal operations and knowledge of external operations.

We found that statistically HR professionals have a high level of knowledge about HR, but HR knowledge does not differentiate HR professionals in high-performing firms from those in low-performing firms.

When it comes to knowledge of internal operations, HR professionals do medium well, and this knowledge has medium influence on business performance.

Knowledge of external reality consists of knowledge about customers, competitors, capital markets, suppliers, globalization and industry structure.

HR professionals have a low level of knowledge about these external business realities. However, knowledge of such external realities is a big differentiator of performance. In other words, HR professionals in high-performing firms have much greater knowledge of external realities than do their counterparts in low-performing firms.

The logic is straightforward. If HR´s job is to create the capabilities that the firm needs to have to compete in its markets, it can´t begin to do that unless it knows what´s required to be an effective competitor. And that´s defined by external realities - not internal dynamics.

WI: You mentioned that in addition to being externally focused, HR needs to function as a totally integrated system.

WB: The HR value proposition requires that HR be treated as a totally integrated system. The first stage requires that HR professionals have a firm knowledge of external business realities and that they use that knowledge in discussions with senior line executives about business strategy and organizational direction.

Second, they need to be able to create a direct line of sight to external and internal stakeholders as they design and deliver HR practices. External stakeholders include customers and shareholders. Internal stakeholders include management and employees.

Third, they need to be able to craft HR practices that influence the flow of talent, the flow of performance, the flow of information and the flow of work.

Fourth, with those abilities to create those different practice areas within HR, they can then link them to business strategy and create more powerful HR strategies.

Our research shows that HR needs to create key cultural capabilities that are exactly aligned with the requirements of the business and the marketplace. As part of developing its HR strategy, an effective HR department also needs to make sure its HR structure is consistent with the organizational structure of the lines of business.

Last, HR needs to be able to develop the capabilities within the department to deliver on all of the above. That is, the HR department must invest in developing the competencies of the HR professionals that make up its department.

Only as HR begins to conceptualize and integrate all five of these stages will it be able to add value in the stable, predictable way that is increasingly being expected of it.

WI: What are the skills HR professionals need to develop in order to transform themselves to meet the rising expectations?

WB: They have to have better knowledge about the state of the art in business thinking: the customers´ requirements, trends in strategy development and trends in competitive analysis. In other words, they need to understand the key strategic elements of the business.

They need to know state-of-the-art HR practices as well, and they already do a good job of this.

Most important, they need the skill to be able to link their HR practices to the key business drivers so they can keep themselves focused on the critical business issues that will add the greatest value through HR.

In some cases there´s a high price to becoming experts in the business. It means understanding the financials, the requirements of the capital markets, the desires of the customers of today and the future. It means knowing who the most critical customers are. It means knowing who the key competitors are. It means knowing their own firms´ strengths and weaknesses relative to the strengths and weaknesses of their competitors.

WI: How should they begin to develop this knowledge and skill?

WB: By talking to customers, reading analyst reports, and immersing themselves in the strategy literature, both academic and practical. At the same time, they need to become versed in general management thinking by reading periodicals like BusinessWeek, Fortune, The Economist, The Financial Times, The Wall Street Journal and The Far Eastern Economic Review.

They also need to be aware of best HR practices that are empirically verified through large-scale empirical research versus those that are assumed to be effective based on anecdotal evidence. They can get such empirical information by reading the Human Resource Management Journal and other professional journals.

WI: You mentioned that they should talk to customers. How does an HR professional convince customers to sit down with him or her?

WB: You need to be ready to respond to the customers´ question, "Why should I spend time with you?" In other words, what´s in it for the customers if they spend time with you? How will they and their company benefit from the direct contact with you?

The answer is, "My job in HR is to create the human and organizational capabilities that are required to provide you (the customer) with products and services that enable you to beat your competitors. The reason you should spend time with me is that I help to put at your disposal human capabilities that help you to beat your competitors."

The problem is that in order to have that conversation HR professionals have to first know the business and the customer´s business very well.

WI: OK, so the homework has been done, and the customer conversation has taken place. What does HR do with the information it has gathered?

WB: That´s the interesting part. Once you know clearly what the customer´s requirements are, you have better line of sight to know what kind of culture the company needs to have; what kinds of people to hire and promote; what to measure and reward; what training is needed; what should be communicated throughout the company; how jobs will be designed; and how leaders will be developed more effectively. Until you know the market requirements, it´s difficult to know exactly what you can do in HR that will, in fact, add value to market realities.

WI: What are the tangible benefits to taking this approach?

WB: We´ve found statistically that when companies align solid HR practices to precise market requirements, HR can experience up to a 250 percent increase on its impact on business performance.

WI: Can you provide any examples of HR organizations that are aligned in this way today?

WB: At Dell, the company, including HR, focuses on the "Soul of Dell" that consists of five major elements: Customer Focus, Dell Team, Direct Relationships, Global Citizenship and Winning. Each of these is broken down into specific targets and behaviors that are created, reinforced and sustained by the full breadth of HR practices.

WI: How do you measure the value of HR?

WB: Measuring HR´s value can be thought about in three ways. First, to what extent does the HR field add value? Second, to what extent does HR add value to an individual company? Third, to what extent do individual HR functions in the department add value? There are specific answers to each of those questions

At The RBL Group, we have very strong data showing that HR is directly and statistically related to almost 30 percent of the financial performance of the firm that is under the control of management. So, statistically we can show that the HR field as a whole is adding value.

You can also assess the extent to which the HR department is adding value by measuring three factors and linking them. They are the performance of the business, the creation and sustaining of key organizational capabilities, and the extent to which HR practices are being designed and delivered.

Once you have measures for each of those, you can statistically link them and show that investment in these HR practices influences key capabilities. Then you can show that the creation of these critical organizational capabilities is statistically linked to key business measures.

The good news, from a conceptual standpoint, from a best-practice standpoint, from a practical standpoint and from a measurement standpoint, is that it´s clear that HR has reached a point where it is in a position to add greater value than it ever has before.

For more, interesting questions and answers, visit the Workforce Insights Q&A archive.

Wayne Brockbank is a clinical professor of business at the Ross School of Business at the University of Michigan in Ann Arbor, Mich.

The article originally appeared in Workforce Insights on Veritude.com. Veritude provides strategic human resources and serves clients throughout the United States and Canada.

^©2005 Veritude,LLC.  Reprinted with permission.