Beyond HR Activities
Co-authored By: David Ulrich and Norm Smallwood
HR Champions described four roles of HR- Administrator, Employee Champion, Change Agent and Strategic Partner. Of these roles, the Strategic Partner role continues to challenge and excite many HR professionals. Over the years, this role has received more talk than forward progress.
In our just released book, Why the Bottom Line Isn´t: How to Build Value through People and Organization, we describe a value-creating role for HR that shows what an HR professional must do to become a strategic partner. It requires us to shift the focus in HR from activities to deliverables or more visually from rows to columns.
In a report recently given to her CEO by the senior vice president of HR of a large pharmaceutical company, she describes her outcomes for the year in "traditional" HR activity terms- we hired 573 people last year; we gave every leader 40 hours of training etc.
After listening to a good deal of the presentation, her CEO seemed agitated and asked, "So, did we do a good job or a bad job in HR last year?"
The HR executive was equally stunned and asked for a more specific question.
The CEO quickly helped her: "Were the 573 people that we hired the right 573 people? Do we now have better talent?"
"After receiving 40 hours of training last year, do we have better leaders than last year?"
Clearly the CEO is asking what a good CEO wants to know: How has our investment in HR impacted our business?
To better respond to the CEO´s question we need to step back and look at how lasting market value is measured for a publicly traded business.
Market Value Shifts
In 1965, earnings accounted for about 95% of market value. Today, earnings make up only 50% of the market value of the average publicly traded company. This is a huge shift. As this shift occurred, financial people began to ask: "What is the 45-50% of market value that is not earnings?" The answer: Intangibles. Intangibles are factors that increase or decrease the value of a business that are not directly related to earnings. Intangibles include reputation, brand, and quality of leadership as well as a host of other variables. Accountants also call intangibles, "future earnings". In the world of intangibles, two companies in the same industry can earn the same amount yet one company has a much higher market value than the other one. Why? The company with greater intangibles is perceived by investors to do better in the future than the one with lower intangibles and receives a higher price: earnings multiple.
To date, most of the work around intangibles relates to how to measure them. In Why the Bottom Line Isn´t, our focus is about how leaders build intangible value. We believe there are four layers of leadership activity to build intangible value:
- Keep your promises;
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- Articulate a growth plan;
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- Build core competencies consistent with this growth plan;
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- Increase Organization Capabilities.
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The fourth level- increase organization capabilities- is the domain of HR. Capabilities represent what the organization is good at doing that adds value for customers. Representative capabilities include talent, leadership brand, speed, learning, accountability, shared mindset, and collaboration.
From Rows to Columns
With these insights from the intangibles work, we can help the HR executive answer the question posed to her by the CEO. In order to become strategic partners, HR must directly contribute to creating value that matters to senior leaders. HR professionals can do this by building organization capabilities that increase intangible value because intangible value is an important component of market value.
How HR Shifts
HR makes the shift from Rows to Columns by mastering three important activities:
1. Organization Audits;
2. Education;
3. Partnerships
Organization Audits: Finance audits the numbers to ensure that products and services are being sold profitably and to troubleshoot potential problems. HR must audit the organization to ensures that the organization is building capability through its´ people to deliver what it promises to do in the future. Results of the audit should point to the kind of investments that should be made in each capability. It is important that any capability is at least at industry parity standards. Other capabilities may be invested in to provide advantage to the business consistent with the strategic direction of the firm.
Education: HR professionals have spent years learning HR activities. This activity approach must be replaced with frameworks, language and tools that are consistent with the needs of their business. We advocate that an HR professional who is a strategic partner should be able to lead a group of executives in a rigorous and action oriented discussion of the organization capabilities required to deliver business results. For example, in one firm seeking global growth, the key capability was talent. The HR professional should be able in about a half day meeting to frame the talent issue and offer alternatives for action. HR professionals become credible when they have the ability to define and deliver capabilities in highly focused and action oriented meetings.. This requires an investment in education both for aspiring HR professionals and for business leaders who must work together to build these capabilities.
PartnershipsHR Strategic Partners must forge strong alliances with Finance, Accounting, IT and business leaders. Business leaders want to increase intangible value and they need support organizations to help them. Together, these organizations can both measure and build business value that is recognized by customers, employees and investors.
HR professionals have arrived. They are welcomed in many firms to forums where business issues are discussed. They provide ideas and actions that help firms succeed. With a focus on intangibles through capabilities, HR professionals can delineate how to really be strategic partners.
Why The Bottom Line ISN''T is available at Amazon.com.
