In 1954, Drucker, the author of “The Practice of Management”, highlighted that “personnel” managers are worried about “their inability to prove that they are making a contribution to the enterprise”. It seems that almost 70 years later we can still debate the question: How do human capital and the HR function create value for companies?
Companies with employees who are able to take part in innovating new products, who can rapidly implement strategic objectives, and who are motivated and empowered to improve organizational performance have a significant advantage over competitors.
Despite the obviousness of this statement, many companies are still making the choice between viewing employees as a long-term investment or as a cost to be minimized; the popularized distinction between “high-road” and “low-road” strategy.
When companies follow the “high-road” strategy, they invest in employees through high rewards, extensive training, and long-term career prospects in the hope of creating a highly productive and innovative company. The “low-road” strategy, on the other hand, relies on reducing salaries and controlling labor costs, in order to maximize profits and shareholder returns.
We are witnessing that not all companies follow the “high-road” strategy. Not all companies are convinced that investing in employees is the only way to ensure sustainable success in the future. Why is it so? It might be that companies don’t see human capital as assets since human capital is “invisible” by nature and does not appear on a company’s balance sheet. Nevertheless, it’s becoming more and more clear, even for those companies, that the competitive advantage is coming solely from a skilled, motivated, and adaptable workforce and from the HR function that develops it.
Part 1: For those senior HR professionals who believe that HR is still not there: Are we ready for the shift?
Let’s imagine that senior managers, to a substantial degree, now “get it” and do not have to be persuaded that the quality with which they lead their people has a strategic impact. Debate on the “black box”, a useful conceptualization of never-ending discussion on how HR contributes to the financial performance of the company can be parked.
Designing a credible HR function that can manage a strategic workforce and be a partner to CEO and senior management, is something that must be done incrementally.
Let’s imagine that deploying financial capital and human capital has the same importance and focus for senior managers. That people allocation is as significant as financial allocation. No acquisition is to be made before financial and human capital is allocated and ensured. Managers are aware that the behavior and performance of people are making a managerially significant contribution to their company’s financial performance and deserve strong focus. Now let’s go further with imagination.
Let’s imagine senior HR professionals also “get it” and don’t have to be persuaded that CEOs are people focused and expectant of a strong impact from the HR function in terms of managing all people and cultural elements that contribute to the success of the company.
Let’s imagine senior HR professionals perfectly understand CEOs’ needs and concerns. They know that CEOs are strong on strategy but coming to people matters might have some concerns on how to set a strong, healthy culture and develop people. They know that CEOs want to make sure to have the right talent on hand before going too deeply into the strategic and financial planning of new projects.
CEOs want to be sure they are matching talent with roles that create the most value. Senior HR professionals know that CEOs want to build organizations around empowered teams who are capable of delivering strategic initiatives. They want a top team that can strongly influence a company’s success. They want to ensure their management team performs strongly as a unit. CEOs want healthy and sustainable organizations, with people who are engaged, motivated, creative, innovative, and ready for the future.
People who have a collaborative mindset and way of working. Research shows that all of this is true. Top teams that work together toward a common vision are 1.9 times more likely to deliver above-median financial performance (McKinsey). CEOs who insist on rigorously measuring and managing all cultural elements that drive performance more than double the odds that their strategies will be executed. And over the long term, they deliver triple the total return to shareholders that other companies deliver (McKinsey).
If this would be our reality, we might ask ourselves: Do we have within our HR function the right mindset, capabilities, confidence, and processes to add value to the CEO’s efforts to manage a strategic workforce? Do we have all the tools – methods and techniques to measure and manage all cultural elements that drive organizational performance? Are we, as senior HR professionals ready for the shift towards meeting CEOs’ expectations and wishes?
Part 2: For those senior HR professionals who believe that HR is a value-creating function: How to measure intangibility?
As one senior manager put it, “I’m absolutely convinced that doing a better job managing the workforce would create considerable wealth in our business. I’m just not convinced that anyone in the HR department can help us get there.”
This quote highlights an important distinction between managing a strategic workforce that drives organizational performance and managing the HR function. Too often senior HR professionals are reduced to presenting results from the latest employee survey, or trends for various turnover rates.
When the CEO asks, “Why is this important?”, they lack convincing arguments. Traditional HR measures (like cost per hire, and benefits expense as a proportion of revenue) focus on the performance of the HR function and tend to rely on external benchmarks. They are typically used to analyze and benchmark the efficiency of a company’s HR function.
As such, they are descriptive but not at all predictive (since the efficiency with which HR transactions are accomplished has a little visible impact on either overall organizational costs or value creation). This approach merely reinforces the view that the HR function is a cost center and does very little to improve the company’s strategy implementation and business results. Therefore, measures are answers to the questions, and most benchmarking measures companies use in HR do not answer a strategic HR question for an organization.
The success of a value-creating HR function depends also on the CEO’s commitment, attention, and care. It doesn’t just happen because the CEO hires a great senior HR professional. The CEO should elevate the senior HR professional, and give the mandate that is broad enough.
According to the behavioral perspective of Human Resources Management, companies do not perform themselves, but instead, use HR systems to encourage productive behaviors from employees and thus achieve desirable operational and financial objectives.
The question is – do we have enough focus on workforce productive behavior and performance? Is our HR function shaped in the right way to deliver this? How can we measure and manage team and organizational commitment, engagement, organizational citizenship behavior, creative performance, flexibility, and innovation.. all those behavioral elements that lead to high performance and matter the most?
Measures that put more emphasis on results that appropriately capture HR’s strategic contribution are needed. We might ask ourselves: Are we stuck in measuring (managing) performance of HR function and neglect measuring (managing) all cultural elements that drive organizational performance and create value for the company?
Human capital creates value for the company. Senior HR professionals design HR systems to manage the behavior and performance of the workforce. Consequently, the behavior and performance of the workforce influence meaningful financial outcomes. Is there any objective reason, outside HR, for not being able to justify this?
In the knowledge era, human capital—the productive capacity embedded in people—has become one of the few sustainable sources of competitive advantage, while physical capital is now more or less a cost of doing business. Nonetheless, expenditures on physical capital and equipment are accounted for and reported as investments, while expenditures on human capital are accounted for and reported as a cost.
Most companies have much better accountability and control systems for raw materials (roughly 15% of total expenses) than they do for the workforce (65% of total expenses). As a result, a manufacturing company can identify the supplier of a bad bearing with a high degree of accuracy and speed. However, most companies have no clue as to the source or the reason for their defective (or high-quality) managers, if, in fact, they even know who they are.
For those senior HR professionals who believe that HR is still not there: Are we ready for the shift?
Developed nations are now at least three decades into the knowledge era, but continue to operate under an accounting and reporting system that was designed for the industrial era that preceded the current one. For companies to effectively manage human capital, they must develop a much better understanding of the causes and consequences of workforce performance. They must also do a much better job of holding senior managers accountable for the most expensive resource that has been assigned to them. Apart from this, the measurement of intangibles is a developing area in management and one that is particularly applicable to the field of HR.
Part 3: Where do we go from here?
Designing a credible HR function that can manage a strategic workforce and be a partner to CEO and senior management, is something that must be done incrementally. Foundational steps might be—building trustful professional relationships with the CEO and senior managers, designing effective HR systems with the right portfolio of services and capabilities within the HR team, and measuring and managing a strategic workforce and all cultural elements that drive organizational performance. Let’s go step by step.
Step 1 – Relationship first.
CEOs and senior managers want a senior HR professional to be a great business person, not just a great people person. The conversation with HR shouldn’t be, ‘We can’t do it.’ Instead, it’s, ‘Here’s how we can get there.’ What they want is a senior HR professional who is a problem solver, not a deal killer.
But the notion of truth is that the success of a value-creating HR function depends also on the CEO’s commitment, attention, and care. It doesn’t just happen because the CEO hires a great senior HR professional. The CEO should elevate the senior HR professional, and give the mandate that is broad enough. In return, senior HR with professional work, should make the CEO feel safe in terms of all people matters.
Setting this kind of relationship requires time, energy, and effort and is based on competence, professional integrity, and trust. We should ask ourselves: do we have the right relationship with the CEO and senior management? Do we have enough opportunities for informal chats and formal meetings to get the right understanding of their needs and concerns? And if the answer is no, then let’s start thinking about how to get there.
Senior HR professionals should always ask: is this sustainable? Are we mindful leaders and do we treat our people with care? How sustainable our approach is and what is the impact of this solution on our people, company, environment, and the wider community?
Step 2- Efficient HR processes.
Setting an efficient HR function is important and has to be in place as a base, or rather a foundation for elevating HR to a value-creating function. We should ask ourselves how our HR systems are designed. Do we have the right portfolio of HR products to cover everything business needs? Are HR processes reinforcing one another or do we have a dead combination of HR practices in place that diminish the effects of each other? Do we have the right mindset and capabilities within the team?
Look into HR function benchmarks for your market. Find a way to compare the efficiency of the HR function in your company with other benchmark companies and to fine-tune, reshape, adjust, and improve where needed. This is the second step.
Step 3 – Focus on relevant measures to get insight into how successful we manage the behavior and performance of our people that drive business success.
We are aware that most companies measure employee engagement. While employee engagement indeed correlates with financial performance, a typical engagement survey covers less than 20 percent of the elements that are proven to correlate with value creation. A proper assessment of the workforce takes in everything, from alignment on direction and quality of execution to the ability to learn and adapt.
How successful are we in measuring and managing all cultural elements that drive performance? Do we measure team and organizational commitment, organizational citizenship behavior, creative performance, flexibility, innovation, intention to quit, health and well-being, and team efficiency?
If business results are consequences of people’s behavior and performance, we should go beyond measuring employee engagement and include other relevant measures to get insight into how successful we manage the behavior and performance of our people. We should focus on the measurement of those indicators that can really make a difference and have an impact on business results. That is how we can build a value-creating HR function that drives business performance.
And last but not the least, senior HR professionals should always ask: is this sustainable? Are we mindful leaders and do we treat our people with care? How sustainable our approach is and what is the impact of this solution on our people, company, environment, and the wider community?
Author: Zaklina Teofilovic
Publication: HR World Magazine No. 8 (2022)
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