1. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 1 HR AS A STRATEGIC PARTNER Becker, Huselid, & Ulrich The HR Scorecard Chapter 1 “People are our most important asset” HR as administrative function vs. HR as strategic partner capable of enhancing the organization’s performance But do people understand how the HR function influences firm performance? Does HR really matter? What’s the perception of the HR function? List adjectives you have heard to describe the HR department. Do HR people feel like they play an important role in implementing the organization’s strategy?

2. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 2 Measuring HR’s influence on the organization Traditional HR Focus: the individual employee Select the best employee Find benefits that satisfy the employee Identify incentives that do motivate the employee Solve individual skill deficiencies through training Improve individual employee performance Automatically enhance organizational performance?

3. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 3 HR as a strategic asset New HR Focus: multiple levels of analysis: individual, team, organization… Alignment of HR systems with the company’s strategy How can HR play a central role in implementing the organization’s vision & strategy? How do people create value for the organization? Ho do we measure such value-creation process? Example: making SEARS a compelling place to shop required making SEARS a compelling place to work: Developed a measurement system to manage this vision of the company (focusing on competencies, climate, and behaviors).

4. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 4 HR as a source of competitive advantage Tangible vs. intangible assets Widening in the ratio of market value to book value (based on intangible assets) HR is key to flexibility, innovation, and speed to market HR as competitive advantage: barriers of entry, difficult to imitate HR managers can become NUMERATOR managers (contributing to revenue & growth) rather than just DENOMINATOR managers (cutting costs & reducing overhead). Link performance measurement with strategy implementation: facilitates communication with stakeholders.

5. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 5 HR as an investment, not an expense Conventional accounting was created at a time when tangible capital (financial & physical) was the primary source of profits. Today: Human capital as the primary source of profits. Conventional accounting generates short-term thinking regarding intangibles, because intangible-related expenditures are treated as expenses vs. tangible-related expenditures, which are treated as asset investments (and therefore depreciated over their useful lives). Managers whose salaries are tied to earnings obviously prefer expenditures that can be depreciated over time rather than people-related expenditures than are expensed in their entirety during the current year.

6. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 6 HR architecture as a strategic asset Goal of corporate strategy: create sustained competitive advantage. Goal of HR strategy: maximize the contribution of HR towards that same goal. HR FUNCTION HR professionals with strategic competencies (delivery of HR services in a way that supports the implementation of the firm’s strategy HR SYSTEM High-performance, strategically aligned HR policies & practices EMPLOYEE BEHAVIORS Strategically focused competencies, motivations, and associated behaviors HR ARCHITECTURE

7. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 7 Strategic HRM requires systems thinking… Systems thinking emphasizes the interrelationships of the HR system components AND the link between HR and the larger strategy implementation system. Interactions among components make a system more than just the sum of its parts.

8. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 8 Exercise: The laws of systems thinking LawExample Today’s problems come from yesterday’s solutions The easy way out usually leads back in Cause and effect are not closely related in time & space (HR effects are indirect) Cutting an elephant in half doesn’t get you two smaller elephants Consider the following “laws of systems thinking.” Describe an example of an organization that failed to understand each one of these laws, and the consequences that derived from such a failure.

9. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 9 Best HR Practices help almost every business… HR Practice Bottom 10% Top 10% No. of training hrs. for new employees 35117 Percentage of employees receiving a performance appraisal 41%95% No. of employees per HR professional 254140 Percentage hired based on a validated selection test 4%30% From Huselid et al., 2000, AMJ

10. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 10 What does HR alignment take? It requires a clear understanding of the value chain: What kind of value the organization generates and exactly how that value is created. Be able to describe how ultimate financial goals are linked to key success factors at the levels of customers, operations, people, and IT systems. With this shared understanding of the value-creation process, the organization can design a strategy implementation model that specifies needed competencies and employee behaviors. The HR system can be geared toward the generation of these competencies, which in turn generate the desired behaviors.

11. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 11 Understanding the value chain Clear understanding of what kind of value the organization generates and exactly how that value is created. Be able to describe how ultimate financial goals are linked to key success factors at the levels of customers, operations, people, and IT systems. With this shared understanding of the value-creation process, the organization can design a strategy implementation model that specifies needed competencies and employee behaviors. The HR system can be geared toward the generation of these competencies and behaviors. Strategic behaviors are not directly affected; they are the end result of the larger HR architecture.

12. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 12 But strategic HR goes beyond “best practices”… Behaviors Strategy _ + + _ HR alignment

13. Copyright 2004, Juan I. Sanchez, Ph.D., All Rights Reserved 13 Kaplan & Norton’s Balanced Scorecard: Moving beyond mere financial measurements Measuring business performance from the perspective of strategy implementation Too much attention to financial dimensions of performance, and not enough attention to the forces that determine those results. Financial measures are backward-looking. Measurement should focus on “performance drivers” that are under management’s control now. Specify not only financial but also customer, business process, and learning & growth elements of the organization’s value chain. By specifying and assessing the vital process measures of the value chain, and regularly communicating the firm’s performance on these criteria to employees, the balanced scorecard makes strategy everyone’s business.