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The HR Scorecard: Linking People, Strategy, and Performance

Synopsis
Providing the tools and systems required for leading a "measurement managed" HR architecture, this important book heralds the emergence of human resources as a strategic powerhouse in today's organizations.

Three experts in the field outline a powerful measurement system that highlights the indisputable role HR can play as both a prime source of sustainable competitive advantage and a key driver of value creation. They draw from an ongoing study of nearly 3,000 firms to outline a seven-step process they call an HR Scorecard, specifically designed to embed human resources systems within a firm's overall strategy and manage the HR architecture as a strategic asset. Building on the proven Balanced Scorecard model, they also show how to link HR's results to measures-such as profitability and shareholder value-that line managers and senior executives will understand and respect.

The authors argue that human resources's strategic role begins with designing an HR architecture-the HR function, the HR system, and strategic employee behaviors-that relentlessly emphasizes and reinforces the implementation of the firm's strategy. Using compelling examples from a variety of leading companies, they explain how to develop and implement an HR Scorecard in order to both manage the HR architecture as a strategic asset, as well as measure the contribution of that asset to firm performance.

From The Publisher
As human capital takes center stage in today's economy, the HR profession has been charged with shifting its emphasis from administrative cost center to active partner in helping firms to implement strategy. But beyond recruitment and compensation, what does HR actually do to help firms succeed?

Now, three experts in the field introduce a measurement system that convincingly showcases how HR impacts business performance. Drawing from the authors' ongoing study of nearly 3,000 firms, this book describes a seven-step process for embedding HR systems within the firm's overall strategy -- what the authors describe as an HR Scorecard -- and measuring its activities in terms that line managers and CEOs will find compelling.

Analyzing how each element of the HR system can be designed to enhance firm performance and maximize the overall quality of human capital, this important book heralds the emergence of HR as a strategic powerhouse in today's organizations.

Reviews
At most companies, Human Resources is still seen as a paper-pushing department that focuses on administering benefits and issuing paychecks. But that narrow view of HR can be costly, according to the trio of business-school professors who co-authored this book. "New economic realities are putting pressure on HR to widen its focus from the administrative role it has traditionally played into a broader, strategic role. As the primary source of production in our economy has shifted from physical to intellectual capital, senior HR managers have come under fire to demonstrate exactly how they create value for their organizations. More important, they have been challenged to serve increasingly as strategic partners in running the business." Building on the Balanced Scorecard approach pioneered by Robert Kaplan and David Norton, this instructive book shows HR managers how to turn their departments into key weapons in their companies' competitive arsenal.

Highlights:

Details a seven-step plan for transforming the HR function into a strategic asset: clearly define a business strategy; build a business case for HR as a strategic asset; create a strategy map; identify HR deliverables within that map; align the HR architecture with HR deliverables; design the strategic HR measurement system; and implement management by measurement.

Examines the challenges associated with implementing an HR Scorecard, and explores seven key success factors for implementing that initiative, starting with "leading change (who is responsible)" and ending with "making it last (how it will be started and sustained)."

Advantages:

Co-authors Brian Becker, Mark Huselid, and Dave Ulrich persuasively argue that HR managers shouldn't feel threatened by their measurement-based approach. "Based on our experience, firms frequently under-invest in their people -- and, just as important, invest in the wrong ways ... The most effective way we know to change the calculus is to develop a measurement system designed to link people, strategy, and performance. That is what this book is intended to do."

This work bolsters the Balanced Scorecard approach by strengthening an aspect "that Norton and Kaplan themselves acknowledge to be its weakest feature -- the question of how best to integrate HR's role into a firm's measurement of business performance."

CHAPTER 1: HR AS A STRATEGIC PARTNER

There is a disconnect between what is measured and what is important.

Def: Strategic Asset: “The set of difficult to trade and imitate, scarce, appropriate, and specialized resources and capabilities that bestow the firm’s competitive advantage.” By definition, strategic assets are difficult to copy.

Managers must:

1. understand the firm’s strategy

2. grasp the implications for HR

move from a “bottom-up” perspective to a “top-down” perspective (strategic)

Intangible assets generate tangible benefits [8]

Its up to HR to develop measurement tools (accounting tools don’t give us what we need) [11]

The HR Architecture as a Strategic Asset [12]

Focus of HR strategy: “maximize the contribution of HR toward business goals, thereby creating value for stakeholders”

The HR Value Chain: (1) function, (2) system, and (3) employee behaviors

The HR Function: HR Professionals with Strategic Competencies

HR effectiveness:

Technical (delivery of HR basics),

Strategic (support implementation of firm’s strategies)

Most HR managers are technically good but strategically weak

The HR System: High-performance, strategically aligned policies and practices

The High Performance Work System (HPWS)

- links selection and promotion to validated competency model

- skill building: timely and effective

- compensation and performance management (attract, retain, motivate hi performers)

Table 1-3 Comparison of High/Low HR Management Quality [16]

Strategic Employee Behaviors

Def: “Strategic Behaviors”: “the subset of productive behaviors that directly serve to implement the firm’s strategy” [20]

Core behaviors: from core competencies

Situation-specific behaviors: job related or task specific

How to manage strategic behaviors

“Important Behaviors” = contribute to business success

We can’t affect strategic behaviors directly; they are an end result of larger HR architecture.

Why Measure? (1) Decision-making, (2) evaluation of performance

How to Measure?

(1) clear consistent shared values

(2) narrow down to a few measures

(3) easy to communicate outside of HR

CHAPTER 2: CLARIFYING AND MEASURING HR’S STRATEGIC INFLUENCE

Balanced Performance Management

1. How to implement strategy in our firm (how the firm generates value)

KRA’s and Non-Financials

2. What to measure

Balanced

Tangible AND intangible

Financial AND non-financial

Customers+ees+ops+technology

Leading AND Lagging Indicators

HR Deliverables

1. Performance Drivers

People-related capabilities/assets (e.g. productivity, ee sat)

Strong financials (lagging) + weak HR measures (leading) = future failure

Strong HR measures (leading) + weak financials (lagging) = future success

2. Enablers

Reinforce performance drivers (e.g. selection, development, and rewards)

A value creation model [29]

Ee skills --> process quality/cycle time --> on-time delivery -->customer delivery --> ROI

Learning --> business process --> customer --> financial

The 7-Step Model for Implementing HR’s Strategic Role

1. Clearly define the business strategy

State firms goals so (a) employees understand their roles (b) org knows how to measure success

2. Build business case for HR as a strategic asset

Strategy implementation = $$

Strategy implementation is more important than strategy selection

3. Create a strategy map

Map the Value Creation Process

a. What strategic goals are critical?

b. What are performance drivers for each goal?

c. How to measure progress to these goals?

d. What are barriers to achieving each goal?

e. What behaviors employees need to have to ensure reaching goals

f. Does HR provide ee competencies and behaviors needed to reach goals?

g. If not… what needs to change?

4. Identify HR deliverables within the strategy map

Where on map can HR create value?

Deliverables: Performance Drivers and Enablers

5. Align HR Architecture with HR deliverables

Strategy tells us what deliverables to focus on

How can HR systems be structured to provide deliverables?

- rewards, competencies, org design, development program

6. Design the Strategic HR Measurement System

a. chose the correct HR performance drivers and enablers

b. choose the correct measures

7. Implement Management by Measurement

Measurement: Increasing Complexity in Stages

Stage 1 Measurement: traditional

“HR Focused Operational Measures”

e.g. cost per hire, counting activities

Stage 2 Measurement: no clear strategic linkage

“track intangibles without measuring intangibles”

e.g. ee sat

Stage 3 Measurement: measurement-led management

Acting on measures

Creation of a strategy map

Stage 4 Measurement: Profit relationship measures

Estimate HR impact on firm’s strategy

Chapter 3: Creating an HR Scorecard

Why a scorecard?

manage HR as a strategic asset
demonstrates commitment to firm’s financial success

Scorecard Themes

1. Key HR Deliverables (leading)

2. High-Performance Work System (HPWS) (leading)

3. Extent HPWS is aligned to firm’s strategy (lagging)

4. Efficiency with which deliverables are generated (lagging)

The HR Scorecard emphasizes HR value-creation tempered by attention to efficiency [58]

Most of the scorecard should be value-creation

HIGH ROI		HR deliverables disciplined by attention to both benefits and costs
LOW ROI	HR do-ables driven by cost control	Undisciplined attention to value-creation that misjudges benefits and/or ignores efficiency
	OPERATIONAL	STRATEGIC

Focus on strategic high ROI

Aligned goals:

External Alignment: aligned with firm’s strategy

Internal Alignment: elements work together

Constructing the HR Scorecard

1. The High Performance Work System

Current state vs. desired state

2. The HR system alignment

Elements that make contribution to HR deliverables

From strategy map --> deliverables

3. HR efficiency: core vs. strategic measures

Measures that encourage cost savings

2 kinds

a. core. Significant HR expense but little strategy

(e.g. benefits, accuracy of HRIS)

b. strategic. Investments (e.g. cost per hire, training)

4. HR deliverables; Ways HR system generates value for firm

Organizational Capabilities: [68]

“combine individual competencies with org systems that add value throughout the firm’s value chain”

not all deliverables are organizational capabilities nor do they have to be

not all the HR deliverables are directly linked to firm’s success. Sometimes there is just a “casual logical” link [69]

Include these kinds of deliverables

1. Performance drivers

2. HR enablers

3. If appropriate: org capabilities

4. Estimated impact of each deliverable (hypothetical or actual)

Benefits of HR Scorecard

1. Distinguishes between HR doables and HR deliverables

Deliverables = strategic, doables = not strategic

2. Controls cost while creating value

3. Measures leading indicators

4. Assess HR contribution to strategy and to bottom line

5. Makes HR more strategically responsible and focused

6. Encourages flexibility and change (view numbers as means to end, not the end itself) [77]

CHAPTER 4: COST-BENEFIT ANALYSIS FOR HR INTERVENTIONS

Operational vs Strategic Cost-Benefit Analysis

Operational = lower cost (how to improve what you already do)

Strategic = help implement firm’s strategy

Which HR Activities should you cost and why?

1. First ask what types/categories of activities to cost

2. Should have these attributes

a. Strategic importance (directly influences strategy) (use value-driver analysis Chapter 3)

b. Financial significance (significant and ongoing investment)

c. Widespread impact

d. Links to a business element of considerable variability in outcomes or performance levels (e.g. some perform good, others poor)

e. Focus on a key issue, problem, or decision facing line managers (provides answers to key questions or problems)

Determining the ROI in HR: A 3-step Process

1. Identify potential costs

2. Identify potential benefits

3. Calculate the ROI of the program using an appropriate index

Identifying Costs and Benefits

1. Costs are easy… benefits are harder

a. Benefits are future, not 100% guaranteed

i. Indicate the estimated benefit (e.g. +/- x%)

ii. Develop a strawman, potential cost/benefit categories

iii. Ask experts for estimated benefits and costs

Understanding the financial impact of employee performance

Managers know the performance levels differ between employees, but don’t know how much difference better employees make. What is the relative contribution of an average employee compared to an above average employee?

Three Levels of HR Measures Fig 4-1

1. Level 1. Don’t measure ROI

2. Level 2. Intuitive or estimate ROI. Measure cost

3. Regularly measure ROI and NPV

Chapter 5: Principles of Good Measurement

Why better measurement? [110]

1. Improves decision-making by concentrating on aspects that create value. Provides feedback

2. Justification for resource allocation

Using HPWS

Creates “black box” between where we are and where we want to be.

Today

Black Box

Where we want to be

Black box contains strategic HR architecture and strategy implementation process

Measure level and relationship of measures not just A-->B-->C as there is limited use to this kind of diagram

Numbers with meaning

a. 85% of employee opinion surveys mean nothing

b. ask is it good compared to benchmarks

c. ask what $ would a score of 90% give us

d. what performance would a 90% give us

Measures vs concepts/visions

a. concepts/visions are important for strategy, but are not the strategy, as they don’t guide decisions nor evaluation

b. concepts/visions (AKA constructs) are used to determine measures

a. sometimes several measures per construct

i. example: “retain best employees” (through development, C&B, supervisory skills)

Kinds of Measures

1. Nominal Measures

a. Categorize only (e.g. male-female)

2. Ordinal measures

a. Rank order (e.g. meets, exceeds, far excceds)

b. Says it is better, but not how much better

i. The difference between not acceptable and meets is not the same as the difference between meets and exceeds

3. Interval measures

a. Assumes intervals equal between measures (e.g. likert scale)

4. Ratios

a. Have a zero point, allow comparisons

b. Units have inherent meaning ($, hours, etc)

c. Easy to collect

Ideally, measures show how much to change X in order to make Y change in Z

Most hold on to legacy measures: what you always measure

Valuable measures are often hardest to measure

CHAPTER 6: MEASURING HR ALIGNMENT

		Strategy Implementation
		¯
HR Competencies	-->		<--	HR Role

		HR Systems

1. Strategic Implementation (top down)

2. HR Systems… ability to deliver

3. HR Competencies… in HR professionals and in line managers

4. HR role… degree of partnership

a. Internally and externally viewed as partners (shared view)

Diagnosing Internal Fit of HR

Source of Misalignment

1. Operational focus

2. Focus on consistency-uniformity (tell others what they can and can’t do)

3. Too much benchmarking (bottom up focus)

Alignment of HR Systems

	Comp	Teams	Communication	Training
Comp	-	-60	+50	0
Teams		-	+60	+100
Communication			-	+100
Training				-

-100 = cross purposes

0 = no effect on each other

+100 = consistent, enable each other

DKN = don’t know

Example: Table above shows comp system does not support teams but does support communication

Measuring External Alignment [138]

Three Parts of Diagnosis

1. HR Deliverables aligned with firm’s strategy

Firms strategy¯	Recruitment	Retention	High performance
Synergy capture	0	0	+100
OD	+60	+80	+100
Forecasting	+70	+40	DKN
Branding	DKN	DKN	DKN

2. HR system alignment with HR deliverables

deliverables¯	Comp	ER	Communication	Training
Recruitment	-50	+50	0	+50
Retention	-60	-50	+100	+100
High performance	+20	+50	+10	+60

3. System alignment map SAM [146]

	Firms Strategies			HR Systems			ME	MY BOSS
Firm´s strategies¯	1	2	3	A	B	C
1	-
2		-
3			-
HR Systems ¯
A				-
B					-
C						-

Using the SAM

1. identify key strategic drivers (e.g. LRP strategies)

2. Identify HR System elements (comp, benefits, training, selection, etc)

3. Ask sample of ees to evaluate “distance” between these pairs on 0-100 scale

i. Example… OD strategy is very close to training so gets 80

ii. Example… OD is not close to synergy capture so might only get 10

CHAPTER 7: Competencies of HR Professionals [158]

See table 7-1 on page 162

1. Knows the business

a. Allows HR to join the mgt team

b. Adapt HR and organization to changing business conditions

i. Must know… Finance-strategy-technology-org capability

2. Delivery of HR Practices

a. Experts in HR

b. Master theory, adapt to change

3. Management of Change

a. Knows the change process

b. Skilled change agent

c. Able to deliver change

4. Manager of culture [160]

a. Keeper of culture

5. Personal credibility

a. Lives the firm’s values

b. Builds relationships based on trust

c. HR with an attitude

i. A point of view about how to win

ii. Back up soft stuff with evidence

iii. Present innovative ideas and solutions

iv. Encourage debate on key issues

And now HR must also have Strategic Performance Management Competency (measurement) for each of the above competencies [167]… this is not a separate competency by is applied across other 5 competencies.

Dimensions of Strategic Performance Management

1. Critical causal thinking… how does HR Drive performance???

2. Understand principles of good management

3. Estimation of causal relationships

4. Communication of HR performance results to Senior Management

CHAPTER 8: GUIDELINES FOR IMPLEMENTING HR SCORECARD

Effective change = quality X acceptance (EC=Q*A)

a. Quality… technical aspects of change defined

b. Acceptance … ensures long-term success of scorecard

Airplane pilot checklist for making change happen … disciplined approach

(Don’t fall into “smart trap”… you know it, then you stop)

Guidelines for Pilot’s checklist

1. Org must attend to all seven factors

2. Must use checklist on any project

a. Graph

b. Plot over time

3. Use to monitor what needs attention

4. Use it to learn new language

Keys and Processes for Making Change Happen [186]

*Key success factors for change*	*Questions for assessing and accomplishing*
1. Leading change a. WHO is responsible	Do we have a leader, owner, champion, getter or resources, investor of time
2. Creating a shared need a. WHY do it	Do ee’s see reasons, urgency, benefits?
3. Shaping a vision a. What will it look like when we are done?	Do ee’s a. understand what behaviors will be required b. get excited c. understand benefits to stakeholders
4. Mobilizing commitment a. Who else to get involved	Do sponsors of the change build support?
5. Building enabling systems a. HOW will it be institutionalized	Do sponsors of the change know how to sustain change, recognize technical requirements, get the money needed
6. Monitoring and demonstrating progress a. How will it be measured	Do sponsors have way to measure success And plan to benchmark progress and results
7. Making it last a. Making it last (how will it be initiated and sustained	Do the sponsors of the change recognize the first steps needed to get started, have a short and long-term plan to keep attention focused on change, and have plan for adapting change over time to shifting circumstance