Harvard Business School Working Knowledg e Archive

HR's New Mandate: Be a Strategic Player

6/20/2005
We know what HR does, but what does it deliver? In this excerpt from the new book The HR Value Proposition, two experts contend that the HR function is poised for powerful strategic advantage.

A while back, the vice president of human resources (HR) of a big consumer product company decided to visit with a few key customers and improve his line of sight with his company's marketplace. To avoid wasting his customers' time, he began by reading everything he could—annual reports, 10K reports, product brochures, analysts' reports. His counterpart in sales was leery of the whole idea, but once the HR VP showed how knowledgeable and thoughtful he was, his sales colleague agreed to set up a meeting with the VP of purchasing at one of their main customers. The moment they walked into the office, however, the customer snapped, "I'm busy today. Why should I spend time with you?"

This short story captures the past, present, and future of the field of HR. Twenty years ago, it would have been unthinkable for almost anyone in HR to even consider spending time with external customers. HR professionals built staffing, compensation, training, and other programs and policies that focused on employees and kept companies legally compliant. In the last decade, HR professionals have worked to become business partners and to align their work with business strategies. HR professionals have been coached to spend time with general managers and with their counterparts in sales, marketing, and manufacturing to ensure that HR work helps deliver business results. But this story also suggests what is next for HR: beginning to connect with those outside the firm as well as those inside.

To do so, HR professionals must grasp and master the concept of value. At a basic level, values reflect the standards within a firm. While HR professionals must declare, live, and encourage moral principles, we believe that an HR value proposition goes beyond values. Value also means that someone receives something of worth from a transaction.

Value in this light is defined by the receiver more than the giver. HR professionals add value when their work helps someone reach their goals. It is not the design of a program or declaration of policy that matters most, but what recipients gain from these actions. In a world of increasingly scarce resources, activities that fail to add value are not worth pursuing. No matter how interesting or valuable an activity may seem to those doing it, if those who receive the output of that activity don't find it of value to them, continuing the activity cannot be justified. The HR value proposition means that HR practices, departments, and professionals produce positive outcomes for key stakeholders, employees, line managers, customers, and investors.

Value becomes the bellwether for HR. When others receive value from HR work, HR will be credible, respected, and influential. But as the customer in the preceding story points out, HR value for customers will require that HR professionals answer the question "Why should I listen to you?" This is a great question for all HR professionals. How do customers and other key stakeholders—investors, managers, and employees—benefit if they spend time with HR professionals or adapt innovative HR practices?

HR transformation
Many attempts at HR effectiveness start without defining value. For example, some companies invest in e-HR services such as portals and online employee services and believe that they have transformed HR, but they have not. While e-HR may be a part of an overall transformation, it is merely a way to deliver HR administrative services. HR transformation must change the way to think about HR's role in delivering value to customers, shareholders, managers, and employees and not just about how HR services are delivered and administered.

The changes must improve life for key stakeholders in ways that they are willing to pay for.

Moving toward service centers, centers of expertise, or outsourcing does not mean that HR has been transformed. If new delivery mechanisms provide basically the same old HR services, the function has changed but not transformed itself. HR transformation changes both behavior and outputs. The changes must improve life for key stakeholders in ways that they are willing to pay for.

Changing any single HR practice (staffing, training, appraisal, teamwork, upward communication) does not create a transformation. Unless the entire array of HR practices collectively adds value for key stakeholders, transformation has not occurred. Transformation requires integrating the various HR practices and focusing them jointly on value-added agendas such as intangibles, customer connection, organization capabilities, and individual abilities.

Writing an HR strategy or making a statement about HR roles does not necessarily create a transformation. In presentations on HR strategy, we often ask six random participants to complete the following statements as fast as they can:

Filling in these six blanks with the first thing that comes to mind and then connecting these statements into a vision generates an amazingly plausible HR strategy statement—but it's a fleeting moment of corporate rhetoric, irrelevant from the get-go. HR transformation must be more than rhetoric; it must shape behavior and create and ensure stakeholder value.

Sending one or two HR professionals to a seminar does not transform an HR department. Often, people return from training with great ideas but little opportunity to apply them. Transformation requires whole new agendas, thoughts, and processes across the entire department, not just on the part of a few individuals.

Finally, gaining credibility and acceptance by management or employees is not transformation. Doing so may be a good stepping-stone to future work, but real transformation must turn relationships into results and also create value for customers, shareholders, managers, and employees.

We believe that a fundamental transformation of HR starts with a definition of HR value—who the receivers are and a clear statement of what they will receive from HR services. It also requires a complete picture of all the elements of HR transformation, so that piecemeal attempts do not become isolated events.

Premise of HR value
Since value is defined by the receiver, not the giver, any value proposition begins with a focus on receivers, not givers. For HR professionals, the value premise means that rather than imposing their beliefs, goals, and actions on others, they first need to be open to what others want. This fundamental principle is too often overlooked. Often, HR professionals have beliefs, goals, and actions that translate into things that they want to have happen in their organization—so they go straight for their desired results, without paying enough attention to the perspectives of others.

Influence with impact occurs when HR professionals start with the beliefs and goals of the receivers. Who are the key stakeholders I must serve? What are the goals and values of the receiving stakeholders? What is important to them? What do they want? When these requirements are fully understood, then the HR professional can show how an investment in an HR practice will help the stakeholder gain value as defined by that stakeholder.

Influence with impact occurs when HR professionals start with the beliefs and goals of the receivers.

To an employee worried about getting laid off, HR professionals should demonstrate that being more productive will help the employee stay employed. To a line manager worried about reaching strategic goals, HR professionals need to show how investment in HR work will help deliver business results. With customers, HR professionals need to remember that their interest in customers must create value in the products or services customers receive. For shareholders who are worried about shared returns and growth, HR must create organizations that deliver results today and intangibles that give owners confidence that results will be delivered in the future.

Starting HR transformation with a value proposition has six important implications for HR professionals.

First, human resources work does not begin with HR—it begins with the business. For the last decade, HR professionals have aspired to be more complete players relative to the core issues of the business, as described in a number of phrases: business partners, strategic players, full contributors, players in the business, and so forth. These aspirations are appropriate and desirable, but the fact that HR professionals continue to frame aspirations in these terms communicates a continuing concern. Think, for example, of the key wealth creator in your business. In an investment banking firm, that would probably be an investment banker. In a software company, it could be a systems architect. In the upstream portion of an oil company, it's probably the petroleum geologists who search the world for oil. For none of these three job categories are you likely to find a professional conference titled "Being a Business Partner." All of them would think (assuming they could perceive the issue), "We do not need to aspire to be partners in the business. We are the business."

These key wealth creators can readily show how their activities create substantial value for key stakeholders. Their line of sight runs directly to the best interests of customers, investors, managers, and employees. To be real—not declared—business partners, HR professionals need the same kind of line of sight between their activities and the best interests of key stakeholders. The HR value proposition offers this line of sight.

Second, the ultimate receivers of business reside in marketplaces that companies serve. These markets include customers who buy products and services and shareholders who provide capital. Since HR professionals desire to be business partners and since business begins by meeting market demands, HR must also begin with a line of sight to the marketplace. This places HR professionals in a complex situation. They must create a line of sight to the multiple and frequently conflicting demands of stakeholders ranging from internal clients such as managers and employees to external stakeholders such as customers and investors.

The line of sight of HR professionals to internal customers is important and generally well understood, but the one to external customers and shareholders typically receives less attention. Knowledge of external business issues matters because external realities ultimately determine the relevance and utility of virtually all internal operations. External constituents who compose markets for products, services, and capital ultimately vote with their dollars about virtually everything that occurs in a firm. These realities determine whether HR is successful in creating human abilities and organizational capabilities that generate products, services, and results that customer and capital markets demand. HR professionals must have knowledge of external business realities before they can frame, execute, and create substantive value through even the most basic of HR agendas.

A third implication of the HR value premise is found in framing HR as a source of competitive advantage. Competitive advantage exists when a firm is able to do something unique that competitors cannot easily copy. And what it does better than its competitors must be highly valued by its customers, owners, employees, or managers. The creation of competitive advantage can be simplified as the "wallet test." An internal operation passes the wallet test if it inspires customers or shareholders to take money out of their wallets and put it into the firm's wallet instead of into the wallets of competitors. For example, product development creates competitive advantage when it creates products that customers buy. Marketing creates competitive advantage when it creates advertising programs that inspire customers and shareholders to buy products and stock. If HR is to create competitive advantage, it must create substantial value with similarly concrete results. HR passes the wallet test when it creates human abilities and organizational capabilities that are substantially better than those of the firm's competitors—and thus move customers and shareholders to reach for their wallets.

A fourth implication of the HR value proposition is that HR professionals must align practices with the requirements of internal and external stakeholders. When this is successful, HR creates value as defined by those stakeholders.

For example, an oil field service company (referred to here as OSC, a pseudonym) had dropped from 24 percent to 19 percent in a $15 billion total market.1 In a senior management team (SMT) meeting, the HR leadership recommended a large-scale customer survey to determine the reasons behind the drop in market share. Marketing was deep into its annual advertising program and, although willing to support the effort, didn't want to take the lead, which defaulted to HR. With the support of the marketing department and working with an outside consulting group, HR and the CEO developed the research questionnaire and determined the sampling logic and process. The question that eventually had the greatest influence focused on the identification of customer buying criteria. The question required respondents to allocate a hundred points over alternative buying criteria including price, service, product quality and availability, sales effort, and ease of distribution. The survey was administered through live interviews with 1,200 of the most influential users of this company's products throughout the world. Before the HR team fed back the results to the SMT, they asked SMT members to give their best estimates of the customers' responses. The logic behind this request was simple: if the HR team had simply given the survey results to the SMT members, their probable response would have been to say, "We already knew that."2 The SMT response varied dramatically compared with customer responses. The SMT felt customers were much more worried about price than they actually were, while customers were actually much more worried about service than management anticipated.

Management's initial response was to dismiss the data as inaccurate. With this possibility in mind, the HR team had brought all 1,200 surveys to the feedback meeting. Following the review of the numerical results, the SMT demanded an opportunity to review the original customer surveys. After reviewing the records for an hour, the SMT was ready to examine the implications of the management-customer gap. Management had substantially overestimated the importance of price and underestimated the importance of service. Using price as the competitive criterion, the company had been hiring low-cost service personnel and had been providing standardized technical training that included little work on customer relations. Based on the customer data, HR and the SMT agreed to substantially increase hiring criteria and the service training budget.

Over the next two years, a market share that had dropped from 24 to 19 percent now soared to 31 percent—a $1.8 billion increase in top-line growth. Such is the potential influence of HR professionals in creating value when they align their practices with accurate perceptions of the ultimate receivers of the firm's value and collaborate with others inside the firm.

The fifth implication of the HR value premise is that it directs HR professionals to acquire the personal knowledge and skills necessary to link HR activity to stakeholder value. When HR fails to make this linkage, it allows "noise" to occur between HR practices and stakeholder demands. Noise may be a lack of knowledge of external customers and shareholders, business strategy, or new HR processes. The "company party trivia test" exemplifies the importance of blocking out noise: Imagine that you're at one of your company's annual parties, and a senior line or staff executive who is known to be critical of HR approaches you. The exuberance of the occasion has worn the usually polite facade away a bit, so this individual feels free to walk up to you, look you in the eye, and say, "I still don't know why we should be giving so much money to you folks in HR. I don't know why we shouldn't simply outsource the whole thing. Why should we continue to invest in you?" (If you haven't experienced this kind of thing face-to-face, do you suspect people are asking such questions behind your back? It's not paranoia ...). To respond to this challenge effectively, you must show that HR adds value to things that are of value to this individual.

An HR perspective that is both unique and powerful is one that establishes the linkages between employee commitment, customer attitudes, and investor returns.

The sixth implication of the HR value premise is that it leads HR professionals to view a company's key stakeholders from a unique and powerful perspective. And the HR perspective must be both. Unique implies that other functions or members of the leadership team do not share this same perspective and do not realize they need it. Powerful implies that this perspective adds a substantial value in helping the organization succeed.

All departments that matter bring such unique and powerful perspectives of their own. For example, when finance specialists look at product markets, they see margins, profits, cash flow, credit worthiness, risk, return on sales (ROS), economic value added (EVA), and the like. When marketing or sales specialists look at exactly the same product markets, they are more likely to see segments, demographic trends, product or service requirements, sales, buying habits, and so forth. Notice that although the two perspectives are compatible, they have very little overlap. Asking which perspective is more accurate is not useful. Both are unique and powerful.

HR professionals need a perspective that is compatible with and distinct from other business perspectives. That is, they must be able to understand and value the finance and sales perspectives, but they must also add their own point of view. Without such a unique and powerful perspective, they are redundant and fail in their aspirations as full business contributors. For example, an HR perspective that is both unique and powerful is one that establishes the linkages between employee commitment, customer attitudes, and investor returns.3 This unique view demonstrates a powerful connection between what is carried out by managers and employees inside the firm and what happens with customers and investors on the outside.

With a unique and powerful perspective of their own, HR professionals will see aspects of the business environment that go beyond what other business disciplines bring and that add substantially to business success. Thus when HR professionals view the market environment, they should address the following questions:

When HR professionals respond to these questions, they will know why others would benefit by listening to them, because they will be delivering real value and they will know what that value is. When HR professionals begin with the receiver in mind, they can more quickly emerge as full strategic contributors; add greater value for key stakeholders (customers, investors, line managers, and employees); enhance business productivity; achieve measurable and valuable results; create sustainable competitive advantage; and have more fun in their careers.

Reprinted by permission of Harvard Business School Press. Excerpted from The HR Value Proposition by Dave Ulrich and Wayne Brockbank. Copyright 2005 Dave Ulrich and Wayne Brockbank; All rights reserved.

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Dave Ulrich is a founding partner and Wayne Brockbank is a principal partner of RBL, Inc., an HR and leadership consulting firm. Both authors are professors at the Ross School of Business at the University of Michigan.

Evolution of HR Roles

 
Mid-1990s Mid-2000s Evolution of Thinking
Employee champion Employee advocate (EA), human capital (HC) developer Employees are increasingly critical to the success of organizations. EA focuses on today's employee; HC developer focuses on how employees prepare for the future.
Administrative expert Functional expert HR practices are central to HR value. Some HR practices are delivered through administrative efficiency (such as technology), and others through policies, menus, and interventions, expanding the"functional expert" role.
Change agent Strategic partner Being a strategic partner has multiple dimensions: business expert, change agent, knowledge manager, and consultant. Being a change agent represents only part of the strategic partner role.
Strategic Partner Strategic partner As above.
Leader The sum of the first four roles equals leadership, but being an HR leader also has implications for leading the HR function, collaborating with other functions, ensuring corporate governance, and monitoring the HR community.

From Dave Ulrich, Human Resource Champions (Boston: Harvard Business School Press, 1996).

Footnotes:

1. Wayne Brockbank and Dave Ulrich, "Avoiding SPOTS: Creating Strategic Unity," in Handbook of Business Strategy, ed. Harold E. Glass (Boston: Warren, Gorham & Lamont, 1991).

2. One must keep in mind that in the oil field service business, the relationship between the vendor and the field customers is unusually close. Representatives can literally spend months together on drilling rigs and platforms in remote locations. However, boom and bust cycles in the oil business occur with great frequency. Thus the possibility of losing touch with current reality is very real.

3. See, for example, Anthony J. Rucci, Steven P. Kirn, and Richard T. Quinn, "The Employee-Customer-Profit Chain at Sears," Harvard Business Review 76, no. 1 (1998): 82.