Differentiating Your Workforce Strategy

by Mark A. Huselid, Brian E. Becker, and Richard W. Beatty

In Chapter 1, we outlined three challenges companies face as they attempt to manage the workforce as a strategic asset. The first of these, the perspective challenge, is the focus [now]. At the foundation of the perspective challenge is an increased emphasis on differentiation—of employees, jobs, and performance. Such a shift in focus may represent a new approach to workforce management for most firms. Indeed, we find it interesting that while most managers appreciate the value of differentiation as an attribute of products and services, we don't observe the same emphasis on the role of differentiation in the execution of workforce strategies. For example, managers routinely evaluate the key elements of their customer value proposition or marketing strategies and readjust when necessary. Yet they rarely apply the same discipline to managing and measuring the foundational driver of strategy execution: workforce performance and the HR management processes and systems that drive it. [...]

Differentiating the execution of workforce strategy
Execution is the second dimension of workforce strategy. Just as the content of workforce strategy requires more differentiation, so too does the execution of that strategy. They are related in part because increasing differentiation in the content of the workforce strategy implies increased differentiation in the execution of the strategy. Not all positions have the same strategic importance, and being able to identify and act on differential performance within those "A" positions takes on even greater importance when the firm has developed a detailed and specific business strategy. Therefore, while execution of the workforce strategy is in part a shared responsibility of line managers and HR professionals, it is foremost the responsibility of line managers. It falls to line managers to adopt the principles of differential execution if the workforce strategy, and ultimately the core strategy, is to be successful.

The problem
Firms that don't emphasize differentiation in the execution of their workforce strategy will underperform, but the source of the problem won't be obvious. Without the right perspective, the line of sight between the execution of the workforce strategy and firm performance is in most cases simply too indirect. In our experience the simplest indication that there is a problem is in how HR generalists allocate their time. In "low-differentiation" firms, HR professionals spend too much time on employee performance problems; specifically they spend too much time on employees who should no longer be with the firm and should never have been hired in the first place. This marks a failure to differentiate by HR at the point of hire, but perhaps more importantly a failure to differentiate by line managers once the performance problem is obvious.

The misallocation of HR resources follows directly from the workforce decisions of line managers. HR managers respond to requests of supervisors and managers to solve specific workforce performance problems—especially of underperforming employees. These are problems that should be solved between the individual employee and the line manager, but many of these problem employees become HR's problem. The key is to deal with the root cause—never to hire low performers in the first place—and secondly to have measurement and information systems that enable and encourage line managers to quickly fix or exit problems in the workforce.

The responsibility for a new perspective on workforce strategy falls squarely on the shoulders of the line manager. But just as we call for a new shared responsibility for workforce performance, the reliance on an undifferentiated strategy in large part reflects the perspective of most HR professionals and the HR management system. HR professionals' understandable attention to legal compliance issues and administrative efficiency encourages an emphasis on homogeneity (i.e., treating all employees the same regardless of role or performance level), which tends to drive variance out of the system. Even where line managers might prefer a more differentiated system, every tool, every form, and very often the firm's culture make it nearly impossible to treat the execution of the workforce strategy as anything more than an administrative chore.

Moreover, the costs and benefits of this new perspective are not equally apparent. The problem is that the immediate costs are obvious and often tangible in terms of both financial investments and increased effort. Differentiation takes effort. At a minimum it requires a clear explanation of what the firm is looking for in the way of employee performance. By contrast, because workforce success is a leading indicator of firm performance, the benefits necessarily "lag" the more obvious costs. Make no mistake, however—the benefits are substantial. The overarching benefit is increased strategic success. At its core, our argument is that in firms where workforce performance is crucial for strategic success, the status quo results in strategic underperformance. By treating all jobs more or less equally, the organization underinvests in high-return ("A") positions and overinvests in low-return ("C") positions. These losses are compounded by underinvestments in high-return employees ("A" players) and overinvestments in low-return employees ("C" players). As a result, high performers leave and low performers stay, which over time creates a drag on firm performance and the need for significant, and often unfocused, layoffs.

Differentiation by roles—identifying the "A" positions
Managers are paid to differentiate. In the case of workforce strategy, this takes the form of disproportionate investments in high-return positions and high-return individuals. The challenge is to think of these investments as strategic decisions and bring the same discipline and effort to investing in intangibles as to making tangible investments decisions.

The first step toward differentiating the execution of a workforce strategy is to recognize and accept that some positions and roles in the organization have a more important influence on the execution of strategy than others. We use the term "A" positions to describe those positions that have a significant influence on the execution of the firm's strategy. There is no rule of thumb regarding the percentage of the workforce that might be included in this designation. The lesson is that firms will vary by how they execute their strategy, and this differentiation will translate into a differentiated workforce strategy. What we can say is that a choice will have to be made regarding the importance of a position, and that the choice should be driven by how the firm has chosen to execute its strategy.

What should be clear is that the decision about which positions will be designated "A" positions will follow directly from the nature of the differentiation in the workforce strategy. For example, if the firm has adopted a core workforce differentiation strategy, the positions will map directly onto the overall approach to delivering value to the customer. If your firm has extended the differentiation of the workforce strategy to strategic workforce customization, the choice of "A" positions will be linked directly to the system of performance drivers that populate the firm's strategy map. In either case, identifying the "A" positions should be considered an integral part of the organization's workforce strategy. This is one of the key points of intersection between the corporate strategy and the workforce strategy and should be a key strategic responsibility of line managers. It is also an essential element in the development of your Workforce Scorecard.

An "A" position (e.g., R&D scientist) is a job that has a critical impact on the formation of one or more of the strategic capabilities (e.g., new product development) the firm needs to execute its strategy. As a result, "A" positions are critical to the firm's competitive advantage. Note that these positions have nothing to do with a firm's hierarchy, which experience has taught us is often an "A" position criterion proposed by executive teams. Resist this temptation! "A" positions can be found in a wide variety of places throughout the organization. In R&D it could be a biochemist; in joint ventures, a manager of new business development; in marketing, a field sales representative; in government relations, the chief lobbyist; in retail, a cashier, and so on.

An example of a firm that has developed a clear workforce strategy and identified "A" positions is IBM. IBM's overarching strategy is to go to market as "One IBM," which means leveraging its resources in hardware, software, and consulting to provide a systemic solution that is uniquely tailored to the business needs of each client. A key element of this strategy is ensuring that IBM can develop into an "on-demand" business. IBM Chairman and CEO Sam Palmisano defines an on-demand business as an enterprise whose business processes—integrated end-to-end across the company and with key partners, suppliers, and customers—can respond with speed to any customer demand, market opportunity, or external threat.16

IBM believes that an on-demand business requires an "on-demand workforce"—one that is responsive to market requirements—adaptively brings the right skills and expertise to meet client demand, is resilient to market forces, and provides strong leadership. Key elements that help to create an on-demand workforce include deploying programs that recognize accomplishments, regarding people development as an investment, differentiating performance and rewards, nurturing leadership capacity, driving accountability, and balancing its human asset utilization. In other words, IBM intends to use its HR management system to help deliver value to its customer, the business.

IBM's new business strategy relies on considerably more cross-IBM collaboration than ever before. This in turn requires more and better workforce management systems. IBM needs to be able to assemble workforce capabilities to meet client needs wherever they may be in the world, and they need to be able to do it quickly. The challenge in doing this is that 49 percent of the workforce has less than five years' experience with the firm, and more than one-third of the workforce do not work out of a traditional IBM building, but are considered mobile workers. As a key element of their execution strategy, IBM has developed what it describes as an Adaptive Workforce (ADWF) in its services business. In essence, ADWF is the application of supply chain management principles to the workforce. In IBM's case, the key question is "How do we optimally match resources to client demands, across units within IBM and throughout the world?" Including contract workers, IBM has more than 475,000 employees throughout the world. The problem is that historically, the resources have been in a variety of supply pools and difficult to aggregate leading to suboptimized response to client needs. To deal with this issue, IBM has included approximately 65 percent of the workforce (primarily technical, client-facing employees) in their ADWF program, which is a multimillion-dollar transformation project integrating strategy/policy, process, organization, and technology to ensure that the resource supply and demand information is available throughout the business to match critical skills to client needs, on demand.

As a result of this type of analysis, IBM has identified membership on the Strategic Leadership Team as a key "A" position. The SLT consists of about three hundred people, or about 1 percent of total (full-time) employment. Selection to the SLT reflects both the significance of the positions held by these employees and their leadership skills. Members of the SLT are expected to be role models and drive the strategy down through the organization.

Another example of an "A" position at IBM involves "major dealmaking." IBM's strategy of going to market as "One IBM" requires developing and selling business-transformational systems solutions that leverage the firm's capabilities in hardware, software, services, and consulting. This is an important part of the firm's comparative advantage over firms such as Accenture (whose primary focus is on consulting and software) or HP (hardware and software). The economic impact of a successful "systems sell" can be significant. For example, a "clothed" server (i.e., one with software applications installed) will generate on average several million dollars more in revenue over its service life than will a "naked" server (one without software). Developing sales leaders with the breadth of experience to master major deals and leveraging IBM's full brand to help generate business transformational solutions for clients is a key objective for the firm. This is an important part of the firm's focus on developing cross-unit initiatives that can drive growth and innovation.

It is important that line managers and the senior executive team understand that identifying the strategic "value" of a job should not be left to an outside method of job evaluation. Effective processes for identifying "A" positions do not include scientific methods of job evaluation that rationalize the value of jobs in one organization in comparison with the value of jobs in another organization. There is no market equivalent for the strategic value of a job, because of the unique way in which "A" jobs contribute to your firm's strategic success. Designing and implementing a workforce strategy requires investing in a mix of intangible assets (strategic human capital) that contribute uniquely to the success of your firm's strategy. This is in stark contrast to job evaluation systems intended to develop an internally consistent set of job values that ultimately are independent of the firm's strategy. Said differently, if seniority and job level explain 90 percent of the variation in pay in your organization, you probably need to take another look at how jobs are valued in your firm.

Reprinted by permission of Harvard Business School Press. Excerpt from The Workforce Scorecard: Managing Human Capital to Execute Strategy by Mark A. Huselid, Brian E. Becker, and Richard W. Beatty. Copyright 2005 Harvard Business School Publishing Corporation. All rights reserved.

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Mark A. Huselid is a professor of human resource management in the School of Management and Labor Relations at Rutgers University.

Brian E. Becker is the chairman of the Department of Organization and Human Resources at SUNY-Buffalo.

Richard W. Beatty is a professor of human resource management in the School of Management and Labor Relations at Rutgers University and a member of the Core Faculty of the Executive Education Center at the University of Michigan's School of Business.