2

THE IMPORTANCE OF HUMAN CAPITAL STRATEGY AND THE ROLE OF THE CHIEF HUMAN RESOURCES OFFICER

The first step in examining the ability of the CHRO to create value for an organization is to revisit the strategy. This chapter explores a variety of issues involved in linking human resources to the strategy of the organization and includes current trends, processes, and successes. The focus throughout this chapter is how to develop a human capital strategy to create value, drive results for the organization, and prepare for the forces influencing organizations.

The Importance of Linking Human Resources to Strategy

Connecting HR to strategy has been a developing trend for many years. Human resources was originally initiated in organizations because business strategy determined that HR was necessary. The level of CHRO participation in the corporate strategic planning process has been increasing, and there is evidence to suggest that the CHRO’s role as strategic planner will be increasingly important in the years to come.1 This conclusion is based on how CHROs respond to five basic questions that surround the strategic planning process:

Human resources is an important part of framing the appropriate responses to these questions. The CHRO, as part of top management’s strategic planning effort, can provide the knowledge and vision necessary to make decisions and take action that will provide employees the opportunity to achieve success.

HR is being completely transformed in many organizations. The result is the creation of strategic, value-added, critical business processes within the organization. To achieve value, the human capital function is creating business results, assisting in strategy implementation, and helping in strategy formulation.

Influences

Although the connection of human resources to strategy seems to be a logical, rational evolution of the field, several important influences emerge. For HR to become more effective and produce the desired results, it must be closely linked to the strategic objectives of the organization. Otherwise, it may not add the appropriate value and move the organization in the desired direction. Thus providing the right opportunities at the right time for the right individuals to generate the desired results requires a close alignment with strategic business objectives.

At the heart of any strategic direction of an organization is change and change management. Change is the only constant in most organizations, and human resources is often seen as the driver for the change process. This requires the HR function to be more closely aligned with strategy as the CHRO organizes, coordinates, implements, evaluates, and leads organizational change.

Recent interest in accountability for human resources has brought more attention to the strategic connection. As senior executives and internal clients demand a measurable value, the HR function must initiate and design programs with specific business objectives. These objectives are derived from an analysis of the business needs of the organization, which are usually defined by the strategic direction. Thus the requirement to produce business results from HR is driven by business objectives, which come from business needs, which are connected to strategy. This chain of events links human resources to the key strategic objectives of the organization.

As the human resources function becomes more sophisticated, CHROs are planning strategically. HR functions have mission statements, vision statements, and their own strategic plans, which must support the strategic plan of the organization. Thus as the HR function plans strategically, it becomes more closely aligned with the organization’s overall strategy.

Top executives recognize the importance of HR and the necessity to use it in a strategic role. In some situations, top executives are applying top-down pressure to link human resources to strategic direction. For example, some organizations have developed a strategy to transform customer service into a strategic and competitive weapon. HR programs are one of the most effective processes to achieve excellent customer service. Consequently, HR is an important tool to fulfill a major strategic objective.

Finally, with increased concern about intellectual capital, knowledge-based organizations, and human capital development, some top executives are realizing that to sustain their competitive advantage, they must acquire, develop, and retain effective human capital. To do so, the CHRO must connect human resources directly to the strategic direction of the organization.

Overall, these major influences have placed considerable pressure on organizations to connect HR more closely with strategy. The evidence is impressive, and the progress has been significant. However, there are still more advances to be made as more organizations attempt to make this dramatic shift.

Human Capital Is Critical

Perhaps no influence in the evolution of organizations and human resources and its connection to strategy is more pronounced than the growth of human capital. Some argue that human capital is just another label for the traditional personnel function, just renaming the process to enhance its image. Others argue that human capital is much different—designed to imply more of a strategic approach than traditional “personnel.”

The importance of human capital rests with four major issues:

The clear-cut differences between traditional HR and the human capital approach were presented in Chapter 1, as Table 1.2.

Strategic Roles

The CHRO is poised to assume several roles in developing and supporting organizational strategy. In some organizations, only one or two roles are developed, while in world-class HR teams, as many as five roles are defined to build a strong linkage with strategy.

The first important role for the CHRO is to develop a strategic plan for human resources. This brings strategy to the HR functional level. Beginning with a mission statement or business objective, this plan contains specific strategies that the learning and development staff members can understand and implement while staying connected to the organization. A major part of this book focuses on this effort.

In another role, the CHRO is often involved in developing the strategic plan for the organization. In this role, the CHRO has a “seat at the table” where strategy is developed and provides important input, raises critical issues, voices necessary concerns, and offers suggestions and solutions to shape the direction of the HR function. This is another critical role of human resources in its linkage to strategy. The material in this book helps ensure that the forces external to the organization that influence the availability and success of human capital are appropriately addressed in the organization’s strategic plan.

A third role is in implementation. As different parts of the organization implement strategic plans, the CHRO is often involved in the implementation with specific programs, services, and processes. Almost every strategy implementation will include the need for HR programs and services, because people are essential to achieving the strategic objectives. When HR programs and services are successful, business results are produced—usually linked to strategic objectives. Thus the human resources function is operating strategically, as it drives the important operating and business performance measures.

A final role assumed by some HR functions is to teach the strategic planning and implementation process to others in the organization. A successful organization requires an adequate level of knowledge and skills with strategic planning and implementation processes. Every employee should understand some level of the processes, requirements, tasks, and outcomes of strategic planning. Through consulting services, rewards systems, and learning programs, the HR function can build the appropriate expertise.

Several operational frameworks are used to develop a strategic role for the human resources organization. A strategic role requires a major shift for HR with more focus on purpose and direction. As depicted in Figure 2.1, the early focus of the HR department was on products or programs. The HR staff developed as many products as possible. There was little concern about whether the programs were needed or actually worked. The goal was to have as many products as possible, used by as many groups and individuals as possible.

The shift to a service-focused HR function was an improvement, where the focus was on ensuring that products and services met the actual needs of the organization. The client concept entered the process, and customer service became extremely important. With various customers identified, the staff focused on ensuring that customers were pleased with the products and services delivered, usually through client surveys.

The HR function is now strategically focused, implementing products and services and meeting organizational needs that are linked to strategic objectives. The focus goes beyond client satisfaction, ensuring that the products and services are closely linked to important strategies in the organization and achieving desired results. This mindset helps ensure that the HR function is adding value to the organization and becoming an important business partner with the management team.

Strategic Planning Process

Strategy is about value. According to strategy expert Ken Favaro, strategy boils down to three fundamental questions: First, how can you differentiate yourself from the competition in the way you create value? Second, what capabilities do you have that are distinct from those of your rivals and essential to your particular way of creating value? Third, what businesses should you be in, and what products and services should you offer, given your chosen approach to creating value and your particular set of distinctive capabilities?2

Most organizations fail to fully answer these questions—particularly in a fashion that views them as an integral whole. This leaves leaders without guideposts to navigate the most pivotal challenges of top management, including transformation, change, agility, and invention. As a result, instead of growth and innovation, there is only incoherence and inefficiency.

Several models are available that reflect the varied stages, processes, and steps of developing a strategic plan and process for the organization. From the perspective of creating value, the model shown in Figure 2.2 is the most useful and practical model. A few select parts of the model are described here.

Develop a Vision for Value

An important part of developing the strategic direction of the HR function is to develop an appropriate vision that reflects strategy and other shifts in the human resources function. At times, the vision starts with the value the organization places on its people. Although top executives claim that people are the most important issue, sometimes it needs to be more specific.

For example, at SABMiller, one of the world’s largest brewing companies with operations in more than forty countries and beer brands in the world’s top fifty (more than any other brewery), the efforts of the training institute are reflected in its initial value. According to the company, “Unquestionably, SABMiller believes in the value of people as a core element of business success. Today, SABMiller competes successfully in the global beer industry and is proud to acknowledge that one of our key points of differentiation is our Human Resource Proposition. Whilst virtually all our competitors leverage a brand-led or capital resource-led expansion strategy, our international expansion has been led by our people proposition. This proposition has established our reputation for attracting the most talented individuals.” They go on to indicate that “a corporate university allows not only world-class skills development, but an opportunity to instill in employees the corporate culture, corporate ethics and the soul of the company. Leadership by examples is SAB’s corporate brand essence and this is woven into the culture the corporate university imparts to all delegates.”3

The following vision comes from a large healthcare chain and reflects HR’s connection to strategy as the organization shifts from the traditional HR function to a human resources performance-consulting role.

Establish Mission/Purpose

The next step of the model is to develop the specific mission or purpose for the organization, whether it is a learning and development position in a major department, division, unit, subsidiary, or the entire company. The mission statement describes why HR exists. It is usually simple, sometimes one sentence, and it serves as the reason for being.

Sometimes the mission statement is quite simple and very specific. As mentioned in Chapter 1, QUALCOMM is a leading developer in supplying digital wireless communication products and services and is the innovator of code division multiple access (CDMA), a technology that has become the world standard for the wireless communications industry. It is truly one of the most successful telecommunication and technology companies today. QUALCOMM’s human resources mission statement is “We are committed to optimize employee performance and engagement providing HR opportunities linking overall business goals and professional development needs.”

Part of the mission is defining the overall purpose of the HR function. The human resources function has been shifting from an activity-based process to a results-based process. This is a slow transition for some and a much quicker one for others. An HR function focusing on results with a desire to create value for the organization will quickly move to a results-based process. Figure 2.3 shows the shift that has been occurring for some time. The focus on results is about more than just measuring success; it is creating value throughout the process from beginning to end. Programs and solutions are developed with the end in mind, described by very specific business needs. Performance issues and objectives are developed for application and business impact. Results and expectations are communicated to a variety of audiences, with the focus on learners. An environment is prepared to support the implementation. Partnerships are developed with all key managers and clients, and metrics are utilized, including a healthy dose of return on investment (ROI). More important, the planning and reporting is based on output, not input, as measured by number of programs, projects, involvement, costs, and processes. This, in essence, is the focus of much of this book: to show organizations how the CHRO is adding value along all these dimensions—and others—as the shift to value is occurring.

Activity-based programming	Results-based programming
• No business need for the programs/solutions	• Programs/solutions linked to specific business needs
• No assessment of performance issues	• Assessment of performance effectiveness
• No specific measurable objectives	• Specific objectives for application and business impact
• No effort to prepare program participants to achieve results	• Results expectations communicated to participants
• No effort to prepare the work environment to support implementation	• Environment prepared to support implementation
• No efforts to build partnerships with key managers	• Partnerships established with key managers and clients
• No measurement of results or benefit/cost analysis	• Measurement of results and benefit/cost analysis
• Planning and reporting is input focused	• Planning and reporting are outcome focused

Define the Audiences for Best Results

In many organizations, the “clients” of the HR function are predetermined by executives and may not be adjusted easily; the audience is usually all employees. However, sometimes there is some flexibility. In most organizations, there are a variety of audiences that can be served by HR. Figure 2.4 shows the variety of audiences in a typical multiple-purpose organization.

Although human resources may be part of a division or subsidiary or even a business unit within a major organization, the same issues may be developed. The employees (or employee groups served) are at the core of any HR function. This key target group has several subdivisions, ranging from professional staff, to sales staff, to manufacturing, to technical support, to research and development, and many others. Human resources should focus on all employee groups and levels, as this is the fundamental target for creating results.

The next logical progression is those groups closely aligned to the employee network. These are the franchise owners or resellers—individuals who are charged with selling the product or services. This is an excellent audience for leveraging results. Most HR program opportunities will focus on value-adding processes that are easily measured and should translate into sales growth and market share enhancement. A notable example of franchisee training is Subway Restaurants. The company provides HR advice and support to franchisees to recruit, select, train, compensate, engage, retain, and discharge employees. This provides a tremendous opportunity for improving sales, increasing profits, decreasing customer complaints, and preventing excessive employee turnover.

The next logical audience is partners or allies. These groups or organizations may represent joint ventures, alliances, or partnerships, both formal and informal. From the HR perspective, there is value in helping partners recruit, select, and develop skills and capabilities, although the payoff may not be as direct as with employees, franchisees, and resellers.

Another prospective audience is made up of suppliers and vendors. For some, it may seem unusual for a supplier or vendor network to participate in diversity and affirmative action programs. However, because of the need to have consistency in processes and focus on quality and standardization, some organizations provide learning opportunities for the supplier network. For example, many HR functions provide a variety of training and development programs for their suppliers and require them to meet compliance standards.

Another interesting audience group is the company’s actual customer base. While not appropriate for every organization, some HR functions provide learning and development opportunities for their customers with the goal of enhancing the use and implementation of their products and services. For example, the learning center at Home Depot provides customer clinics, demonstrating how to use tools and processes to successfully complete home improvement projects. Microsoft Learning, through a variety of learning centers, provides all types of training and certification on the proper use of Microsoft products. Verizon Communications provides a similar service.

A final target audience is the public; companies target this audience by offering a variety of programs and opportunities for anyone interested in improving performance. These are usually developed after an HR function has established a reputation for being very successful in communicating innovative approaches and ideas. Several notable organizations have developed these types of programs. DuPont developed a tremendous reputation for safety and ultimately sold this service to an external, public company. Walt Disney designed the Disney Institute to provide customer service programs to a variety of organizations. These programs represent a great opportunity to generate results, as these HR programs are usually operated at profit centers, sometimes driving a significant amount of revenue for the organization while enhancing corporate image.

If there is flexibility, audiences should be selected for maximum results. Some audiences, such as those dealing directly with customers, the public, franchisees, and employees, represent some of the best opportunities for driving results. Usually those connected closely to the customer provide the best opportunities for adding value.

Organize for Results

When focusing on results, organizational structures are very important for the CHRO. Structure can sometimes make the difference between an inefficient, bureaucratic, and unresponsive learning center and an efficient, productive, and effective process. The first issue involves the actual reporting relationship of the CHRO. Figure 2.5 shows the potential reporting relationships. Where the CHRO is positioned in the organization often reflects the senior executives’ view of HR. Ideally, the CHRO should report directly to the CEO, and this is common in some organizations. This placement ensures the proper support and direction from top management and sends a strong message throughout the organization that HR is important. However, in large organizations with many issues, functions, and priorities, the CHRO may report to other executives. A second choice is reporting to the chief operating officer (COO) or the equivalent role. Because HR mainly supports the operations of the organization, this provides a direct link to the leader of that function. A growing trend is for CHROs to report directly to operating units to ensure support, commitment, and direction from the customers that are most often served. One disadvantage to this is that service to nonoperating units may suffer on the priority list. Another disadvantage is the lack of corporate oversight of the function and alignment with the CEO and his or her direct staff.

A trend that has been developing in recent years is to have the CHRO report directly to the CFO. According to Gartner Research, the prevalence of this practice is growing, though slowly, and this is surprising to some HR observers. Gartner explains it this way: The human resources function manages the human capital strategy of the organization. The largest single expense is human capital. Previously, the HR function had not done a very good job of showing the value. Placing it under the chief financial officer brings two important influences: First, there is help with measurement in terms of showing the value of human capital. Second, there is emphasis on controlling the costs. The CFO philosophy is that if you cannot show the value, then focus on controlling the costs. Although this is a frightening scenario for many HR executives, it actually has very positive outcomes. Most CFOs go into this new responsibility with a very helpful spirit. They want to help the HR team show the value, improve efficiency, and save costs. This is sometimes the kind of support CHROs need as they struggle to get budgets approved and show the impact and ROI of human capital programs.

When organizing for results, the next issue is the actual structure of the HR organization. While there can be many different structures, four basic approaches are utilized. Most organizations will either follow these approaches or have a blend of the four. Figure 2.6 shows the approaches, ranging from functional to regional.

A functional approach structures HR into functional units, such as recruiting, selection, learning, and compensation. A structure based on programs builds on the specialties within human resources, such as analytics, design and development, delivery and implementation, and consulting and advice.

The business unit approach ensures that the learning organization is aligned with the business units and providing staffing support. A variation of this would be to have support for the different functional units for manufacturing, sales, finance, research and development, and so on.

The regional approach is to break the organization down into different regions and provide HR support to each particular geographic area. A broader version of this, the global approach, has the learning manager for each country reporting to the CHRO.

Whatever the approach taken, the following recommendations must be considered when selecting the proper organizational structure:

These factors affect not only responsiveness and efficiency but the overall effectiveness and value added to the organization.

Human Capital Strategy

With the process model in place, a functional, flexible, and adjustable human capital strategy must be developed. It is helpful to examine the typical human capital strategy and then update that strategy to address the forces that are influencing organizations today.

Typical Human Capital Strategy

Figure 2.7 shows what most would consider a typical human capital strategy. This is arranged in a sequential format of how talent is cycled through an organization.

This range of progressive steps is very typical and necessary in organizations.

Human Capital Strategy Reflecting Today’s Climate

Figure 2.8 shows the updated version of the human capital strategy, where the twelve forces explained in this book have a significant impact on the organization. These forces must be addressed in the human capital strategy in specific statements as well as in policy, provisions, and actions taken:

Together, the typical human capital strategy and these forces make an updated strategy. Figure 2.8 depicts the recommended strategy that is the basis of this book. The strategy is implemented through the process model described earlier in this chapter.

Top executives and CEOs of major organizations want this change in strategy. Ben Verwaayen, chief executive officer of British Telcom, made a speech in autumn 2014 for an audience of 350 HR professionals in the Netherlands. The key message he gave was very clear: HR leaders will have to leave their comfort zone and step up their efforts if they want to make a significant business contribution. Instead of accommodating current strategies, HR should play a proactive role when it comes to strategic changes and talent development.

When asked what CEOs do to provide the space to make HR an integrated part of the overall business strategy, he stated that CEOs do too little. They do not give these topics sufficient thought. They may find it scary to explore new approaches. HR does not challenge CEOs enough in this respect; they leave their bosses too much in the comfort zone.4 In a study from the Economist Intelligence Unit involving more than 130 CEOs, the need for HR executives to be more involved in strategy was clear. When asked “How involved is the head of HR is strategic planning?” 55 percent said they were a key player. When asked “How involved should they be?” 70 percent wanted them to be a key player.5 Ram Charon, trusted CEO advisor, weighed in on this issue: “I talk with CEOs across the globe who are disappointed in their HR people. They would like to be able to use their chief human resource officers (CHROs) the way they use their CFOs—as sounding boards and trusted partners—and rely on their skills in linking people and numbers to diagnose weaknesses and strengths in the organization, find the right fit between employees and jobs, and advise on the talent implications of the company’s strategy. But it’s a rare CHRO who can serve in such an active role.”6

Final Thoughts

This chapter has explored the very beginning of the formal human resources process linking HR to strategy. Although all organizations have an ongoing HR function, it may be helpful to review the current approach to human capital and assess the degree to which HR is connected to strategy. A variety of issues and approaches were described, all focusing on how the CHRO can create value for the organization. This focus on accountability, results, and creating value is critical to the success of the HR function. A typical human capital model was presented along with an updated version that focuses on twelve of today’s major forces that affect organizations. The remainder of the chapters are devoted to these twelve forces.