Creating an Effective Human Capital Strategy

A changing workforce, global competition, advances in information technology, new knowledge, the 2008 global recession and demands for sustainable performance have forced corporate leaders to examine and re-evaluate how they manage and operate.

In response, they are utilizing new technologies, changing their organizations' structures, redesigning work, relocating workforces and improving work processes. These changes have significant implications for how their human capital should be managed and how their HR functions should operate.

The annual reports of many corporations in North America, Europe and Asia state that their human capital and intellectual property are their most important assets. In many organizations, compensation is one of the largest costs. In service organizations, it often represents 70 percent to 80 percent of business cost. Adding in the costs of training and other HR management activities, one finds that the HR function often has responsibility for a very large portion of total expenditures–and this portion is growing.

More than ever, the effectiveness of an organization depends on its ability to address talent management issues such as knowledge management, change management and capability building. The key question is whether HR professionals will rise to the occasion and address them.

If current HR practices don't change, the work of HR professionals could end up being largely administrative. They could merely manage IT-based HR systems and vendors who do most of the HR administrative work. On the other hand, HR professionals could become drivers of organizational effectiveness and business strategy.

To determine what makes HR functions effective and how they are changing, we have repeatedly surveyed senior HR and other executives from more than 200 U.S. corporations as part of a research project funded by the SHRM Foundation.The survey, fielded six times from 1995 to 2010, asks respondents about how HR operates in their organizations and about how effective HR is. The results are generally poor when it comes to making changes that improve the status and responsibilities of HR professionals.

Some of the questions we ask on our surveys are shown here. You can use these as tools to measure your HR department's progress in linking your company's business goals with a sound talent management strategy.

Search for Strategy

In our research, we have found that HR professionals can add value by:

• Providing administrative support services.
• Serving as business partners who help to implement business systems and practices.
• Becoming strategic partners who help corporate leaders develop business strategy.

Despite compelling arguments that talent management is a key strategic issue in most organizations, our research finds that HR executives often are not strategic partners; they are administrators and, on occasion, business partners.

As just one example of the survey data underscoring this conclusion, consider the fact that from 1995 to 2010, there has been no significant change in the way HR professionals say they spend their time. They still spend very little time being strategic partners. Though HR professionals say their roles have changed, our data show that they are guilty of wishful thinking and a selective memory.

All too often, the HR function is largely an administrative one headed by individuals whose roles focus on cost control and administrative activities. Missing almost entirely from the list of HR focuses are such key talent management challenges as improving productivity, increasing quality, facilitating mergers and acquisitions, managing knowledge, implementing change, developing business strategies, and improving the ability of the organization to execute strategies.

Metrics: Just One Part

Since these areas are critical determinants of organizational performance, HR leaders are missing a great opportunity to add value. A strong case can be made that HR needs to develop much better metrics and analytics. Our previous studies have all identified metrics as one of the key characteristics that lead to HR's being a strategic partner in corporations. Managers want measurement systems that enhance their decisions about human capital. Yet HR professionals often focus on delivering HR services. HR departments have become more sophisticated in the measures they use, yet, according to our 2010 data, this has not led to HR leaders being strategic partners or to HR professionals being more effective. Business leaders can now be and sometimes are held accountable for HR measures such as turnover, employee attitudes, bench strength or performance distributions; however, this is not the same as having an effective human capital strategy. The issue is how to use HR measures to make a true strategic difference in an organization's performance. At the Center for Effective Organizations, we have identified four components of a measurement system that drive strategic change and organizational effectiveness: logic, analysis, measures and process. Measures represent only one component of this system.

HR professionals can make strides by studying how practitioners in more-mature decision sciences have evolved their measurement systems. Three anchor points–efficiency, effectiveness and impact–connect decisions about resources such as money and customers to organizational effectiveness, and they can similarly be used to understand HR measurement.

Efficiency asks, "What resources are used to produce our HR policies and practices?" Typical indicators of efficiency are cost-per-hire and time-to-fill.

Effectiveness asks, "How do our HR policies and practices affect the talent pools and organization structures to which they are directed?" Effectiveness refers to the effects of HR policies and practices on human capacity and the resulting "aligned actions" of the target talent pools. Effectiveness includes trainees' increased knowledge, better-selected applicants' enhanced qualifications and the performance ratings of those receiving incentives.

Impact asks, "How do differences in the quality or availability of different talent pools affect strategic success?" This question is a component of talent segmentation, which means understanding the strategically important differences between various groups of employees and potential employees.

Link Strategy and Talent

Most HR measurement systems largely focus on efficiency, though there is some attention paid to effectiveness since they often measure turnover, attitudes and bench strength.

Rarely do HR leaders consider impact, the relative effect of different talent pools on organizational effectiveness. More important, HR measurements are rarely directed specifically to where they are most likely to have the greatest effect–on key talent.

Attention to nonfinancial outcomes and sustainability needs to be increased, and strategic HR can affect these as well. Based on the results of our 2010 survey, it is possible to identify key activities that HR executives in corporations need to engage in to be effective. Most have to do with how business strategies relate to human capital management. Here is how we measured HR activities and what our research tells us about how well HR professionals are creating and defining this vital link:

Assessing the organization's readiness to implement different strategies and supporting implementation of the business strategy are activities done much more frequently by effective HR functions.

High-performing HR departments separate themselves from the rest by the strategies they use and develop with respect to talent and HR management. High-performing HR departments have data-based talent strategies integrated with the business strategy, while low performers do not.

In high-performing HR departments, leaders do not rely on HR best practices or administrative standard operating procedures as the key drivers of how the HR professionals act and the policies they set. Instead, they rely on data-driven practices and the organizations' business strategies. This allows them to make rigorous data-based decisions about human capital management and to engage in discussions with senior executives based on business strategy and data. Not surprisingly, these are the kinds of discussions that lead other executives to have a positive view of HR and to listen to HR recommendations with respect to talent management and HR policies and practices.

It is interesting that the relative degree of involvement in different activities as seen by line managers and HR executives is very similar. Managers agree with HR executives that the major involvement of HR executives is in recruiting and developing talent and other implementation issues involved in strategy.

Although they spend less of their time on administration and give more emphasis to strategic talent management, the most effective HR functions do not neglect basic administration and compliance with rules, laws and regulations. Having quality professional practices and services is a must. But the best HR leaders do not let this work dominate their activities. They are able to combine their attention to basic administration with making important strategic inputs that have a positive impact on the future of the organization. This is obviously not an easy balance to maintain.

Fill in the Gaps

These are many opportunities for HR professionals to improve their status and responsibilities. Most business managers have increased their awareness of the importance of human capital, and of their role in nurturing and deploying it. HR data and scorecards are more available, providing a basis for improved decisions. There is also a great deal that most managers still do not know about talent segmentation, motivation, culture and learning. HR executives likely can see this gap, and it is reflected in their ratings on our surveys. HR executives report that "our business leaders don't know what they don't know" when it comes to sound principles of human capital decisions. It is easy for managers to regard their performance as sufficient, while HR executives who are more familiar with human resource management see that much more could be accomplished.

Our survey results demonstrate the tremendous importance of linking business strategy with talent management–yet we find little indication that HR professionals are doing it. True, HR leaders face a formidable challenge, but they must deal with the human and business issues raised by large-scale strategic change. To meet these challenges, HR must focus on how human capital can add value.

Edward E. Lawler III is distinguished professor of business and director of the Center for Effective Organizations in the Marshall School of Business at the University of Southern California in Los Angeles. John W. Boudreau is professor at the Marshall School and research director at the center. This article is adapted from their book Effective Human Resource Management (Stanford University Press, 2012).

​Web Extras​

• Book summary: Effective Human Resource Management
• Website: Center for Effective Organizations