The new economic paradigm is characterized by speed, innovation, quality and customer satisfaction. The essence of the competitive advantage has shifted from tangible assets to intangible ones. The focus is now on human capital and its effective alignment with the overall strategy of organizations. This is a new age for Human Resources. The entire system of measuring HR‘s contribution to the organization‘s success as well as the architecture of the HR system needs to change to reflect the demands of succeeding in the new economy. The HR scorecard is a measurement as well as an evaluation system for redefining the role of HR as a strategic partner.
Managers often use an HR Scorecard to measure the HR function’s effectiveness and efficiency in producing employee behaviors and thus in achieving the company’s strategic goals. The HR Scorecard is a concise measurement system. It shows the quantitative standards or “metrics” the firm uses to measure HR activities, and to measure the employee behaviors resulting from these activities, and to measure the strategically relevant organizational outcomes of those employee behaviors. In so doing, it highlights, in a concise but comprehensive way, the causal link between the HR activities, and the emergent employee behaviors and the resulting firm wide strategic outcomes and performance.
Brian E.Becker, Mark A. Huselid, David Ulrich in their book titled “The HR Scorecard: Linking People, Strategy, and Performance,” explain the need for such a measurement system this way:
In our view, the most potent action HR managers can take to ensure their strategic contribution is to develop a measurement system that convincingly showcases HR’s impact on business performance. To design such a measurement system, HR managers must adopt a dramatically different perspective, one that focuses on how human resources can play a central role in implementing the firm’s strategy. With a properly developed strategic HR architecture, managers throughout the firm can understand exactly how people create value and how to measure the value creation process.
The HR scorecard is based on the Balanced Scorecard framework developed by Kaplan and Norton and is set to revolutionize the way business perceives HR. Balanced Scorecard (BSC) is a performance management tool which began as a concept for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy. By focusing not only on financial outcomes but also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests.
Firms with high performance work systems tend to devote considerably more resources to recruiting and selection. There is a strong emphasis on training and performance management and compensation is tied to performance. Teamwork is encouraged, there is generally less unionization and they have a large and effective HR team. It is important to note, that all these factors in tandem, not in isolation, lead to better performance, once again showing the systemic nature of HR‘s role in performance enhancement. The effects of these measures are lower employee turnover, more retention, greater sales per employee and a greater market value for the firm.
It is also important for the HR system to constantly check for alignment of all its parts i.e. how much they reinforce or conflict with each other. An example of misalignment is a policy that encourages teamwork but rewards individual contributions.
In the service sector, the employee-customer relationship is very obvious and visible and so the impact of value creation is unmistakable. But, in many firms, the value is derived from the operational processes and quality of work that the employees generate. This is less obvious to competitors and it cannot be imitated. It is especially in these kinds of firms that the alignment of HR strategy and policy with the overall strategy of the firm matters the most.
The alignment process begins with a clear understanding of what kind of value the organization is supposed to generate and how it should be generated. In the Balanced Scorecard, this is referred to as the ‘strategy map‘ that stresses the relationship between the ultimate goals and the key success factors at the four important levels of customers, internal operations, people and systems.
Once the firm has a clear understanding of the value-creation process, it can then design an implementation model that specifies needed skills and competencies and employee behaviors throughout the firm. The HR management section can then be directed towards generating these necessary competencies and behaviors. The stress is not just on the creation of sound HR policies and strategies. How these are implemented is also very important. There has to be a strong alignment with the firm‘s competitive strategy. A high performance HR system will also tend to be unique. This is because it depends on the particular organization, its goals, people and strategy. Hence, it proves to be a strategic asset.
Integrating HR into the Performance Measurement System
To integrate HR into a business performance measurement system, managers must identify the points of intersection between the HR and the organization‘s strategy implementation plan. These points are commonly called the HR deliverables. They are the outcomes of the HR architecture that serve to execute the firm‘s strategy. This is in contrast to the aspects of HR that focus on HR efficiency and activity. The deliverables can be classified into two groups, namely the performance drivers and the enablers. Performance drivers are core people-related capabilities or assets such as employee productivity and satisfaction. There is no single correct set of performance drivers. Each firm needs to identify its own set based on its unique characteristics. Enablers reinforce performance drivers. Preventive maintenance can be considered an enabler of on-time delivery, which is a performance driver. A performance driver can have several enablers. Most of the time, each enabler separately may seem rather mundane but it‘s the cumulative effect that has strategic importance.
Performance Drivers
HR managers tend to focus on performance drivers in an attempt to demonstrate their strategic impact. However, in most cases although they do stress on these drivers they are unable to make a solid case for it since they do not have the right measures. Without measures one cannot display HR‘s actual contribution to the overall mission. Most of the measures used are very simplistic and it undermines HR‘s credibility in the organization. This credibility is very important since it is what matters when a manager is faced with a conflict between financial and non-financial reports. For example, if people measures are good but financial measures are bad, the manager will go for the solution that supports the credibility of finance or HR. In most cases it is finance and the immediate decision is reducing bonuses etc. as the CFO might feel it is not warranted when there is no proof of performance. The point that is being missed is that the CFO is looking at the lagging indicators. Balanced performance needs one to look at the leading indicators such as HR measures as well since these are the ones that create value in the organization. High HR scores in the face of low finances actually signal improved finances in the future (provided other leading indicators are also on the positive side). Similarly, strong financial measures and weak leading measures such as HR measures are indicative of a financial problem in time to come. Thus, managers must interpret these measures in a balanced manner looking at the past and into the future. Identifying HR performance drivers can be very challenging since it is unique to the firm. It is important to identify the performance drivers and integrate them directly into performance criteria giving them equal weight with the more traditional performance measures. For example, one half of the bonus pays can be based on the financial results while the other half is based on the employee‘s adherence to the value behaviors.
HR Enablers
HR enablers reinforce the core performance drivers. If employee productivity is identified as a performance driver, re-skilling and training can be considered an enabler. Some enablers might be specifically HR focused i.e. they enhance the effectiveness of HR performance drivers. There might also be some HR enablers that do have profound positive effects with respect to the other perspectives as well, such as customers, operations and the financial segment. It is important to identify these and keep them up to date with the current goals of the organization. Without the properly aligned enablers, it is not possible to implement new strategies. The systemic aspect of HR once again comes to the forefront, whereby the entire HR system can influence employee behavior from different points. Thus, HR managers should evaluate the degree to which their firm‘s system of enablers support the HR as well as non-HR performance drivers as listed in their Balanced Scorecards. By identifying the links between enablers and universal performance drivers, the HR team can play a much larger role and suggest ideas that can affect other sectors in the firm as well.
Basically, the direct impact on the HR systems high performance characteristics is non-linearly related to the increase in market value. This is because in the lower ranges of performance, increase in market value is basically because HR stops making mistakes it used to make in the past. It is almost like it is getting out of the way and avoids blunders and wrong practices that worsen the situation. In the middle range of performance, HR starts consolidating its efforts. It is learning from its mistakes and in the process does not actually add much to the market value of the employees and the company, but once a certain threshold is crossed indicating that the firm has adopted the appropriate HR practices and implemented them effectively, the market value soars exponentially. This is mainly because the HR system starts getting integrated into the overall strategic system of the firm. Basically, the firms must consolidate the appropriate HR policies and practices into an internally coherent system that is directly aligned with business priorities and strategies that are most likely to create economic value. This can lead to significant financial returns to the company. It is this plan that must be made concrete and shown as a strong case to make senior management believe in HR‘s potential.
It is important to note however, that simple changes in an HR practice do not make a difference. The HR measures describe the whole HR system and changing the system to cross the threshold mentioned above needs time, effort, insight and perseverance since results are not directly proportional. This clearly indicates the requirement of an HR transformation rather than a change. It is this very character of transformation, which is difficult and time-consuming to achieve, that makes HR a strategic asset.
Along with value creation, there must also be a strong case for HR‘s role in strategy implementation. Strategy implementation rather than strategy content separates the successful from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement one. This once again shows the strategic nature of HR‘s role in performance improvements. Successful strategy implementation is driven by employee strategic focus, HR‘s strategic alignment and a balanced performance measurement system. The most important HR performance driver is a strategically focused workforce. Effective knowledge management combined with the above- mentioned a factor creates a strategically focused organization.
Aligning the HR Architecture with the HR Deliverables
It is also important to consider how the HR system made up of the rewards, competencies; work organization etc. needs to be structured to provide the deliverables that are identified in the strategy map. This step enhances the value creation aspect of the firm by aligning the HR system with the firm‘s larger strategy implementation system. For this, internal alignment and external alignment are important. Internal alignment refers to the aligning components within the HR system. External alignment refers to the alignment of the HR system with the other elements in the firm‘s value creation process. These two are not isolated processes. They are closely related. Internal alignment is necessary but not sufficient in itself for external alignment to occur. Basically, highly cohesive HR strategies will work as long as they are aligned well with the overall strategy of the company. It will fail if it is not periodically reshaped so as to align it with the overall strategy. However, for a particular fixed overall strategy, all firms need an internally aligned HR strategy in order to achieve the overall goals. Misalignment between the HR system and the strategy implementation system can destroy value. In fact, the wrong measurement system can have the exact opposite effect than intended.
Designing the Strategic HR Measurement System
The above steps guide the development of the HR architecture and lay the groundwork necessary to measure the performance relationship between HR and the firm‘s strategy. The next step is to design the measurement system itself. This requires a new, modern perspective on measuring HR performance. It also requires HR to resolve several new technical issues that it might not be familiar with. To accurately measure the HR-firm performance relationship, it is imperative that the firm develops valid measures of HR deliverables. This task has two dimensions. Firstly, HR has to be confident that they have chosen the correct HR deliverables. This requires that HR have a clear understanding of the causality in the value chain for effective strategy implementation.
Secondly, HR must choose the correct measures for those deliverables. During this process of developing the HR scorecard, the firm might go through several stages of increasing sophistication. The first stage is normally the traditional category of measures. These mainly include operational measures such as cost per hire, activity counts etc. These are not exactly strategic measures. In the second stage, HR measures have a strategic importance but they don‘t help much in making a case for HR as a strategic asset. Firms may declare several people measures such as employee satisfaction as strategic measures and these might be included directly into the reward systems. In this stage, there tends to be a balance between financial and non-financial measures but there is less of an agreement on how exactly they combine together to implement the strategy. These are normally hasty decisions and the firms might have not gone through all the previous steps mentioned above. The next stage represents a transition point whereby the firm includes non-financial measures such as HR measures into its strategic performance measurement system. The links between the various measures are also identified i.e. they are placed appropriately in the strategy map. The HR measures now actually track HR‘s contribution to strategy implementation. In the final stages, the HR measurement system will enable the firm to estimate impacts of HR policies on firm performance. If the value chain is short and the strategy map is relatively simple, the complete impact of HR on the overall performance can be measured. For more complex value chains, the impact can be more accurately measured on local segments or sectors of the strategy map. These local impacts can then be assimilated to give a good measure of the total impact on the firm‘s performance. Thus, each level of sophistication of the measurement system adds value to the non-financial measures and forces in the firm and enables a better performance appraisal.
Implementing the Strategy by Using the Measures
The previous step completes the HR scorecard development process. The next step is to use this powerful new management tool in the right way. This tool not only helps the firm measure HR‘s impact on firm performance, but also helps HR professionals have new insights into what steps must be taken to maintain HR as a strategic asset. It helps the HR professionals dig deeper into the causes of success and failure and helps them promote the former and avoid the latter. Implementing the strategy using the HR scorecard requires change and flexibility as well as constant monitoring and re-thinking. The process is not a one-time event. HR professionals must regularly review the measures and their impacts. They must review the HR deliverables identified as important and see to it that the drivers and enablers and internally as well as externally aligned. Special reviews of the HR enablers must be conducted as these have the maximum direct impact on specific business objectives. Enablers that do not tend to play a positive role should be replaced.