Using the HR Scorecard Approach
There are seven steps in using HR Scorecard approach to create a strategic results oriented HR system. The seven steps are as follows:
- Define the Business Strategy: Creating a strategy-oriented HR system starts by defining what the company’s strategic plans. Ideally, senior HR leaders insights regarding the human resources in their own company and in those of the competition provide valuable planning input. Similarly, their insights regarding how HR practices and deliverable can improve the firm’s performance can help top management develop a superior strategic plan. Toward the end of this stage, management translates its broad strategic plans into specific, actionable strategic goals.
- Outline the Company’s Value Chain: To achieve its strategic goals, any business must engage in certain strategically required activities. Each such activity requires certain employee behaviors. The point is this: any manager who wants to understand what employee behaviors are essential for his or her firm’s success must first understand what the firm’s required activities are. For this, value chain analysis can be useful. The company’s value chain “identifies the primary activities that create value for customers and the related support activities.” We can think of any business as consisting of a chain of crucial activities. Each activity is part of the process of designing, producing, marketing, and delivering the company’s product or service. These activities might include bringing supplies and materials into the company’s warehouse; bringing these materials to the shop floor and designing the product to customers’ specifications; and the various marketing, sales, and distribution activities that attract customers and get the company’s product to them. Outlining the company’s value chain shows the chain of essential activities. This can help managers better understand the activities that drive performance in their company. In other words, it is a tool for identifying, isolating, visualizing, and analyzing the firm’s most important activities and strategic costs. Outlining and analyzing the company’s value chain can also help the HR manager create an HR system that makes sense in terms of the firm’s strategy. For example, it can help him or her identify the organizational outcomes the company absolutely must achieve if it is to achieve its strategic goals. This in turn can help the HR manager better understand what employee behaviors and competencies are required, and what HR policies and activities (HR system) would produce these behaviors and competencies.
- Identify the Strategically Required Organizational Outcomes: Every company must produce critical, strategically relevant outcomes if it is to achieve its strategic goals. Based on his or her understanding of how the company operates, and perhaps an analysis of the firm’s value chain, the manager, in this step, now identifies and specifies the strategically relevant organizational outcomes.
- Identify the Required Workforce Competencies and Behaviors: The question here is, “What employee competencies and behaviors must our employees exhibit if our company is to produce the strategically relevant organizational outcomes, and thereby achieve its strategic goals?.” Some strategic HR experts, notably Becher, Huselid, and Ulrich refer to required workforce competencies and behaviors like these as HR deliverables (because the HR system’s training and other activities can help to produce or “deliver” them). Competencies and behaviors such as personal accountability, working pro actively, motivation, courteous behavior, and commitment produce strategically relevant organizational outcomes, and thereby drive organizational performance.
- Identify the Strategically Relevant HR System Policies and Activities: Once the HR manager knows what the required employee competencies and behaviors are, he or she can turn to the task of identifying the HR activities and policies that will help to produce these employee competencies and behaviors. The question in step five is, What HR system policies and activities will enable us to produce those workforce competencies and behaviors?.” In this step, the important thing is to be specific. It is not enough to say, “We need new training programs, or disciplinary processes.” Instead, the manager must now ask, “exactly what sorts of new training program to do we need, to produce the sorts of employee competencies and behaviors that we seek?” How and to what end should we change the disciplinary process? In this step, the HR manager must therefore become precise about the actual form and design of the firm’s HR system. For example, all high-performing companies tend to use incentive pay. However, what precise form should the incentive plan take in this company? What specific behaviors do we want to encourage? Who will decide if the person gets the incentive pay? What percent of total pay should we base on incentives? In other words, to achieve improved organizational performance, HR management needs to align the HR system-the firm’s HR policies and practices with the company’s specific strategic needs.
- Design the HR Scorecard Measurement System: After choosing strategically required organizational outcomes, and employee competencies and behaviors, and specific HR system policies and activities, the question is, how shall we measure them all? For example, if we decide to “improve the disciplinary system,” how precisely will the company measure such improvement? Perhaps in terms of number of grievances. If “higher morale” is one employee competency / behavior we want to improve, how will we measure higher morale? Perhaps with surveys that measure attitudes regarding satisfaction with supervision, and with pay. Deciding on the proper measures or metrics requires considerable thought. The HR Scorecard is crucial in this measurement process. As noted earlier, it is a framework that 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. It highlights, in a concise but comprehensive way, the causal links between the HR activities, and the emergent employee behaviors, and the resulting firm wide strategic outcomes and performance. The HR Scorecard thus helps the HR manager demonstrate how HR contributes to the company’s strategic and financial success. Several consulting firms provide Web-based services that make it easier to create HR Scorecards, based on metrics from best practice, world-class firms.
- Periodically Evaluate the Measurement System: The HR manager cannot assume that the HR Scorecard’s various measures (metrics) and links will always stay the same. Perhaps reducing grievances is not having the assumed effect on raising morale. Perhaps the company must drop some firm wide employee measures (such as front-desk customer service) and add new ones. Perhaps the measures the HR manager chose (such as number of grievances) are proving too hard to quantify. In any case, the HR manager should periodically evaluate measures and links, to make sure they are still valid.
Benefits of the HR Scorecard
The HR Scorecard offers the following benefits:
- It reinforces the distinction between HR do-ables and deliverables: The HR measurement system must clearly distinguish between the deliverables that influence strategy implementation and do-ables that do not. Policy implementation is not a deliverable until it has a positive effect on the HR architecture and creates the right employee behaviours that drive strategy implementation. An appropriate HR measurement system will encourage HR professionals to think both strategically as well as operationally.
- It enables cost control and value creation: HR is always expected to control costs for the firm. At the same time, HR has to fulfill its strategic goal, which is to create value. The HR scorecard helps HR professionals balance the two and find the optimal solution. It allows HR professionals to drive out costs where appropriate, but at the same time defend investments in intangibles and HR by outlining the benefits in concrete terms.
- It measures leading indicators: Just as there are leading and lagging indicators in the overall balanced performance measurement system, there are drivers and outcomes in the HR value chain as well. It is thus important to monitor the alignment of the HR decisions and systems that drive the HR deliverables. Assessing this alignment provides feedback on HR‘s progress towards these deliverables and lays the foundation for HR‘s strategic influence.
- It assesses HR’s contribution to strategy implementation: The cumulative effect of the HR Scorecard‘s deliverable measures provides the answer to the question regarding HR‘s contribution to firm performance. All measures have a credible and strategic rationale. Line managers can use these measures as solutions to business problems.
- It lets HR professionals effectively manage their strategic responsibilities: The scorecard encourages HR managers to focus on exactly how their decisions affect the successful implementation of the firm‘s strategy. This is due to the systemic nature of the scorecard. It provides a clear framework to think in a systemic manner.
- It encourages flexibility and change: The basic nature of the scorecard with its causal emphasis and feedback loops helps fight against measurement systems getting too standardized. Standardization is good for things that don‘t tend to have a dynamic nature but firm performance is a dynamic phenomenon. Every decision needs to be taken based on the past and future scenarios. One of the common problems of measurement systems is that managers tend to get skilled to obtain the right numbers once they get used to a particular measurement system. The HR scorecard engenders flexibility and change because it focuses on the firm‘s strategy implementation, which constantly demands change. With this framework, measures simply become indicators of the underlying logic that managers accept as legitimate. It helps them look at the bigger picture and since there are no perfect numbers it makes it easier for managers to change direction when needed.
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