Leading companies are linking HR and strategy but many companies following suit are Rea a AL OL|AAUSTRATION: JON CONRAD TRANSFORMING Human Re BY THOMAS R. CONNOLLY, WAL t was nearly a decade ago that several ‘management visionaries began promot: ing @ new direction for the human re- sources function. They argued that, as, business made the transition from an in- dustrial to an information age, the knowledge, know-how and experience of employees would become the core assets of companies. The real foundation of ‘competitive success would no longer be propri- etary processes or even distinctive products but, rather, outstanding people. As the nurtur- er and caretaker of the workforce, the HR de- partment would, in turn, need to undergo fun damental changes, moving beyond its traditional responsibilities of personnel admin istration and employee advocacy to play a cen tral role in helping companies fulfill their high- est-level business goals. If HR did not become more tightly inked with strategic and econom- ic objectives, the reasoning went, its ability to make an adequate contribution to the bottom line would be undermined, The logic was, and is still, compelling, Unfortunately, the path from idea to reality has not been an easy one. Many management teams have had trouble figuring out what it will actually take to transform HR into a strategic Thomas R. Connolly isa principal of, and Walter Mardis isa managing principal of, IBM Consulting Group. James W. Down is vice chairman of Mercer ‘Management Consulting In. Sarah Johnson, former- ly program director for personnel research at IBM Corporate HR staff, aso contributed to this article sources :R MARDIS AND JAMES W. DOWN function. As a result, a lot of lip service has been paid to “making HR a strategic business partner” but the only real changes that have oc- curred in most HR departments have resulted from downsizing and other cost-control efforts rather than from a realignment of responsibili- ties. In most companies, HR remains focused con administrative and clerical tasks. Is the new vision of HR doomed to go un- fulfilled? With that question in mind, Mercer Management recently undertook a benchmark- ‘ing study of 17 companies that are widely rec- ognized as leaders, both for their success in the marketplace and for their success in HR man- agement. The results of the research are en- couraging, Many of these companies are mak- ing concrete progress in forging an HR-strategy link, often at the same time that they are dra- ‘matically cutting the overall cost of HR man- agement. Moreover, the most successful efforts shared a number of com- mon themes and charac- teristics that can provide guidance for other compa- nies looking to transform their human resources function The new status of HR is definitively reflected by senior HR managers when they describe their func tion, Margaret Savage, di- rector of strategy services at British Telecom, de- scribes the role of HR at BRIEFCASE MANAGEMENT REVIEW /JUNE 1997.11 COVER STORY rrCOVER STORY rr her company in clearly strategic terms: “The only long-term competitive advantage which companies possess is the ingenuity, skills and capabilities of the people they employ. At British Telecom, the FIR department is charged with fostering that resource” Ron Parker, vice president of human re- sources at PepsiCo’s corporate office, echoes her belief that HR is an essential function as furthering corporate strategy: “PepsiCo is a hard-driving, performance-oriented company. HBR is charged with putting programs in place to support this entrepreneurial culture.” He ex- plains that each year, PepsiCo's HR department ‘examines the strategic plans of all the compa- ny’ operating divisions, looking at the HR im- plications ofall the key elements, from catego- ry management to delivery efficiency. “On this basis, we are able to incorporate very focused performance measures into executive perfor- mance and incentive plans; he says. “We want execu- tives to see the linkage be~ tween individual and orga- nizational performance.” Despite the continuing trend toward smaller HR staffs, particularly at corpo- rate headquarters, the HR function in the sample has actually increased its influ- ence in the executive suite. Most of the companies report that senior man- agement is committed to having a strong HR function support all elements of the business, that top HR executives have regular CEO and boardroom access and have been made full ‘members of the companies’ top-management committee, and that senior line executives view HR as an equal partner with other staff special- ties. These companies are using downsizing and reengineering not just to reduce the number of stafi members devoted to traditional adminis- trative tasks, but also to allow HR professionals to shift their focus to higher-value activities such as change management, organizational de- velopment, communications and information management, and succession planning. Emerging Organizational Model The increasingly strategic role of HI does not mean that there is uniformity in the way pro- gressive companies have designed their HR functions. Companies are tailoring their func- tions and organizations to meet the unique characteristics oftheir business and to reflect the 12. AMERICAN MANAGEMENT ASSOCIATION /JUNE 1997 hilosophy of the CEO and other top executives. ms that want to promote a strong sense of en- trepreneurship among their business units often, for example, have a small corporate HR staff that focuses on a very limited number of activities. ‘They grant line management broad authority to tailor HR practices to individual business-unit needs. In contrast, companies with strong, ho- mogeneous corporate cultures often have a much larger corporate HR operation with broad oversight over firmwide practices. Underlying these approaches, however, are three common threads that together form. the outline of a new organizational model for HR: Corporate headquarters sets the direction for HR strategy firmwide, administrative function are concentrated in highly efficient central ser- vice units, and line managers are responsible for delivering day-to-day HR services to ployees at the business-unit level. We have named these three characteristics, respectively, Strategic _Recentralization, —_Scale-Driven Economics and Line Delivery (see Exhibit 1), SSUEGAS EY Most ofthe companies stud- EAU ied provide greater corp rate oversight of a cluster of critical HR activ ties that mesh with corporate strategy. The goal is to ensure greater strategic control from the center and greater consistency and uniformity of approaches among business units. At many ‘companies this has meant actually pulling back selected strategic responsibilities that had pre- viously been delegated to the units. ‘The fast-growing software supplier Oracle, for example, has long avoided creating astro HR presence in its corporate headquarters, However, rapid workforce expansion is now forcing the company to formalize many HR functions that in the past were left largely to chance, including executive compensation and development, equal-opportunity programs, employee research, recruiting and HR strategic planning. Greater centralized control is seen as ‘essential to protecting the firm's technologies and financials, yet the company has been care- ful to position the central HR organization as a catalyst, the hub of a “cooperative-server envi- ronment.” ‘Many of the best companies have become very sophisticated in providing corporate di- rection for HR without usurping line authority. For example, at General Electric, a pioneer of decentralized management, senior HR man- agers at headquarters coordinate with theit counterparts in line organizations by attending forums for communicating strategy and vision and sharing best practices. To ensure that man-agers throughout the company fully under- stand key corporate values, GE also conducts extensive, centralized training and develop- ment programs. The company finds that this approach leads to a greater worldwide focus on those organizational competencies that GE per- ceives as critical to success. At the highly decentralized global engi- neering firm Asea, Brown, Boveri (ABB), avery small headquarters staff focuses on critical pri- orities that cannot be carried out at the busi- ness units, Percy Barnevik, ABB's chairman, has stated that the company is a “federation of national companies with a global coordination center.” Consistent with this philosophy, corpo- rate HR focuses on two related priorities: First, it plays an active role in managing the develop- ‘ment and compensation of 1,500 top executives ‘who are expected to serve as a worldwide re- source for the business units. Second, it works hard to expose promising people to a range of international experiences and promote cross- unit sharing of personnel. These strategic ini- tiatives have been recentralized to provide ‘greater focus in those areas in which the global coordination center can add clear value. AUSITGI Cost reduction remains a EGS pissy fori, ant most companies appear to have concluded that the benefits of consolidating routine HR adminis trative tasks are too attractive to pass up. In an interesting development, however, several com- panies are not consolidating the tasks at head- quarters. Instead, they are handing them off to a semiautonomous service center or to a busi- ness unit with special competence in a given function, which then fulfils the function for the whole company. In addition, many of the companies are giving the “customers” of these central services—i.e,, the business units—si nificant influence over the support services provided, the costs and the performance stan- dards. AL IBM, this has led to the creation of a single, centralized services group designed to cost-effectively fulfill most HR administrative needs for all U.S. operations. The group de- signs HR programs for all U.S. units and also provides direct support to managers and em- ployees via a call center. HR information is just an 800-number away. At chipmaker Intel, the transactional as- pects of HR—benefits changes, address changes, etc—are being removed from the various business units and consolidated into an Employee Information Services Unit. While the consolidation will reduce HR expenses, cost re- ‘duction was not the primary motivation for the change. The consolidation was undertaken to shift time-consuming administrative tasks away from the firm's HR specialists at the business- unit level, This will free them to devote more time and attention to organizational and strate- gic issues. Microsoft is another fast-growing company that is centralizing administrative functions in an effort to streamline customer service. ‘As part of its goal to move away from being structured as a holding company, where FIR de- cisions were largely left to business units, American Express has recently begun consoli- dating all training, development and adminis- trative-service functions. Its goal: to become an operating company, where there is a strong need for the firmwide alignment and efficient delivery of HR processes. “Ina holding compa- ny, the ‘silos’ could operate more independently. ‘As we restructured, we moved to a single set of consistent, uniform values and supportive mes- sages for our employees” says Glenn Kaufman, vice president of organization development. ‘The functions are not all being colocated ‘or managed as part of a single centralized unit, however. Benefits and compensation adminis tration will be handled by a central site in Salt Lake City with 800-number access for employ- ees. Employee-elations advice, previously pro- vided to line management within the business units, is being centralized in a single unit in MANAGEMENT REVIEW /JUNE 1997 13COVER STORY yr H Peo meraganert “perting une ope tein ‘ecial decison maling == pet cons vroged ose Conn capepaie Cartraind seca nd ‘pwratona onto) ‘OPERATING MODELS inns ogee Greensboro, N.C. Several other functions are being assigned to an American Express operat- ing unit, Still other activities are being out- sourced. All Amex businesses will have a rela- tionship manager to ensure that their unit's needs are met by all the HR service suppliers, internal and external. ‘Amex’s model, according to Kaufiman, al lows HR to meet management's directive to “do what you're doing for us at the least possible cost, and whatever you do, provide value.” Kaufman is obviously pleased with the way the vided with effective linkages to the central- service units, business-unit managers can satis- fy employee needs more efficiently than can more distant HR practitioners. In many cases, interactive information systems are being de- veloped to allow employees to fulfill directly many of their own HR-related needs. Pete Peterson, vice president of human resources at Hewlett-Packard, says his compa- ny is revitalizing its long-standing principle that line managers are responsible and ac- countable for people. “As we increased the inks dive tas: HR organization has worked as a team, even in the sensitive task of shrinking its overall size, “(The change has] allowed us to reduce the number of HR professionals in business units, and yet helps us deliver the consistent applica- tion of Amex’s human resources values” he says, A final example that Kaufman uses is his own team of organizational effectiveness prac- itioners. Previously they operated out of the holding company silos, without much interac- tion or sharing of knowledge. “Now,” Kaufman says, “we are one team, sharing best practices and learning from each other.” PEPER While administrative, “back-office” tasks are being consolidated, many leading companies are pushing responsibility for the actual day-to-day delivery of HR ser- vices to the field. There are two main aspects of this shift: the deployment of capabilities to di- visional and business-unit specialists and the assignment of HR delivery responsibilities to line managers instead of HR staff. When pro- 4. AMERICAN MANAGEMENT ASSOCIATION /JUNE 1997 number of personnel liaisons, we found they increasingly dealt with day-to-day people is- sues,” he says. “Today we have fewer liaisons, and they are refocusing on unitwide organiza- tion priorities. People management is clearly the responsibility of line managers” Samsung Electronic Corp. has centralized selected strategic responsibilities, stich as re- cruitment, compensation standards and “cul- ture management.” But as TH. Lee, manager of international human resources, reports: “HR delivery is seen as a continuing responsibility of line managers.” General Electric also stresses that line managers are accountable for leading and developing their people, and the company has continuously downsized the HR function as it has pushed HR-delivery responsibilities to the line. ‘The shifting of responsibility to line man- agement has meant that, in many companies, the HR function in the units is shrinking as fast as, if not faster than, at headquarters. Top man- agement has concluded that as long as there isaPLAYING AN HR ROLE WHERE PERFORMED co Ro er ow cove pea ee foSerme baled Masons tn, Hetores Busnes unis Eta on umuencens SSS Hectares Seinacorat | HORE Dimecrons Pinos Heslovores Hesdovorent Hilts set Sc Ht ivy ay hgh Cerda nts clear overall HR strategy and an efficient and easily accessible centralized services capability, local line executives can act a real managers of people. As Peterson at Hewlett-Packard notes, “In the past, line management would say they ‘got whatever they needed from personnel? Today they say, ‘Personnel helps me to do more for myself’ In the future, they'll be saying, ‘I've got what I need. I only use personnel for the problems I can't solve?” Tailoring the Model to the Company The way leading-edge companies organize themselves to deliver their core human re sources processes varies considerably depend- ing on management style and culture. Companies tend to fall into one of three cate gories: Advisors, Influencers and Directors (see Exhibit 2) Advisors typically delegate most opera. tional and strategic decisions to operating units, while retaining policy control over a small number of HR functions. They tend to believe that economies of scale in staff func tions are less important than giving business units control over HR activities. In these com- panies, HR's roles will typically include identi- fying and developing future leaders, facilitat ing the exchange of best-practice. HR information, and developing HR policy in support of corporate goals. Phil Wilson, se- nior vice president of human resources at Oracle, uses an analogy based on the theory behind Oracle's own products: “We want HR to be the hub in 2 cooperative-server environ- ment.” Corporate HR sets the strategy and supports a network of HR functions among the global business units. Influencers retain both strategic and op- rational authority over a number of central ized functions. These companies walk a tightrope between the need for companywide consistency in policy and practice and the de- sirability of business unit autonomy. A typical Influencer HR department will share respon sibility for both strategic and administrative work between central and unit management. Intel is an example of a company operating in this middle range. HR’s corporate-wide role at Intel includes a variety of broad, strategic ‘mandates, including ‘keeping the culture. en- suring alignment with the Intel vision, reduc- ing legal vulnerability through fair application of guidelines and developing leaders. Similarly, a select group of HR functions are managed on a common basis across the company, including, for example, benefits planning, human resources information systems, recruiting and employee assistance programs. Other functions, such as exempt compen- sation and performance appraisals, are delegated to or shared with busi- ness units. Directors tend toward tight strategic and operational control. They usually centralize HR to gain economies of scale, minimize risk and promote consistency. A typical Director HR organization will have broad re- sponsibility, supporting the company with a full array of strategic and operational people policies and control parameters. At British Telecom, the structure of the HR organization has three elements: policy, delivery and consul- tancy. A small policy group, at headquarters, designs the practices and programs common throughout the company. Delivery of the pro- ‘grams is the responsibility of a centralized-ser- vices unit. A separate consultancy unit has staff assigned to each of the firm’ five business units and provides support for unit needs while also helping maintain firmwide coordination. BT's Margaret Savage says, “Centralized human re- sources can work with and for the line. In part- nership with the line, we optimize the flexibili- ty; enthusiasm and competitive advantage of our people.” A company’s categorization as an Advisor, Influencer or Director should strongly influ- COVER STORY MANAGEMENT REVIEW /JUNE 1997.15COVER STORY ence the organization and responsibilities of its HR function organization (see Exhibit 3) The Big Picture In all three types of companies, HR is shifting from a “micro” to a “macro” view of its man- agerial mission. The old personnel focus on in- dividual case management has been replaced by new concentration on organization-wide is- sues such as change management, leadership development and culture building. Routine employee issues are now typically the responsi- bility of line managers or the individual work- ers themselves, and benefits transactions and other administrative tasks are performed by a centralized-services unit or outsourced entirely Aetna Life & Casualty provides a case study in HR transformation. Two years ago, the role of HR at Aetna was to undertake many of the tasks that line managers wanted to duck—transactions, rules, regulations and HR policies. Today, some transactional ar- eas have been made the re- sponsibility of line man- agers—for instance, resume tracking and job posting. Employees themselves have the capability to complete many transactions, such as address changes, directly at “People management is clearly the responsibility of line managers.” —Pete Peterson, Hewlett-Packard the job site; and centralized service staffs per- form benefits and compensation administra- tion. At the same time, the company is stream- lining many HR procedures. For instance, the number of job titles tracked by the compensa- tion department has been cut from 40 individ- ual titles to just three families of jobs. ‘The HR transformation has enabled Aetna to cut significantly the overall cost of HR man- agement and reduce the size of the HR staff. Interventions by HR professionals are now lim- ited mostly to more complex and difficult situ- ations managers face; they are rarely involved in providing advice on routine how-to issues. “The goal is to transform HR from a transac- tion-oriented department to one where HR is ‘working in partnership with managers to solve problems by giving more accountability to the 16 AMERICAN MANAGEMENT ASSOCIATION / JUNE 1997 ‘managers and providing them with the appro- priate tools and processes to perform this re- sponsibility,” says Don Benson, head of human resources services at Aetna, Gary Grom, senior vice president of hu- ‘man resources at Sara Lee, sums up the change occurring in HR with this observation: “You can't control the universe; limit what you try to ‘manage. You'll do better and have greater influ- ence on the business. At Sara Lee, we dontt tell them what to do; our job is to lead.” Preparing for Change Obviously, dramatic changes are finally under way in human resources. The good news is that the influence of HR will increase a its energies become focused more on strategic contribu- tions and less on administrative and clerical tasks. The bad news s that many HR executives are not confident that current HR professionals with traditional HR skills possess the capabil ties to make the transition which these new ap- proaches demand. A surprising number of the HR executives we interviewed express a high degree of concern about the abilities of their stalls to cope with the present and future pace of change. ‘To beef up the skills in HR, many compa- nies are recruiting line managers into HR roles. Aetna, for example, is increasingly selecting business generalists for top HR positions— that is, men and women with good sales ability and a broad knowledge of current trends in the insurance industry, Merck is now looking to chemists, business strategists and epidemiolo- gists to add their knowledge and background to the HI function. The cross-fertlization of the HR function with talent from general manage- ‘ment and other areas will be critical as the pace of change picks up. In seeking to link HR with corporate strat- egy, companies are taking many different paths. But whatever the course chosen, the top-gun HR organizations are concentrating their intellectual and organizational firepower ona limited number of high-stakes targets. Their goal is to enrich the depth of knowledge in HR, to tighten the ties to corporate strategy, and to communicate their enhanced capability and insights to the top-management echelon. Their approach, we believe, will spread throughout the corporate community in the coming years. Ml crepes cl 800-644-2464 o 1740-200 1. nanbe 8109 Fr photocopy permison se ag