Tuesday, August 09, 2005

"HR has to fall in Love with the business not HR itself"

'HR has to fall in love with the business not HR itself'

In their new book,The HR Value Proposition, Wayne Brockbank and Dave Ulrich, professors at the University of Michigan School of Business, explore the HR discipline's Holy Grail: making human resources a strategic partner to business. Indrajit Gupta met up with professor Brockbank for a discussion on the new book and other critical HR issues. He was accompanied by Satish Pradhan, HR head of the Tata Group. Professor Ulrich joined the chat through a tele-conference.
IndrajitGupta:What triggered your new book?
Wayne Brockbank: For the last decade or so, we have been thinking about what it means for HR to be a true business partner. That statement itself implies that it should not begin with HR logic, but with business logic. Therefore, the key issue became: what is required for a business to be successful? To succeed, a business has to ensure that its two key constituents (external customers and shareholders) are happy. If HR cannot align with those externally-driven requirements and bring internal stakeholders (management and employees) in line with the external stakeholders,then it isn't a business partner.In 1997, a colleague from Argentina did a dissertation with us and came to a very interesting conclusion using our dataset and human resource competencies at the university. He found that knowledge of HR does not distinguish HR professionals at high-performing firms from those in low-performing firms. And that external knowledge, not internal knowledge of HR, is the key differentiator. Most HR professionals have a low level of external business reality - customers, competitors, shareholders, industry structures, globalisation and all the things that make business what it is. It was a very interesting finding. So we had two starting points for our thinking. First, HR aspires to be a business partner. And second, to be a business partner, it needs to create a line of sight to the outside. Our empirical research here shed additional light. Over the last 18 years, we have gathered the largest dataset of HR professionals. Put together, all that provides a very compelling argument for creating the HR value proposition. And, of course, the title of the book is taken from the concept of business value proposition, which starts from the outside and moves towards the inside. With that in mind, we decided to pool our thoughts, experiences and the best practices - gleaned during our consulting and research work - into creating one powerful package.

IG: Why did HR get marginalised, especially at a time when the traditional sources of competitive advantage were eroding? What did HR need to do to be able to sit at the same table and have the same influence as other departments?
WB: The missing piece was the fundamental appreciation we talked about earlier. Nothing of what happens inside matters, unless it happens to matter to somebody outside. We call that the 'Wallet Test' in the book. Unless HR can create an exact line of sight, not an ambiguous line, between its activities and getting customers to take money out from their wallet and put it in your wallet, instead of the competitor's wallet, it doesn't contribute to the success of a business, and therefore, does not matter.HR needs that line of sight to create the human side of the business - the culture, capabilities, technical knowledge and skills that enable people to create products and services better than the competitors. With this, we are holding HR up to the same standards on which other departments are held. Why does the product development department exist? To create products and services that result in customers taking out money out of their wallets. The same is true for marketing, sales, manufacturing and so on. If HR is to be an essential part of the business, it has to align with the external business realities.Two factors have inhibited HR's ability to function as a business partner: its logic and its language. For example, HR likes to say it has internal customers. When it takes that vocabulary and logic to the strategy table, it automatically condemns itself to a second tier status.At the strategy table, when the business partners say: "How do we make the customer happy?" they are actually asking: "How do we take money out of the customer's wallet into our wallet and make them happier with us than with our competitors?" When HR walks into the room and says that it has internal customers, it is immediately removed from the basic logic and language of the business. The logic and language of the business is the external customer. This is also the logic and language of HR professionals in high performing firms.
IG: But CEOs sometimes don't allow HR to play the role it can...
WB: My experience has been overwhelmingly that the demand for strategic HR far exceeds the supply. It was a conclusion vividly conveyed to me by the senior HR vice-president of one of the five largest companies in North America. I asked her the traditional consulting question: "What keeps you up at night?" She said: "Ten years ago, given the state of strategic HR at the time, our supply exceeded the demand. Today, the demand so far exceeds the supply that it threatens to be a fundamental source of competitive disadvantage of the company." In the University of Michigan, we have seen a huge increase in the number of senior line executives enrolling in our executive programmes on how to create and engage the human side of business - how to conceptualise and create the total human organisation. Furthermore, these issues are increasingly preoccupying the senior thought leaders throughout the strategy community, the best of whom is C.K. Prahalad.

The changes in the world of business require companies to pay more attention to the human side of the business. Many other sources of competitive advantage have gone by the wayside. The shelf life of technological know-how has dropped through the floor. The critical issue now is not what you know, but what you are able to create. Institutionalised creativity is a central cultural issue and is, therefore, an HR issue. Also, how well a company can execute self-standing platforms of technology, products and services is being replaced by the leveraging of common technologies, products and services across business units. This business trend may also be called the culture of cooperation, synergy and convergence. These should be central agendas of HR. The human resource department should be responsible for recruiting, promoting and developing high-quality leaders who will take the company to greater levels of success.Thus, the world is telling HR: 'We need to have you add greater value.' But if you need to have that, you need to start from the business standpoint, and not the HR standpoint. I once had a student ask me for a letter of recommendation for a leading HR graduate programme in the US. This was an extremely gifted young man. He graduated from one of the leading schools with almost a perfect GPA. I told him: "You have the ability to be one of the best in the field, is that your aspiration?" He said: "Yes." Then I said: "If you want to be really good in HR, get an MBA. Work in line management for two or three years and then go into HR, and you will be fabulous." His response was: "I don't want to go into business. I want to go into HR." At one level, there is nothing wrong with that. But at another level, something is centrally wrong with his logic. His identity was first in HR and then in business. If HR is to contribute to business, it has to break out of that way of thinking; it has to fall in love with the business rather than human resource.
IG: Coming back to the notion of what the HR leadership will be all about, what does your research really tell us?
WB: The good news is we don't have to guess anymore. In our most recent research, we have asked two questions. What are the competencies and capabilities of the HR professionals? And what are the competencies of HR that distinguish high performing firms from low performing firms? The latter is the more interesting of the two questions.We have found that there are five categories of HR capabilities and competencies: HR professionals need to make strategic contributions; have personal credibility; deliver the basic HR practices of staffing, training, developing and measuring performance; have business knowledge; and they need to be fluent with the application of information technology to HR. The first of these five categories is strategic contribution. Of HR's total impact on business performance, 43 per cent is accounted for by strategic contribution. That consists of: first, designing and creating the cultural infrastructure that creates sustained competitive advantage. Second, managing rapid change. Third, adding value through contributions to the strategy forums and discussions in the company. Fourth, creating an organisation that is focused on responding to and being unified around external market needs.

We also know how to make each of these happen. Culture management is the most statistically significant of all HR practices that impacts all business practices. Successful HR professionals align their HR practices to create the culture that drives business success. An interesting conclusion can be deduced. Delivery of the HR basic practices accounts for only 18 per cent of differentiating variance between high performers and low performers. That includes the basic HR infrastructure practices. When they are done in a tactical and reactionary manner and when they are done without a definitive business focus, they account for 18 per cent of HR's influence on business results. But when those same practices are designed and implemented in the context of HR's strategic contribution as described above, that 18 per cent jumps to 43 per cent. That's about a 250 per cent increase in HR's impact on business. Doing HR practices with a clearly targeted culture-based business agenda creates great results.

The major inhibitor to HR adding this kind of value is the trap of being internally focused - thinking in terms of internal customers and not focusing on the results that the marketplace requires. In our dataset, we asked senior line executives to evaluate HR professionals in terms of their over-competencies. I consider this to be an indicator of HR's internal popularity. To be internally popular, HR professionals need to have personal credibility; they need to do the basics; do what they say they will do and; have good interpersonal and communication skills. But while these competencies will increase the internal popularity of an HR professional, they have a mediocre impact on business performance. Thus, what an HR professional does to be internally popular is very different from what he must do to push the business ahead.

IG: Any advice for HR professionals?
WB: My first advice: have a great sense of urgency about your own focus on business. Second, HR professionals in India must think in terms of being more effective at their jobs than their counterparts in the US and Europe. US and European companies have the competitive momentum to carry themselves to Indian markets; likewise, Indian companies must be good enough to carry themselves to these markets. Such is the nature of global competition. Indian HR professionals cannot think about benchmarking Indian practices; they must be knowledgeable about best practices outside India. They must also think about next generation practices and be more powerfully competitive than their counterparts. Five or six years ago, the head of staffing at Cisco stated: "Our product life cycle is six to nine months. If we are not changing our HR practices as fast as the product life cycle, then we are not contributing to the competitive advantage of the company. If, we in HR, are doing the same things that we were doing nine months ago, then we are probably doing what everyone else is doing. That just isn't good enough, isn't just adequate."

IG: Professor Ulrich, how does your earlier work on HR roles tie in with your current research with Professor Brockbank?
DU: The roles we talked about in HR Champions (HBS Press, 1997) were defined as deliverables. The deliverable of the employee champion role is employee commitment. The deliverable of the administrative expert role is efficiency. The change agent deliverable is making change happen. The deliverable of the strategic partner role is making strategy happen. Each role had to make something happen. Wayne talked to you about world trends in the economy - India, Europe and North America. Those trends have shifted what those deliverables have to be. So we now believe that those roles have to be tied with the trends in the economy.We see, more than ever before, that the employee advocate role must help employees feel cared for. Through the years, I am convinced that people need to have meaning and relationship in their personal and professional lives. The employee advocate works not just to get people to work harder, but to have meaning, relationships and hope in their professional lives.The human capital role focuses on helping employees prepare for the future. As human capital becomes more central to productivity and improvement, HR professionals functioning in this role become more critical. The functional expert delivers efficient HR processes. Some of these efficiencies come through technology and some through service centres. Whatever the channel, HR must become more efficient and the HR personnel members need to be experts.The strategic partner role is more than just managing change. It also includes knowledge sharing, collaboration and strategy implementation. The strategic partner role also focuses on developing key capabilities that the company needs for success. Finally, as HR professionals function in the leadership role, they serve as role models. Wayne and I aren't sure if these roles are the right five. But we do believe that the human capital developer roles are hugely critical.

IG: Among the high performing organisations you have researched, how much has that shift played out? Do you see them clearly moving away from the administrative kind of roles, and focusing instead on more strategic dimensions?
DU: The answer is yes and no. That is a great academic answer! I think Wayne may have a slightly different view, but I feel that resources have been split into halves. Half of HR work is administrative transaction work - hiring, training, benefits, facilities management. That takes 80 per cent of its time and attention. That will be reduced by outsourcing, technology and service centres.When that is done, the whole second half of HR - transformation, innovative or strategic work will get a lot more attention. That's where HR professionals are coaches, architects, designers, and facilitators who can really begin to transform business strategy into a set of capabilities and actions. In the future, there will be fewer HR people but these few individuals will be much more qualified to do what Wayne has talked about in our research.

Satish Pradhan: You have the insight and foresight of the initiatives that help companies stay ahead in the game. Could you pick one or two of the practices or initiatives that will be the most significant in the next decade?
DU: I am going to be bold and pick free three. Maybe the first two are what matter most. Each one is built on a myth. The first one is that competitiveness is not strategy. The CEO needs to compete. The world is becoming even more competitive. Competing is not just building a strategy, it is having an organisation that will deliver the strategy better than your competitors. We can't compete by just knowing where we are going. We compete by getting there. Two, organisation is not structure. It is a set of capabilities. When I teach, I ask people to pick a company they admire. Assume for a moment that someone picks a Tata company. How many levels of management does a Tata company have? Nobody knows and nobody cares. An organisation is not evaluated by the number of levels. It is deemed successful if it has a successful set of capabilities. A Tata company may be very good at leveraging diversity, collaborating across businesses, or be very good at speed. But it is capabilities that make the Tatas good. I think HR's job is to do an organisational diagnosis that begins with the process of identifying and building key capabilities. The third insight is that HR is not a practice, but an integrated set of practices that join together to create capabilities and allows strategies to happen. HR professionals build capabilities into the organisation when they have integrated HR practices. When this is done, HR benefits not only employees, who feel valued and engaged, but also customers and investors. And when we follow those three premises, HR benefits an entire network of stakeholders.


Ajit Chouhan

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