Friday, June 17, 2005

Human Resources Driving Business Performance

An enlightening article for C-level execs in Harvard Business Review that makes quantum leaps in underscoring the value of Human Resources to the organization. The article, entitled The Surprising Economics of a "People Business" might do for HR professionals what the dotcom boom did for IT. The exciting thing about this article is that it quantifies the economic value of human resource management and calculates how it drives business performance. Something that HR execs have been wracking their brains and gnashing their teeth over for the past several years.

The article, while seemingly complicated, is actually quite simple. The authors, Felix Barber and Rainer Strack of the Boston Consulting Group in Switzerland and Germany respectively, make a strong case that standard economic measures provide little useful meaning in people-based businesses. These businesses are defined as organizations with relatively high people costs and low capital costs. For these organizations measuring the return on assets, a standard performance measurement, can be meaningless.

They state,
The critical resource of most businesses is no longer capital-that is, assets that a company owns and utilizes at as high a level as possible. Rather, the critical resources are employees whom a company hires and must motivate and retain.

Obvious to those of us in HR, but the authors analogize human resource measures to capital measures in a way that execs are used to thinking about.
If success in a capital-intensive business comes primarily from making the right investment decisions, success in a people-intensive business comes from hiring the right people and putting in place processes and an organization that makes them productive.

The article includes calculations that a company can use to measure Economic Performance using employee productivity as the main driver of performance. The calculation is derived from sales per employee minus supplier and capital costs per employee. Subtract employee costs per employee from the remainder and this provides you with economic profit per employee.

[Sales/EE - Supplier & Capital Costs/EE] - Cost/EE = Economic Profit/EE

By looking at economic performance in this light, CEOs and CFOs can see how improving people performance can improve business performance.

This reframing of the issue, if taken seriously by senior management, immediately elevates the role of Human Resources Management. "Given the high financial stakes, people management needs to be a core operational process and not solely a support function run by the human resources department."

Hopefully that statement is not suggesting that HR professionals are incapable of handling people issues now that the operations folks have finally figured out its importance. If anything, they are going to need us more than ever. The article discusses HR strategies such as diagnosing and addressing employee concerns and using variable incentive compensation. These are areas that non-HR operations managers should not be attempting without HR's guidance.

Barber and Strack have articulated what most of us in HR have had difficulty doing up to this point. If the Chiefs agree with this concept, it creates an incredible opportunity to elevate HR's value to the organization. Read the article, take some time to understand the calculations (or get some help from a friendly CFO) and show the CEO how you can work together to develop a people strategy that will drive those Economic Profit numbers in the right direction.

With a model in hand like Barber and Strack propose, we should begin to see some CHRO (Chief Human Resources Officer) positions being created soon.

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