THE TWENTY-FIRST-CENTURY HR ORGANIZATION
THE TWENTY-FIRST-CENTURYHR ORGANIZATIONDAVE ULRICH, JON YOUNGER, ANDW AY N E B R O C K B A N KLike any value-creating staff function, HR departments should operate as abusiness within a business. Others have focused on the strategy and direction of HR departments. This article examines the next evolution for how HRdepartment organization structure can deliver value based on two premises:(1) HR organization should be structurally aligned with the organizationstructure of the business and (2) because diversified/allied business modelsprevail, it is important to lay out the five roles and responsibilities of HR thatrespond to this organization model: service centers, corporate, centers of expertise, embedded HR, and operational HR. The article lays out the duties ofeach role, the relationship among these roles, and suggestions for implementing this new HR structure. 2008 Wiley Periodicals, Inc.R departments are increasingly expected to operate as a businesswithin a business rather than as adisconnected and isolated set of HRpractices. As such, like any business,HR departments (and other staff groups)must have a vision or strategy that defineswhere they are headed, a set of goals (objectives, outcomes, or deliverables) that focusthe priorities for the work and investmentsessential to carrying out this vision, and anorganization structure that allows HR to accomplish these goals. We have discussedelsewhere that the emerging vision of an HRdepartment is, simply stated, to create value(Ulrich & Brockbank, 2005) for key stakeholders as follows:H Employees have the right set of competencies and are committed to the organization and its goals.Line managers have increased confidencethat business strategies will be executed.External customers buy more productsor services resulting in greater loyaltyand customer share.Investor confidence leads to increases inmarket value through recognition of thecompany’s growth prospects as measured by intangible shareholder value (Ulrich & Smallwood, 2004).Communities in which organizationsparticipate have more confidence in theorganization’s ability to deliver on its social responsibilities.Correspondence to: Dave Ulrich, Partner, The RBL Group and professor of business, the Ross School of Business atthe University of Michigan, 1030 East 300 North, Alpine, UT 84004, Phone: (801) 756-3240, E-mail: dou@umich.edu.Human Resource Management, Winter 2008, Vol. 47, No. 4, Pp. 829–850 2008 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI: 10.1002/hrm.20247
830HUMAN RESOURCE MANAGEMENT, Winter 2008The goals and outcomes of the HR department have also been well documented.The value of HR’s contributions has traditionally been measured by the quantity orcost of activities (e.g., how many people werehired in a given time period), the percentageof employees who annually received 40 hoursof training, or the financial cost of deliveringemployee benefits. Instead of focusing on therelatively easy-to-measure activities ofstaffing, training, or other functional operations, HR departments are better assessed bythe outcomes created that support the company’s objectives. These outcomesgenerally may be defined as thecapabilities an organization reInstead of focusingquires for its strategy to succeedon the relativelyon a sustained basis (Ulrich &Smallwood, 2004). For example,easy-to-measureorganizations may require comactivities of staffing, petitive superiority in speed tomarket (a consumer products firmbringing new products to market);training, or othercollaboration (a firm growingfunctionalthrough mergers and acquisitions); culture change (a firm tryoperations, HRing to shift its firm brand to bemore connected with new cusdepartments aretomer expectations); efficiency (abetter assessed byfirm competing on price); service(a firm working to deepen relathe outcomes theytionships with key customers orgrow position in a new customercreate in support ofsegment); innovation (a firmthe company’scompeting based on the creationof new products and services); acobjectives.countability (a firm dedicated tomeeting deadlines); or leadershipbrand (a firm focused on buildingconfidence in the quality of its leaders andleadership as a competitive tool). These andother capabilities represent what the organization is known for, and this identity may beenhanced because the HR practices arealigned with the desired capability. For example, alignment enables an organization’s efforts in recruitment, development, communication, compensation, and work design tobe more effectively integrated around the capabilities they are trying to deliver. Trackingand measuring an organization’s capabilitiesshift the focus of HR from activities to outcomes. Capabilities become the HR deliverables that show up in employee value propositions, investor intangibles, and firm brand.With an HR vision of value and outcomesof capabilities, an HR department can nowturn its attention to how it can and shouldbe organized to deliver on this vision andreach these outcomes (Christensen, 2005).This article proposes alternatives for how toorganize an HR department so that the vision of value and the outcomes of capabilities occur. To create an HR organization, wesuggest two basic premises. First, it should beorganized to mimic the business organization in which HR operates. Second, since theprevailing business organization for larger,multibusiness, and multigeographic companies is what we term “Allied/Diversified,” anHR department operating within this formatshould reflect this business organizationstructure by adapting five roles and responsibilities. We conclude with implications forhow to manage the transition to implementthis next evolution in HR organization.Premise 1 of the HR Organization:The HR Structure Should Reflect theBusiness OrganizationAs a business within a business, the HR organization should be structured to reflect thestructure of the larger business. Business organizations align with the strategies of thebusiness they support, and HR should followsuit.1 Companies typically organize along agrid of centralization-decentralization, whichleads to three basic ways in which a companyoperates (see Figure 1): holding company, allied/diversified organization, or single/functional business (Lawler & Galbraith, 1995).Single/Functional BusinessWhen the company is a single business, itcompetes by gaining leverage and focus.HR’s role in the single/functional business isto support that business focus in its peoplepractices. Generally, start-ups and smallcompanies have little or no HR staff. Until acompany has 50 to 75 employees, it hardlyHuman Resource Management DOI: 10.1002/hrm
The Twenty-First-Century HR OrganizationFIGURE 1. Alignment of Business Organization and HR Organizationneeds a full-time HR professional; a linemanager can usually handle required basicHR activities. As the business grows, so doesthe HR workload. The business eventuallyhires someone to oversee HR; set basic policies and practices for hiring, training, andpaying employees; and perhaps also run theoffice and administrative side of the business. This HR generalist will normally be partof the management team and will be consulted on organization needs and changes.As companies grow, HR departments andstaffs grow as well. But as long as the organization remains primarily a single line ofbusiness, HR expertise most logically residesat corporate, establishing companywide policies, with HR generalists implementing thesepolicies in the plants or divisions since thereis no meaningful differentiation between thebusiness and the corporation.Herman Miller, for example, wasfounded in 1923 as a home furniture manuHuman Resource Management DOI: 10.1002/hrmfacturer and branched out into office furniture and ergonomics to become the world’ssecond-largest company in the field (Herman Miller, 2007). It now employs morethan 6,000 people worldwide who work infunctional departments. Its HR departmenthas corporate specialists in recruitment, development, and compensation who designpolicies and practices that apply throughoutthe company. While leadership in definingHR policies comes from corporate specialists, the responsibility for employee engagement rests with line managers, and local HRgeneralists tailor corporate policies to plantconditions and participate in employee-related decisions.Herman Miller is by no means the largestcompany to use this format. McDonald’s hasmore than 13,000 outlets in the UnitedStates alone and employs more than half amillion people. Most of its employees receivesimilar treatment because they are in rela-831
832HUMAN RESOURCE MANAGEMENT, Winter 2008tively similar operations. The standardization and integration of services ensure efficiency, low cost, and consistency across thecompany, while the corporate HR specialistscreate policies that will work across the McDonald’s enterprise to deliver the company’soverall strategic agenda.In a single/functional business organization, a strong HR functional organizationusually makes the most sense. This meansidentifying staff specialists who can designHR practices that match the needs of thebusiness and deliver them to all corners ofthe company. Employees whomove from site to site want tofind familiar terms and work conIn a single/ditions. Managers want to knowfunctional business what is expected of them regardless of where they work. HR proorganization, afessionals in local plants or operations need a solid line to their HRstrong HR functionalhierarchy while supporting theorganization usually business leaders in these localplants or operation.makes the mostHR departments in single/functional business companiessense.are susceptible to the followingcommon mistakes: Hyperflexibility. Many HR professionalswant their work to be flexible, withunique HR systems and practices for theirunit rather than standardized, eventhough flexibility can do more harmthan good when the basic business issimilar across the organization. Flexibility in HR should match diversity of business operations.Separating corporate and operating-unit HR.As single businesses expand, the increasingworkforce seems to generate a need for operating-unit HR specialists. Both corporateand operating units add HR staff, creatinga financial and administrative burden andleading to unnecessary proliferation andredundancy of HR practices.Isolation. Corporate staff specialists whodistance themselves from business realities respond slowly to businesschanges. Barricaded in corporate offices, they are at risk of designing HR practices that worked in the past butnot for the future.Disintegration. Functional HR specialistsoften settle into silos that separate themfrom one another. When recommendations for new HR policies and/or procedures come from separate specialties, itmay become difficult to weave the resulting practices into a unified whole. Toomany companies hire based on one set ofcriteria, train based on a different set, andevaluate performance on yet a third. Then,their leaders wonder why employees lack acommon set of goals and objectives.The HR functional organization suits asingle business strategy. It should not beabandoned in favor of the more popularshared service organization unless the structure and strategy of the business mandatethe choice. We see only about 10% of largeorganizations following this functional organization alignment.Holding CompanyA company composed of multiple, unrelated, independently managed businesses isbest described as a holding company. Pureholding companies are rare (probably about10% of overall businesses), although we seesome resurgence of holding company structure associated with the rise of large andwell-capitalized private equity and investment firms such as Berkshire Hathaway andBlackstone. For example, Berkshire Hathaway owns or controls Dairy Queen, NetJets,GEICO Insurance, and Fruit of the Loom.Blackstone has such varied companies asCelanese, Houghton Mifflin, SouthernCross/NHP, SunGard Systems, TRW Automotive, and Vanguard Health Systems.In a holding company, there is often little or no HR at a corporate level and little impetus to implement HR. Each business is expected to create and manage its ownautonomous HR practices based on the specific needs of the business. Therefore, HR isembedded within the businesses. GEICO,Dairy Queen, and NetJets have HR departments, but Berkshire Hathaway has no corHuman Resource Management DOI: 10.1002/hrm
The Twenty-First-Century HR Organizationporate HR. Realistically, as long as the corporation is managed as a group of independentbusinesses tied together only by a commontreasury function (how investment fundingis raised) and perhaps investor relations (ifthe company is publicly traded), HR requirements and the benefits of interaction amongsubsidiary HR groups are minimal. Even inthose cases where there is a corporate HRfunction, it is likely to be small and focusedprimarily on executive talent recruiting andmanaging executive compensation.While each independent organizationmay work well, the corporate value is by definition no more (and often less) than thesum of the independent parts. If organizingHR for a holding company, the requirementis to embed dedicated HR departmentswithin business units and ensure they are appropriately focused and well led. Here aresome of the common mistakes to avoid: Corporate interference. A true holdingcompany should have limited corporateinvolvement in the HR work done at thebusiness-unit level. Corporate should setgeneral directions and philosophy, butHR policies, practices, and priorities belong to the business units.Lack of sharing. Diverse business unitsfind it easy to slide from autonomy intoisolation. In the absence of a business imperative for coordination, HR leaders andprofessionals need to make extra effortsto stay in touch with one another, sharing lessons through learning communities, technology, or other forums. Without a corporate HR function to host andsponsor such meetings, HR departmentswithin independent businesses need totake extra efforts to avoid the “out ofsight, out of mind” trap.Repatenting the wheel. Even when business-unit HR departments are in touchwith one another, they often prefer to develop programs on their own. In theholding company context, the “not invented here” syndrome is especially aliveand well, and many professionals are reluctant to utilize programs they did notcreate. Business HR units in holdingHuman Resource Management DOI: 10.1002/hrm 833companies should consider some form ofregular communication that facilitatescoordination in areas when unique business solutions are not needed.Linearity. We strongly advocate HR focusing on the needs of the business. A dangerfor HR professionals in holding companiesis that they may become overly focused onthe short-term needs of the business andmay overlook long-term business implications of HR’s involvement and potentialfor contribution. HR must notonly focus on those issues cenIn a holdingtral to market share growthand short-term profitability,but must also ensure that thebusiness is operating within along-term vision and strategyand is complying with regulatory mandates such as affirmative action, disability issues,Sarbanes-Oxley, and labor law.While relatively few trueholding companies exist, thecloser a firm comes to that model,the more its HR work needs to belocated in dedicated escompany, there isoften little or no HRat a corporate leveland little impetus toimplement HR. Eachbusiness isexpected to createand manage its ownautonomous HRpractices based onthe specific needsThe choice between functionalof the business.and dedicated HR is often put asan either/or question: HR existseither at corporate or business-unit levels; iscentralized or decentralized; efficient or effective; standardized or flexible. Businessunits have similar or dissimilar HR practices:the flow of decision making and operationalinfluence is top-down or bottom-up, and soforth. In the kind of reorganization that onlylooks like progress in aligning the structurewith business requirements, companiesoften shift from one extreme structural configuration to another, not realizing that thekey requirement is not the appearance ofstructural improvement per se but, rather, organizing to reflect the requirements of thebusiness organization.
834HUMAN RESOURCE MANAGEMENT, Winter 2008Most large companies are not pure andsingle businesses and do not operate as holding companies. They lie somewhere in between, either in related or unrelated spectraof diversification. They create operatingunits or business units to compete in different markets yet try to find and exploit thesynergies among them. The best of these organizations align their portfolio of businesses around a core set of strategic capabilities that are leveraged across operations.General Electric is an exemplar of the diversified/allied model. For these business organizations, a relatively new way to organize HRresources has emerged called shared services(Bergeron, 2003; Ulrich, 1995). From a dis-TABLEItance, shared services looks a lot like centralization, but it is not. Table I points out someof the ways functional HR, shared services,and dedicated HR differ from one another.Shared services became popular amongmost staff groups, not just HR, beginning inthe late 1990s as a response to general costpressures. Staff leaders could not simplychoose the cheapest and most efficient approach—centralize and standardize allprocesses—because centralized staff workcannot keep up with the differentiated needsof units within a diversified/allied business.For example, the different businesses withinIBM gain leverage from a common approachto talent and performance management, butFunctional HR, Shared Services, and Dedicated HRDimensionFunctionalShared ServicesDedicatedBusinessorganization Single business Related or unrelateddiversification Holding companyDesign of HRpolicies Performed by corporatefunctional specialists Alternatives created byspecialists in centers ofexpertise Designed and delivered byfunctional specialists within abusinessImplementationof HR practices Governed by corporatespecialists Governed by local HRprofessionals who selectoptions from center ofexpertise menu Governed by local HRspecialists embedded in thebusinessAccountability Corporate HR Split between operationsand HR Local business leaderServicesorientation Standardized servicesacross the corporation Tailored to business needswith consistency throughlearning and sharing Unique services for eachbusinessFlexibility Mandates use of internal Has flexibility as governedresourcesby the centers of expertise Each business creates what isrequiredChargebacks Business units pay anallocation of HR costs Business units pay for useof service Business units fund their ownHR costsLocation Strong corporatepresence with HRgeneralists on site Wherever it makes sense Small (or no) corporate HRoffice, with HR staff at thelocal business levelSkillrequirementsfor HR Technically expert infunctional designand delivery Design expertise but alsoconsulting and support Business expertise andtechnical specialty in businessWealth creationcriteria Corporate shareholdervalue HR value creation for linemanagers, employees,customers, and investors Business-unit growthand profitabilityHuman Resource Management DOI: 10.1002/hrm
The Twenty-First-Century HR Organizationthey require different HR solutions in areassuch as compensation where competitivepressures are distinct and different across sectors. Hence, in a number of areas, businessconsulting—a major and growing commercial focus of IBM—has very different needsfrom the company’s hardware and softwaredivisions, its IT services business, or its R&Doperations. In a world where corporategrowth and industry consolidation lead tothe increased presence of diversified/alliedorganization structures, shared services hasbecome a useful means by which organizations balance the efficiencies of centralization with the flexibility required for competing in different markets and/or geographies.Premise 2 of the HR Organization:To Respond to PrevailingDiversified/Allied Business Models,HR Work Can Be Divided Into FiveRoles and ResponsibilitiesThe HR organization is positioned to createvalue and deliver strategically relevant organization capabilities when it reflects thestructure of the business. This leads to ques-FIGURE 2. Overview of the HR OrganizationHuman Resource Management DOI: 10.1002/hrmtions about how to specifically organize anHR department to fulfill these needs. Figure2 shows an overview of the HR organizationthat facilitates the achievement of these twofundamental ends: value creation and capability enhancement. As the figure illustrates,the evolving HR organization has five distinct and, at times, overlapping roles and responsibilities. These are discussed in the sections that follow.HR Role and Responsibility 1:Service CentersService centers emerged in the late 1990s asHR leaders (and other functional organizations such as purchasing) realized that manyadministrative tasks are more efficiently performed in a centralized, standardized way(Reilly, 2000; Ulrich, 1995). The maturation ofinformation technology has also contributedto the growth of service centers and the ability to locate them in lower-cost geographies(e.g., India, Eastern Europe). There is no reallimit to centralization. As one HR executivesaid, “If we move the HR work 400 yards, wemight as well move it 3,000 miles.” It works835
836HUMAN RESOURCE MANAGEMENT, Winter 2008because employees are increasingly willing tofind answers to routine, standard questionsthrough a service center. Technology enablesthese centers to access employees and meetbasic transactional needs as well or betterthan other methods.Service centers enjoy economies of scale,meeting employee needs and resolving concerns by fewer dedicated HR resources. In addition, service centers require a standardization of HR processes, thusreducing redundancy and duplication. For example, a global oilProperly designedservices firm had more than tentechnology enables separate ways to register for training; its new service center createdemployees toa single, standard procedure thatincreased efficiency and reducedmanage much ofcosts. Because of technology,service centers can also be accessitheir own HRble 24 hours a day, 7 days a week,administrative work. from inside or outside the company. This enhances the servicelevel to employees and retirees.Service centers offer new ways to do traditional HR work such as employee assistanceprograms, relocation administration, benefitsclaims processing, pension plan enrollmentand administration, applicant tracking, payroll, and learning administration. Employeerelated transactional processes need to be performed well; performed poorly they have thepotential to damage employee morale anddestroy HR’s reputation. (As one HR executive pointed out, “If we drop the ball on paying people, we will have a very difficult timerecovering.”) But it is work that we think ofas “table stakes,” work that must be done tobe in the game but certainly not work that isthe basis of winning the game. HR organizations are increasingly addressing their transactional needs primarily through technologyenabled employee self-service and throughoutsourcing. We review the trends and challenges of each in turn.Service Centers Through TechnologyEnabled Employee Self-ServiceProperly designed technology enables employees to manage much of their own HR ad-ministrative work. The popular emergingterm for this trend is self-service. They can access HR policy and usage, such as vacationdays allotted, and take retirement provisions,such as 401(k) status; career opportunitiesand qualifications; and their own skill levels(via self-assessment surveys). They can alsotake care of many routine transactionswhenever they wish, because automated systems don’t keep office hours. For example,many consulting firms have built their business on HR shared services, designing anddelivering an array of HR technologies (Deloitte Consulting, 2006; Mercer Human Resource Consulting, 2008).We estimate that employees themselvescan answer 60% of their HR questions ortransactions (e.g., 401(k) investmentchoices) online. If they feel uncomfortablewith the online service or have an unusualissue, they can contact a service center. Customer service representatives at service centers can usually deal with about 85% of theremaining queries. A case manager respondsto the remaining 15 percent. Some estimatesof the cost savings of these tiered solutionsare as high as 50% of HR transaction costs(McRae, 2003).Relying on technology to perform HRtransactions offers a number of benefits.First, it requires standardized HR practices,which avoids duplication, reduces costs, andensures consistency. Since employees can access HR transactions at their convenience,their perception of service quality also increases. In addition, accuracy improves because employees update and modify theirown records. As a result, managers have access to personnel information (such as training and salary history) and are often able tomake better decisions about personnel-related matters. As technology-based solutionsto routine HR administration increase, a fewtrends are worth considering—and someemerging pitfalls are well worth avoiding(Lawler, Ulrich, Fitz-Enz, & Madden, 2003). Building from scratch or excessive customization. Companies often regardthemselves as unique, but it is best toavoid designing and implementing aHuman Resource Management DOI: 10.1002/hrm
The Twenty-First-Century HR Organization unique HR data portal and service or tosignificantly customize one. One company spent thousands of hours creatingits unique human resources informationtechnology (HRIT) system only to findthat it did not match the capabilities ofavailable marketplace systems. There aremany effective HRIT products on themarket, and adapting one of them ismuch simpler and less expensive thanbuilding something new or massivelycustomizing a purchased system.Believing that channel is content. Occasionally, IT specialists become more enamored with the design and implementation of their technology than with thebusiness success that they should be trying to create. This was a fundamentalcause in the dot-com boom and bust ofthe late 1990s. They fail to rememberthat information technology is a channelfor providing and disseminating information, but the information itself ultimately drives business performance.They need to maintain their businessfocus and not just their technologyfocus.Forgetting the importance of the employee relationship. The employee’s goal for manyHR transactions is to finish as quicklyand easily as possible. Nonetheless, HR isnot like retail banking where customershappily manage transactions by ATMand do not want a personal relationshipwith the bank. It is more like investmentbanking where relationships still offerthe best long-term approach to customershare. Relationship HR, designed to buildloyalty between individual employeesand the firm, likewise offers the bestlong-term approach to employee care.Data without insight. One clear benefit ofself-service is the ability to collect dataon trends and needs. For example, knowing the differences between how manyyounger and older employees use e-learning can help in planning and employeecommunication. But data does not improve decision making unless it is used.Data that is warehoused in files andnever fully deployed might as well notHuman Resource Management DOI: 10.1002/hrm837exist. Good business decisions start withgood questions that require managerialinsight and foresight; then, data collected through technology-based selfservice can be used to assess alternativesand test hypotheses. Intrusiveness. Concerns over privacy continue to be a major challenge. The moredata accumulates, the more the firmknows about the employee, and theharder it is to keep the data secure. Asuseful and convenient as 24/7 access toemployee data can be, it blursthe boundaries between workand social life. While eachAs the technologyemployee needs to find waysto manage this balance, tech- becomes more usernology may become increasfriendly andingly intrusive and inhibitwork-life balance that helps toaccessible, it willgive employees purpose andmeaning at work and athelp employeeshome.manage theirEven with these concerns andpersonal careerschallenges, technology will increasingly be used to facilitateand leaders useemployee transactions. As thetechnology becomes more user- employee data andfriendly and accessible, it will helpresources toemployees manage their personalcareers and will help leaders useproduce value foremployee data and resources toproduce value for the company.the company.Service Centers ThroughOutsourcingAs we pointed out earlier, organizations aretaking two distinct approaches to dealingwith routine transactional HR tasks. The preceding section describes how organizationsinsource HR transactions through technology-enabled self-service. Other firms use outsourcing.Outsourcing draws on the premise thatknowledge is an asset that may be accessedwithout ownership. HR expertise can beshared across boundaries by alliances inwhich two or more firms create a commonservice or by outright purchase from vendors
838HUMAN RESOURCE MANAGEMENT, Winter 2008who specialize in offering services (Cook,1999; Scott-Jackson, Newham, & Gurney,2005).Vendors take advantage of economiesof knowledge and scale. Economy ofknowledge allows them to keep up with thelatest research on HR issues and with thelatest technology to offer transaction support that accesses the most recent ideas andis delivered in the most efficient way.Economies of scale make it possible to invest in facilit
ple, alignment enables an organization’s ef-forts in recruitment, development, commu-nication, compensation, and work design to be more effectively integrated around the ca-pabilities they are trying to deliver. Tracking
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Le genou de Lucy. Odile Jacob. 1999. Coppens Y. Pré-textes. L’homme préhistorique en morceaux. Eds Odile Jacob. 2011. Costentin J., Delaveau P. Café, thé, chocolat, les bons effets sur le cerveau et pour le corps. Editions Odile Jacob. 2010. Crawford M., Marsh D. The driving force : food in human evolution and the future.
