New HR Metrics: Scoring On The Business Scorecard
ISSN 0090-2616/03/S-see frontmatterdoi:10 .1016/50090-2616(03)00013-5Organizational Dynamics, Vol . 32, No . 2, pp. 107-121, 2003 2003 Elsevier Science Inc . All rights reserved .w ww .organizational-dynamics .comAvailable online at w wwsciencedirect.co msCIRNC (f) DIRuICT New HR Metrics:Scoring on theBusiness ScorecardRICHARD W . BEATTY MARK A . HUSELIDCRAIG ERIC SCHNEIERhe role of the Human Resource functionin firms has changed in parallel with theTeconomic shift from agrarian to manufacturing to services-and now to information .Early on, HR was considered a staff function,not integral to the firm . Its role was administrative or transactional, its work-productoften regarded as a commodity . One factorin changing HR's role is the increased reliance on knowledge workers . In our transitioning economy, observers, both inside andoutside of organizations, have come to view afirm's workforce as far more valuable . Thus,if one views HR's primary role as influencingworkforce mindset, competencies, and behavior, HR's role becomes central to the firm,for it is people who carry out its strategy. HRprofessionals need to recognize this changeand adapt to it .To enhance HR's organizational contribution, HR professionals not only will needto transform what they do but also how theyare perceived. Early in its history, the "personnel" function was a refuge for line managers who were polite but ineffectualemployees "too nice to terminate ." Threedecades ago, empowered by federal andstate legislation, HR became known as the"personnel police," often to the frustration ofline managers. In the ongoing transformationto a services and information economy, HRwanted to be seen as a strategic partner,hopefully invited to the strategic planningparty . But significant challenges await HRonce invited to the party . It must have something to bring to the table.We wish to address what and how HRcan contribute to the strategic success offirms by transforming itself from a partner(that can be removed or outsourced) to aplayer-on the field, in the game, with theability to score . The ability to score necessitates a new understanding of the rules of thegame-a new perspective on what HR is tocontribute, how its systems enable it to contribute, and how its ultimate deliverables canbe measured . The rules of the game meanthat HR should only attempt to score on anHR Scorecard integrated with the firm'sBusiness Scorecard .The shift to a services and knowledgeeconomy has accelerated interest in the"intangibles" that have fueled market capitalization growth in the equity markets . Baruch Lev and others at New York Universityoffer annual seminars on intangibles . CFOmagazine has reported on how the value ofknowledge workers in various industries canbe captured in financial terms . Several studies have found that 30 to 40 percent ofmarket appreciation is due to non-tangiblefactors . An Ernst & Young study has shownthat intangible factors (e.g., strategy execution, managerial credibility, strategy quality,attracting and retaining talent, managementexperience, and compensation strategy)107
One problem has been measurementeffectiveness . A Conference Board surveyof senior executives reported, as expected,that customer, financial, operational, and people measures were all seen as important butnot equally effective . The test of measurementeffectiveness was the executives' willingness"to bet their job" on the quality of the measures . The survey found significant discrepancies among domains, with the greatestdiscrepancy in people measures . Thus, substantial work is needed in the assessment ofworkforce measures in firms . Below weexplore how to measure the workforce, theHR function, and firm leadership with respectto their impact on the workforce and ultimately upon a firm's strategic success .explain much of the variance in the marketvalue of firms. These factors vary acrossindustry; for example, in the computer industry, the quality of management explains asmuch as 13 percent of the total variance inmarket capitalization.Thus, research has demonstrated thatmany targets of HR work can and do differentially impact a firm's financial outcomes .While this notion is often given lip service byfirms, a growing body of evidence shows thatwhat HR does can have a significant bottomline effect. In a major research study, Huselidfound that firms with sophisticated HR systems (also known as "high performancework systems") have a significant financialimpact on profits per employee, sales peremployee, and market value per employee .These findings have gained the attention ofother academics and executives interested inbetter assessment of HR systems, as well as inredesigning executive appraisals to ensurethat leaders are held accountable for enhancing their workforce's contribution to thebottom line .FIGURE 1RewardsFROM BUSINESS SCORECARDTO HR SCORECARDOur approach starts with Kaplan & Norton'sBalanced Scorecard, a familiar concept in mostfirms . While maintaining the scorecard'sBUSINESS SCORECARDFINANCIAL SuccessTWORKFORCESUCCESS Mindset Competend Behavior8TRATEGYNALUEPROPOSITIONa Opsrstlond Excellenceo ProducUServiceLeadershipO Customer IntimacyBUSINESS PROCESSSUCCESS108 ORGANIZATIONAL DYNAMICSCUSTOMER SUCCESS-11
HR SCORECARDFIGURE 2HR Competencles Admin . Expertise Employee Advocacy Strategy Execution Change AgencyHR Practices Communication'Work Design Selection Development'Measurement'RewardsSTRATEGIC FOCUSo OperationalExcellenceO Product leadershipo Customer IntimacyHR DeliverablesWorkforce Mindset'Technical Knowledge'Workforce BehaviorHR Systems Alignment Integration Differentiationcore by retaining the financial, customer andbusiness process success components, wehave changed the component "Learning,Innovation, Etc ." to "Workforce Success ."We call this new scorecard the Business Scorecard (Fig . 1) . Also notice that we prefer touse the word "success" as opposed to "satisfaction ." Clearly firms can go out of businesswhile satisfying customers and employees .Rather, the objective is to make both customers and employees successful in orderto make the enterprise successful . We havealso replaced terms such as "mission" and"vision" from the center of the scorecardwith "strategic choice ." For a non-diversifiedfirm or for a business unit within a diversified firm, we believe that a strategic choice(or value proposition) should be articulated,such that the workforce can understandand embrace how the unit intends to be successful in its chosen market . To simplify, wechose Tearcy & Wiersema's scheme in whichfirms pursue value propositions of low-costprovider (operational excellence), innovator(product or service leadership) or customiza-tion/unique solutions (customer intimacy) .Strategic choice significantly impacts the definition of customer success, business processsuccess, and plays an important role in assessing what the workforce must do to be successful .To make the workforce successful in thecontext of the scorecard system, we mustspecify the major targets of an HR system,or HR's deliverables : workforce mindset,competencies, and behavior . To producethese deliverables, components of the HRsystem must be assessed on the competenciesrequired of the HR workforce, the HR practices used to produce HR's deliverables (e .g .,communication, work design, selection,development, measurement, rewards, etc .),and the HR system's integration and alignment with the strategy of the business .This approach yields an HR Scorecard(Fig. 2) that enables the development of HRdashboards that capture HR's contribution .Several firms are pursuing such measurements systems and have made substantialprogress . Boeing, General Electric, South109
Corp Ltd ., United Distillers & Vintners andVerizon are developing on-line, real-timemetric systems to monitor HR processesand deliverables .ASSESSING HR'SCOMPETENCIESAssessing HR's competencies refers to thecompetencies of the HR workforce (i.e ., thepeople who populate the HR function, theirstrengths and weakness in specific areas ofexpected HR performance) . We look at HRcompetencies through the lens of Ulrich,whose book, HR Champions, analyzes HR'sroles in terms of its focus on people or processes, as well as its strategic or operationalfocus . Thus, these roles can be depicted as atwo-by-two matrix . First, the HR functioncan be conceived as having a process andtactical focus on administrative efficiency inthe delivery of HR transactions . Second isHR's "employee advocacy" role (formerly"employee relations"), with an operationalfocus on serving the workforce (i.e., people)and the growth and retention of critical components of the workforce . HR's third role isstrategic, whereby HR better enables the firmto execute its strategy by aligning HR practices with business strategy. The fourth role isconcerned with changing the workforceHR's "cultural change" role . Obviously,HR functions do not focus only on one role,nor should they. The point is to determine towhat extent HR is currently focused on eachrole, and where it will need to be focused toenable the firm to be more successful .The focus of the HR function shouldcorrelate with the firm's life cycle phaseand strategic choice . As these shift, HR'sfocus must shift . For example, a firm pursuing an operational excellence strategy wouldwant an HR function concerned with administrative efficiency . A firm moving from aproduct leadership to operational excellencestrategy (a common occurrence with thecommoditization of products and services)would likely require significant HR compe1 1 0 ORGANIZATIONAL DYNAMICStencies in cultural change, as well as in strategy execution . Firms pursuing a product orservice leadership strategy (i .e ., innovation)would most likely want HR focused on providing "A players in A positions ." In otherwords, the HR focus is to help populate thefirm with the very best R&D or technical/innovative talent in order to distinguish itselffrom its competitors by building appliedinnovative and creative products (or services) that can create large-scale demandand command premium pricing .How success in each role might be measured is easily understood. Measures ofadministrative efficiency are relatively simple (e .g ., benefits cost per employee, processing cost per transaction, response time foretc.) .benefitinformationrequested,Employee advocacy measures are somewhatmore complex. They involve issues such asretention rates of critical human capital,growth rate of core competency human capital, retention rate of critical human capitalduring organizational transitions or transformation, retention rate of "A" players in "A"positions, etc . Strategy execution measuresmight include : the extent to which the workforce understands the business's strategy (asmeasured by survey), line management feedback on the HR system's alignment withbusiness strategy, or the HR workforce's levelof understanding of the criticality of the HRfunction's integration . For firms active inmergers and acquisitions, another measuremight be the depth of excess capacity ofexecutives to export to recent acquisitions .The cultural change role measures mightinclude: success rate of external hires broughtin to "seed" firm change efforts, employeeknowledge of the status of change efforts,depth of bench strength in change efforts,measures of employee mindset or mindsetshift towards strategic goals and objectives,and certainly management's satisfaction withHR's contributions to organizational transformation efforts. Thus, there are some relativelystraightforward measures of the HR functionin terms of its competencies, all of which aredriven by what the HR function needs toaccomplish at any point in time.
ASSESSING HR'S PRACTICESHR practices can be assessed against "bestpractices," or benchmarking . What can theHR function learn from other firms? Howwell is it doing relative to others? There aremany best practice studies and many purveyors of best-practice information. Thus,one way HR can assess itself and its processes in delivering basic HR practices (e .g.,selection, rewards, measurement, trainingand development, communications, workdesign, etc .) is to collect best practice datafrom available sources or actually conductsite visits . Once the data is gathered, thefunction can compare itself against a baselineand decide what improvement initiatives toundertake . Firms of substantial size can buildinternal scorecards, whereby critical HRpractices can be compared across businessunits to determine how well one unit is doingrelative to the firm's other business units onfactors such as retention, labor costs, scarcetalent compensation, customer satisfaction,etc .There is one caveat in using best practiceassessment. Focusing on one practice orprocess in a system to the exclusion of otherscan drive the system out of tolerance, ratherthan enhancing the system's contribution tothe firm . This very important point wasoften emphasized by W . Edwards Deming,who stimulated attention to operationalmeasurement in the United States basedon his work on quality in Japan . Thus, wemust realize that enhancing a given HRprocedure or practice can be useful, but indoing so we must avoid diminishing theefficacy of other components of the HR system . This leads us to HR systems as a thirdway of diagnosing the impact of the HRfunction on firms .ASSESSING HR'S SYSTEMSWe conceive of HR systems as the basiccomponents of HR viewed as an interconnected whole with respect to a firm's strategy or value proposition . Our discussionexplores three ways of assessing HR systems :alignment, integration, and differentiation .Alignment relates to understanding thatdifferent business strategies require differentcultures. Drawing on the seminal work ofSchuler & Jackson, we use the three businessstrategies previously mentioned-operational excellence, product leadership, andcustomer intimacy-to demonstrate thispoint. In particular, there are significant cultural differences required of the primaryworkforce that must deliver the firm's valueproposition.Firms following an operational excellence strategy need a workforce that: identifies with business processes, is trainable, canlearn rapidly, willingly follows the battleplan, is short-term focused, possesses amindset that seeks to avoid waste and minimize costs, and is driven by incrementalimprovement . Because the objective of suchfirms is to build systems to drive the variance-and thus all the costs-out of thesystem, free spirits and ostentatious behaviorare not welcome . The last thing that is neededin McDonald's is a creative hamburger-flipper! Firms that essentially follow this strategy include : Federal Express, Nucor, WalMart, and, of course, McDonald's and mostother fast-food franchisers . Such a value proposition offers it "our" way to the customer,at a price that is at or below all competitors .Ideally, the successful competitor can pricethe product or service at a level below acompetitor's cost to produce, gain marketshare and thus leverage their operationalexcellence by serving a much broader customer base at an even lower price .In product (or service) leadership, innovation is the value proposition . With anoperational excellence strategy, the firm'suniqueness or competitive advantage is tiedto cost . In product/service leadership, competitive advantage is tied to innovativenessof the offering . The workforce that producesinnovations often identifies with, values andis humbled by the discovery process . This isparticularly true for the R&D workforce,which is largely responsible for the innovativeness, and the continued uniqueness, of111
firm offerings . Such a workforce tends tochallenge the status quo, is anti-bureaucratic,has a longer-term focus, is driven by learning, has a greater tolerance for ambiguity,and is willing to take greater risks . It shouldnot be structured or streamlined, because itsmembers are expected to be innovative andcreative, and think outside the box . Firmsthat generally follow this value propositioninclude Sony, G1axoSmithKline, Merck, 3M,Intel, and Nike. These firms win in theirmarkets by continuing to offer things "thenew way" as opposed to "our way," ascharacteristic of an operational excellencestrategy .The customer intimacy value proposition offers unique solutions customized forthe client. Such a strategy calls for a workforce constantly finding and improving solutions . Customer needs not only are satisfiedbut also anticipated . This requires a workforce that identifies with customers, shares"secrets" easily and readily with co-workersso that the entire system continuouslyleverages the firm's value proposition inorder to grow by offering additional solutions to the client . Such a workforce shouldconstantly seek customer intelligence, beadaptable and flexible, concerned with making results happen for the customer, be quickstudies, and driven by customer success . It isnot made up of clones, but employees whocan think, capture and readily disseminateinformation, and better utilize that information in meeting a customer's unique requirements . Firms following a customer intimacystrategy include : the Four Seasons, Airborne,Roadway Express, Home Depot, Cott Corp .,Cable & Wireless, PriceWaterhouseCoopers,and Dell Computer Corp . The value proposition in customer intimacy is customizationyou can have it "your way ."Alignment requires firms to understandthat different value propositions require different cultures . There are many ways oflooking at culture . One relatively straightforward approach is to use two very simpledimensions : firm structure (loose vs . tight)and firm focus (internal vs . external) . Firmsthat are tight and internally focused are more1 1 2 ORGANIZATIONAL DYNAMICStypical of operational excellence . Becausesuch firms are delivering a value proposition"our way," are trying to eliminate variance(and thus all avoidable costs) from the system, they must be tight and internallyfocused to achieve their strategy . On theother hand, product leadership firms, especially the R&D workforce responsible forcreating the value proposition, need to berelatively loose . Just how loose? Fortunemagazine featured a covering showing aprospective employee saying: "Yo, I'm thenew corporation, man! I want an outlandishsalary, a cappuccino machine, and by theway I'm bringing my bird to work ." Whilethe cover is a caricature, nevertheless flexibility, looseness, and tailoring to creativeemployees are important to yield the innovation necessary to leverage the productleadership value proposition . The challengefor line management, and especially the HRfunction, is to develop a core workforcefocused on an applied innovation (i .e ., anexternal focus) that delivers value to a customer . Thus, the culture needed for the product leadership value proposition to besuccessful is loose and external, especiallyfor the core workforce that creates this valueproposition.The customer intimacy core workforcethose employees who interface with the customer-must be externally focused in a relatively tight platform . This enables thecapture of customer information (i.e ., customer intelligence) to build and efficientlydeploy knowledge capital throughout thesystem, such that unique solutions are developed to leverage the relationship with thecustomer . The customer solutions culture notonly solves immediate customer problemsbut also anticipates future customer needsbased on learning occurring throughout thefirm. Learning from customers enablesfurther customization and requires a verystrong external focus that operates througha smart and efficient dissemination platform .Airborne Express and Dell are exampleswhere a firm finds unique solutions to customers' delivery problems but within a system that is tightly structured to capture
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HR function, and firm leadership with respect to their impact on the workforce and ulti-mately upon a firm's strategic success. FROM BUSINESS SCORECARD TO HR SCORECARD Our approach starts with Kaplan & Norton's Balanced Scorecard, a familiar concept in most firms. While maintaining the scorecard's CUSTOMER SUCCESS BUSINESS PROCESS SUCCESS
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