The HR Scorecard: Linking People, Strategy, and Performance

221 Pages·2001·1.98 MB·English

by  Dave Ulrich

Copyright
Copyright 2001 President and Fellows of Harvard College
All rights reserved
First eBook Edition: February 2001
ISBN: 978-1-5785-1136-5
To Mary, Emily, and Ethan
To Rebecca, Rachel, and Robert
To Wendy, Carrie, Monika, and Michael
Contents
Copyright
Foreword by David Norton
Preface and Acknowledgments
1 HR as a Strategic Partner: The Measurement Challenge
2 Clarifying and Measuring HR’s Strategic Influence: Introduction to a Seven-
Step Process
3 Creating an HR Scorecard
4 Cost-Benefit Analyses for HR Interventions
5 The Principles of Good Measurement
6 Measuring HR Alignment
7 Competencies for HR Professionals
8 Guidelines for Implementing an HR Scorecard
Appendix: Research and Results
Notes
About the Authors
Foreword
BOB KAPLAN AND I FIRST INTRODUCED the idea of a Balanced Scorecard
1
in a 1992 Harvard Business Review article. Since that time we, and our
consulting organization, have had the opportunity to design Balanced Scorecards
in more than 200 companies. These designs always start with the same simple
question, What is your strategy? This experience has given us far reaching
insights into the ways that executive teams think about strategy and their
organizations. The typical executive team has a high degree of awareness and
consensus around the financial strategy, as well as the priorities for operational
process improvement. They typically have limited consensus around customer
strategies (i.e., who are the target segments, what is the value proposition),
although this has improved in recent years. But the worst grades are reserved for
their understanding of strategies for developing human capital. There is little
consensus, little creativity, and no real framework for thinking about the subject.
Worse yet, we have seen little improvement in this over the past eight years.
The greatest concern here is that, in the New Economy, human capital is the
foundation of value creation. (Various studies show that up to 85 percent of a
corporation’s value is based on intangible assets.) This presents an interesting
dilemma: The asset that is most important is the least understood, least prone to
measurement, and, hence, least susceptible to management. Clearly, we are at a
watershed. As a new economic model ripples through the economy, a new
science of management is needed. In an economy where value creation is
dominated by human capital and other intangible assets, there can be no better
starting point for this new science than with the measurement of human resource
strategies. The HR Scorecard does just that and provides an important step
forward in our ability to manage strategy.
Several facets of the book will make lasting contributions. First, the
development of causal models, which show the relationship of HR value drivers
with business outcomes, takes the Balanced Scorecard to the next level of
sophistication. Second, the research into the drivers of high-performance HR
organizations gives executives a framework with which to build strategies for
human capital growth. And finally, their insights into the competencies required
by HR professionals lay the groundwork for an organization that can deliver on
the promise of its measurement systems.
We can’t manage something that we can’t describe. Measurement is the
language used to describe organizations and strategy. Through the frameworks,
research, and cases encompassed in this work, the authors have given us a new
generation of tools to measure and manage the creation of human capital. The
HR Scorecard should be essential reading for the New Economy manager.
DAVID NORTON
BOSTON, MASSACHUSETTS
Preface and Acknowledgments
PROFESSIONALS IN HUMAN RESOURCES are increasingly challenged to
take a more strategic perspective regarding their role in the organization. We find
that as HR professionals respond to this challenge, measuring HR’s performance
and its contribution to the firm’s performance consistently emerges as a key
theme. This should come as no surprise. The last decade has been highlighted by
an ever-increasing appreciation for the value of intangible assets and the
associated trend toward strategic performance measurement systems such as
Robert Kaplan and David Norton’s Balanced Scorecard. New opportunities for
HR professionals, new demands for HR’s accountability, and new perspectives
on measuring organizational performance have all converged. This book is
intended to guide HR managers through the challenge of these converging
trends. It is based on more than a decade of academic research on the HR-firm
performance relationship and grounded by our consulting work in a wide range
of companies. The result is a new approach to managing a firm’s “HR
architecture” (the sum of the HR function, the broader HR system, and resulting
employee behaviors) as a strategic asset, as well as measuring its contribution to
the firm’s performance.
Our work (some would call it an obsession) in measuring HR began with our
efforts to try to understand whether, and if so by how much, this broader HR
architecture contributes to firm success. Over the last decade we have collected
data on HR management quality from nearly 3,000 firms and have matched
these data with employee turnover, productivity, stock market, and accounting
performance measures. We’ve visited these companies, followed their
performance over time, written cases about them, and subjected them to detailed
statistical analyses. All of these activities have led us to the same broad
conclusion: Firms with more effective HR management systems consistently
outperform their peers.
Yet, in our teaching and consulting work with executives we consistently
confronted (and were confronted by) the same paradox: Evidence that HR can
contribute to firm success doesn’t mean that it is now effectively contributing to
success in any given business. Managers (HR and line) have repeatedly
challenged us with the question, Based on your research, how can I make HR a
strategic asset in my firm?
We have come to believe that the capacity to design and implement a
strategic HR measurement system—what we call in this book an HR Scorecard
—represents an important lever that firms can use to design and deploy a more
effective HR strategy. However, implementing effective measurement systems is
not easy; if it were, we would see a lot more of them. In addition, being held
accountable for results through measurement can be threatening. Many managers
will avoid it if they can. But based on our experience, firms frequently
underinvest in their people—and, just as important, invest in the wrong ways.
Moreover, many firms seem to be unaware of the consequences of their
investment decisions involving people. The most effective way we know to
change the calculus is to develop a measurement system designed to link people,
strategy, and performance. This is what this book is intended to do.
ACKNOWLEDGMENTS
This project draws inspiration and wisdom from the efforts and support of many
individuals. We are especially indebted to Garrett Walker, director of HR
Planning, Measurement and Analysis at GTE (now Verizon), and Steve Kirn, VP
for Innovation and Organizational Development at Sears. Garrett and Steve were
very generous with both their time and their patience, providing a window into
the best current work on HR measurement systems. The reader will also quickly
recognize the intellectual debt we owe to Bob Kaplan and Dave Norton. We
have benefited not only from their work on “balanced” strategic performance
measurement, but also from the passion and generosity with which they share
those ideas. Brian Becker and Mark Huselid would also like to thank Reed
Keller and Bob Lindgren of PriceWaterhouseCoopers, LLC for their vision and
enthusiasm about measuring HR’s impact on firm performance. They displayed
a confidence in these ideas, and in us, at a time when these ideas weren’t very
well accepted.
Our work has also benefited immensely from the influence of a wide variety
of colleagues. We would particularly like to thank Jane Barnes, Dick Beatty,
Wayne Brockbank, Susan Jackson, Steve Kerr, Jeffrey Pfeffer, and Randall
Schuler for their ability to frame the issues about measurement and their
willingness to debate these ideas and share their insights. Carol Tutzauer’s
familiarity with the Galileo program was an essential contribution to chapter 6.
Wayne Cascio has also had an important influence on our thinking, especially
evident in chapter 4.
This project would not have been possible without the financial support of
the School of Management and Labor Relations at Rutgers University, the
Human Resource Planning Society, and the SHRM Foundation. In addition to
funding much of this research, Rutgers also provided Mark with a sabbatical to
work on this project. Mark would also like to thank his graduate students in HR
Strategy, HR Measurement, and Financial Analysis for HR Managers, who
continually challenge him and help him to refine his thinking.
We also owe a special debt of gratitude to the editors at the Harvard Business
School Press. The reader will benefit from the gentle, but firm, efforts of Nicola
Sabin and Laurie Johnson to move us away from our natural tendencies to write
like academics.
Finally, we are most grateful to our families, who provide love and support
too valuable to measure.
BRIAN E. BECKER
MARK A. HUSELID
DAVE ULRICH
1
HR AS A STRATEGIC PARTNER
The Measurement Challenge
How can we ensure that HR is at the table—
and not on the table?
A
S YOU BEGIN TO READ THIS BOOK, take a moment to reflect on your
firm’s human resources “architecture”—the sum of the HR function, the broader
HR system, and the resulting employee behaviors. Why are these three features
important? How does the HR architecture help your company to excel in the
marketplace?
If your organization is like most, you’re probably finding it difficult to
answer these questions. In our experience, many HR management teams have a
well-developed vision of their department’s strategic value (at least from the
perspective of HR), but the CEO and senior line managers are at best skeptical
of HR’s role in the firm’s success. Worse, in many firms, executives want to
believe that “people are our most important asset,” but they just can’t understand
how the HR function makes that vision a reality.
What explains this situation? We believe that these problems have the same
root cause: HR’s influence on firm performance is difficult to measure. Consider
the elements and outcomes of your firm’s human resources architecture that are
tracked on a regular basis. You might have included total compensation,
employee turnover, cost per hire, the percentage of employees who had a
performance appraisal in the last twelve months, and employee attitudes such as
job satisfaction. Now consider those HR attributes that you believe are crucial to
the implementation of your firm’s competitive strategy. Here you might mention