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Achieving Strategic Excellence

STANFORD UNIVERSITY PRESS

Contents

Tables and Exhibits.........................................viiPreface.....................................................ixThe Authors.................................................xi1 How HR Can Add Value......................................12 Research Design...........................................123 Role of Human Resources...................................204 Business Strategy.........................................245 HR Decision Science.......................................326 HR Organizational Design..................................417 Human Resources Activities................................488 Outsourcing...............................................529 Use of Information Technology.............................5910 Effectiveness of Information Systems.....................6411 HR Analytics and Metrics.................................7212 Human Resource Skills....................................8013 Effectiveness of the HR Organization.....................8714 Determinants of HR Effectiveness.........................9315 HR Excellence............................................104References..................................................119Appendixes..................................................123

Chapter One

Global competition, information technology, new knowledge, the increase in knowledge workers, and a host of other business environment changes are forcing organizations to constantly evaluate how they operate. In many cases they have embraced new strategic initiatives and significantly changed how they operate. They are utilizing new technologies, changing their structures, and improving their work processes to respond to an increasingly demanding and global customer base. These initiatives involve fundamental changes that have significant implications for their human capital and their human resources functions.

Human capital management should be an important part of the strategy of any corporation. The annual reports of many corporations argue that their human capital and intellectual property are their most important assets. In many organizations, compensation is one of the largest, if not the largest, cost. In service organizations compensation often represents 70 to 80 percent of the total cost of doing business. Adding the costs of training and other human resources management activities to the compensation costs, we can see that the human resources function often has responsibility for a large portion of an organization's total expenditures.

But the compensation cost of human capital is not the only, or even the most important, consideration. Even when compensation accounts for very little of the cost of doing business, human capital has a significant impact on the performance of an organization (Cascio, 2000). In essence, without effective human capital, organizations are likely to have little or no revenue. Even the most automated production facilities require skilled, motivated employees to operate them. Knowledge work organizations depend on employees to develop, use, and manage their most important asset, knowledge. Thus, although the human capital of a company does not appear on the balance sheet of corporations, it represents an increasingly large percentage of many organizations' market valuation (Lev, 2001).

A growing body of evidence affirms that HR practices can be a value-added function in an organization. The initial work on the relationship between a firm's performance and its HR practices was conducted by Becker and Huselid (1998). In their study of 740 corporations, they found that firms with the greatest intensity of HR practices that reinforce performance had the highest market value per employee. They argued that HR practices are critical in determining the market value of a corporation and that improvements in HR practices can lead to significant increases in the market value of corporations. They concluded that the best firms are able to achieve both operational and strategic excellence in their HR systems.

Role of the Human Resources Organization

The HR function can add value by adopting a control-and-audit role. But two other roles that it can take on allow it to add still greater value. Lawler (1995) has developed this line of thought by describing the three roles it can take on. The first is the familiar human resources management role (Exhibit 1.1).

The second is the role of business partner (Exhibit 1.2). It emphasizes developing systems and practices to ensure that a company's human resources have the needed competencies and motivation to perform effectively. In this approach, HR has a seat at the table when business issues are discussed and brings an HR perspective to these discussions. When it comes to designing HR systems and practices, this approach focuses on creating systems and practices that support the business strategy. HR also measures the effectiveness of the human capital management practices and focuses on process improvements.

The business partner approach positions the HR function as a value-added part of an organization. It is positioned to contribute to business performance by effectively managing what is the most important capital of most organizations, their human capital. But, this approach may not be one that enables the HR function to add the greatest value. By becoming a strategic partner, HR has the potential to add more value (see Exhibit 1.3).

In acting as a strategic partner, HR plays a role that includes helping the organization develop its strategy. Here, not only does HR have a seat at the strategy table, HR helps to set the table. Boudreau and Ramstad (2005a, 2005b) support this idea by suggesting that strategies can be shaped and enhanced by bringing a human capital decision science to HR's role in strategy.

In the knowledge economy, a firm's strategy must be closely linked to its human talent. Thus, the human resources function must be positioned and designed as a strategic partner that participates in both strategy formulation and implementation. Its expertise in attracting, retaining, developing, deploying, motivating, and organizing human capital is critical to both. Ideally, the HR function should be knowledgeable about the business and expert in organizational and work design issues so that it can help develop needed organizational capabilities and facilitate organizational change as new opportunities become available.

To be a strategic partner, HR executives need an expert understanding of business strategy, organizational design, and change management, and need to know how integrated human resources practices and strategies can support organizational designs and strategies. This role requires extending HR's focus beyond delivery of HR services and practices to a focus on the quality of decisions about talent, organization, and human capital.

As a strategic partner, HR brings to the table a perspective that is often missing in discussions of business strategy and change-a knowledge of the human capital factors and the organizational changes that are critical to determining whether a strategy can be implemented. Many more strategies fail in execution than in their conception.

Despite...