What HR Needs to Do

A changing workforce, global competition, advances in information technology, new knowledge, the 2008 global recession, demands for sustainable performance, and a host of other changes are forcing organizations to constantly examine and reevaluate how they operate (Lawler and Worley 2011). They are utilizing new technologies, changing their structures, redesigning work, relocating their workforces, and improving work processes to respond to an increasingly demanding, unpredictable, and global competitive environment. These important changes have significant implications for how their human capital should be managed and their human resources functions should operate. But are organizations changing their human capital management policies, practices, and processes? Are they redesigning their HR functions?

During the last decade it has been difficult to find a management book or business magazine that doesn't point out how many of the changes in the business world have made human capital—people—an organization's most important asset in the United States as well as in the rest of the developed world. Human capital management has been the focus of a great deal of writing focused on finding, motivating, developing, and monitoring the "right talent."

The annual reports of many corporations in North America, Europe, and Australia 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 it 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 compensation costs means that the human resources function often has responsibility for a very large portion of an organization's total expenditures, and this portion is growing.

In most organizations the cost of human capital is not the only, or even the most important, determinant of an organization's effectiveness. Even when compensation accounts for very little of the cost of doing business, human capital has a significant impact on the performance of most organizations (Cascio 2000; Cascio and Boudreau 2011). 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; Huselid, Becker, and Beatty 2005).

Not all organizations can or should look upon their human capital as a major source of competitive advantage (Lawler 2008). In some organizations it may be sufficient to simply have talent that can and will adequately do relatively simple jobs. But in an increasing number of organizations, having the best talent and talent management processes can be a source of competitive advantage. It can make it possible for companies to be more innovative and agile, develop superior products and customer knowledge, and offer superior services.

Role of the Human Resources Organization

The HR function typically adds value by performing an administrative role. The human resources function in most organizations plays a key role in determining how their human capital is managed and serviced. How well it does this helps determine how much value it adds. But two other roles that it can take on allow it to add greater value. Lawler (1995) has developed this line of thought by describing three roles HR 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 focuses on the effectiveness of the human capital management practices and on process improvements in them. HR is expected to help implement changes and to help managers effectively deal with "people issues."

The business partner approach positions the HR function as a value-added part of an organization, so that it can contribute to business performance by effectively managing what is the most important capital of most organizations, their human capital (Ulrich 1997; Ulrich, Losey, and Lake 1997; Ulrich and Brockbank 2005). But this approach may not be the one that enables the HR function to add the greatest value given the increasingly important role that talent plays in determining organization performance. By becoming a strategic partner (see Exhibit 1.3), HR has the potential to add more value in those situations where human capital can be a difference maker.

In acting as a strategic partner, HR plays a role that includes helping the organization develop its strategy. Not only does HR have a seat at the strategy table, HR helps to set the table with information about organizational capabilities, talent analytics, and the labor market. It helps shape and enhance strategies by bringing a human capital decision science to strategy discussion.

In a knowledge business, a firm's strategy must be closely linked to its talent. Thus, the human resources function is well positioned to do 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, organization design, and change management, and they need to know how integrated human resources practices and strategies can support organization designs and...