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The HR Balanced Scorecard

Today I would like to talk about HR metrics – what is, I honestly believe, one of the most important but underdeveloped HR skills. Only very few companies, I have been consulting for in the recent years for example had an HR Balanced Scorcard. Fact is that most companies are not even in a position to measure basic HR reporting figures. Even some of the DAX companies only have a rough idea on how many people they employ. Topics like employee skills, job-profiles or similar are far off. Problem though is that if I don’t know the figure, I don’t know my performance, meaning I cannot improve it.

When having HR metrics discussions, it often leads into an IT discussion. For a long time this meant big fat ugly ERP – expensive, hard to implement and not very flexible… With today’s SaaS solutions the picture paints itself already very different. Especially solutions like SuccessFactors or Workday are a gold standard. Of course, also these SaaS solutions have their issues and difficulties when to implement, especially in Germany – but more about that later.

Ok, so why is an HR Balanced Scorecard so important? – To be a really strategic HR Function with having a consequent focus towards company goals an HR Balanced Scorecard is key. A Balanced Scorecard always has to be company and (HR) strategy specific. There is not “one-size-fits-all”, however the basics can be applied to any HR function. And this Balanced Scorecard help with two things: a) measuring the “right” things and b) making sure that HR improves these things.

Like every Balanced Scorecard, the HR Balanced Scorecard has to represent the performance of the entire HR function on company level. To achieve this, four quadrants should be covered:

  • Financials
  • Customer
  • Innovation/ Learning
  • Process

These represent the four views on HR.

Financials – first the most obvious. All companies are finance-triggered, and only when assessing HR against financial performance indicators, a real bottom-line impact of HR can be measured. Potential indicators are “HR expense ratio” or “staffing efficiency ratio”.

Customer – HR has always been and will always be a service function. HR should never just by itself decide which projects should be prioritized and which shouldn’t. This always has to be executed in close cooperation with HR’s customers and customer needs. Customer is the second most critical indicator! Example indicators are “new hire quality” or “% of critical workforce with workforce and succession planning in place”.

Innovation/ learning – closely aligned with customer, the topic of learning and innovation mainly focusses on workforce effectiveness and how to improve it. And how can HR best influence it? – through targeted training measures as well as targeted performance management. Example figures here are „% of critical capabilities in place/ increased“ or very important not only by itself, but also for innovation “diversity“

Process – last but not least. Process brings the inside-out perspective for HR. How does my HR function perform? Is it efficient? How do my processes run, where do I need to get better at, etc. This category plays the basis for all other three. If this one delivers poorly, the other three cannot be good either. Example figures are “time to fill”, “new hire pipeline”, etc.

HR should measure itself and its performance according to these four quadrants. On top-level and of course broken down to each HR employee. Each and every activity or project HR does should be visible in at least one of these quadrants.

However, all performance figures cumulate in the finance quadrant: Each and every figure has a financial impact. Lets take „time to fill“ as an example. This is a classic process figure. How long does it take from identification of an open position to get it filled? – expressed as financial figure: How much does it cost me to recruit someone into this position? And, which alternative costs occur because of having an open position? – an improvement of „time to fill“ has not only an impact on HR internal financial figures, but more importantly on business figures. Positive: A manager has to interview less candidates when the candidate quality improves; negative: a new recruiting system needs to get implemented. However, if I measure both, I can easily calculate a business case for my CFO to get the new recruiting system!

However, and this is something every salesman knows: Every employee that did not quit his/ her job is more valuable and less costly as every new employee – but more about that next time.

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How to tell my CEO that HR needs funding

In my recent post I have spoken about a”value-adding, emancipated HR Function”, as well as how to reach this state and how to convince HR’s internal customers of this necessity.

From my perspective as well as from my recent client experience, the most successful way is “talking numbers”. Because regardless how many qualitative improvements a transformed HR organization might bring to the table (and as HR people we know how important those are!), in the end it is all about the bottom line – and of course the CFO that “has the money”. But how to get to those numbers?

The most important numbers are of course the bottom-line ones. So these are the ones that HR must influence! So far so easy…however, this means that each and every HR project, each operational decision of HR, the HR function as a whole must be targeting those numbers. These are the numbers which belong on an HR Balanced Scorecard. The first abstraction layer of those figures is still more a theoretical exercise than anything else, e.g. market share, revenue, customer satisfaction, etc. – but already the second abstraction is more difficult. Here it gets company and HR specific.

To reach this abstraction as well as to get the best reasoning for your CFO and CEO, the next abstraction layer needs to be very close to your company’s strategy. This also defines the first step: understand the company strategy in depth. From my experience, this is already where many HR colleagues start to struggle, for various reasons. One is that for years it was not necessary for HR to understand such things as HR was an administrative back-office. Another one plays into the general skill set of HR professionals: my recent empirical analysis in Germany showed that not many HR professionals do have a business background. Most of them have studied law or psychology or similar. So it is not really HR’s fault, however, we as a function need to work on this!

Next step is to derive workforce or human capital requirements out of this business strategy: what is the skill set in need? which are the regions and/ or markets the company is going to? is the current focus on quantity or on quality? etc. – it is essential to understand those needs. Always a good idea is to check the results with the business unit head or function head.

Step three is the classical SWOT – what are the workforce requirements, which can be fulfilled, which can’t? – to do this, of course you must understand your workforce which is not too often the case. Therefore, this might be already one of the spheres of activity. But if you have those, the SWOT will provide you with your Talent fields of action.

We are not done yet. This is just the so called Human Capital Strategy. From here we need to derive the HR Strategy. HR has to ensure that all identified Talent fields of action are responded to by the HR function. And for this, you need to have the “right” HR organization in place.

And this is where the circle closes: To enable the business strategy, HR needs funding for an HR transformation as well as for the projects to enable the workforce to deliver on the business strategy. The rationale behind this is backed up with financial numbers, influencing the bottom line. These are arguments, CEO and CFO will listen to, but more importantly: will understand!

The process described to get from business strategy to HR strategy and workforce outcomes is relatively easy – execution however, is more complex and I have seen HR departments struggle.

The first tricky step is the HR Balanced Scorecard which is why I will write about that in my next post.

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The "emancipated" HR organization

The discussion about “understanding” and “wanting” a modern HR Organization which I have laid out in my last post is not a new one. Since Ulrich has first published his work on transformed HR (check out here) the discussions about what HR should be and do are going off into various directions. The extreme positions are “HR as administrative back-office” on the one end and “HR as strategic value generator” on the other. As laid out in my last post,  a transformed HR Organization based on the Ulrich model is only under specific circumstances the right thing to do. However, if those circumstances fit to your company, there is not much which speaks against such a transformation. – however, objective criteria alone are not sufficient to lead the discussion!

In my meetings on Top-Management Level in German and European  companies, the knowledge and insecurity about Ulrich’s HR Model is high – although the model is around for more than 10 years. This does not differ whether my meetings are within or outside HR. From my perspective, there is more than one reason for this. The most common are a) lack of knowledge b) knowing, but not understanding the model c) not “wanting” an emancipated HR Function. Interesting is that all of those reasons are spread similar across HR and non-HR Managers.

Many HR colleagues are actually quite happy in their back-office and making-employees-happy role. This is based on my experience neither surprising nor condemnable. But in today’s competitive environment a transformed, value-adding HR function is no longer a nice-to-have, but a must! HR has to support workforce effectiveness through targeted, strategy supporting projects and processes like Performance Management, Strategic Workforce Planning, HR Analytics, etc. As Ulrich said, the workforce is the remaining differentiating competitive advantage – and HR is in the pole position to further foster this advantage. However, to do so, the HR function needs to emancipates itself.

At HR’s customers, the picture differs a bit. The majority did not yet understand the critical factor Human Resource/ Workforce. Although today’s recruiting web-pages of each an every  company highlight the criticality of skilled and motivated employees, reality looks different. And… who really wants another player on the “big” strategy table, someone with an opinion? Someone who tells me “how I have to organize my team to be more effective?”, “how I motivate my people best?”, “isn’t all of this common sense?” – and this is where the real issue is: HR is not yet seen as a real function! But this is just normal human behavior – nothing surprising.

However, it is the priority of us HR folks, to actively promote HR as a real, differentiating function! As soon as the HR Management has identified the advantages and calculated the business case of an HR Transformation, they have to start a marketing campaign – and this not only for Shared Services, but for a “bottom-line value-adding, emancipated HR Function!”

There are sufficient reasons for it! More in my next post.

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The "right" HR Organization

In my last post I have written about the value contribution that HR adds to the companies bottom-line. But, what I experience in my client discussions lets me ask another question: Why should we discuss bottom-line impact when this is not wanted from HR? Or when HR’s customers do not understand this? Or believe that they don’t need this?!

All three questions are important to discuss, within the HR function as well as with HR’s customers before an HR Transformation should take place.

In the recent weeks I independently met the HR Head of a German DAX daughter as well as his most important client to talk about HR business partnering. And analyzing these discussions retrospectively, I must conclude that the requirements towards HR, the expectations as well as the understanding what HR should stand for were highly different: The Head of HR is about to transform his function towards the Ulrich model to establish a more strategic, actively participating HR function. However, his main client has a very different view on what is HR’s role. For him, HR is responsible for administration first, followed by policies and works council interactions. For the most important HR client, HR is nothing more than an administrative function – strategic learning or talent management, organization development are not part of that!

This was not the first time I had this experience. And because of this it is most important and a necessity for HR to ask themselves a question before starting a transformation: “What is the right HR organization for my company?” – and answering this question is not trivial.

In his articles and books about HR Transformation, Ulrich has asked for every HR Organization to contribute to the bottom-line. Based on my experience I have to intervene. Not each and every HR Organization in every company has to do this. Why not? – well, in principle, two important aspects have to be considered:

a) is there at all a business case for the transformation? – the costs of a fully fledged HR transformation are high (direct as well as indirect costs). And in today’s economy the payback period needs to be short – we normally talk about 2-4 years.

b) an HR transformation based on Ulrich has two main goals: Efficiency gains through the shared approach as well as effectiveness through enablement of transformational HR services.

To enable the efficiency gains, a company has to have a critical mass. At least 10.000-12.000 employees in one country/ policy/ language area is necessary to build up a quality oriented, cost effective Shared Organization.

Not only the critical mass is important, but it also has to be asked, if HR needs the effectiveness gains? – does my company need a strategic, business oriented HR department which enables strategic personnel planning, total compensation, talent management, etc. ? – there are companies that do not need this. And in those cases, I would opt out of an HR transformation.

Next to these two questions, “understanding Ulrich HR” as well as “wanting Ulrich HR” are interesting questions, which I will touch in my next post.

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HR's Bottom Line contribution

In one of my last blogs, I have already mentioned that cost cutting is still one of the most prominent topics for HR departments. Cost cutting through company wide employee reductions (even when the company is doing well…), but also cost cutting through HR internal efficiency gains, automation and HR employee reduction. Ok, in many companies the HR ratio is still south of 1:100 or even 1:80, which calls for action – but this is not true for all companies.

But besides the ratio discussion, one should ask a different question: What is the effect to the companies bottom line? Too often HR departments are still and only seen as costs, but a modern HR department can (and I mean can as I haven’t seen many that perform in this way) have a positiv impact on the companies bottom line!

Within the last few weeks I had the opportunity to talk to two Bord members responsible for HR and we discussed the topic of “HR’s bottom line value contribution”. In both discussions, the value of HR was unclear. This is not only because these Bord members were not HR specialists, but also because their Business Partners were not enabled to show them the positive impact that HR can bring.

Most of today’s HR departments already contribute to the bottom line: Training for example, almost every HR department that I know does offer training to the company’s employees. And a good, target group and business focused training does have a positive impact to the companies bottom line. Why? Where? How?
This is an easy answer (however, measuring this success is a bit more tricky): each and every positive performance impact through the training is HR’s value impact.

HR’s problem though is that there is in most cases no metrics system that enables identification of bottom line contribution. HR today only measures things like training days delivered per employee or training costs per employee. These figures just show the negative contribution of HR: costs and having employees non-productive days counted. – HR of course needs to follow up on these figures, but has to market the positive figures more prominently. The occurred costs do have a positive bottom line contribution! (And if not, the wrong trainings are applied…)

And once an HR department is able to show the value and bottom line contribution, it can be much more confident when the next round of cost cuttings are coming. This is “having strategic discussions at eye level”, this is where HR should be! This is why HR should have a seat at the table and this is how HR should use it!

More about HR Analytics and HR Balanced Score Card in one of my next posts.

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Ulrich's idea of HR governance

In my last post, I have introduced “HR for HR” and completed the last of Ulrich’s roles. But to get them to cooperate and successfully deliver on HR’s agenda a governance model is needed.

The usual Governance Model that we see in companies is hierarchically driven. There is a clear top-down mechanism enforced by a clear “Head of”. Ulrich has drastically changed that classical model of hierarchy in his thoughts of how HR should be run. He doesn’t really lay out his reasoning for that change but in his model it does make sense.

Ok, so what is different in Ulrich’s Model? – the absence of any hierarchy! For Ulrich the different roles (CoE, BP, Shared Service Center, etc.) are all on one level, working in a horizontal set-up. This means that there is no hierarchical escalation or decision making process. Ulrich has based his model implicitly on the ideas of the internal market. Meaning the usual exchange between supply and demand. This is true for all of the HR roles.

The demand is personalised through the HR Business Partners. They are the one’s presenting the demand as a stand in for the real HR customers. Supply is realised by the Centers of Expertise as well as the Shared Service Center. In this hierarchy-less set-up these roles have to align themselves to each other to ensure that a) the demand is met and b) also new, innovative ideas to bring forward the whole of the company are presented to the customers.

This set up is very fragile and it is often not implemented in its pure way. This is due to the fact that most companies cannot execute a clean and clear internal market model when it comes to HR. I talk more about that in my PhD, but I don’t want to bore you with theory. Often the set-up is either that a hierarchy instance is institutionalised by a clear HR Leadership Team overseeing and guiding the three Ulrich roles, or even that the HR Business Partners are placed on top of the pyramide.

There is no right or wrong, it all comes with advantages and disadvantages. However, it is important to understand how Ulrich wanted his roles to interact to enable the full power of his model.

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Professionalizing HR – HR for HR

Alright, so Ulrich got the Business Partner, the Centers of Expertise as well as the Shared Service Center. But these three roles are not sufficient for his model to work in real life. So he introduced in the early 2000 two additional roles to support his model: The Operational Implementers and the HR Leadership Team. Why are these so important?

Well, I guess many of us who have seen Business Partners have seen that still a lot of operational (or high-touch) tasks remain in the organization on the ground – things that cannot be executed from a shared service center due to distance. Without the Operational Implementers the Business Partner would be stuck with them. But Ulrich wants the Business Partner to be freed up for strategic tasks. And to enable this, Ulrich introduced the Operational Implementers – they are sitting in the BU, local, wherever the on-the-ground work needs to be executed. In addition to that they support in implementing the strategic agenda – meaning executing the Change Management, the local implementation of new processes – that is why Ulrich has called them Operational Implementers.

The 2nd additional role is the HR leadership Team or HR for HR. Ulrich said that to make his model work in real life, there needs to be a functional oversight, a body that steers the overall direction of HR within the company as well as an HR body that executes the CEOs agenda. This is the HR leadership team. It sits where the CEO sits and is responsible for  a) executing the CEOs agenda b) ensuring alignment of all HR people to the overall strategic direction of the company c) solving internal issues between CoEs, BPs and SSCs and d) ensuring continuous improvement and learning of the whole HR organization.

These are now all roles that Ulrich has envisioned. Now what it needs is a governance model to link these roles and ensure cooperation – this is quite  interesting in the Ulrich Model, and highly controversial, but I will get into it in my next blog.

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Professionalizing HR – Business Partners

In the last post I have talked about the Shared Service Center as well as the Centers of expertise – one very important role, actually a completely new role for HR at the time Ulrich hast started his ideas, is the HR Business Partner. The Business Partner are in their job pretty close to consultants.

They are analyzing and diagnosing the organization of their clients (may it be a function or a business unit) and (a) brokering services from the SSCs and CoEs to the line as well as (b) supporting the CoEs and SSCs to design the right (meaning fitting) HR products. HR Business Partner have to first understand their clients business: How does it work? What are key trends? Where does this organization want to go in the next year, 2-3 and 5 years? – this is essential knowledge to diagnose and consult effectively. This is very easy to understand for consultants – they do that every day!

But for HR professionals, which are often heart & soul HR people, this is a 180 degree different understanding from what they have learned and executed for most of their HR life.

These three roles are the core roles of Ulrich’s model. However, there are two more to understand Ulrich’s concept. He himself only got to them later, but they are essential for the model to work. I will talk about these roles in my next post.

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Professionalizing HR – starting with Shared Service Centers

Ulrich very often is utilized to legitimate cost cuttings in HR but that is not what Ulrich meant. I have written already in my last post that Ulrichs foundation is in the resource-based view. The 2nd misinterpretationis to reduce Ulrich down to Shared Service Center only.

Concentrating only on Shared Service Centers in HR is a big mistake if not to say the worst you can do. And why? Easy answer: HR work does not only consist of transactional/ administrative tasks, but also (to use Ulrichs language) transformational tasks. And on a continuum of tasks, these are on the opposites. It is not possible to treat both in the same way.

Ulrich says and in that he is right: Transactional HR tasks are standardizable, exchangeable and non-differentiating. Still, they have to be delivered (or who wants to claim that although it is a standard process, payroll can be neglected ;)). But these activities are destined to be delivered through a Shared Service Center or through outsourcing.

Differentiating are transformational activities. With and through these, companies and the entire workforce can be formed, motivated and targeted in their day-to-day work. For Ulrich, these are the most important activities for HR, these are value leavers! And for those, Ulrich has foreseen the Centers of Expertise. They are the strategic and conceptual part of HR (core HR if you want). With its knowledge about the company and its functional expertise their mandate and job is to design and develop tools (meaning processes, services, etc.) that motivate the workforce and that make the whole workforce more efficient and effective. Of course, as soon as these tools are finalized, implementation and day-to-day servicing lies with HR Business Partners and the Shared Service Center – no question on that. But the transformational part lies with the CoEs.

Sometimes I hear from our clients that CoEs belong into the Service Center, but this interpretation of Ulrichs idea is wrong and honestly, not working. Why? The goals of both are diametric. I will talk about this in the next post in more detail.

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Employees are the most critical resource of a firm

Some of you might still remember the good old days in university when the theories of the firm were introduced and discussed. But for all the others, it might be new – however, I am sure it is interesting for everyone. Why? – because it shows what Ulrich really meant by introducing a new model for HR.

The resource-based view (RBV) dates back to the 50ies of the last century. Edith Penrose (1959) was the first one to talk about resources as critical factor in competition. Before, competitive advantage had to be found only outside of a firm. She was the first one to search for differentiation within the firm. She distinguished between physical and human resources. But her ideas were quiet until the early 80ies when Birger Wernerfelt (1984) took a look at Penrose’s ideas. He further distinguished resources into „brand names, in-house knowledge of technology, employment of skilled personnel, trade contracts, machinery, efficient procedures, capital, etc.“ He also claimed that through specific, targeted usage of resources, a firm can reach competitive advantage. This competitive advantage is of strategic interest, and to create such a strategic competitive advantage through resource management, the resource has to be:

  • of strategic value
  • scarce
  • not reproducible
  • not substitutable

Both, Penrose and Wernerfelt identifed that employees of a firm are such resources – or at least the knowledge and capabilities of these employees are such strategic resources. And actually still today employees can be strategic resources – if identified and utilized like that.

However, this can be both positive and negative. If employees are not motivated, not educated or not aligned to a firm’s goals, they are still differentiating – but in a negative way. And this is where we as HR professionals come into the game – all of our ideas are based on the resource-based view of the firm and we are trying to transform employees into a positive competitive advantage.

And this is also where Ulrich sees the basis for his model: The RBV is the basis for all Strategic Human Resource Management concepts. Ulrich is one of them, and so he claims that through the “Art of right HR”, the HR department can transform all of a company’s employees into strategic competitive advantage. And the “Art of right HR” means using his model.

In his books about the new mandate for HR, and also before, Ulrich talks about “Organization Capability”, the capability of organizations to serve as competitive advantage, he writes: „Organizational Capability is more than just people. People represent a critical aspect of organizational capability, but it is the organization and people management system that focus people’s attention and shape their behavior to create an organizational capability.” For him, this is the only remaining competitive advantage – all other resources can be imitated at some point. But employees and organizations remain inimitable.

And having this thinking in mind, it is easy to understand that Ulrich’s aim was not to be more cost-effective, to scale down HR costs, but he had the aim to transform the HR department in something that can create “organization capability”. This is something we should always have in mind as HR practitioners. Yes, Ulrich is also the “father” of the HR Shared Service Centers (which are focused on cost-effectiveness), but the SSCs are only one step in creating “organization capability”. In the end, more emphasize lies on HR Business Partners and Centers of Expertise. SSCs are only the foundation for the Ulrich model – the real value comes only when utilizing BPs and CoEs.