The need for a new business model for HR has been articulated, but the human resource function still appears to be at the very beginning of the changes that are needed in order for it to become reality, according to this excerpt from Achieving Strategic Excellence, An Assessment in Human Resource Organizations, by Edward E. Lawler III, John W. Boudreau, and Susan Albers Mohrman.
HR as a High Value Contributor
As a business, HR potentially can have three product lines. The first is to provide basic HR administrative services and tasks that are involved in compensating individuals, hiring them, training them and staffing positions in the organization.
The second role is as a business partner that helps business units and general managers realize their business plans. In this role, HR needs to provide advice and services concerning organizational development, change management, and the articulation between human resource management systems and business operations. This role entails leading development and installation of human resource management practices that position the organization to execute its business plans.
The third role is to contribute to the strategic direction of the organization. It requires leading the development and assessment of the human capital and organizational capabilities required to support the long-term success of the organization. This role requires individuals who understand business strategy and how it relates to organizational capabilities and core competencies.
Let us look separately at how each of these product lines within HR might develop in future.
The administrative and functional human resource management services of an organization are clearly moving more and more toward being a commodity or product that can be delivered in a number of different ways. Historically, they have been delivered by an in-house HR function in a labor-intensive, poorly integrated, and costly manner.
There is little doubt that this labor-intensive approach is obsolete and needs to be replaced by a new model. The obvious technology to replace it is an IT-based HR system that provides self-service. Today at least three models are emerging as ways to acquire the information technology needed to deliver HR services.
The first is custom systems that are designed by firms for their own use. This model is currently used by information technology companies such as Dell, Cisco, Hewlett-Packard, and Microsoft. Some of these systems are very impressive, allowing individuals on a self-service basis to perform a number of important HR tasks and access a great deal of information.
However, it is highly unlikely that most companies will ever develop the kind of custom systems that have been developed by technology companies; doing so is simply too expensive and time consuming.
What companies can do, is adopt either of two other alternatives: they can buy the integrated, Web-based systems that are sold by the major ERP vendors, Oracle and SAP, or they can purchase individual HR IT applications designed to do compensation administration, staffing, training, and other HR activities from software vendors.
Some good software programs exist, and when combined can produce an effective HR system for companies. However, there is a significant disadvantage associated with choosing a set of best-of-breed software systems. Making the best use of HR data often involves using them in multiple processes. In order to do so, software integration needs to occur. This can be costly and time consuming; thus, in future, organizations will be increasingly likely to buy integrated HR systems rather than individual solutions.
A third option is complete business process outsourcing. A number of major corporations have signed contracts to outsource all of the administrative aspects of their human resource management process. Case studies of four early adopters show it resulting in significant cost savings as well as enabling some movement toward HR's becoming more of a strategic partner (Lawler, Ulrich, Fitz-enz, and Madden, 2004).
It is unlikely that any one of these three alternatives will be dominant by the end of the decade. However, it is quite likely that the majority of large firms will have highly developed, computer based HR systems, because such systems create the opportunity to build an HR function that is not only more cost effective but also delivers a superior product. In short, they may represent a better business model than the traditional HR model when it comes to delivering routine human resource management services and administration.
But what about the business partner activities of HR? Can they be outsourced? Should they be outsourced? Can they be put on the Web? Should they be put on the Web? There is little doubt that some business partner activities can be greatly facilitated by the use of vendors and by the use of the Web. Effective computer systems can collect and analyze data about the condition of the human resources of an organization that have previously not been available because of the great amount of time required to collect, aggregate, and analyze such data.
HR IT systems can aid in change management, business plan implementation, and the operation of the business, because they can make information readily available to employees and can easily solicit employee feedback and suggestions. In all these areas, it should be pointed out that computer systems are merely enablers; they cannot take the place of human judgment in problem-solving and decision-making that entail judgment and values.
With regard to outsourcing, many consultants can provide insight into the implementation of business plans and change management. However, our view is that organizations will always need to have skilled HR professionals to provide many of the services and the information and knowledge that are necessary in order for HR to be an effective business partner.
Performing the business partner role entails solving problems and making decisions that are value-laden, highly uncertain, and context-specific; they require an understanding of the business, its strategy, the nature of the workforce, and the required competencies. It entails the application of tactic experience-based knowledge as well as knowledge with the perspectives of other disciplines such as business management, marketing, information technology, and technology.
The key question here is not whether professional HR executives will perform the business partner role, but whether the individuals who are currently human resource executives can perform it effectively.
The evidence in this study suggests that the comfort level of human resource professionals is highest with traditional activities and modes of delivery, because it is where their effectiveness and skills are the highest. If they want to be effective business partners, they need to change their skill set and become comfortable with variety of new activities.
HR executives need to understand and be able to formulate a business model for the HR function and to contribute to the firm's business model. They need to understand business operations better and be able to craft human resource management approaches that fit its requirements.
They need to understand organization and work design and change management principles and approaches, and be able to play a leadership role when these issues are considered. They need to understand different models of staffing, compensation and other human resources practices so that they can effectively implement HR systems that support the business plans of the organization. Finally, they need to identify the vital pivot points in the business that drive strategic and organizational effectiveness, and then connect human capital decisions to those pivot points.
Last but certainly not least is the strategic partner activities of HR. As organizations do more knowledge work and human capital has become more important, there is no question that these activities have become more important.
The rapid rate of change, the need to develop new strategies and to quickly translate them into human resource strategies, and the likelihood that the availability of talent will be a key strategic differentiator have greatly increased the importance of HR's being a strategic partner.
Our view is that this can only be done by individuals who have good understanding of business strategy, as well as of HR strategy. Some of the work that is involved in being a strategic partner can be outsourced to HR strategy vendors; however, we believe there needs to be a strong internal presence of individuals who have good HR knowledge, who can manage vendors, and who can be truly present at the table when strategy formulation and implementation is discussed by senior executives.
HR's strategic partner seat at the table needs to be filled by a senior executive in the corporation, not by a consultant. The importance of the strategic partner role, and the need to fill it with somebody who understands business, may be why almost a quarter of all chief HR executives come from the business rather than from HR function.
In essence, some companies may have decided that the HR strategic partner role is too important to leave to someone with an HR background. However, we believe that assigning the strategic role to those outside the HR profession is no substitute for developing HR executives who are experts in HR practices and principles and how those practices and principles affect the business and enable its strategy.
In the future there are likely to be great opportunities for senior HR managers to be strategic partners. Having data available from HR IT systems is one of several enablers that can strengthen their position as strategic partner.
HR IT systems can, for example, help them make significant contributions to strategy formulation, by providing both cost and organizational effectiveness data with respect to human resource practices. They can provide information about how to develop certain key competencies in the workforce and about existing levels of organizational effectiveness and organizational capabilities.
These are all critical inputs to the strategic planning process. They also can enable HR executives to translate what they know about existing organization and its capabilities into change programs, thus allowing the organization to develop the necessary capabilities to implement new strategic plans and new directions (Lawler and Worley, 2006).
The key question with respect to the strategic partner role concerns not so much whether it is an important role at this point, but how it can be filled. As with the business partner role, there is a serious question as to whether many of the current individuals in the HR function are in a position to fill it.
To be specific, it is not clear whether they understand the business well enough to be a strategic partner. Many of them have never worked outside of HR and, as a result, have a limited understanding of what the business is about and what strategic options are both with respect to business strategy and HR strategy. Moreover, the HR profession had yet to develop a decision science akin to those of marketing and finance.
HR Organization Design
A clear organizational model for the HR function seems to be emerging for companies with multiple business units. It involves creating HR leaders who partner with line management in business units. This role involves HR's contributing to business unit plans and helping to develop organizational capabilities and implement the human resource practices and people development approaches that are needed to create a competent workforce. These HR leaders are also expected to represent the central HR organization in its dealings with the business unit.
Instead of locating many of the HR services in the business unit, multi-business corporations are creating shared-service units and corporate centers of excellence for the business units to draw on. Alternatively, they are outsourcing HR transactional services and telling the business units to use them. The role of the generalist is thus to be both a business partner and a coordinator of HR services to the business unit in which he or she works.
In essence, the HR organization appears to be becoming a type of front-back organization, with the generalist as the front, customer focused, part. The generalist represents the HR organization in the business unit and is responsible for coordinating and delivering services from the back of the organization. The back, in this case, is the shared-services units and centers of excellence that are available to the business units, and also the services that are delivered by an HR IT system.
The opportunity for the human resource function to add value at the strategic level is great, but at the present time it is more promise than reality. For promise to become reality, HR executives need to develop new skills and knowledge, and of course, HR needs to be able to execute human resources management and administration activities effectively.
Doing the basics well is the platform upon which the HR organization needs to build its role as a strategic partner. Doing so is critical, because it demonstrates the capacity of the HR function to operate effectively as a business, and it potentially can provide the information which enables HR to be an effective strategic partner.
The need for a new business model for HR has been articulated, but the human resource function still appears to be at the very beginning of the changes that are needed in order for it to become reality.
Our study demonstrates that the change process is slower than anticipated, but it has identified a clear agenda of actions that can yield an HR function capable of adding more value to the business. We still believe there will be enormous change in the design and operation of human resource functions in this decade.
We have said it before and we say it again: the HR function needs to look seriously at how it can reinvent itself. The old approaches and models are simply not good enough.
This excerpt from Achieving Strategic Excellence, An Assessment in Human Resource Organizations, by Edward E. Lawler III, John W. Boudreau, and Susan Albers Mohrman, (c) 2006, is reprinted with permission of the Board of Trustees of the Leland Stanford Jr. University. All rights reserved, by permission of the publisher, www.sup.org.