Retooling HR

HR Executive of the Year Dennis Donovan is helping Home Depot better manage its enormous size while preparing for an increasingly competitive environment.

Thursday, October 2, 2003
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Now and then, Dennis Donovan's father, Frank Donovan, carefully examines hardware stores in the Tampa, Fla., area -- where he lives -- and reports his impressions back to his son. Frank, who spent many years managing a hardware store in Gardner, Mass., first investigates the parking lot and the outside of the store to see whether it's orderly and well kept.

Next, he'll wander the aisles and note whether merchandise is easy to find, if different sections are clearly marked and whether items are in stock. Finally, he'll observe the store employees to see if they're friendly and helpful.

That last category is perhaps what interests Dennis the most: These aren't just any hardware stores Frank investigates -- these are The Home Depot Inc. outlets, vast "big-box" home-improvement centers selling virtually every item and tool used to repair, expand or remodel the American (and increasingly, Canadian and Mexican) home. And Dennis isn't just Frank's son. He's also the executive vice president of human resources for the Atlanta-based retailer.


Ever since its founding in 1978 by Arthur Blank and Bernie Marcus, the Home Depot story has been one of extraordinary growth, to the point that the company is now the second-largest retailer in the United States after Wal-Mart, with 1,568 stores, record sales of $58.2 billion and net earnings of $3.7 billion last year. In 2002 alone, the company hired more than 180,000 people and continued to expand its presence in Canada and Mexico.

Beyond the impressive numbers, however, the picture is less certain. The company's once high-performing stock lost 53 percent of its value last year, reflecting investor concerns about slowing sales growth at the retailer -- same-store sales at Home Depot were down 10 percent in the fourth quarter of 2002 from the same period in 2001. Many analysts believe the home-improvement market is saturated, with little room left for retailers like Home Depot to grow. Meanwhile, energetic competitors such as Wilkesboro, N.C.-based Lowes Cos. Inc. are aggressively targeting Home Depot's customer base.

The strategy Home Depot has adopted to respond to these challenges includes focusing on customer service and niche markets -- having associates offer more training to so-called "do-it-yourself" customers who want to learn how to install Sheetrock and countertops, offering more services for "do-it-for-me" shoppers who'd rather someone else do the hammering and framing, and providing specialized venues and services for building contractors, home decorators and the like. Ultimately, the company plans to distinguish itself from other low-cost competitors by the friendliness and knowledge of its associates -- all 300,000 of them. A tall order, especially for a firm that has grown so big and so quickly.

Donovan, who was one of CEO Bob Nardelli's first executive hires when he took the reins of Home Depot in December 2000, has put HR at the center of the company's transformation. His accomplishments have ranged from putting an HR manager into every single Home Depot store to overseeing an effort that dramatically reshaped the company's enormous purchasing operations within an eight-hour time period. It is for these and other reasons that he's been named Human Resource Executive's 2003 HR Executive of the Year.

From Chaos to Order

Nardelli and Donovan have a shared background: Both spent a considerable number of years together at General Electric's GE Power Systems subsidiary in Schenectady, N.Y. -- Nardelli as the unit's president and CEO and Donovan as vice president of HR. When Nardelli arrived at Home Depot in December 2000, he knew exactly who he wanted to run the company's HR department.

"I needed the best HR officer in the country, and that's Dennis," he says. "A lot of people have theories, but Dennis can actually turn his theories into reality."

Nardelli wanted to bring order to chaos: Home Depot had grown rapidly, yet the corporate infrastructure had not kept up with that growth. Everything from purchasing to management selection was highly decentralized, with many divisions operating almost totally autonomously. It was almost as if each store was its own separate business, he says.

"We needed to go from 1,500 businesses to 1,500 stores and one business," says Nardelli.

The HR function was no exception to that antiquated model, with relatively little set up in the way of centralized structures or processes to cope with the company's skyrocketing head count. This decentralization had led to many duplicative processes: For example, the company had 157 different performance-appraisal processes, says Nardelli.

"Before Dennis arrived, working here was kind of like riding a wild stallion," says Don Singletary, the company's vice president for compliance training and a 13-year veteran of Home Depot. "Back then, we'd be happy if we managed to complete 75 percent of what we'd set out to do. Things were so hectic, we were starting new projects before we could finish the previous ones."

The company did not place an emphasis on managerial development. As new stores opened, managers were pulled from existing stores to oversee the new ones without having a chance to hone their skills at their previous jobs. The company made little attempt to hire outside managers, preferring instead to promote from within.

Under Nardelli's and Donovan's leadership, all of this has changed.

"I think it's obvious that effective leadership will be the common denominator to the overall performance of this company," says Donovan. The task facing Donovan and his team was to put in place programs to find, retain and develop the necessary talent.

A Simple Equation

Donovan had lots of ideas. But before he could put them into action, he wanted to ensure that HR had the "traction" within the company to win support for its plans from the rest of the organization.

"There are lots of brilliant plans and theories that end up sitting on a shelf in three-ring binders, collecting dust," says Donovan. Effective execution is the difference between plans that become reality and those that go nowhere, he says. Donovan has even devised an equation that summarizes his thinking on this matter, one he repeats like a mantra to his staff: VA = Q x A x E, or the value added of any HR initiative is the result of the quality of the effort, the acceptance of stakeholders and its execution.

However, quality, acceptance and execution won't occur unless there is a world-class HR department behind them, says Donovan. So within the first few weeks of joining the company, he ordered a thorough assessment of all the department's capabilities, from staffing to benefits to training, and all of its processes.

"Basically, I wanted to ensure that all of our human resource initiatives are world-class in design, process-focused, metrics-based, systems-capable and simple," he says.

Within a few months, Donovan and his HR team devised more than 300 initiatives that the HR department promised to deliver within the following three years. Approximately 70 percent of them have already been achieved, including an annual HR Review process, in which the entire HR organization, from the store level on up, analyzes its progress over the past year and learns about new initiatives and programs for the upcoming year; replacing the 157 different performance-evaluation processes with one process for the entire organization; creating four "learning institutes" focusing on leadership, Six Sigma, customer service and enterprise learning; deploying a Web-based e-learning platform to deliver basic product knowledge and selling skills to employees in every store; and implementing a profit-sharing plan for non-bonus eligible employees.

One of Donovan's biggest accomplishments was expanding HR down to the store level. When he arrived, store managers in most locations had to oversee HR processes, including hiring, firing and training -- no easy task, considering many Home Depot stores have more than 400 employees. Donovan felt each store needed its own professional HR manager.

"Ninety-five percent of our employees are in the stores," he says. "So that's where we need top HR talent to be."

Within three months, the HR department processed more than 37,000 applications for the positions, conducted 97 full-day career forums, interviewed 3,000 candidates and ultimately selected 1,500 new HR managers, 800 of whom came from outside the company. The project ushered in a new "mass hiring" model that Home Depot would use for other companywide positions.

The company's business leaders praise the initiative.

"Introducing HR managers into the stores was a smart, gutsy move that's been extraordinarily key," says Annette Verschuren, who, as president of Home Depot's Canadian division, oversees 19,000 people and 89 stores. "The HR managers work with the store team on developing talent, conflict resolution, union avoidance and government compliance -- things that require professional attention."

Tom Taylor, who as president of Home Depot's Eastern division oversees 600 stores and 148,000 employees, says the HR managers make the store managers' jobs easier.

"Managers used to have to wear multiple hats, but now they're free to run the business," he says. "[Putting HR professionals in the stores] has helped us hire more efficiently and find better people."

Key to the process, says Donovan, was getting the buy-in of all the company's leaders at the outset, something that's integral to the "acceptance" part of his aforementioned equation.

"In the past, the HR department came up with good plans that were rarely executed because it didn't really take the time to get the rest of the organization on board," he says. "To get the business leaders' acceptance, we needed to get their involvement right from the design stage."

This has meant that with every major initiative Donovan and his team undertakes, he first consults with the company's division presidents and regional managers, right down to store-level managers. For example, Donovan made a point of getting together with the company's business leaders right after HR had completed its initial assessment to find out what they thought HR should focus on.

"This is part of the 'acceptance' factor," he says. "We sat down with the division presidents and each division's vice president of HR, and asked them things like, Did they see the world the way we saw it in terms of what we thought HR's priorities should be? How good was HR at the company -- where were we weak, where were we strong? What should our priorities be?

"They told us that no one from HR had ever involved them like that before," he adds.

Verschuren concurs: "Dennis drives change by building relationships with people like me," she says. "He's really identified the needs of the company."

Says Taylor: "HR under Dennis is very responsive and in tune with the business. The folks in HR today are as much operations people as they are HR people."

One of the things the division presidents told Donovan was that they were somewhat skeptical of the HR department's ability to actually deliver what it promised. To help lessen that skepticism, Donovan requires the HR staff to submit detailed plans for each project they're responsible for and to meticulously document their progress each month.

"Everyone on the HR team project-reviews every single process area, and they do it religiously," says Donovan. "That's how we focus on the 'execution' part."

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As a result, says Singletary, "we have a newfound respect for process since Dennis arrived. We're a much more organized and professional HR department than before."

'Super Saturday'

Another key part of Donovan's accomplishments at Home Depot has been a renewed focus on leadership development.

Donovan's efforts in this area have included a number of initiatives, including one designed to locate and train managerial candidates from outside the company.

"[Before Dennis arrived], there was a disproportionate amount of inside promotions at the company -- we needed new ideas and new perspectives," says Verschuren.

Under the company's new "store leadership program," specially selected candidates undergo a rigorous two-year training program to eventually run a Home Depot store. The company hired approximately 700 such candidates, 400 of whom are former junior military officers and graduates of the armed-services academies.

"These are people not necessarily experienced in retail, but whom we think possess the necessary leadership potential, relevant business knowledge and functional competencies to make good store managers someday," says Donovan.

The candidates were selected by current store managers and division presidents during a series of mass-hiring career forums. These and other initiatives are part of the company's effort to build a "longer talent pipeline" of managerial competencies so the company can stop shuffling store managers from store to store as new ones are opened, says Donovan.

"A longer talent pipeline means we can keep our current store managers in their positions longer, monitor their track records and develop them so that when they're eventually promoted, they'll succeed in their new positions," he says.

Other initiatives include an accelerated leadership program for high-potential managers from across the company who spend two weeks immersed in a learning program designed around strategic thinking, operating excellence and leadership, and an executive leadership program for newly promoted vice presidents from all areas of the company. For that program, Nardelli and other company leaders "team teach" courses in partnership with faculty from Emory University's Goizueta Business School. Donovan has also implemented week-long, on-site "immersion" programs for existing store managers and division leaders, in which they participate in business simulations where the goal is to "beat" Home Depot, thereby honing their strategic skills. Both initiatives are run through the HR department.

"If I had a buck to spend, I'd spend 99 cents on picking and developing great leaders and a penny on everything else," says Donovan. "Even though I consider myself a systems thinker, I also know if I've got a great leader, everything else tends to work."

While Donovan clearly has plenty of workforce-related challenges to worry about, his role goes beyond HR. He also led the company's transition from a decentralized purchasing model, in which purchasing and selling decisions were made by nine regional offices, to a "hybrid" model in which a central office oversees purchasing while store and division-level managers decide what to sell based on the local market. The new model is designed to cut costs by eliminating redundancies, help the company obtain better terms and conditions from suppliers, and react more quickly to changes in consumer preferences.

Since it was implemented, the hybrid model has helped improve the company's gross margins by 1 percent -- an achievement Fortune magazine described as "a huge accomplishment in the world of retailing."

On Donovan's first day at the company, Nardelli assigned him to lead the transition to the hybrid model. "In typical Bob fashion, he told me I had 90 days to make it happen," Donovan says with a wry grin. "I said 'OK.' "

A key part of the process was creating the new organizational structure and filling the 29 new senior-level positions it would require.

Donovan formed a team of leaders from across the organization and hired consultants McKinsey & Co. to help them design the hybrid model and map out the new processes and staff positions it entailed. During one eight-hour period, since referred to as "Super Saturday," Donovan, his team and all of the company's business leaders gathered in Atlanta to review the new process, define the new roles, agree on a communications plan for the rest of the company and the media (Donovan also oversees the company's communications department), and choose a slate of candidates for the new positions. By day's end, offers had been made and were accepted by the candidates, and the new model was announced to the rest of the company the following Monday.

"We accomplished in eight hours what would take most companies months, if not years, to do," says Donovan.

Having such a close involvement in the company's business isn't new to Donovan. During his time at GE, he oversaw a consulting business within GE Power Systems in addition to his HR duties, traveling to clients around the world to teach them about Six Sigma, leadership development and several other processes that GE helped to make world-famous.

"This was an initiative I came up with called HR Solutions," says Donovan. "Our clients were always asking us how we made things happen, so I said, 'Why can't we leverage HR for the business?' We packaged the service as part of our long-term customer contracts, and our salespeople loved it because it gave them point of entry into the market."

Donovan credits GE for letting him be so closely involved with the business.

"At GE, we in HR never talked about becoming a business partner because you were considered to be one as soon as you walked through the door," he says.

It's clear that Donovan's current boss feels the same way about him.

?Dennis is a partner and a confidant," says Nardelli. "He's brought credibility and respect to a function that was in total disarray. His personal energy, his ability to energize others and the professionalism by which he packages and gets acceptance of his ideas has been a credit to us in making this transformation."


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