The End of Human Resources as We Know It

The challenges are great, and a new kind of HR executive is emerging to meet them. In the process, these strategic leaders are turning our traditional concept of human resources on its head. Here are five major forces that are driving the changes that will end HR as we know it by the year 2020.

Sunday, October 2, 2011
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The human resource department -- the corporate home of hiring, firing, compensation and employee benefits -- is undergoing a major transformation. Technology has automated basic functions, forcing HR to reshape its identity.

Boards are demanding higher-level HR executives to become strategic partners in dealing with new regulations and the problems facing companies battered by the global recession. And the financial crisis has forced companies to evaluate their management teams and revamp entire workforces for a post-recession economy.

The challenges are great, and a new kind of HR executive is emerging to meet them, in the process turning our traditional concept of human resources on its head. Five major forces are driving the changes that will end HR as we know it by the year 2020:

Technology Changing the Game

For decades, technology has been helping companies automate basic HR functions. Through employee self-service systems via intranets, employees can access the information and support to manage their own health benefits, 401(k) programs and day-to-day HR transactions. Companies have also been reducing costs and staffing requirements by turning to outsourcing providers to handle benefits administration, payroll, employee education, workforce analytics and recruitment-process outsourcing for junior-level positions.

According to the Society for Human Resource Management, nearly half (47 percent) of U.S. companies outsource at least some HR functions.

Many companies are also exploring the integration of certain HR functions into individual departments -- sales compensation and sales training moving into Sales, and executive compensation into Finance or Compliance functions.

Technology has also made possible the shared-services model for back-office functions: Every non-strategic HR function -- administrative support, research, document centers, benefits, billing and payroll, among others -- is taken out of the hands of outsourcing providers and centralized in one unit that handles these functions for all departments across the organization.

This centralization reduces costs and allows front-line people to focus on higher-impact work.

With all of this electronic, self-service, outsourced and integrated HR, one might think that the function is being marginalized or commoditized, but the reverse is true: HR is being freed to concentrate on critical functions -- raising the quality of talent hired throughout the organization, decreasing expensive turnover and improving leadership development and succession planning.

Talent, not transactions, will drive the success of HR in the future.

New Rules

The Sarbanes-Oxley Act of 2002 riled the business world by setting new standards for all U.S. public-company boards, management and public-accounting firms. Nine years later, the debate goes on about whether the law really improved governance or added excessive costs and hurt U.S. competitiveness overseas.

Either way, SarbOx sent public companies running to hire compliance experts and legal counsel to deal with the new requirements. HR became an important component of corporate strategies to respond to the new laws.

The financial crisis in 2008 spawned the next wave of regulations challenging HR to help implement changes across their organizations. Since 2010, the Wall Street Transparency and Accountability Act of 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act, and several other bills and Securities and Exchange Commission rules have inundated compliance and HR staffs with new guidelines.

In this climate, boards are looking for HR to up its game and become a strategic partner in meeting the human capital requirements, as dictated by the regulations for, among other things, independent board chairs and lead directors, formal leadership development, retention and succession-planning programs, transparency in executive-compensation reporting -- and, of course, accounting practices and risk management in financial-services firms.

HR executives who can't rise to the role of strategist will be left behind by the elite group of HR leaders so strong that they themselves could qualify as board directors. Some of them might even wind up as CEOs some day.

Multi-level Succession Planning

Succession planning is always stated as a board priority, but the National Association of Corporate Executives reports that 50 percent of boards do not have formal plans for CEO replacement. Cautionary tales abound when succession, hastily planned or decided on the sole basis of who is next in line, creates disruption, excessive turnover and shareholder unrest.

The result is a renewed focus on succession plans by public and private companies of all sizes. In fact, many boards want plans that will ensure the depth of talent within the entire leadership team. In some major corporations, succession planning is going several layers deep into their organizations.

One strategy to strengthen succession planning is to set up real-time testing grounds. A large financial-services company recently created a new venture company to explore acquisitions and other opportunities to reinvent their business. They brought in a former CEO to lead the effort, and in the process have a potential successor to their current CEO, based on results.

Apple Computer provided a testing ground for Tim Cook, who served as acting CEO during Steve Jobs' medical leaves. The illness of a CEO is not a desirable platform for grooming a successor, but Cook had a chance to demonstrate that he had the confidence not only of Jobs, but of the entire organization and shareholder community, before he officially assumed the role.

Succession planning is complex, takes time and has to be continuous to accommodate every imaginable contingency.

Today's directors, mandated by law and logic to shed the good-old-boy network to make boards more independent, are demanding that HR leaders lead a thorough, mature planning process that looks at the best talent inside and outside the company, respects corporate culture and aligns with long-term business goals and potential market shifts.

This comprehensive succession-planning process takes far more than the administrative skills associated with traditional HR executives.

The Three Percent Rule

While many organizational experts call for succession planning in large companies to include executives 10 layers deep, others suggest that every company regardless of size should concentrate on the top three percent of employees as the critical assets that drive the business -- assets that need to be constantly educated, evaluated, motivated and rewarded.

Companies are demanding from their HR leaders talent strategies that define the way companies will get to the top of their industries and stay there by virtue of their premier workforce.

The focus on the top three percent of employees has to be balanced with attention to the other 97 percent. One firm spent millions on its top three percent of "high potentials," cutting investment in the rest of its senior executives -- from 401(k) benefits to travel allowances -- to fund the increased focus on the top.  

The result was to de-motivate and alienate good talent below that elite level.

Great companies such as Google, BlackRock, KKR, Goldman, HP and many others identify, engage and retain their best talent without losing the trust of the rest of the organization.

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The commitment to talent development within corporations runs so deep that recently there have been instances of boards ordering the firing of HR executives because they had not developed a realistic strategy.

In one instance, at a company in turnaround mode, the chairman had asked for a list of the highest potential, top-performing employees. The head of HR produced a list approaching 50 percent of the company, so impractical a number that it cost the HR executive his job.

Based on the three percent guideline with some flex for individual situations, 150 to 200 people in a 5,500-person company would hypothetically qualify as critical assets; 2,750 employees (50 percent) is not a realistic number.

HR can't be well managed without thoughtful criteria for assessing talent. The best HR leaders today are doing the math.

A New Kind of HR Leader

The rise of the CHRO -- Chief HR Officers, participating in the highest levels of decision-making -- confirms the seriousness of boards of directors in elevating the role and capabilities of HR leadership. While historically CHROs were added to boards as a way to add diversity, companies in recent years have begun to add top-notch CHROs to broaden their perspective on organizational issues and expertise in talent matters. 

The trend has accelerated this year and will continue to do so.

The pressures in this new HR world are enormous. A few of the current crop of HR superstars -- Kevin Cox of American Express, Laszlo Bock of Google, Jeff Smith of BlackRock, Tracy Keoch of HP, Matt Schuyler of Hilton Hotels, Ashley Goldsmith of Polycom -- are carrying the weight of their organizations on their shoulders.

Leaders like these won't be caught short when asked for a realistic assessment of their organizations' critical assets.

The best HR leaders welcome the challenge and in the process are strengthening the role of HR. They understand that talent is the competitive edge and the core of any organization -- and that talent development is the most important responsibility of their job.

These world-class CHROs all have the capacity to challenge the thinking of the CEO and the board. They are strategic partners in the human capital decisions that keep their companies competitive. They live up to the expectations of an organizational expert who recently said that you know a company has the right HR person "when you're in a meeting with the CEO, CFO and CHRO -- and you can't tell the difference."

Some of these exceptional CHROs are already being evaluated as potential CEOs. One life-sciences company is grooming its general counsel to become CEO. This GC was willingly reassigned to a line position and distanced from the board, with the idea that the experience would test his readiness for a CEO role.

A technology firm took a young CHRO (head of global compensation, benefits and M&A) out of Human Resources and assigned him to a strategic business role with significant P&L responsibility. The experience, under the watchful eyes of management and the board, will give him a chance to demonstrate that he's ready for the corner office.

HR superstars, and there are many in development, are in the process of transforming their careers and the identity of human resources because they see the writing on the wall. The future for HR is talent -- recruitment, development and retention -- not compensation, benefits and administration.

Daniel Kaplan is a managing partner in the New York headquarters of CTPartners, a premier executive search firm. Dan leads the firm's Global Human Resources Practice and advises boards and CEOs on assessing and acquiring world class HR leaders. Prior to joining CTPartners, Dan was a senior partner at another major search firm. Previously, he shaped leading recruiting initiatives during his tenure as director of recruiting at Fannie Mae, and as recruiting executive with Sapient Corp. A graduate of Rutgers University, Dan is active in fundraising for several nonprofits including Alex's Lemonade Stand, the Lemon Society and the Manhattan Society. He is also a member of the National Multiple Sclerosis Society's Business Advisory Council. He can be reached at (212) 588 3536. 

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