Transforming HR: Line Delivery's The Way To Go*
By By Thomas R. Connolly, Walter Mardis and James W. Down who can be contacted at www.mercerhr.com
Leading companies are linking HR and strategy but many companies following suit are realizing the path is not without its bumps. No matter how hard it tries, HR is having difficulty shedding its image as a paper-pushing department. After a decade of proponents touting the direction HR needs to take, only a handful of companies have succeeded at making HR a strategic business partner. But it can be done.
It was nearly a decade ago that several management visionaries began promoting a new direction for the human resources function. They argued that, as business made the transition from an industrial to an information age, the knowledge, know-how and experience of employees would become the core assets of companies. The real foundation of competitive success would no longer be proprietary processes or even distinctive products, but rather outstanding people. As the nurturer and caretaker of the work force, the HR department would in turn need to undergo fundamental changes, moving beyond its traditional responsibilities of personnel administration and employee advocacy to play a central role in helping companies fulfill their highest-level business goals. If HR did not become more tightly linked with strategic and economic objectives, the reasoning went, its ability to make an adequate contribution to the bottom line would be undermined.
The logic was, and is still, compelling. Unfortunately, the path from idea to reality has not been an easy one. Many management teams have had trouble figuring out what it will actually take to transform HR into a strategic function. As a result, a lot of lip service has been paid to "making HR a strategic business partner," but the only real changes that have occurred in most HR departments are have resulted from downsizing and other cost-control efforts rather than from a realignment of responsibilities. In most companies, HR remains focused on administrative and clerical tasks.
Is the new vision of HR doomed to go unfulfilled? With that question in mind, we recently undertook a benchmarking study of 17 companies that are widely recognized as leaders, both for their success in the marketplace and for their success in HR management. The results of the research are encouraging. Many of these companies are making concrete progress in forging an HR-strategy link, often at the same time that they are dramatically cutting the overall cost of HR management. Moreover, the most successful efforts shared a number of common themes and characteristics that can provide guidance for other companies looking to transform their human resources function.
The new status of HR is definitively reflected by senior HR managers when they describe their function. Margaret Savage, director of strategy services at British Telecom, describes the role of HR at her company in clearly strategic terms: "The only long-term competitive advantage which companies possess is the ingenuity, skills and capabilities of the people they employ. At British Telecom, the HR department is charged with fostering that resource."
Ron Parker, vice president of human resources at PepsiCo’s corporate office, echoes her belief that HR is an essential function as furthering corporate strategy: "PepsiCo is a hard-driving, performance-oriented company. HR is charged with putting programs in place to support this entrepreneurial culture." Parker explains that each year PepsiCo’s HR department examines the strategic plans of all the company’s operating divisions, looking at the HR implications of all the key elements, from category management to delivery efficiency. "On this basis, we are able to incorporate very focused performance measures into executive performance and incentive plans," he says. "We want executives to see the linkage between individual and organisational performance."
Despite the continuing trend toward smaller HR staffs, particularly at corporate headquarters, the HR function in the sample has actually increased its influence in the executive suite. Most of the companies report that senior management is committed to having a strong HR function support all elements of the business, that top HR executives have regular CEO and boardroom access and have been made full members of the companies’ top management committee, and that senior line executives view HR as an equal partner with other staff specialties. These companies are using downsizing and reengineering not just to reduce the number of staff members devoted to traditional administrative tasks, but to allow HR professionals to shift their focus to higher-value activities such as change management, organisational development, communications and information management, and succession planning.
2. An Emerging Organisational Model
The increasingly strategic role of HR does not mean that there is uniformity in the way progressive companies have designed their HR functions. Companies are tailoring their functions and organisations to meet the unique characteristics of their business and to reflect the philosophy of the CEO and other top executives. Firms that want to promote a strong sense of entrepreneurship among their business units often, for example, have a small corporate HR staff that focuses on a very limited number of activities. They grant line management broad authority to tailor HR practices to individual business unit needs. In contrast, companies with strong, homogeneous corporate cultures often have a much larger corporate HR operation with broad oversight over firmwide practices.
Underlying these approaches, however, are three common threads that together form the outline of a new organisational model for HR: corporate headquarters sets the direction for HR strategy firmwide, administrative functions are concentrated in highly efficient central service units, and line managers are responsible for delivering day-to-day HR services to employees at the business-unit level. We have named these three characteristics, respectively, Strategic Recentralisation, Scale-Driven Economics and Line Delivery.
# Strategic Recentralisation.
Most of the companies studied provide greater corporate oversight of a cluster of critical HR activities that mesh with corporate strategy. The goal is to ensure greater strategic control from the center and greater consistency and uniformity of approaches among business units. At many companies this has meant actually pulling back selected strategic responsibilities that had previously been delegated to the units.
The fast-growing software supplier Oracle, for example, has long avoided creating a strong HR presence in its corporate headquarters. Rapid workforce expansion, however, is now forcing the company to formalize many HR functions that in the past were left largely to chance, including executive compensation and development, equal opportunity programs, employee research, recruiting and HR strategic planning. Greater centralized control is seen as essential to protecting the firm’s technologies and financials, yet the company has been careful to position the central HR organisation as a catalyst, the hub of a "cooperative server" environment.
Many of the best companies have become very sophisticated in providing corporate direction for HR without usurping line authority. At General Electric, a pioneer of decentralized management, senior HR managers at headquarters coordinate with their counterparts in line organisations by attending forums for communicating strategy and vision and sharing best practices. To ensure that managers throughout the company fully understand key corporate values, GE also conducts extensive, centralized training and development programs. The company finds that this approach leads to a greater worldwide focus on those organisational competencies that GE perceives as critical to success.
At the highly decentralized global engineering firm Asea, Brown, Boveri (ABB), a very small headquarters staff focuses on critical priorities that cannot be carried out at the business units. Percy Barnevik, ABB’s chairman, has stated that the company is a "federation of national companies with a global coordination center." Consistent with this philosophy, corporate HR focuses on two related priorities: First, it plays an active role in managing the development and compensation of 1,500 top executives who are expected to serve as a worldwide resource for the business units. Second, it works hard to expose promising people to a range of international experiences and promote cross-unit sharing of personnel. These strategic initiatives have been recentralized to provide greater focus in those areas in which the global coordination center can add clear value.
# Scale-Driven Economics.
Cost reduction remains a priority for HR, and most companies appear to have concluded that the benefits of consolidating routine HR administrative tasks are too attractive to pass up. In an interesting development, however, several companies are not consolidating the tasks at headquarters. Instead, they are handing them off to a semi-autonomous service center or to a business unit with special competence in a given function, which then fulfills the function for the whole company. In addition, many of the companies are giving the "customers" of these central services--i.e., the business units--significant influence over the support services provided, the costs and the performance standards.
At IBM, this has led to the creation of a single, centralized services group designed to cost effectively fulfill most HR administrative needs for all U.S. operations. The group designs HR programs for all U.S. units and also provides direct support to managers and employees via a call center. HR information is just an 800-phone number away.
At chipmaker Intel, the transactional aspects of HR--benefits changes, address changes, etc.--are being removed from the various business units and consolidated into an Employee Information Services Unit. While the consolidation will reduce HR expenses, cost reduction was not the primary motivation for the change. The consolidation was undertaken to shift time-consuming administrative tasks away from the firm’s HR specialists at the business-unit level. This will free them to devote more time and attention to organisational and strategic issues. Microsoft is another fast-growing company that is centralizing administrative functions in an effort to streamline customer service.
As part of its goal to move away from being structured as a holding company, where HR decisions were largely left to business units, American Express has recently begun consolidating all training, development and administrative service functions. Its goal: to become an operating company, where there is a strong need for the firmwide alignment and efficient delivery of HR processes. "In a holding company, the "silos" could operate more independently. As we restructured, we moved to a single set of consistent, uniform values and supportive messages for our employees," says Glenn Kaufman, vice president of organisation development.
The functions are not all being co-located or managed as part of a single centralized unit, however. Benefits and compensation administration will be handled by a central site in Salt Lake City with 800-phone number access for employees. Employee relations advice, previously provided to line management within the business units, is being centralized in a single unit in Greensboro, N.C. Several other functions are being assigned to an American Express operating unit. Still other activities are being outsourced. All Amex businesses will have a relationship manager to ensure that their unit’s needs are met by all the HR service suppliers, internal and external.
Amex’s model, according to Kaufman, allows HR to meet management’s directive to "Do what you’re doing for us at the least possible cost, and whatever you do, provide value." Kaufman is obviously pleased with the way the HR organisation has worked as a team, even in the sensitive task of shrinking its overall size. "[The change has] allowed us to reduce the number of HR professionals in business units, and yet helps us deliver the consistent application of Amex’s human resources values." he says.
A final example that Kaufman uses is his own team of organisational effectiveness practitioners. Previously they operated out of the holding company silos, without much interaction or sharing of knowledge. "Now," Kaufman says, "we are one team, sharing best practices and learning from each other."
# Line Delivery.
While administrative, "backoffice" tasks are being consolidated, many leading companies are pushing responsibility for the actual day-to-day delivery of HR services to the field. There are two main aspects of this shift: the deployment of capabilities to divisional and business unit specialists and the assignment of HR delivery responsibilities to line managers instead of HR staff. When provided with effective linkages to the central service units, business unit managers can satisfy employee needs more efficiently than can more distant HR practitioners. In many cases, interactive information systems are being developed to allow employees to directly fulfill many of their own HR-related needs.
Pete Peterson, vice president of human resources at Hewlett-Packard, says his company is revitalizing its long-standing principle that line managers are responsible and accountable for people. "As we increased the number of personnel liaisons, we found they increasingly dealt with day-to-day people issues." he said. "Today we have fewer liaisons, and they are refocusing on unit-wide organisation priorities. People management is clearly the responsibility of line managers."
Samsung Electronic Corp. has centralized selected strategic responsibilities, such as recruiting, compensation standards and "culture management." but as T.H. Lee, manager of international human resources, reports: "HR delivery is seen as a continuing responsibility of line managers." GE also stresses that line managers are accountable for leading and developing their people, and the company has continuously downsized the HR function as it has pushed HR delivery responsibilities to the line.
The shifting of responsibility to line management has meant that, in many companies, the HR function in the units is shrinking as fast as if not faster than at headquarters. Top management has concluded that as long as there is a clear overall HR strategy and an efficient and easily accessible centralized services capability, local line executives can act as real managers of people. As Peterson at Hewlett-Packard notes, "In the past, line management would say they "got whatever they needed from personnel." Today they say "Personnel helps me to do more for myself." In the future, they’ll be saying, "I’ve got what I need. I only use personnel for the problems I can’t solve."
3. Tailoring the Model to the Company
The way leading-edge companies organize themselves to deliver their core human resources processes varies considerably depending on management style and culture. Companies tend to fall into one of three categories, Advisors, Influencers and Directors.
Advisors typically delegate most operational and strategic decisions to operating units, while retaining policy control over a small number of HR functions. They tend to believe that economies of scale in staff functions are less important than giving business units control over HR activities. In these companies, HR’s roles will typically include identifying and developing future leaders, facilitating the exchange of best practice HR information, and developing HR policy in support of corporate goals. Phil Wilson, senior vice president of human resources at Oracle, uses an analogy based on the theory behind Oracle's own products: "We want HR to be the hub in a cooperative-server environment." Corporate HR sets the strategy and supports a network of HR functions among the global business units.
Influencers retain both strategic and operational authority over a number of centralized functions. These companies walk a tightrope between the need for companywide consistency in policy and practice and the desirability of business unit autonomy. A typical Influencer HR department will share responsibility for both strategic and administrative work between central and unit management. Intel is an example of a company operating in this middle range. HR’s corporate-wide role at Intel includes a variety of broad, strategic mandates, including ‘keeping the culture.’ ensuring alignment with the Intel vision, reducing legal vulnerability through fair application of guidelines and developing leaders. Similarly, a select group of HR functions are managed on a common basis across the company, including, for example, benefits planning, human resources information systems, recruiting and employee assistance programs. Other functions, such as exempt compensation and performance appraisals, are delegated to or shared with business units.
Directors tend toward tight strategic and operational control. They usually centralize HR to gain economies of scale, minimize risk and promote consistency. A typical Director HR organisation will have broad responsibility, supporting the company with a full array of strategic and operational people policies and control parameters. At British Telecom, the structure of the HR organisation has three elements: policy, delivery and consultancy. A small policy group, at headquarters, designs the practices and programs common throughout the company. Delivery of the programs is the responsibility of a centralized services unit. A separate consultancy unit has staff assigned to each of the firm’s five business units and provides support for unit needs while also helping maintain firmwide coordination. BT’s Margaret Savage says, "Centralized human resources can work with and for the line. In partnership with the line, we optimize the flexibility, enthusiasm and competitive advantage of our people."
A company’s categorisation as an Advisor, Influencer or Director should strongly influence the organisation and responsibilities of its HR function organisation.
4. The Big Picture
In all three types of companies, HR is shifting from a ‘micro’ to a ‘macro’ view of its managerial mission. The old personnel focus on individual case management has been replaced by a new concentration on organisation-wide issues such as change management, leadership development and culture building. Routine employee issues are now typically the responsibility of line managers or the individual workers themselves, and benefits transactions and other administrative tasks are performed by a centralized service unit or outsourced entirely.
Aetna Life & Casualty provides a case study in HR transformation. Two years ago, the role of HR at Aetna was to undertake many of the tasks that line managers wanted to duck—transactions, rules, regulations and HR policies. Today, some transactional areas have been made the responsibility of line managers (for instance, resume tracking and job posting); employees themselves have the capability to complete many transactions, such as address changes, directly at the job site; and centralized service staffs perform benefits and compensation administration. At the same time, the company is streamlining many HR procedures. For instance, the number of job titles tracked by the compensation department has been cut from 40 individual titles to just three families of jobs.
The HR transformation has enabled Aetna to significantly cut the overall cost of HR management and reduce the size of the HR staff. Interventions by HR professionals are now limited mostly to more complex and difficult situations managers face; they are rarely involved in providing advice on routine how-to issues. "The goal is to transform HR from a transaction-oriented department to one where HR is working in partnership with managers to solve problems by giving more accountability to the managers and providing them with the appropriate tools and processes to perform this responsibility," says Don Benson, head of human resources services at Aetna.
Gary Grom, senior vice president of human resources at Sara Lee, sums up the change occurring in HR with this observation: "You can’t control the universe; limit what you try to manage. You’ll do better and have greater influence on the business. At Sara Lee, we don’t tell them what to do; our job is to lead."
5. Preparing for Change
Obviously, dramatic changes are finally under way in Human Resources. The good news is that the influence of HR will increase as its energies become focused more on strategic contributions and less on administrative and clerical tasks. The bad news is that many HR executives are not confident that current HR professionals with traditional HR skills possess the capabilities to make the transition that these new approaches demand. A surprising number of the HR executives we interviewed express a high degree of concern about the abilities of their staffs to cope with the present and future pace of change.
To beef up the skills in HR, many companies are recruiting line managers into HR roles. Aetna, for example, is increasingly selecting business generalists for top HR positions--that is, men and women with good sales ability and a broad knowledge of current trends in the insurance industry. Merck is now looking to chemists, business strategists and epidemiologists to add their knowledge and background to the HR function. The cross-fertilisation of the HR function with talent from general management and other areas will be critical as the pace of change picks up.
In seeking to link HR with corporate strategy, companies are taking many different paths. But whatever the course chosen, the top-gun HR organisations are concentrating their intellectual and organisational fire power on a limited number of high-stakes targets. Their goal is to enrich the depth of knowledge in HR, to tighten the ties to corporate strategy, and to communicate their enhanced capability and insights to the top management echelon. Their approach, we believe, will spread throughout the corporate community in the coming years.
* Reprinted by permission of Mercer Inc. who can be contacted at www.mercer.com