322 • HUMAN RESOURCE MANAGEMENT, Fall 1997 bilities; (2) enhancing employee satisfaction; whole rather than individual HR practices. and (3) improving customer and shareholder The synergy and congruence among HR prac- satisfaction. Based on the framework, three tices have an important impact on business clusters of HR measures—internal opera- performance. Third, these studies are quite ro- tional measures, internal strategic measures, bust as they examine sample firms within an and external strategic measures—are suggest- industry [e.g., the auto industry (MacDuffie & ed to help the HR function demonstrate and Krafcik, 1992), the steel minimill industry drive its business contribution. Examples from (Arthur, 1994)] and across multiple industries Eastman Kodak, Sears, and Motorola are used (Pfeffer, 1994), both within a region (Huselid, to exemplify some innovative measures in 1995) and across the nation (Ostroff, 1995). each cluster. Finally, implications for the HR Building upon the premise that HR prac- function are discussed. tices make a difference in business results, our This article embodies three purposes: (1) next challenging task is to offer a conceptual to help HR professionals better articulate the framework that outlines specific ways in value of the HR function; (2) to specify the which HR practices can exert an impact upon paths through which HR can contribute to business performance. business performance; and (3) to stimulate HR professionals to develop innovative HR measures that can demonstrate the value How Can HR Practices Impact added of HR practices, on the one hand, and Business Performance? drive business performance on the other. While this article helps frame the HR mea- To develop meaningful HR measures, a frame- surement issue and helps propose a conceptu- work is needed to outline how HR can impact al framework, much more effort will clearly be business performance. Based on the experi- required to develop the exact HR measures ence of Eastman Kodak, this article proposes that address the unique needs of each com- an integrative framework that builds upon a pany. balanced scorecard framework (Kaplan & Norton, 1992, 1993) and a strategic HR framework (Ulrich & Lake, 1990). While the Does HR Make a Difference balanced scorecard framework defines what a in Business Results? business should focus on, the strategic HR framework offers specific tools and paths to To many HR functions, this is the fundamen- identify how a firm can leverage its HR prac- tal question. Without the conviction that HR tices in order to succeed. In this section, we does make a difference, HR professionals will will first briefly review the balanced scorecard not, and cannot, be motivated to develop HR framework, then the strategic HR framework, measures that drive business performance. and finally the integrative framework. Fortunately, in the last few years, several re- search studies have reported some important findings regarding the relationships between Balanced Scorecard HR and business performance (Arthur, 1994; Huselid, 1995; MacDuffie & Krafcik, 1992; The balanced scorecard framework defines Ostroff, 1995; Pfeffer, 1994; U.S. Depart- what it takes for a company to succeed. Popu- ment of Labor, 1993). Table I summarizes the larized by Robert Kaplan, a Harvard professor, key findings of these studies in the area of and his associate, David Norton (Kaplan & HR–business performance relationships. Norton, 1992, 1993), it has increasingly been Several consistent themes emerge from adopted by major companies such as Sears, these exemplary studies of the HR–business AT&T, Eastman Kodak, American Express, performance relationship. First, HR practices and Taco Bell. Simply put, two key premises definitely make a difference in business re- underlie the concept (Ulrich, 1997). First, for sults, especially the use of HR practices that businesses to succeed in the long run, the ex- build employee commitment. Second, all of pectations of three stakeholders—sharehold- these studies examine the HR system as a ers, customers, and employees—need to be
Adding Value through HR • 323 TABLE I Summary of Major Research Studies in HR–Organizational Performance Relationships.Research Studies Methodology Key FindingsMacDuffie & • Studied 70 automotive • Manufacturing facilities with “lean production systems”Krafcik (1992) assembly plants are much higher in both productivity and quality than representing 24 those with “mass production systems” (Productivity: companies and 17 22 hours vs. 30 hours in producing a car; Quality 0.5 countries worldwide. defects vs. 0.8 defects per 100 vehicles). • While the HR strategy of a mass production system is used to create a highly specialized and deskilled work- force that supports a large-scale production process, the HR strategy of a lean production system aims to create a skilled, motivated, and flexible workforce that can continuously solve problems. • The success of a “lean production system” critically depends on such “high-commitment” human resource policies as the decentralization of production respon- sibilities, broad job classification, multiskilling practices, profit/gain sharing, a reciprocal psychological commitment between firm and employees, employment security, and a reduction of status barrier.U.S. Department • Summarized all major Studies that demonstrate business impact by adoptingof Labor (1993) research studies the following high-performance work practices are regarding the HR-firm summarized: performance • Employee involvement in decision making. relationship. • Compensation (profit/gain sharing). • Training programs. • Constellation of high-performance work practices.Pfeffer (1994) • Identified the five top- • Contradictory to traditional strategy literature, these performing firms five companies are neither in the right industry (based (based on percentage on Porter’s industry structure analysis) nor are they of stock returns) market leaders in these industries (based on Boston between 1972 and Consulting Group’s learning curve). and 1992 and assessed • Instead, these companies share a set of high commit- their common ment work practices such as employment security, selectivity in recruiting, high wages, incentive pay, employee ownership, information sharing, participation and empowerment, teams and job redesign, cross- training, etc.Arthur (1994) • Conducted a survey • Empirically identified two distinct HR configurations: research from 30 U.S. control and commitment systems. steel minimills. • Control systems aim to reduce direct labor costs, or improve efficiency by enforcing employee compliance with specified rules and procedures and basing employee rewards on some measurable output criteria. • Commitment systems aim to shape desired employee behaviors and attitudes by forging psychological links between organizational and employee goals. • The mills with commitment systems had higher productivity, lower scrap rates, and lower employee turnover than those with control systems.Huselid (1995) • Utilized both survey • Based on his sample, Huselid found that if firms research and financial increase their high-performance work practices by one data of 968 firms. standard deviation (SD), their turnover would be reduced by 7.05%, productivity increased by 16%. continued
324 • HUMAN RESOURCE MANAGEMENT, Fall 1997 TABLE I Continued Research Studies Methodology Key Findings • In terms of financial impact, a one-SD increase in high- performance work practices leads to a $27,044 increase in sales, a $18,641 increase in market value, and a $3,814 increase in profit. Ostroff (1995) • Conducted a survey • Developed an overall HR Quality Index based on the research jointly sponsored aggregate ratings of all HR activities adopted by a firm. by Society of Human • Based on the HR Quality Index, firms are grouped Resource Management into four categories based on their percentile (i.e., and CCHIncorporated. bottom 25%, second 25%, third 25%, and top 25%). • Firms that score higher in the HR Quality Index con- sistently outperform firms with a lower index in four financial measures: market/book value ratio, productiv- ity (i.e., sales/employees), market value, and sales. satisfied. While a business may still succeed in in employee growth and development. If even the short run if it ignores the expectations of one of the components breaks down, the sys- one of the stakeholders, in the long run, its tem cannot work. business performance will suffer. Second, as The strength of the balanced scorecard depicted in Figure 1, all three stakeholders are framework is that it provides a simple concep- interrelated. Employee attitudes and behav- tual and diagnostic tool to ensure that compa- iors impact the level of customer satisfaction nies utilize the right processes and people to and retention. In turn, customer attitudes and drive customer and business performance. behaviors influence shareholder satisfaction Figure 1 also lists how Sears, Eastman Ko- and retention. Finally, shareholder satisfac- dak, AT&T, and American Express make use of tion affects employee satisfaction through the balanced scorecard principle but with dif- bonuses, stock options, or further investment ferent terms. In spite of different labels and FIGURE 1. Framework of a balanced scorecard.
Adding Value through HR • 325 TABLE II Sears Measures in Operationalizing Balanced Scorecard. I. Compelling Place to WorkAttitudes about the job 1. I like the kind of work I do. 2. My work gives me a sense of accomplishment. 3. I am proud to say I work at Sears. 4. How does the amount of work you are expected to do influence your overall attitude toward the job? 5. How do your physical working conditions influence your overall attitude toward your job? 6. How does the way you are treated by those who supervise you influence your overall attitude about the job?Attitudes about the company 7. I feel good about the future of the company. 8. Sears is making the changes necessary to compete effectively. 9. I understand our business strategy. 10. Do you see a connection between the work you do and the company’s strategic objectives? II. Compelling Place to Shop1. Customer service.2. Customer recommend products.3. Customer loyalty. III. Compelling Place to Invest1. Revenue growth.2. Profit contribution margin.3. Sales per square feet.4. Inventory turnover.measurement indices, the logic of the bal- more likely to visit Sears again and thus be re- The Sears exam- ple is distinctiveanced scorecard framework is quite similar in tained as steady clientele. Through repeated as it not onlyall these companies. shopping by loyal customers, Sears can then translates “soft” It is intriguing to note that the ultimate become a “Compelling Place to Invest,” as business issuespower of the balanced scorecard framework productivity and financial results both attract (people) intodoes not lie in its conceptual elegance, but in and retain shareholders. In order to make this “hard” (financial results), but alsoits empirical validity. The following sections model work, however, Sears understands that identifies peopleexamine how the balanced scorecard frame- all senior managers must be evaluated on the as the driver ofwork is being validated at Sears and Eastman basis of their performance on all three critical business growthKodak. success factors, not just on financial results. and success. Their bonuses should also be significantly tiedSears. As part of its transformation under the to the measures in these critical factors. Tablenew chief executive officer (CEO), Arthur II lists the measures used to track the perfor-Martinez, Sears believes that “Compelling mance of managers at Sears.Place to Work,” “Compelling Place to Shop,” To ensure that all senior managers “buyand “Compelling Place to Invest” are three into” this model, Sears has undertaken an ex-critical success factors that will in the long run tensive and comprehensive study to assesssustain the success of the company. The logic whether the model is in fact working as it pre-is simple: by creating a “Compelling Place to dicts. In the first and second quarters of 1995,Work,” associates’ behaviors will be changed a Sears task force collected hard data fromin ways which, in turn, create a “Compelling 800 stores. It collected 300,000 data pointsPlace to Shop.” As a result, customers are and utilized vigorous statistical tools to assess
326 • HUMAN RESOURCE MANAGEMENT, Fall 1997 the strength of relationship among the three 50% based on “Compelling Place to Invest.” critical success factors: “Compelling Place to By restructuring the bonus system, Sears’ se- Work,” “Compelling Place to Shop,” and nior managers are encouraged to focus not “Compelling Place to Invest.” The results, only on the financial outcomes, but also on though preliminary, are impressive. Sears re- the process and capability that contribute to ported that for every 5% improvement in asso- such outcomes. ciates’ behaviors, customer retention was in- creased by 1.3%, revenues by 1.04%, and profit Eastman Kodak. A similar transformation is by 0.4%. under way at Eastman Kodak since George What does this mean to Sears? It means Fisher became CEO. Eastman Kodak, tradi- that if Sears succeeds in improving associates’ tionally a technologically driven company behaviors by 5% (e.g., from 50% to 55%), its which capitalized on its brand name, focused revenue will be increased by $300 million on customer satisfaction through technical in- (Sears’s current revenue is approximately novation to drive shareholder satisfaction. The $230 billion)! It is also important to note that implicit assumptions were that employee sat- this enormous increase in revenue does not re- isfaction could be achieved when the compa- quire additional head count or payroll, but ny was financially successful and that em- simply an improvement in employee work en- ployee satisfaction was a byproduct, not a vironment. Moreover, line managers (not HR) driver, of business success. Results from 1990 are critical to the creation of such a positive to 1993 (please refer to Figure 2), however, re- work environment. vealed that customer satisfaction alone drove The Sears example is distinctive as it not neither market value nor employee satisfac- only translates “soft” business issues (people) tion. into “hard” (financial results), but also identi- While many factors may have contributed fies people as the driver of business growth to the declining performance of Eastman Ko- and success. Based on the above logic and dak from 1990 to 1993, George Fisher decid- findings, the bonuses of all senior managers at ed to restore employee satisfaction as the dri- Sears are now tied to a measure called Total ver for business success. As he strongly Performance Index, of which 25% of the Index expressed it: “We will never achieve total cus- is based on “Compelling Place to Work,” 25% tomer satisfaction without a much higher lev- based on “Compelling Place to Shop,” and el of employee satisfaction. . . . My funda- FIGURE 2. Traditional paradigm of employee satisfaction at Eastman Kodak.
Adding Value through HR • 327 FIGURE 3. The new paradigm of employee satisfaction at Eastman Kodak.mental responsibility is to make sure this is a The balanced scorecard provides a usefulstrong company and that the employees who business framework that highlights what is re-exist in this company have a great place to quired for a company to succeed by meetingwork.” As a result, he instituted a new para- the expectations of employees, customers, anddigm, using employee satisfaction to drive cus- shareholders. The next critical questions are:tomer satisfaction and then shareholder satis- Given the balanced scorecard framework, howfaction. Along with other ongoing initiatives, can the HR function add value to businessthe new paradigm appears to be working. success? What kinds of HR practices shouldWhile employee satisfaction has increased be designed to enhance business competitive-about 80% from 1993 to 1995, the market val- ness? In the next section, Eastman Kodak’s ex-ue has also increased approximately 90% in perience will be used to illustrate how HR canthe same period (please refer to Figure 3). contribute to business competitiveness. It is naive, however, to claim that the in-crease in Kodak’s market value is completelyattributable to the increase in employee satis- Strategic HR Frameworkfaction. Causal relationship is also hard to es-tablish without vigorous statistical analyses Like many companies that attempt to alignand control (as in the case of Sears). Never- HR practices with business strategy, Eastmantheless, the story of Eastman Kodak is power- Kodak’s strategic HR framework involvesful in two ways: (1) it illustrates how CEO three components (Ulrich & Lake, 1990).Fisher reconceptualizes the relationship They are presented below, along with the mostamong employees, customers, and sharehold- pertinent questions a company could ask in itsers to drive business success; and (2) it pro- efforts to formulate plans for each compo-vides some empirical support of how such a nent.paradigm shift can make a difference in busi-ness performance. Eastman Kodak offers an- 1. Business strategy: What is the businessother story based on the balanced scorecard strategy of our company? How do weprinciple of how companies use people to dri- win in the marketplace based on cus-ve their business performance. tomer buying criteria, competition,
328 • HUMAN RESOURCE MANAGEMENT, Fall 1997 FIGURE 4. Integrative model connecting strategic HR framework to key results areas. government regulations, supplier situ- Integrative Framework ation, etc.? 2. Organizational capabilities: In order to By integrating the strategic HR framework implement the business strategy, what with the business framework, the interrela- are the critical organizational capabili- tionships among the six components can be ties we need to develop? Companies of- identified in two linkage chains. In the first ten target two or three organizational chain, HR practice can be conceptualized as capabilities that are critical but with key drivers in building organizational capabil- which they have not totally succeeded. ities, enhancing employee satisfaction, and These capabilities might include com- more innovatively, shaping customer satisfac- petitive shared mindset, speed to mar- tion (Ulrich, 1989a; Ulrich & Lake, 1990). In ket, innovation, etc. turn, both organizational capabilities and em- ployee satisfaction can impact customer satis- 3. Human resource practices: How should faction. HR practices be designed and deliv- In the second chain, organizational capa- ered to build these organizational bilities become key drivers which implement capabilities? Are our leaders and em- business strategy, impact customer satisfac- ployees competent, motivated, and tion, and, eventually, contribute to sharehold- empowered to contribute to the fullest er satisfaction. In addition, both business extent in the development of these ca- strategy and customer satisfaction, if properly pabilities? managed, should increase shareholder satis- In summary, the strategic HR framework faction.The Kodak aims to leverage and/or align HR practices to The Kodak framework lays out threeframework lays build critical organizational capabilities that unique ways in which HR can contribute toout three unique enable Eastman Kodak to win in the market- business success: building organizational ca-ways in whichHR can con- place. pabilities, enhancing employee satisfaction,tribute to business How can HR practices truly contribute to and shaping customer satisfaction. While pre-success: building the critical business success factors as out- vious research and case studies have suggest-organizational lined in the balanced scorecard framework? ed the strategic relevance of HR in each ofcapabilities, What are the most viable and effective HR these three areas, very few researchers haveenhancingemployee satisfac- measures which can demonstrate the value systematically addressed all three contribu-tion, and shaping added of the HR function? To think through tions:customer the impact of HR practices on business, East-satisfaction. man Kodak has connected its strategic HR a. HR–organizational capability linkage: framework to the business framework (see The thesis that HR practices should be Figure 4). aligned to build organizational capabil-
Adding Value through HR • 329 ity was suggested by Schuler & Jackson more successful; and (2) stronger rela- (1987) and Ulrich & Lake (1990). The tionships with key customers are estab- argument for this linkage is simple: if lished. Another positive example of us- companies intend to compete based on ing HR to drive customer satisfaction is specific organizational capabilities (e.g., Southwest Airline. To ensure that its customer service for Nordstrom, inno- crew members are customer-focused, vativeness for 3M, quality for Motoro- the airline has been involving external la), they require a coherent set of HR customers in selecting the crew force. practices to influence the mindset and As a result, Southwest’s crew members behaviors of their leaders and work- tend to possess attributes that are de- force at all levels. sired by customers.b. HR–employee satisfaction linkage: The The integrative model in Figure 4 is impact of HR practices on employee unique in two ways. First, it tightly aligns the satisfaction has also been widely publi- HR planning process with the business plan- cized through a well-known example of ning process. For example, while the business New United Motor Manufacturing Inc. framework (i.e., the balanced scorecard) high- (Pfeffer, 1994). In 1982, the GM Fre- lights what Eastman Kodak needs to focus on mont facility was closed due to severe in order to succeed, the strategic HR frame- employee problems. When approached work provides specific tools and paths to iden- by Toyota for a joint venture, GM tify how Eastman Kodak can leverage its HR agreed to reopen the facility in 1984 practices and organizational capabilities to under a new entity called New United succeed. Thus, the integrative model provides Motor Manufacturing Inc. (NUMMI). a simple but comprehensive roadmap for a Without moving to a new facility, in- company to think through its strategic focus. vesting heavily in new technology, or Second, the model helps senior line and HR hiring a new group of employees (85% executives rethink the strategic roles within of NUMMI employees were rehired corporations which can be played by HR prac- from the GM Fremont facility with the tices. As human resources clearly have be- same UAW hierarchy), NUMMI was come an important source of sustainable com- able to substantially improve employee petitive advantage (Pfeffer, 1994; Huselid, satisfaction through radical changes in 1995), the model explicitly identifies the high human resource philosophy and prac- value-added contribution of HR practices tices. The effects of these HR philoso- within corporations. phy and practice changes were dramat- ic. Between 1982 and 1986, employee absenteeism was reduced from 20% to What Are the New HR Measures 2%; grievances decreased from 2000 that Drive Business Performance? per year to two per year; and strikes went from two–four times per year to If HR practices can impact business success zero times per year. As a result, produc- through building up organizational capabili- tivity was increased by 100%; cost was ties, improving employee satisfaction, and reduced by 30%; and both quality and shaping customer satisfaction, new HR mea- consumer satisfaction were enhanced sures should be developed to drive business substantially. performance. As succinctly argued by Kaplanc. HR–customer satisfaction linkage: Some & Norton (1992, p. 71): “What you measure pioneering companies are leveraging is what you get.” Unless HR measures are re- HR practices to drive customer satis- aligned to drive the activities and behaviors of faction (Ulrich, 1989a). For instance, HR professionals and line managers, HR prac- Baxter Healthcare has offered free con- tices can hardly be expected to demonstrate sulting and training sessions for any impact on the bottom line. its key customers. This has led to two Dramatic changes in HR measures are ur- outcomes: (1) key customers become gently required to refocus the priorities and re-
330 • HUMAN RESOURCE MANAGEMENT, Fall 1997 sources of the HR function. Instead of being 3. External strategic measures: How well HR-driven (what makes sense to HR profes- do our HR practices increase customer sionals), the next generation of HR measures and shareholder satisfaction? needs to be business-driven (how HR can im- Table III lists the possible combination pact business success). Instead of being activ- HR measures that can be developed to in- ity-oriented (what and how much we do), new crease efficiency, quality, and cycle time of HR HR measures should be impact-oriented (how practices; to build organizational capability; much we improve business results). Instead of and to enhance employee, customer, and looking backward (what has happened), inno- shareholder satisfaction. Examples in each vative HR measures should be forward look- cluster of HR measures are illustrated below. ing, allowing managers to assess and diagnose the processes and people capabilities that can predict the future success of corporations (Ka- Cluster 1: Internal Operational Measures plan & Norton, 1992). Finally, instead of fo- cusing on individual HR practices (the perfor- This cluster of HR measures encompasses tra- mance of staffing practices, training and ditional HR measures for which the HR func- development practices, etc.), future HR mea- tion and HR professionals are (and have been surement should focus on the entire HR sys- in the past) held accountable. It focuses on tem, taking into account the synergy existing the efficiency, quality, and speed of delivering among all HR practices. HR practices and managing the HR function Based on the integrative model in Figure as a whole. 4, Eastman Kodak has developed three clus- For HR practices, typical measures in- ters of HR measures: clude both process measures (such as cycle time, quality, and cost of HR processes/prac- 1. Internal operational measures: How tices) and result measures (such as offer/ac- well do we design and deliver our HR cept ratios; different levels of training evalua- practices? tion such as reaction, knowledge, on-the-job 2. Internal strategic measures: How effec- behaviors, and business impact) (Cascio, tively do our HR practices build desired 1987; Fitz-enz, 1984; Ulrich, 1989b). For the organizational capabilities? How effec- HR function, typical evaluative measures in- tively do our HR practices increase em- clude the HR ratio (number of HR profes- ployee satisfaction? sionals to employee population), the percent- TABLE III Developing New HR Measures that Drive Business Performance. Internal Operational Internal Strategic External Strategic Clusters of HR Process Outcome Organizational Employee Customer Shareholder Measures Measures Measures Capability Satisfaction Satisfaction Satisfaction Staffing Training/ Development Performance appraisal Rewards system Organization design Communications Others
Adding Value through HR • 331age of HR expenses to operating expenses, and tracking of aligned performance commit-the results of the client satisfaction surveys, ments, and employees’ surveys which includeetc. questions that focus on management account- In short, these internal operational mea- ability for performance, clarity of performancesures track the activity, cost, and quality level expectations, adequacy of performance feed-of HR services. When corporations conceptu- back, and reward of goal achievement.alize the HR function as a cost center, these To ensure that HR practices are meetingmeasures make perfect sense (Wintermantel employee needs and expectations, Motorola As the HR func- tion is trans-& Mattimore, 1997). As the HR function is has developed an index called Individual Dig- formed to betransformed to be more business oriented nity Entitlement (Ulrich, 1997). Based on the more business(Yeung, Brockbank & Ulrich, 1994; Winter- following six questions, the index directly af- oriented (Yeung,mantel & Mattimore, 1997), these traditional fects the annual performance review and Brockbank &HR measures will no longer be adequate and bonuses of Motorola managers: Ulrich, 1994; Wintermantel &accurate means to assess the performance of 1. Meaningful job that contributes to mo- Mattimore,new HR roles and activities. tivation: Do you have a substantive, 1997), these meaningful job that contributes to the traditional HR measures will no success of Motorola? longer beCluster 2: Internal Strategic Measures 2. Behavior and knowledge to be success- adequate and ful: Do you have the on-the-job behav- accurate meansThe internal strategic HR measures assess the iors and the knowledge base to be suc- to assess theeffectiveness of HR practices in building or- performance of cessful? new HR rolesganizational capabilities and enhancing em- 3. Training available to upgrade skills: Has and activities.ployee satisfaction. For instance, at Eastman training been identified and been madeKodak three critical organizational capabili- available to continuously upgrade yourties are identified, and specific HR measures skills?are developed to track the progress in these ca-pabilities. The targeted organizational capa- 4. Career plan: Do you have a career planbilities include: and is it exciting, achievable, and being acted on? • Leadership effectiveness (both compe- 5. Feedback: Have you received candid, tency and diversity). positive, or negative feedback within • Workforce competencies (in terms of the last 30 days which has been help- customer commitment and market fo- ful in improving your performance or cus, working across boundaries, finan- achieving your career plan? cial excellence, and operational excel- 6. Personal Sensitivity: Is there appropri- lence). ate sensitivity to your personal circum- • Performance-based culture. stances, gender, and cultural heritage so that such issues do not distract from While Eastman Kodak uses 360-degree your success?assessment to measure leadership competen-cy, it also tracks leadership diversity through By tracking these six questions, Motorolathe race, gender, and nationality composition can ensure that its HR practices are addingof its senior and middle managers. Workforce value through a more committed and compe-competencies are measured by three aspects tent workforce.of the development process: (1) the percent- Unlike internal operational measures, lineage of employees with documented develop- managers should be held accountable for thement plans to develop required competencies; internal strategic measures. As emphasized at(2) the number of hours devoted to develop- Hewlett-Packard, managers are responsiblement; and (3) the results of developmental for people management. While HR profes-programs as measured by four levels: reaction sionals may design and develop all kinds of HRand planned action, learning, on-the-job be- practices (such as performance appraisal, re-havior, and business results. Performance- ward systems, succession planning, promotionbased culture is regularly assessed through the process), the effectiveness of these practices
332 • HUMAN RESOURCE MANAGEMENT, Fall 1997 ultimately relies on implementation by line between HR practices and shareholder satis- managers; therefore, line managers, more faction. For example, Kodak traditionally had than HR professionals, should be held ac- a program called “wage dividend,” which was countable for building critical organizational essentially an annual bonus payment that, capabilities and enhancing employee satisfac- over time, became a pure entitlement for em- tion. ployees. Every year they could expect 7–8% of their base pay as a bonus at the end of the year; however, in the last few years, Kodak has Cluster 3: External Strategic Measures changed the plan so that the wage dividend payoff is strictly a function of shareholder sat- The external strategic measures assess the ef- isfaction as measured by return on net assets fectiveness of HR practices in satisfying cus- (RONA) within the corporation. This was sup- tomers and shareholders. The purpose is to ported by a communication process driven by use HR practices to drive customer and share- the HR community to help employees under- holder satisfaction. Eastman Kodak has ex- stand what RONA is and how it translates to perimented with several HR programs to their particular operation within the company. achieve this goal. In this way, they could understand what they The first, a program called Champions for could do to influence their wage dividend by Customer Success, is a customer-oriented the end of the year. The HR measure for this program that serves two goals: (1) to create a program is to determine the change in em- learning situation that directly connects man- ployee mindset from entitlement to contribu- ufacturing employees with customers (e.g., tion. The purpose is to use the bonus system print shops); and (2) to share best practices to drive shareholder value. and expertise with customers in areas in which Kodak has also used a strategic investment they need help, such as reducing paper waste, approach to plan and evaluate incentive com- deploying total quality management (TQM), pensation plans (Boudreau & Berman, 1991). establishing self-managed teams, etc. By en- Using return on investment as a key metric, gaging manufacturing people with customers they have applied tools such as sensitivity and by helping customers build their capabil- analysis and break-even analysis to foster an ity in those areas, the HR function intends to alignment between HR systems and strategic drive greater customer satisfaction and com- imperatives from a shareholder perspective. mitment to Kodak products. In addition, the Kodak has taken a similar approach to evalu- program serves to build employees’ under- ating the effectiveness of various wellness pro- standing of customers’ needs. The simple mea- gram initiatives. By collecting a variety of sures necessary for this program include: (1) health care experience data from both partic- incremental sales and earnings as a result of ipants and nonparticipants in these programs, establishing these customer relationships; and Kodak has been able to assess the financial re- (2) change in customer satisfaction and com- turn it is realizing from these wellness pro- mitment. grams. Another HR effort that drives customer While these examples highlight how East- satisfaction is that of leveraging the executive man Kodak is beginning to refocus its HR education process. By inviting senior execu- practices to drive business performance, cor- tives from major customers to attend and porations still need to invest time and re- share an executive education experience with sources in developing a set of external strate- Kodak executives, Eastman Kodak succeeds in gic HR measures that can systematically alignFirst, HR mat- achieving two goals: (1) creating a greater their HR practices with critical business re-ters. Second, aframework is a shared mindset with key customers; and (2) sults.prerequisite to enabling Eastman Kodak to meet customerthe development needs more effectively. The performance mea-of specific HR sure is the degree of change in customer sat- Implications for HRmeasures. isfaction and commitment as a result of the shared executive education experience. By reviewing some recent research studies re- Eastman Kodak also has changed a num- garding the HR–business performance rela- ber of processes to create a greater connection tionship, and by building upon the use of the
Adding Value through HR • 333balanced scorecard framework in some com- and shareholders are the three interre-panies such as Sears and Eastman Kodak, this lated stakeholders who deserve specialarticle has answered the three questions posed attention.at the outset: (1) HR does make a difference 2. Understand how HR can add value toin business results; (2) HR practices can con- the critical success factors. In what waystribute to business performance through a can HR create sustainable competitivemultidimensional approach—building organi- advantage for the corporation? Will itzational capabilities, improving employee sat- be certain organizational capabilitiesisfaction, and increasing customer and share- such as speed, customer service, andholder satisfaction and commitment; and (3) innovation? Will it be the accumula-new clusters of HR measures, in addition to tion of intellectual capital? Will it be athe traditional HR measures, should be devel- pool of committed and competent em-oped to capture and drive the impact of HR on ployees? Will it be a group of loyal andbusiness performance. After gaining a broad committed customers? This articleunderstanding of these issues, several impli- suggests organizational capability, em-cations for HR function and professionals can ployee satisfaction, and customer sat-be developed. isfaction as three possible avenues First, HR matters. With this conviction as through which HR can make an im-the springboard, the challenges which lie pact. Different corporations may at dif-ahead for HR professionals are to ensure that: ferent times have different priorities.(1) their HR practices are aligned through dif- The soul-searching question remains,ferent paths to add value to business perfor- however: What is the highest value-mance; and (2) their HR measures are prop- added contribution of HR in this cor-erly formulated to drive desirable activities poration? This question should be an-and behaviors of both HR professionals and swered in the strategic HR plan.line managers. Because “what you measure iswhat you get,” a new set of HR measures are 3. Design the appropriate HR measures torequired to refocus the resources and energies be aligned with the framework. Onceof the HR function. the HR function identifies its unique Second, a framework is a prerequisite to contribution to the corporation, appro-the development of specific HR measures. HR priate measures need to be developed.professionals need to understand how HR can This article suggests three clusters ofcontribute to business success before they can HR measures: internal operationaldecide on HR measures that add business val- measures, internal strategic measures, Third, the impactue. The design and development of HR mea- and external strategic measures. As de- of HR measuressures typically involves deep thinking, reflec- scribed in Table III, the HR measures on business suc-tion, and discussion in the following three should be developed in a way to rein- cess is moststeps: force and accomplish the intended powerful if a complete process contribution of HR. HR professionals, cycle is followed. 1. Determine what it takes for the corpo- moreover, need to resist the temptation ration to succeed. What are some im- of adopting HR measures in good part portant business trends that impact the because they are easy to collect or corporation? What will make or break track. By all means, internal opera- the corporation in the current and fu- tional HR measures are the easiest ture business environment? Who are measures to assess; however, it does the critical stakeholders? How can you, not mean they are the most important. as an HR professional, meet their ex- On the other hand, it is much harder to pectations and needs? What are the assess the contribution of HR in inter- scarce resource constraints for the cor- nal and external strategic measures, as poration to succeed? These questions a host of other factors are also influ- should be answered as part of the cor- encing such measures. As “what you porate strategic plan. Based on the bal- measure is what you get,” a weak mea- anced scorecard principle, this article sure on the right issue is better than a suggests that employees, customers, strong measure on the wrong issue.
334 • HUMAN RESOURCE MANAGEMENT, Fall 1997 Third, the impact of HR measures on 4. Both HR and line managers are ac- business success is most powerful if a countable for HR measures. Depending complete process cycle is followed. While on their areas of responsibility, both the development of appropriate HR mea- HR managers and line managers sures is a vital first step, the implementa- should be assessed based on the HR tion of the measurement process is equal- measures. While HR professionals ly important. The full potential of HR should be accountable for the internal measurement cannot be fully utilized un- operational HR measures (e.g., cost til the following steps are taken: and efficiency of delivering HR ser- vices), line managers (like those in 1. Accurate data on desirable HR measures Sears and Motorola) should also be ac- are collected on an ongoing and timely countable for their approaches to man- basis. It is important to ensure that crit- aging employees, to building organiza- ical data are captured at the right mo- tional capability, and to enhancing ment when HR programs or activities customer satisfaction. The results of are designed and delivered. HR measures should constitute part of 2. HR measures are analyzed and feedback their performance review and bonus is presented in a timely manner. One scheme. common fallacy for many companies is Without moving through such a complete cy- to collect quantities of data, analyze cle, HR measures cannot drive the desirable them, and file them on a shelf. To behaviors of line managers in utilizing em- drive behaviors and performance, all ployee contribution. As a result, the linkages HR measures need to be widely dis- between HR measures and business perfor- seminated to the right audience (both mance will be weakened. HR professional and line managers) for When faced with the challenges of feedback purposes. demonstrating its value added, the HR func- 3. The purpose of HR measures is to stim- tion has to carefully think through its value ulate change and improvement. HR proposition and its impact on business perfor- professionals and line managers need mance. By developing the right measures, HR to use the findings to create an open fo- can clearly demonstrate its strategic relevance rum to diagnose/solve problems and to within corporations, firmly establish its in- improve organizational capabilities. valuable status as a strategic business partner, The discussion and action planning and substantially contribute to business suc- which result from the HR measures are cess. much more valuable than the results of the measures themselves. Arthur K. Yeung is the Executive Director (Asia-Pacific) of the University of Michigan Business School and a faculty member at the Michigan Executive Education Center. His areas of specialization include HR process reengineering, strategic HR management, Asia- Pacific management practices, and organizational learning. He is an Associate Editor of Human Resource Management and has published more than 15 articles in leading HR jour- nals. Dr. Yeung is involved in leadership development programs for numerous corporations, including ABB, Philips, Carrier, Hewlett-Packard, ICI, and Allied Signal Inc. Robert Berman is Director, Human Resources, and Vice President of the Consumer Imaging business of Eastman Kodak Company. He joined Kodak in 1982, and has served in a wide variety of assignments within Kodak’s HR community. His current responsibili- ties include leadership in the delivery of integrated strategic and operational HR services to Kodak’s global, $7 billion consumer products business. He is leading the organizational and individual capability strategies underpinning the growth strategies of the Consumer Imaging business. Mr. Berman has a B.S. in Business from the University of Minnesota and a Master of Industrial and Labor Relations from the New York State School of Indus- trial and Labor Relations at Cornell University.
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