The essay introduces the framework of the HR scorecard, which is modelled after the Balanced Scorecard developed by Kaplan and Norton. The first few sections describe the problems with traditional approaches to viewing HR’s role in business performance. It explains why HR should be looked at as a strategic asset. The HR architecture is then described in brief. It highlights the links between the HR scorecard and the Balanced Scorecard. The nature of HR deliverables including performance drivers and enablers is explained. The seven-step model explains the details of implementing an HR Scorecard. The basic benefits of the HR Scorecard are highlighted. Finally, to highlight the implementation details, a case study of the Verizon HR scorecard is presented.
Introduction The new economic paradigm is characterised by speed, innovation, quality and customer satisfaction. The essence of the competitive advantage has shifted from tangible assets to intangible ones. The focus is now on human capital and its effective alignment with the overall strategy of organisations. This is a new age for Human Resources. The entire system of measuring HR’s contribution to the organisation’s success as well as the architecture of the HR system needs to change to reflect the demands of succeeding in the new economy. The HR scorecard is a measurement as well as an evaluation system for redefining the role of HR as a strategic partner. It is based on the Balanced Scorecard framework developed by Kaplan and Norton and is set to revolutionise the way business perceives HR. Based on various studies, it can be concluded that firms with more effective HR management systems consistently outperform the competition. However, evidence that HR can contribute to a firm’s success doesn’t mean it is now effectively contributing to success in business. It is a challenge for managers to make HR a strategic asset. The HR scorecard is a lever that enables them to do so. Implementing effective measurement systems for intangible assets is a very difficult task and demands the existence of a unified framework to guide the HR managers. It is this difficulty that has been the prime reason why managers tend to avoid dealing with intangible assets as far as possible. In the process firms under-invest in their people and at times invest in the wrong ways. Another difficulty is, managers cannot foresee the consequences of their investments in intangible human assets in a well-defined measurable manner and they are not willing to take the risk. Thus, the most effective way to change this mindset is obvious – to build a framework just like the Balanced scorecard, which has sound measurement strategies and is
able to link HR functions, activity and investment with the overall business strategy. The HR scorecard framework was specifically designed for these purposes. Human Resources as a strategic partner – The present and the future The general scenario in most companies is as follows. HR management teams have well-developed visions of their departments, their roles and responsibilities. But, the senior management is generally sceptical of HR’s role in the firm’s success. They generally consider HR to just be another necessary appendage but not something that can contribute to the success of the company. Even if the senior management does believe that human capital is their most prized possession and asset, they cannot understand how the HR team can make this belief come alive. There is one reason for all of this. Human capital is an intangible asset and HR’s influence on firm performance is difficult to measure. The standard elements of a firm’s resource architecture that are measured include total compensation, employee turnover, cost per hire, percentage of employees that undergo performance appraisals and percentage employee satisfaction. The question to be asked is: Are these the measures crucial to implementing the firm’s strategy? This is clearly not the case. Interesting attributes would include a committed workforce, competency development programs, etc. But, it is very difficult to imagine measures for these quantities. Hence, in the current state of HR there is a clear rift between what is measured and what needs to be measured. As mentioned in the introduction, the role of HR is no more just administrative. It has a much broader, connected and strategic role to play. But, these statements must be substantiated. The reasons why HR must be considered as a strategic asset must be highlighted. A strategic asset is something difficult to trade or imitate. They are normally a set of scarce, special or even exotic resources and capabilities that bestow a firm its competitive advantage. An unlikely paradox is that the very intangibility of human capital that makes it so difficult to measure and evaluate, also proves to be the one quality that makes it a strategic asset. Consider the difference between being able to align employee efforts with the company’s strategic goals and instead having innovative policies of performance appraisals. The latter is a policy. It is visible to competitors and can be easily copied. The former on the other hand is a strategic move. It is not easy to imitate since it is a very circumstantial effort, which depends on the specific firm, its goals and its people. This proves to be a strategic asset i.e. something that competitors cannot see but that can be utilised to gain a competitive advantage. It is thus important to align the HR strategy to the overall business strategy signifying a top-down approach as opposed to a bottom-up approach where each division such as marketing, HR etc. performs its standard individual roles without a clear outlook towards the firm’s strategy. Many firms have realised this and have made efforts to measure HR’s influence on the firm’s performance. However, most of these approaches seem to focus on the individual, as it is believed that if one can achieve an improvement in individual employee performance, it would automatically enhance the performance of the organisation. The point that is missed is the fact that organisational units, be it individuals or teams, do not function in isolation. The stress is on streamlining and cooperatively working towards a common goal. The individualistic approach once again does not show directly, in measurable values, the competitive advantage that can be gained. Financial policies and numbers and plans on the other hand do. HR is neglected in the process.
The HR architecture as a strategic asset The focus of corporate strategy is to create sustained competitive advantage whereas that of HR strategy is to maximise the contribution of HR towards the same goal. Thinking about HR’s influence on the overall strategy of the company requires one to look at all aspects of the HR architecture. The HR architecture describes the relationship of the HR function, the HR system and the employee behaviour. The HR function: The foundation of a value-creating HR strategy is a management infrastructure that understands and can implement the firm’s strategy. The professionals in the HR function would be expected to lead this effort. This clearly implies that HR managers and professionals need to get a deeper understanding of the HR function. There are two basic functional categories in HR management. The first is technical. It includes delivery of HR basics such as recruiting, compensation and benefits. The second is strategic. It involves delivering the above mentioned services in a way that directly supports the implementation of the firm’s strategy. Most HR managers are proficient enough in the technical aspect but rarely do they even know about the strategic aspect. Thus, the competencies that the HR managers need to develop and the ones that have the largest impact on organisational performance are the business and strategic competencies. The HR system: In an effective high performance HR system, each element is designed to maximise the overall quality of human capital throughout the organisation. To build and maintain a set of talented human capital, the HR system should
• Link its selection and promotion decisions to validated competency models • Develop strategies that provide timely and effective support for the skills demanded by
the firm’s overall strategy implementation. • Enact compensation and performance management policies that attract, retain and
motivate high-performance employees. Basically, the firm needs to structure all the elements of its HR system in a way that supports a high-performance workforce. However, systemic thinking implies stress on the interrelationships of the HR system components and the link between HR and the larger strategy of the firm. The laws of system thinking imply the following:
• Problems of today are most likely due to past decisions. It is thus important to look at the causal nature of past solutions and current problems.
• One should think twice before taking the easy way out or deciding to go with standard solutions to any problem as this will most likely lead to a crop of new problems in the future.
• Cause and effect are not closely related in time. There is a lag between cause and effect and HR’s influence on firm performance is normally much less direct than that of other performance drivers. This can make it hard to measure as well as be misleading. It is thus important to look at the leading indicators and not just the lagging indicators. Typical financial performance measures are lagging indicators and in an attempt to solve financial problems, the first step is normally to cut costs. It is more important to actually pinpoint the cause of the problem and look to long-term benefits than short term ones.
• The best strategies are often unobvious. Small changes in how HR drivers are managed can slowly gather momentum and work their way through the strategy implementation process.
• It is important never to dissect the system and view each of its parts independently. One must look at the system as a whole and the connections between the individual parts is normally the vital place to look at for a solution to any of the problems.
Firms with high performance work systems tend to devote considerably more resources to recruiting and selection. There is a strong emphasis on training and performance management and compensation is tied to performance. Teamwork is encouraged, there is generally less unionisation and they have a large and effective HR team. It is important to note, that all these factors in tandem, not in isolation, lead to better performance, once again showing the systemic nature of HR’s role in performance enhancement. The effects of these measures are lower employee turnover, more retention, greater sales per employee and a greater market value for the firm. It is also important for the HR system to constantly check for alignment of all its parts i.e. how much they reinforce or conflict with each other. An example of misalignment is a policy that encourages teamwork but rewards individual contributions. In the service sector, the employee-customer relationship is very obvious and visible and so the impact of value creation is unmistakable. But, in many firms, the value is derived from the operational processes and quality of work that the employees generate. This is less obvious to competitors and it cannot be imitated. It is especially in these kinds of firms that the alignment of HR strategy and policy with the overall strategy of the firm matters the most. The alignment process begins with a clear understanding of what kind of value the organisation is supposed to generate and how it should be generated. In the Balanced Scorecard, this is referred to as the ‘strategy map’ that stresses the relationship between the ultimate goals and the key success factors at the four important levels of customers, internal operations, people and systems. Once the firm has a clear understanding of the value-creation process, it can then design an implementation model that specifies needed skills and competencies and employee behaviours throughout the firm. The HR management section can then be directed towards generating these necessary competencies and behaviours. The stress is not just on the creation of sound HR policies and strategies. How these are implemented is also very important. There has to be a strong alignment with the firm’s competitive strategy. A high performance HR system will also tend be unique. This is because it depends on the particular organisation, its goals, people and strategy. Hence, it proves to be a strategic asset. Employee Behaviours: As mentioned above the final results of the strategies are mapped to required employee behaviours. It is important that each employee be trained not just to do his or her job but also to have a substantially clear understanding of where he or she stands in the big picture of the overall strategy of the firm. Strategic behaviours are productive behaviours that directly serve to implement the firm’s strategy. There are two basic categories. Core behaviours are behaviours that are considered fundamental to the success of the firm, across all business units and levels. Situation-specific behaviours on the other hand, are more circumstantial behaviours. These are not required all the time but are absolutely necessary in certain scenarios.
Understanding how people and processes within a firm actually create value is the first step to identify the key behaviours. The second step is to develop methods to instil these behaviours and also have measurement techniques that evaluate these methods and key behaviours. The Balanced Scorecard and Balanced Performance Measurement The Balanced Scorecard emphasises the importance of measuring business performance from the perspective of strategic implementation, rather than relying solely on financial results. Senior managers tend to pay far too much attention to the financial dimensions of performance and not enough attention to the driving forces behind those results. Financial measures are lagging indicators i.e. backward looking. They are designed to rectify or change past results. Performance drivers on the other hand are within the control of the management in the present and the Balanced Scorecard methodology encourages management to look at these leading indicators as well. By specifying the important process measures, assessing them, and communicating the firm’s performance based on these criteria to the employees, the managers can ensure that the entire organisation participates actively in the strategy implementation process. It is a unifying tool in strategy implementation. To achieve strategy alignment, firms must engage in a two-step process. As mentioned before, first the managers must understand the details of how value is created in their firm. Once this is done, they can design a measurement system based on their understanding. The first step focuses the organisation on two dimensions of the strategy implementation process namely breadth and causal flow. Breadth refers to the fact that companies must study more than just financial results as outcomes of strategy implementation. It must also focus on other key performance drivers. Causal flow refers to the series of linkages between financial and non-financial determinants of firm performance. This gives the managers a deeper perspective of why certain financial results are the way they are. It allows them to link the financial measures to the non-financial measures of success. The second point is the design of a measurement system. This involves attaching metrics to the financial and non-financial determinants. The Balanced Scorecard identifies four key perspectives that directly and completely define strategy measurement and analysis. They include the financial perspective, the customer perspective (e.g. customer loyalty and satisfaction), the internal processes perspective (e.g. process quality and process cycle time) and finally learning and growth perspective (e.g. employee skills) that is the leading indicator. The next important step is communication. The top management that has done the above analysis must communicate their findings and decisions to the middle and front-line managers, who in turn must communicate it to the other employees. In this way, everyone in the organisation is made aware and can participate in the strategy implementation process. This also helps allocate resources intelligently and guides employees’ decisions. The Balanced Scorecard model recognises the importance of both tangible and intangible assets and of financial and non-financial measures. It focuses on the complex connections among the firm’s customers, operations, employees and technology and places an important role for HR. The BSC framework highlights the differences between leading and lagging indicators. Lagging indicators include financial metrics, which typically reflect only what has happened in the past. Such metrics accurately measure impacts of past decisions but don’t help in making current decisions or guaranteeing future outcomes. The leading indicators are the unique indicators for each firm. They include process cycle time, customer satisfaction or employee strategic focus. These indicators assess the status of key success factors that drive the implementation of the firm’s strategy and hence emphasise the future rather than the past.
Integrating HR into the performance measurement system To integrate HR into a business performance measurement system, managers must identify the points of intersection between the HR and the organisation’s strategy implementation plan. These points are commonly called the HR deliverables. They are the outcomes of the HR architecture that serve to execute the firm’s strategy. This is in contrast to the aspects of HR that focus on HR efficiency and activity. The deliverables can be classified into two groups, namely the performance drivers and the enablers. Performance drivers are core people-related capabilities or assets such as employee productivity and satisfaction. There is no single correct set of performance drivers. Each firm needs to identify its own set based on its unique characteristics. Enablers reinforce performance drivers. E.g. Preventive maintenance can be considered an enabler of on-time delivery, which is a performance driver. A performance driver can have several enablers. Most of the time, each enabler separately may seem rather mundane but it’s the cumulative effect that has strategic importance. Performance Drivers: HR managers tend to focus on performance drivers in an attempt to demonstrate their strategic impact. However, in most cases although they do stress on these drivers they are unable to make a solid case for it since they do not have the right measures. Without measures one cannot display HR’s actual contribution to the overall mission. Most of the measures used are very simplistic and it undermines HR’s credibility in the organisation. This credibility is very important since it is what matters when a manager is faced with a conflict between financial and non-financial reports. For example, if people measures are good but financial measures are bad, the manager will go for the solution that supports the credibility of finance or HR. In most cases it is finance and the immediate decision is reducing bonuses etc. as the CFO might feel it is not warranted when there is no proof of performance. The point that is being missed is that the CFO is looking at the lagging indicators. Balanced performance needs one to look at the leading indicators such as HR measures as well since these are the ones that create value in the organisation. High HR scores in the face of low finances actually signal improved finances in the future (provided other leading indicators are also on the positive side). Similarly, strong financial measures and weak leading measures such as HR measures are indicative of a financial problem in time to come. Thus, managers must interpret these measures in a balanced manner looking at the past and into the future. Identifying HR performance drivers can be very challenging since it is unique to the firm. It is important to identify the performance drivers and integrate them directly into performance criteria giving them equal weight with the more traditional performance measures. For example, one half of the bonus pays can be based on the financial results while the other half is based on the employee’s adherence to the value behaviours. HR enablers: HR enablers reinforce the core performance drivers. If employee productivity is identified as a performance driver, re-skilling and training can be considered an enabler. Some enablers might be specifically HR focused i.e. they enhance the effectiveness of HR performance drivers. There might also be some HR enablers that do have profound positive effects with respect to the other perspectives as well, such as customers, operations and the financial segment. It is important to identify these and keep them up to date with the current goals of the organisation. Without the properly aligned enablers, it is not possible to implement new strategies. The systemic aspect of HR once again comes to the forefront, whereby the entire HR system can influence employee behaviour from different points. Thus, HR managers should evaluate the degree to which their firm’s system of enablers support the HR as well as non-HR
performance drivers as listed in their Balanced Scorecards. By identifying the links between enablers and universal performance drivers, the HR team can play a much larger role and suggest ideas that can affect other sectors in the firm as well. The Seven-Step Model for Implementing HR’s Strategic Role Ulrich et al. discuss a seven step model for formalising the strategic role of HR. They are summarised below: Defining Business Strategy: HR managers should focus on implementation of strategy. By doing so, they can facilitate discussion about how to communicate the firm’s goals throughout the organisation. When strategic goals are not developed with an eye towards the implementation detail, they tend to be too generic and abstract. These vague goals will tend to confuse employees and they would not know how exactly to implement the strategies. The important thing for HR managers is to state the goals in such a way that the employees understand what exactly their role in the organisation is and thus the organisation knows how to measure success in achieving these goals. Building a case for HR as a strategic asset: Once a firm clarifies its strategy, HR professionals need to build a clear case for the strategic role of HR. In concrete terms, they must be able to explain how and why HR can support the strategy. It is important to look at as much of case histories and internal as well as external research while going through this phase. Although it is not wise to imitate others, one can learn a lot by looking through past experiences of others. Basically, the direct impact on the HR systems’ high performance characteristics is non-linearly related to the increase in market value. This is because in the lower ranges of performance, increase in market value is basically because HR stops making mistakes it used to make in the past. It is almost like it is getting out of the way and avoids blunders and wrong practices that worsen the situation. In the middle range of performance, HR starts consolidating its efforts. It is learning from its mistakes and in the process does not actually add much to the market value of the employees and the company, but once a certain threshold is crossed indicating that the firm has adopted the appropriate HR practices and implemented them effectively, the market value soars exponentially. This is mainly because the HR system starts getting integrated into the overall strategic system of the firm. Basically, the firms must consolidate the appropriate HR policies and practices into an internally coherent system that is directly aligned with business priorities and strategies that are most likely to create economic value. This can lead to significant financial returns to the company. It is this plan that must be made concrete and shown as a strong case to make senior management believe in HR’s potential. It is important to note however, that simple changes in an HR practice do not make a difference. The HR measures describe the whole HR system and changing the system to cross the threshold mentioned above needs time, effort, insight and perseverance since results are not directly proportional. This clearly indicates the requirement of an HR transformation rather than a change. It is this very character of transformation, which is difficult and time-consuming to achieve, that makes HR a strategic asset. Along with value creation, there must also be a strong case for HR’s role in strategy implementation. Strategy implementation rather than strategy content separates the successful from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement one.
This once again shows the strategic nature of HR’s role in performance improvements. Successful strategy implementation is driven by employee strategic focus, HR’s strategic alignment and a balanced performance measurement system. The most important HR performance driver is a strategically focused workforce. Effective knowledge management combined with the above-mentioned factors creates a strategically focused organisation. Creating a Strategy Map: The first two steps clarify the firm’s strategy. This paves the way for the implementation process. But, before this is done, the firm must get a clear understanding of its value chain. The value chain is the complex cumulative set of interactions and combinatorial effects that create the customer value in the products and services of the firm. It is important that the firm’s performance management system must account for each of the links and dependencies in the value chain. The Balanced scorecard framework refers to this process and creating a strategy map. These are basically diagrams that show the links in the value chain. It shows how different components in different layers interact. It is what provides managers and employees the big picture of how their tasks affect the other elements in the firm and how it affects overall strategy. This process should involve managers from all over the organisation, not just HR. The broad participation is required to improve the quality of the strategy map. It also allows each member of the team who is an expert in his or her domain to provide his or her own insights into what is accomplishable. The following questions have been identified as the key ones to be asked during the strategy map creation process.
• Identify the critical strategic goals from the generic ones. • Identify the performance drivers for each goal. • Think about how one can measure progress towards these goals. • Identify barriers to the achievement of each goal. • Recognise the employee behaviours needed to ensure that the company achieves its
goals. • Identify missing employee competencies and check if HR is providing the necessary
competencies. • Finally, decide what needs to change.
These basic questions generate a wealth of information about how well a firm’s HR has been contributing to the success of the organisation. Along with these discussions, it is useful for the company to conduct surveys within the organisation to identify the extent to which each employee understands the organisational goals. Once the whole picture of the firm’s value chain is highlighted, the firm can then translate the information into a conceptual model using language and graphics that make sense to the members of the organisation. The model should then be tested for understanding and acceptance amongst the leaders and the employees. The strategy map essentially contains predictions about which organisational processes drive firm performance. The company can validate these hypotheses only after achieving the goals set for each of the performance drivers and then measuring their impact on overall firm performance. The graphical nature of the strategy map helps the senior management as well as the employees have more confidence in the strategy implementation plan. Identifying HR deliverables within the strategy map: HR creates much of its value at the points of intersection between the HR system and the overall strategy implementation system of the organisation. Thus, to leverage this to the maximum possible extent it is important that there is a clear understanding of both sides of this intersection.
In the past, HR managers lacked the required amounts of knowledge about the business side and general managers did not fully understand the HR side. It is HR’s responsibility to depict HR deliverables including performance drivers as well as HR enablers in the strategy map of the firm. Performance drivers such as employee competence, motivation and availability are very fundamental and so it might be difficult to locate these precisely on the strategy map. It is important to identify those HR deliverables that support the firm-level performance drivers on the strategy map. The focus should be on the kind of strategic behaviours that depend on competencies, rewards and work organisation. E.g. Employee stability improves R&D cycle time, the latter being a firm-level performance driver. Thus, employee stability becomes an important HR enabler. Once this enabler has been identified, the firm can design policies such as bonus schemes etc. that would encourage R&D staff to continue working for the firm. Aligning the HR architecture with the HR deliverables: The above-mentioned steps encourage the top-down thinking approach, whereby strategy decides what HR deliverables the firm needs to focus on. It is also important to consider how the HR system made up of the rewards, competencies; work organisation etc. needs to be structured to provide the deliverables that are identified in the strategy map. This step enhances the value creation aspect of the firm by aligning the HR system with the firm’s larger strategy implementation system. For this, internal alignment and external alignment are important. Internal alignment refers to the aligning components within the HR system. External alignment refers to the alignment of the HR system with the other elements in the firm’s value creation process. These two are not isolated processes. They are closely related. Internal alignment is necessary but not sufficient in itself for external alignment to occur. Basically, highly cohesive HR strategies will work as long as they are aligned well with the overall strategy of the company. It will fail if it is not periodically reshaped so as to align it with the overall strategy. However, for a particular fixed overall strategy, all firms need an internally aligned HR strategy in order to achieve the overall goals. Misalignment between the HR system and the strategy implementation system can destroy value. In fact, the wrong measurement system can have the exact opposite effect than intended. Designing the Strategic HR measurement system: The above steps guide the development of the HR architecture and lay the groundwork necessary to measure the performance relationship between HR and the firm’s strategy. The next step is to design the measurement system itself. This requires a new, modern perspective on measuring HR performance. It also requires HR to resolve several new technical issues that it might not be familiar with. To accurately measure the HR-firm performance relationship, it is imperative that the firm develops valid measures of HR deliverables. This task has two dimensions. Firstly, HR has to be confident that they have chosen the correct HR deliverables. This requires that HR have a clear understanding of the causality in the value chain for effective strategy implementation. Secondly, HR must choose the correct measures for those deliverables. During this process of developing the HR scorecard, the firm might go through several stages of increasing sophistication. The first stage is normally the traditional category of measures. These mainly include operational measures such as cost per hire, activity counts etc. These are not exactly strategic measures. In the second stage, HR measures have a strategic importance but they don’t help much in making a case for HR as a strategic asset. Firms may declare several people measures such as employee satisfaction as strategic measures and these might be included directly into the reward systems. In this stage, there tends to be a balance between financial and non-financial measures but there is less of an agreement on how exactly they combine together to implement the strategy. These are normally hasty decisions and the firms might have not gone through all the previous steps mentioned above. The next stage represents a transition point whereby the firm includes non-financial measures such as HR measures into its strategic
performance measurement system. The links between the various measures are also identified i.e. they are placed appropriately in the strategy map. The HR measures now actually track HR’s contribution to strategy implementation. In the final stages, the HR measurement system will enable the firm to estimate impacts of HR policies on firm performance. If the value chain is short and the strategy map is relatively simple, the complete impact of HR on the overall performance can be measured. For more complex value chains, the impact can be more accurately measured on local segments or sectors of the strategy map. These local impacts can then be assimilated to give a good measure of the total impact on the firm’s performance. Thus, each level of sophistication of the measurement system adds value to the non-financial measures and forces in the firm and enables a better performance appraisal. Implementing the strategy by using the measures: The previous step completes the HR scorecard development process. The next step is to use this powerful new management tool in the right way. This tool not only helps the firm measure HR’s impact on firm performance, but also helps HR professionals have new insights into what steps must be taken to maintain HR as a strategic asset. It helps the HR professionals dig deeper into the causes of success and failure and helps them promote the former and avoid the latter. Implementing the strategy using the HR scorecard requires change and flexibility as well as constant monitoring and re-thinking. The process is not a one-time event. HR professionals must regularly review the measures and their impacts. They must review the HR deliverables identified as important and see to it that the drivers and enablers and internally as well as externally aligned. Special reviews of the HR enablers must be conducted as these have the maximum direct impact on specific business objectives. Enablers that do not tend to play a positive role should be replaced. Benefits of the HR Scorecard The HR Scorecard offers the following benefits:
• It reinforces the distinction between HR do-ables and deliverables: The HR measurement system must clearly distinguish between the deliverables that influence strategy implementation and do-ables that do not. Policy implementation is not a deliverable until it has a positive effect on the HR architecture and creates the right employee behaviours that drive strategy implementation. An appropriate HR measurement system will encourage HR professionals to think both strategically as well as operationally.
• It enables cost control and value creation: HR is always expected to control costs for the firm. At the same time, HR has to fulfil its strategic goal, which is to create value. The HR scorecard helps HR professionals balance the two and find the optimal solution. It allows HR professionals to drive out costs where appropriate, but at the same time defend investments in intangibles and HR by outlining the benefits in concrete terms.
• It measures leading indicators: Just as there are leading and lagging indicators in the overall balanced performance measurement system, there are drivers and outcomes in the HR value chain as well. It is thus important to monitor the alignment of the HR decisions and systems that drive the HR deliverables. Assessing this alignment provides feedback on HR’s progress towards these deliverables and lays the foundation for HR’s strategic influence.
• It assesses HR’s contribution to strategy implementation: The cumulative effect of the HR Scorecard’s deliverable measures provides the answer to the question regarding
HR’s contribution to firm performance. All measures have a credible and strategic rationale. Line managers can use these measures as solutions to business problems.
• It lets HR professionals effectively manage their strategic responsibilities: The scorecard encourages HR managers to focus on exactly how their decisions affect the successful implementation of the firm’s strategy. This is due to the systemic nature of the scorecard. It provides a clear framework to think in a systemic manner.
• It encourages flexibility and change: The basic nature of the scorecard with its causal emphasis and feedback loops helps fight against measurement systems getting too standardised. Standardisation is good for things that don’t tend to have a dynamic nature but firm performance is a dynamic phenomenon. Every decision needs to be taken based on the past and future scenarios. One of the common problems of measurement systems is that managers tend to get skilled to obtain the right numbers once they get used to a particular measurement system. The HR scorecard engenders flexibility and change because it focuses on the firm’s strategy implementation, which constantly demands change. With this framework, measures simply become indicators of the underlying logic that managers accept as legitimate. It helps them look at the bigger picture and since there are no perfect numbers it makes it easier for managers to change direction when needed.
To clarify the HR Scorecard framework it is important to summarise a case study. The next section explains the details of the HR scorecard developed by Verizon, a leading telecommunications provider in the United States. Case Study: Verizon
Verizon HR has effectively designed and implemented a strategic management system, which is based upon the balanced scorecard model of Dr. David Norton and Dr. Robert Kaplan of Harvard Business School. The HR Balanced Scorecard was conceived with new economy organisational dynamics in mind. The scorecard uses a broad range of leading and lagging indicators which include overall strategy, operational processes, customer perceptions, and financials to evaluate the effectiveness of HR initiatives to the bottom line. The HR Balanced Scorecard provides the means to monitor workforce indicators, analyse workforce statistics, diagnose workforce issues, calculate the negative financial impact, prescribe solutions, and track improvements. Verizon believed that in the coming years the primary source of competitive advantage for their business would continue to increasingly focus on the talent within the organisation, which meant that the ability to effectively manage the employee talent within the organisation was critical. While management tends to make decisions about how to invest in human capital, few companies have an effective process to measure the value created by this most valuable asset. In Verizon, they believed that HR could effectively manage the value created by thorough investments in employees. Managers knew was how much was paid to reward, hire, train, develop, and provide benefits to employees. What managers needed to know, however, was where the investments were most effective and valuable. Some of the questions that did not have answers at that time were:
• Should the business expand the incentive pay program? • Should they outsource safety administration? • What is the most effective use of training dollars? • How much should be spent on recruitment? • Should employee services be in-sourced, out-sourced, or co-sourced? • Should executive bench strength be built or bought?
• What is the cost in human capital terms to break into a new market? • Is the acquisition target a good fit and does it add or dilute the competitive advantage in
terms of talent? • Do the current investments in employees match the strategic objectives of the business? • Is the HR organisation a partner with the business to manage our employees as assets?
To answer these questions, management needed more information not just simple cost figures. Management needed to track the financial results while monitoring progress in developing human capital and acquiring the talent and capabilities needed for business success. The Balanced Scorecard was developed by Kaplan & Norton, 1996 and provided the ideal system that leverages the traditional financial and efficiency measures that were available for Human Resources with metrics of performance from three additional perspectives namely, customers, internal business processes, and learning and growth. In 1996, J. Randall MacDonald, Executive Vice President–Human Resources of GTE Corporation (now known as Verizon), was facing the biggest challenge of his career—to create the HR strategy and plans to support GTE’s workforce through a major business transformation. The Telecommunications Act was transforming the regulated world of protected markets and established profit margins into a highly competitive business environment for the telecommunications giant. Historically, GTE had emphasised a focus on infrastructure quality and customer service. GTE’s senior business leaders were preparing to transform the company into a market-focused organisation that would be the communications provider of choice to targeted customer markets. Significant emphasis on new markets and additional services was part of the strategy. The telecommunications world following deregulation was turbulent. Technology acceleration, emerging customer needs, and data and video transmissions were changing how business operated. GTE’s customers were becoming price sensitive and could now demand superior service and advanced support. The competition was in price, products, and technology. New mergers and partnerships were beginning to occur; brand preferences and aggressive tactics from non-traditional competitors were all part of the mix. GTE Business Strategies were global in scope and translated directly to clearly communicated targeted business results. Additionally, the workforce environment was dramatically different and highly competitive. GTE faced the lowest United States’ unemployment in 24 years. The employer–employee relationship had changed; employees were less likely to remain with a single employer; specialised talent was hard to find; employees expected more work/life balance; and the diverse talent pool most sought had differing interests and needs. Creating the value proposition to acquire the talent to drive the business was more difficult to define and changed rapidly. HR Challenge & Strategy: The Human Resource Challenge was to translate the new business strategies and targeted business results into human capital needs. Recognising that GTE’s employees were a critical component in achieving the business goals, GTE HR leaders inventoried the current skills and abilities that would provide value both in the short-term and into the future. HR professionals then identified the critical people imperatives necessary to grow that talent to increase the value delivered by the workforce. GTE would need new behaviours, actions, and capabilities to drive the business results. To focus the HR organisation on the achievement of these people imperatives, GTE developed a new HR strategy to support the specific people requirements of the business strategy.
This HR strategy was defined in five strategic thrusts: 1. Talent:
• enlarge the talent pool • invest in employees’ development • ensure diversity
2. Leadership: • establish a system to assess high-potential employees • provide coaching and development • establish accountability and rewards for leadership behaviour
3. Customer Service & Support: • create an environment that fosters employee engagement • increase business intelligence within the workforce • provide solutions to retention issues
4. Organisational Integration: • create better systems for knowledge management • enhance union partnerships
5. HR Capability: • develop core HR competencies • identify key talent for growth and development • invest in technology • invest in employee self-service • better understand the relationship of HR actions to business outcomes
The biggest problem was communicating and reinforcing the linkage between HR actions and business results. The business had a clear strategy and targeted business results. The HR Strategy was directly linked to the needs of the business and expressed in terms of HR strategic thrusts. The prime objective was to effectively communicate and execute on strategic intent, motivate and track performance against organisation and business goals, and to align HR actions with business results. The Team: A newly formed HR Planning, Measurement, and Analysis team was created to design and implement a tool that would quantify HR’s contribution to the business. The Balanced Scorecard model, which was at the time a leading edge corporate performance assessment tool, was selected as the framework to adapt and build an HR Measurement model. J. Randall MacDonald served as the senior executive for the HR measurement initiative. This role was critical to the success of the project. Randy MacDonald actively influenced his senior leadership team within HR to secure their buy-in and to hold them accountable for supporting the project. The newly formed Planning, Measurement, and Analysis team included a director and four employees solely dedicated to the design, development, implementation, and operation of the HR Measurement System. An HR Measurement core team included eight subject matter experts representing each of the functions within HR and the business units. The core team members were instrumental in assuring alignment of the measurement model and communicating and training HR departments on the applications and uses of the HR Scorecard. The Balanced scorecard model complements financial measures of past performance with measures of drivers of future performance. Unlike other accounting models, the Balanced Scorecard incorporates valuation of organisations’ intangible and intellectual assets such as high-quality products and services, motivated and skilled employees, responsive internal processes and innovation and productivity. The HR Scorecard approach used slightly modified the initial Balanced Scorecard model, which at the time was
most commonly used at the corporate level. The approach, however, remained focused on long-term strategies and clear connections to business outcomes. The core team members were selected on the following criteria:
• Common link: Selected by functional VP • Knowledgeable on key processes within your HR functional area • Dedicated to building awareness and accountability toward achieving better outcomes • Focused on measuring what matters to enable better decision making and resource
allocation Their key responsibilities included
• Attend Core Team meetings • Communicating to your function the message of why we are measuring HR • Establish SMEs within your function • Identify key processes within your function • Establish key performance indicators/measures reflecting key processes • Submit data within designated timeframe • Responsible for overseeing target setting process for your functional area
The HR Balanced Scorecard includes four perspectives: — Strategic Perspective
• Measures success in achieving the five strategic thrusts. Since the basis for the HR Balanced Scorecard is achieving business goals, the aligned HR Strategic objectives are the drivers for the entire model.
— Operations Perspective • Measures HR’s success in operational excellence. The focus was primarily in three areas:
staffing, technology, and HR processes and transactions. — Customer Perspective
• Includes measures of how HR is viewed by the key customer segments. Survey results were used to track customer perceptions of service as well as assess overall employee engagement, competitive capability, and links to productivity.
— Financial Perspective • Addresses how HR adds measurable financial value to the organisation, including
measures of ROI in training, technology, staffing, risk management, and cost of service delivery.
The Process: A deliberate approach to the project was clearly defined and communicated to each member of the team and to the HR organisation. The project was established and organised into four major components: Planning and Alignment, Assessment, Development, and Implementation.
• Planning and Alignment set the foundation for the project. Project plan, objectives, and milestones were established. Team education and training was imparted on business performance management, the balanced scorecard methodology, and its application to HR measurement.
• Assessment focused on understanding what was used at that time as measures to evaluate HR performance and to assess the relative value to the business.
• Development began the actual process of designing the HR measurement model. Defining the measurement criteria and scorecard measures, establishing targets, defining
the process for collecting and tracking results, and creating the communications strategy were the key deliverables in this phase.
• Implementation operationalised the HR Scorecard from the drawing board to a management tool for HR to assess performance and value added to the business. Data collection, results reporting, evaluation, and analysis all came together as the scorecard was implemented. Communications and training were delivered to the HR organisation as the HR Scorecard rolls out. Once the team was selected, and the mission and objectives were established and communicated, the work to link Business Strategy to HR Strategy began. Fig. 1 illustrates the initial model used to align Business Strategy to HR Strategy and Actions and lists the specific outputs within each step.
Fig 1: Initial model used to align HR strategy to business strategy [2]
Beginning with a clear understanding of the business strategy and goals, the HR team worked with the business leaders and HR leaders to determine the key questions to be answered for the business and to determine what key drivers of the business would translate into clear people requirements. The outcome was an understanding of what questions need to be answered and of the competitive capabilities required for current and future business success. This provided the detail to build a strategy map, which would support the design and development of the HR Balanced Scorecard. Fig. 2 describes the process followed to determine people requirements and business drivers. The people requirements defined the HR Strategy that then translated into specific HR initiatives that should directly support the attainment of HR Strategy. Having this alignment allowed
Verizon to develop a strategy map, which illustrated the cause and effect linkage between HR Strategy and business objectives. Using the strategy map as the guide, they were then able to evaluate the strategic objectives in terms of measures and outcomes (Fig 3.). They could then further refine these into lagging measures (which tell how well a company has already done) and leading measures (which are indicators of future performance).
Fig 2: The people requirement and business driver determination process [2]
In addition to aligning the scorecard measures to the business objectives, they developed causal links between the objectives and the measures. For example, one of the financial objectives, Minimise HR Cost, was expected to be an outcome of the HR Strategy. To create a clear line of sight across the perspectives, they linked Minimise HR Cost back to objectives in the Customer, Operations, and Strategic Perspectives that were performance drivers for these outcomes. This cause and effect relationship described that if HR integrated the organisation, implemented technology enablers and optimised service delivery through streamlined processes the costs for service delivery would decrease and reduce overall HR expense.
Once they had defined the link from the financial objectives, HR focused on the critical human capital requirements defined by the business. Previously, HR Performance measurement at Verizon had focused solely on improvement of administrative and transactional efficiency such as the error rate in employee benefit processing and the number of training hours delivered per month. The focus was expanding to include new processes for the HR organisation to develop exceptional service delivery and increased employee value while ensuring a focus on cost and value. As the measurement model was being developed to support the business’s people requirements, the objectives became clearer. HR recognised that the employees would need to expand their skills and increase their productivity to provide the new products and services that business would provide.
• Sales representatives needed to be able to serve as the customers’ telecommunications solution provider.
• The customer service representatives also would need ready access to customer account information and be trained to quickly recognise possible customer needs and to communicate optimal mixes of products, services, and price plans to customers.
• New incentive systems were needed to encourage the new behaviour and skill acquisition as well as retention plans for critical skill employees.
Providing workforce solutions and ensuring alignment and a strategy-focused workforce all contributed to a more capable and skilled employee population.
Historically, HR had a difficult time communicating to the business and maintaining their focus on the investments and initiatives designed to build employee capability. Strategic skill development, leadership development, and employee development programs were all discussed with business leaders and generally accepted as valuable. When financial pressure was applied, however, these types of programs usually were the first to go. Now with measures, which linked leadership development with competitive capability, people could see the relationship between investing in these programs and achievement of long-term business goals. Early Results: An early benefit of the HR Scorecard work was that it provided a process for the senior HR team to focus on a clear and common objective: to establish a common strategy for HR in support of business objectives. The high level strategy was for everyone to be a partner to the business. Rarely, however, did all of the HR leadership agree on how to implement the strategy because each person had a different opinion about what being business partner really meant and whom exactly the customer was. Taking strategy and translating it into a measurement and management model gave specific and operational definitions for being a business partner and targeted business customers. Communicating the HR Scorecard: Communicating the HR Scorecard across the HR organisation and the business is a critical aspect of successful implementation. The development process increased learning and understanding but was only visible to the top leaders within HR and the business. To use the HR Scorecard to drive change throughout the organisation, the Planning, Measurement, and Analysis team developed a phased approach to communicate and train the managers and their departments on this new management tool. The emphasis on the scorecard was on the value the tool provided in communicating strategy and alignment to the business. It also served as a tool that provided proactive solutions to employee issues or deterrents before a negative impact could occur to the bottom line. Performance measurement was also an essential component, and all in the HR organisation had their incentive compensation tied to the results of the HR Scorecard. Training and communication material was used extensively to reinforce understanding of the new management tool. An interactive teaching tool was developed to train HR professionals to use the HR Scorecard results in problem-solving workforce issues. Verizon realised that measures do not manage, and simply tracking results was not the only intended use of the HR Scorecard. The value was to use the information provided in the scorecard and take action to influence and improve business performance. For example, one of the most important areas to manage in terms of cost was employee turnover. Turnover, particularly within target front-line workforce centres, was critical to productivity and expense control. High turnover results in lower productivity, higher training, and staffing and occupational health costs. The impact is across the board and affects business profitability. Starting in 1998, with a new disciplined process using the HR Scorecard, HR professionals tracked and analysed turnover statistics, determined reasons for turnover, calculated the negative financial impact, prescribed solutions, tracked improvement rends, and showed dramatic results. In partnership with the business leadership in targeted call centres (where operators give minor technical assistance and forward problems to specialists), significant costs were avoided by reducing the regretted turnover. Linkages between business processes and value chains to human resource actions and services were clearly defined as the HR Scorecard became a business tool understood and used across the
HR organisation. Not only are human capital initiatives needed to increase employee value delivered to the business, they are vulnerable to business process changes and the measures taken in isolation can be misleading. For example, in a regional call centre, the external business measures of customer satisfaction were trending downward and accelerating. When HR reviewed the call centre results from the HR Scorecard, there was no single indicator that showed any direct relationship to the customer satisfaction issue; however, the measures, together with input and analysis by HR professionals and line management, pointed to both an issue and solution not readily apparent. The HR metrics showed a very low cost per hire, a very quick cycle time to fill jobs, and an average employee separation rate. On the surface nothing looked unusual. Ironically, the staffing metrics showed a high efficiency and cost control. Drilling deeper showed a high cost of training, a very high separation rate for short service employees, and declining employee satisfaction for long service employees. Further analysis revealed that six months prior a significant expense reduction effort had been put in place for this call centre. HR responded to the required reduced expense by changing talent pools and reducing the investments in selection methods. This action kept costs low while bringing in applicants who were ready to start quickly but were harder to train and keep. It was a bad trade-off. It made sense to accept a longer cycle time and more cost to ensure the right person was put in the right job.
Fig 4: The Web-Desktop Interface for a HR Scorecard [2]
Web-based Implementation and Graphics (Frontend and Backend): Drill down capability below the superficial level of results of the HR Scorecard was enabled through a technology architecture, which at the top level used a Web-based application to deploy and communicate to the desktop HR Scorecard results in a virtual briefing book. Fig. 4 illustrates the HR Scorecard user interface which is available on-line to all HR professionals. The virtual
briefing book is easy to use and uses colour (green, yellow, and red) to indicate whether a metric has exceeded, met, or fallen below target. The underlying technology supporting the virtual briefing book provides links to Enterprise Resource Planning (ERP) systems (SAP and PeopleSoft) and a data-warehouse using a data-mining tool to drill down below the HR Scorecard results to analyse and model cause and effects. Predictive modelling to evaluate workforce decision impacts (positive and negative) prior to execution is the primary objective of this investment in technology. Fig. 5 illustrates the technology architecture. The Employee Data Warehouse provides the intelligence behind the measures tracked by the HR Scorecard. The HR professionals have access to a rich base of employee data integrated from 16 different HR systems including 20 years of history. Users have a suite of reporting tools that enable them to perform sophisticated multidimensional workforce analysis and predictive modelling. Hidden correlation between measures to prove or disprove what business managers previously knew only through hunches could be determined.
Fig 5: HR Scorecard Implementation Architecture
The HR balanced scorecard served as a catalyst to pull together the two HR leadership teams during the merger integration planning. The process of defining the role and strategy of HR in the new company provided a common objective for integrating the HR leadership team. Articulating a common strategy and business alignment for HR services provided a positive perspective—a clear focus on the customer and a shared sense of the enormous potential to deliver world-class programs. The newly merged company faces a highly competitive environment where a competitive cost structure, consistent revenue growth, controlled expense, and excellent investment management are critical to win in the market place. The Verizon HR Scorecard continues to provide the forum for HR leaders to actively discuss performance and future targets. HR leaders now have a tool, which supports a focus on tactical excellence while ensuring alignment with business strategy.
Conclusion: The HR Balanced Scorecard has made it possible for HR managers to understand how to align HR strategy with the overall business objectives. They are able to explain not only what they are tracking but also how they are performing on essential strategies for the business. Business environment and the objectives and strategies will continue to evolve, and HR managers will continue to be flexible and creative in supporting the changes. The value of the HR Scorecard as a tool is that it can get HR to the new goals and measures and through the process ensure continued learning and change management. References: [1] Becker, Huselid, Ulrich; The HR Scorecard (2001) [2] Garrett Walker and J. Randall MacDonald; Designing and implementing an HR Scorecard; Human Resource Management, Winter 2001, Vol. 40, No. 4, Pp. 365–377 [3] Arthur K. Yeung; Measuring human resource effectiveness and impact; Human Resource Management; Fall 1997, Vol. 36, No. 3, Pp. 299–301 [4] Dave Ulrich; Measuring human resources: An overview of practice and a prescription for results; Human Resource Management, Fall 1997, Vol. 36, No. 3, Pp. 303–320 [5] Arthur K. Yeung, Bob Berman; Adding value through human resources: Reorienting human resource measurement to drive business performance; Human Resource Management, Fall 1997, Vol. 36, No. 3, Pp. 321–335 [6] Richard E. Wintermantel, Karen L. Mattimore; In the changing world of human resources: Matching measures to mission; Human Resource Management, Fall 1997, Vol. 36, No. 3, Pp. 337–342
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