Speaking the Language of Business for Strategic HR Professionals

AdobeStock_101865782This week I’m returning to discussing strategic HR and am going to define some important business terminology Strategic HR Professionals must know in order to be taken seriously by their organization’s leadership.

This is not a comprehensive list but simply some basic business terms that relate to developing an effective HR strategic plan.

The first term is Business Strategy.  Business strategy as defined by Michael Watkins of the Harvard Business Review is the following:

A business strategy is a set of guiding principles that, when communicated and adopted in the organization, generates a desired pattern of decision making. A strategy is therefore about how people throughout the organization should make decisions and allocate resources in order accomplish key objectives. A good strategy provides a clear roadmap, consisting of a set of guiding principles or rules, that defines the actions people in the business should take (and not take) and the things they should prioritize (and not prioritize) to achieve desired goals.

The definition implies that a business strategy can be looked at from the perspective of creating shareholder value, competitive market position, and creating a strategic advantage within the constantly changing business environment.  

This constantly changing business environment is influenced by things such as national and local politics, regulatory agencies, the economy, customers, suppliers, competitors, technology, economic trends and current and potential markets.

The second term is Strategic Intent. The business strategy, described above, is built upon the strategic intent and is defined by the website Simply Strategic Planning as the following:

Strategic intent is a statement of the course that the management of an organization plans to take the enterprise in the future. As many people as possible should understand these intentions. Then everyone can work consistently to achieve the corporate purpose.

Statements of intent aim to be more explicit than the usual directional statements. Most mission and vision statements point the way forward only in general terms. Sharp statements of intent can provide more clarity about what to do in the near future to achieve the vision and/or mission. Such statements convey the flavor of the strategic decisions taken through the planning process

In order to determine an organization’s strategic intent, the following questions must be answered: who we are and what we are trying to accomplish, what business are we in, what is our mission, what is our vision, what are our core values, how do we compete, and how do we add value to the marketplace.

The third term is Strategic Focus. A good description of strategic focus comes from Ann Latham at Forbes where she writes the following:

A good strategic framework provides focus by limiting the number of directions the organization runs. You’d be foolish to try to extend all your products while simultaneously expanding all your markets while also ramping up capacity or shifting your business model to include new types of production, sourcing, sales, delivery, and partnerships. This isn’t just an issue of capacity. It is also an issue of risk, learning, complexity, and credibility.

A great way to identify an organization’s strategic focus is to take a close look to the classic Generic Strategies by Michael Porter where he identified three strategies that address the question of how value is added by an organization.

These three approaches are cost leadership, differentiation, and focus as described in this article by the Institute for Manufacturing:

Cost Leadership

In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average.

Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price.

Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments

In order for an organization to be successful and grow, it must have a business strategy that excels in all three of these strategies, not just one or two.  All of the organization’s operating and management systems, which include HR, must support all three of these approaches.

Bottom line, for an HR pro to be seen as an effective business partner, they must fully understand such important basic business elements such as the operations of the organization, its sales/revenue LY and YTD, its profit margin, how those margins compare with competitors and industry, its cash flow, its growth rate, the metrics leadership tracks, and the top initiatives of each of the members of the leadership team.

Jeeps, Tires, and an HR Foundation

I’m taking a break from my series on strategic HR and pushing out a post about a recent purchase I made that ended up inspiring me to write a post that equates to HR.

This morning I had to buy new tires for my Jeep Wrangler – my dream car and one I was finally able to buy (with my wife’s consent, of course!) after pining for one since High School. I’m not an off-roader but have always loved the look of the CJ-5 and CJ-7 and then the Wrangler through all its iterations.

I also had to buy new tires for my wife’s car a couple weeks ago so it’s been an expensive couple of weeks but one I’m OK with it now that winter is here. I’m OK with spending money on important safety and foundational things.

As I was driving from Les Schwab Tires to Starbucks this morning, I noticed how much better the ride was compared to my old tires. I hadn’t noticed my old tires were worn down to the point where I needed new ones until it had snowed a little the other evening and I was slipping around more than usual. This being the rig I’d always wanted, I take very good care of it, religiously washing, getting my oil changed, and rotating my tires every 5,000 miles.  I was hoping I could squeeze out another winter on my old tires

And by just looking at them, they looked fine, the treads were all evenly worn and there were no bald spots (something I used to use as a guide when I was much younger and poorer!) But having slipped around more than usual the night before, I did the “penny test” and discovered that it was time to get new tires.

As I said earlier, I immediately noticed how much better the ride was compared to my old tires. My wife also commented how much nicer her ride was after getting her new tires. Of course, we always notice this whenever we get new tires because it’s a drastic change going from worn out to new tires. We never notice our new tires being slowly worn down because it happens over a long period of time. 

Now that I can afford it, I always buy the highest quality tires I can. I do this because the tires on my vehicles are the foundation of the car. They are the only piece of equipment that has contact with the ground.  Whether the surface is smooth dry pavement, a rough dirt road, a wet surface, or a snowy icy road.

The tires we have on our vehicle are what allows us to safely, or unsafely, navigate the different road conditions to get where we need to go.  If we have poor quality or worn out tires, we can usually survive for a while on the dry smooth roads but they may eventually blow out and leave us stranded. Ultimately, we will have trouble on the other types of road conditions. Its very important to have a solid and safe foundation.

So yes, I’m equating the quality of the tires on my Jeep to building and maintaining a solid HR foundation. Is that a stretch? Maybe, but let me tell you why and explore further as I equate the parts of my Jeep to the functions of an organization. All are equally important.   

So let’s break it down like this:

  1. The financing of the loan for my Jeep is the Finance organization. (Boom. Easy)
  2. The engine and drive train are the Operations organization. This function is what actually propels the Jeep and organization forward and makes everything in the Jeep and organization run. Like the tires, this function has to be regularly  well maintained.
  3. The body of the Jeep is the Marketing organization. This is what things look like to the outside observers and potential employees.  Just as my Jeep looks so darn cool, Marketing is responsible for making the organization look appealing to their customers.    
  4. The driver is the Leadership of the organization. Of course, like the driver of the Jeep, leadership is responsible for steering the organization to where, and at what speed, it needs to go and essentially sets the tone of everything that happens in the organization.
  5. The passengers are the Employees of the organization. The employees are not always just passive passengers but can assist Leadership with the direction they are going and can help drive and offer advice on where to go and how to get there.
  6. The tires are HR.  As are the tires, HR is not the most exciting part of an organization but the function that should always be in constant contact with the culture of the of the organization just as the tires are always in constant contact with the road. Good tires and good HR help the Jeeper and Organization safely navigate through difficult terrain/culture and weather/business environment conditions.  

The next two items are things that a Jeeper and organization have much less control over.  

  1. The climate and weather is the business environment the organization is in.  Jeepers have no control over the weather and Leadership has no control over the business environment. On any given day the weather/business environment can be clear and sunny, overcast, windy, gloomy, stormy – you get the picture.
  2. The road is the organization’s culture. Similar to an organization’s culture, the roads we drive can be smooth and dry, rough and rocky, slick and icy, and even flooded and impassable. Sometimes we even go off-road to experience something new and unusual.

And when we are talking about these last two items, where we have little to no control, it depends mostly on the skill of the driver/Leadership, the health of the engine/Operations, and quality of the tires/HR foundation that you have on your Jeep/organization that determines how well an organization navigates through challenging conditions as they reach their ultimate destination.

Since this is an HR blog and podcast I’ll close with this.  When the organization invests in a high quality HR organization and takes good care of it, just like me investing in and taking care of the high quality tires on my Jeep, the organization will be able to effectively and safely travel to it’s desired destination, weather all the storms, and navigate the different and often dangerous road conditions along the way.

What is a Strategic Plan?

This week I’m going to talk about what exactly a strategic plan is.

A strategic plan is a written statement about the future direction and goals of an organization or HR department based on an analysis of the organization’s current status, strategy, strengths, limitations, threats, and opportunities in the current and future business environment.  

An effective strategic plan helps the organization understand where it is now, where it would like to be in the future, and how it’s going to close the gap between its current reality and the desired future status in order to get to where it wants to be.

All good strategic plans support the organization’s vision, mission, and values as well as identify its strategic goals and needed resources.

Since I brought it up, let’s take a minute to define vision, mission and values even though most readers probably already know but it never hurts to revisit the definitions.

An organization’s vision statement provides a clear perspective of what it wants to have happen in the future. It includes a description of its operations as well as a compelling explanation of how the organization will look and function once the strategic plan has been implemented.

The organization’s mission statement is a clear description of it’s overall purpose. It identifies the essential reasons the organization exists and the principal products and services it provides to the marketplace.

Finally, the values of an organization represent the key core priorities of it’s culture. It’s what drives the organization’s priorities and how employees honestly behave.  An organization’s values typically remain the same over time.

A complete business strategy is made up of three parts – an operations strategy, a financial strategy, and most importantly IMO a people strategy.  I’m focusing on the people strategy, or HR Strategic Plan, as it provides the foundation of all the other strategies with the ability to identify, build, and reinforce the organization’s capabilities.  

The justifications for creating an HR Strategic Plan are that it provides a solid framework for value-added action, helps establish priorities, allows for the all important measurement of results, and creates a way for reallocating resources from the organization’s low producing activities to its high producing activities.

In addition, it helps increase and improve HR’s credibility within the organization by showing its positive impact on the organization’s bottom line. Which is always a good thing especially since, as I recently mentioned in a previous post, HR is still thought by many business leaders as pretty much an administrative function that operates separately from the rest of the other functions in the organization

In order for HR to take on a strategic role and be a strong strategic business partner, it must be represented in the leadership of an organization and be involved in defining the organizational issues before the strategic decision are made.  HR must be involved in turning those decisions into a set of organizational actions.  

According to my favorite HR thought leader, Dave Ulrich, there are several things an HR professional must do in order to be an effective Strategic HR Business Partner:

  • Understand and communicate that improvements are typically very difficult and complex and will take time to accomplish so watch out for quick fixes as they are typically very seductive but rarely work.
  • Align the HR Strategic Plan with the Business Strategic Plan which will ensure HR being seen as adding value to the organization.
  • Keep the strategic plan top of mind instead of shelving it and forgetting it.  The plan must be executed and managed in order to be effective.
  • Create a Capabilities Focus within the organization.

I want to focus a little more on that last bullet, Capabilities Focus, since the first three bullets are fairly self explanatory.

Capabilities are an organization’s ability to effectively manage its resources in order to gain a competitive advantage in the marketplace. They are anything the organization does well that improves business and creates a competitive advantage in the organization’s marketplace.  

Strategic HR Professionals are able to effectively identify and improve an organization’s capabilities that will help execute the organization’s strategy and leverage new products and services.

Some examples of organizational capabilities include knowledge, innovative designs, adaptability, cost competitiveness, and strong leadership.

Defining deliverables and showing how they can be measured and what actions need to be taken is critical in the strategic planning process. The Strategic HR Professional must focus on the deliverables which are, in other words, value added results.

The HR strategic plan is developed from looking, listening, questioning, clarifying and knowing what needs to be done.

The plan must include ways that HR can help the organization add value to its key stakeholders (employees, customers, and investors), improve organizational capabilities, improve employee competence, fulfill regulatory compliance, determine processes and activities that can be retained or outsourced, and align HR programs with organizational goals.

My next post in this series will discuss how the strategic HR Professional must be able to speak the language of business and define a few important strategic business terms that will need to be understood. Then after that, I’ll get into the steps of how to actually develop an HR Strategic Plan.

Why You Need to Create a Strategic Plan for Your HR Function

So why have an HR Strategic Plan?

In today’s highly competitive business environment, success is often determined by how well an organization and Human Resources can manage change.  Organizations have to constantly monitor their place in the external business environment as well as evaluate and improve their organizational capabilities, or intangible assets, in order to effectively compete in the marketplace.

The strategic planning process is the most effective way for organizations to identify and address all of the various external and internal forces that have an impact their business. This process moves the organization from their current place to their desired future.  And more importantly, brings value to all of the stakeholders of the organization.  

But what value is the strategic plan without the people within the organization being ready, willing, and able to execute the plan? None. The organization’s employees must understand and be fully engaged in and willing to follow the strategic plan in order for it to be of any value to the organization.

This is where HR comes in.  

HR’s value lies in being able to build and maintain the organizational foundation and infrastructure to help drive the necessary changes that will accomplish the organization’s strategic goals.  

Regrettably, HR is still thought by many business leaders as pretty much an administrative function that operates separately from the rest of the other functions in the organization.  Sadly, this reinforces the opinion that HR isn’t that important to the success of the organization. HR is also not typically held accountable for business results, as the other functions are, and because of this, HR considerations are typically ignored and viewed as a cost center rather than a profit line contributor.

There are some leaders, however, who recognize that an organization’s human capital is a key strategic resource for increasing organizational capability and achieving a competitive advantage over competitors.  Being able to attract, retain, motivate, and develop the best employees in the organization’s industry are critical to its success in the marketplace.

The ability of an organization to execute it’s strategic plan rests solely on its effective utilization of its human capital.  

Smart business leaders are recognizing this and have turned to HR to help them positively impact their business results.

In order for HR to have a positive impact on an organization’s business results, we must focus on and engage in both the long-term strategic and the short-term administrative and operational planning.

There are three roles that HR has in an organization that need defining before we go any further:

First is the administrative role. This is the traditional role most people think about HR. It’s things like regulatory compliance, policy & procedure interpretation, record keeping, HRIS management, benefits administration, onboarding & offboarding activities, etc.

Second is the operational role. These are the HR activities that relate to the day to day operations of the organization.  These are the tactical activities such as recruiting, filling job reqs, handling employee relations issues, employee communication, compensation program management, etc.

These two HR roles aren’t the high-level exciting things many of us in the upper levels of HR like doing any more but they are absolutely essential to the organization and the reputation of the HR function. HR must be 100% technically competent in the administrative and operational roles and execute their HR services flawlessly.  

HR’s reputation is built on the employee’s perceptions of competence and has to be flawless in these two roles in order for to build a solid foundation of building on the higher level strategic role.

Third is the strategic role. This is the role where HR can really make a difference.  It requires HR participating in the strategic planning process, improving the organization’s performance, ensuring effective leadership, redesigning organizational processes, and ensuring financial accountability for HR results.  

Business literacy is required in order for HR to be effective in the strategic role. HR must know and fully understand who the organization’s stakeholders are as well as the organization’s markets, products, customers, and competitors.  Fully understanding financial terminology, speaking the language of business, and knowing how to read and interpret the organization’s financial statements – income statement, balance sheet, cash flow statement, etc.- are absolutely necessary.

I believe that the most effective strategic HR professionals are those who have real-life business experience outside of HR. (Self-promotion alert) I’m, of course, biased having successfully led and operated, with full P&L accountability, an award winning full line Macys department store for 13 years.

By having a solid business background and experience, HR can develop effective value-added strategies of staffing, performance management, total rewards, employee relations, and employee development. This puts the organization’s employees in the best possible position to execute it’s strategic plan and contribute to its financial success in the marketplace.

Strategic HR is my favorite topic and the role I enjoy most as an HR professional. I’ve touched on it a bit in my Metrics and Analytics series but I’ve been focusing on writing/podcasting mostly on the operational side of HR.  I had to build a foundation first, you know!

Now I can start exploring more strategic HR topics here at HHHR!  

Next week, I’m going to continue with strategic HR and explain exactly what a strategic plan is.  

Delivering Strong Financial Results Through Low Turnover

As a follow up to my post in January, “How We Staffed a New Uranium Mine”, I want to share the financial results delivered  by my HR Department and the 24% employee turnover (TO) rate from the recent hiring campaign in 2013.
It is  commonly accepted that each job separation costs a company between 16% and 20% of the employee’s annual salary (16% for <$50,000 and 20% for >$50,000).  Some studies have even shown that TO cost can run as high as 50% to 200% of an employee’s annual salary.  I chose to go with the more conservative 16-20%.
I analyzed our  hourly employee population of 42 and calculated our average TO cost per employee to be $7,194 and rounded it down to an even $7,000.  Our  average TO cost per employee with the salaried population included is $9,440.  I again chose to be conservative and use the lower hourly number of $7,000 in the table below.

Total Population
Seps %
Seps #
TO Cost/per
Total
Svgs from Act
Actual
24%
13
$  7,000.00
 $   91,000.00
   $                   –
Projected
80%
48
$   7,000.00
 $  336,000.00
 $  245,000.00
Projected
90%
54
$   7,000.00
 $  378,000.00
 $  287,000.00
Projected
100%
60
$   7,000.00
 $  420,000.00
 $  329,000.00
The 13 separations we had in 2013 cost  a total of $91,000.  As can be seen in the last column, Svgs from Act, we saved between $245,000 and $329,000 by having a significantly lower TO rate than expected.  Along with support from the management staff at the mine, I attribute the much of the low TO rate and resulting cost savings to the successful design and execution of the HR Department’s recruiting and hiring strategy!  

HR Mission Statement

I’m working on developing an HR Mission Statement for myself and company and came up with this one:

The mission of the HR Department is to support the company’s business objectives and financial goals by delivering strategic HR Management and excellent customer service to all functions of the company.

Open the Books and Encourage Ownership Thinking

Back in January, at the CHRA 2013 Annual Conference, I attended a Master’s Lunch session called “Ownership Thinking” by Brad Hams and received his book as a bonus for attending.

I planned on reading the book and blogging about it earlier and am finally getting to it now that I’m posting every day. I read the book right away, however.

I also just came across an article in the April 2013 HR Magazine “An Open Book” by Dori Meinert that basically discusses the same topic.

So with that, I am going to blog about both because I love the concept!

Both books encourage companies to be transparent with their information and encourage all employees, including line employees, to participate in important business decisions. Open up the books to all employees and start encouraging them to think like they are owners of the company.  Hence the titles An Open Book  and Ownership Thinking!

Hams’ subtitle,  “How to End Entitlement and Create a Culture of Accountability, Purpose and Profit”   directs you to his focus of where he sees the problem with many companies today.  He believes that entitlement is the “insidious disease”  crippling companies and destroying our economy – not the recession or scandal.  That too many employees think they are entitled to a paycheck just because they show up for work. He understands that many of these employees actually want to do a good job and contribute to their employers in a meaningful way but they need an environment to do so.

His book provides the framework for doing this and breaks it down into a four step process:

  1. The Right People: Ownership Thinking creates an environment that promotes learning and development, while at the same time increasing visibility and accountability. Your best people will excel, and your poorest performers are generally self-selected out by their peers.
  2. The Right Education: Employees are taught the fundamentals of business and finance, so that they are better equipped to make decisions that are financially sound.
  3. The Right Measures: Rather than focusing only on lagging financial measures, an emphasis is placed on identifying the most critical leading, activity based measures (Key Performance Indicators, or KPIs), and utilizing those KPIs to forecast results on a regular, formal basis.
  4. The Right Incentives: The process of employee education and focusing on the right measures in an environment of high visibility and accountability will increase your organization’s profitability – guaranteed. We can now design and implement a broad based incentive plan, because it is self funding.

Meinert’s article encourages the concept  “open-book management” of sharing financial information with all employees and including them in the decision making process.  She gives several examples of companies that have successively practiced open-book management including SRC Holdings who claim it requires more than just sharing financial statements and should include:

  • Teaching employees to understand the business and what makes it profitable.
  • Helping employees determine how they can affect the bottom line by setting companywide and department-level goals, keeping score, and holding people accountable.
  • Providing employees with a stake in the outcome, through bonus and incentive programs that encourage them to get involved in improving business results.

She also talks about how rare transparency is and how reluctant corporate management is about sharing financial information with the rank and file.

Only 7 percent of private companies share financial information with all workers, according to an April 2012 survey by Robert Half Management Resources. Another 17 percent provide quarterly or annual financial data to select employees, while 76 percent don’t share financial updates with employees at all, the survey of 1,300 chief financial officers found.

Many CFOs and CEOs “don’t want to let the secrets out because they are afraid … information is going to get to their competitor that can harm them,” says Paul McDonald, a senior executive director at Robert Half.

I fully understand these concerns but I would like to think that companies can trust their employees and would increase the trust these employees have of management if they would be included in discussions and important decision making and are taught to understand the financial  information of the company.

Meinert breaks the process down to three steps which you will note match up with Hams’ steps 2-4 and, ironically, leaves out the “people” element:

  1. Financial Literacy Training
  2. Keeping Score
  3. Cash Incentives

I think teaching all employees to understand the company’s financials and including them in decision making and keeping them “in the loop” is important to the long term success of any company.  The process helps create a strong culture of engaged long term employees who actually care about the contribution they make towards the big picture because they understand how it all relates.