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.  

Linking Human Capital Measurements to ROI – Part 2

Sixth Entry in the Metrics and Analytics Series

Last week, I published Part 1 of Linking Human Capital Measurements to ROI, setting the stage for the four human capital metrics that track the return on investment in human capital. My source is Kirk Hallowell’s essay in The New HR Analytics book by Jac Fitz-Enz.

As a brief summary,  Hallowell’s four metrics are designed to be event driven (how and when the measurement takes place), clear and easy to understand, and focus on the highest points of leverage for gain or loss of ROI (fewer strategic measures).

So, with that, let’s dig in!

Performance metric 1 – Time to Full Productivity (TFP)

An employee’s time to full productivity (TFP) is simply a learning-value curve that will increase over time as that employee improves their knowledge, skills, and productivity. TFP is a very important metric because it can focus and direct the organization’s investment strategies. In order for this metric to be effective, however, full productivity needs to be clearly defined and quantified in order to properly measure it.

An employee’s competencies and professional relationships will predict the employee’s future performance and contribution to the organizations overall performance.

The primary goal here is for the organization to shorten the employee’s TFP as much as they possibly can. Some of the ways they can do this are listed here:

  • Use an integrated talent development system
  • Hire employees for their competencies and adaptive learning skills
  • Provide competency-based training
  • Deliver a robust and effective onboarding process
  • Identify and address development needs early
  • Deliver timely and effective feedback
  • Provide incentive-based pay
  • Optimize environmental issues (work flow, equipment, support resources, etc.)

Performance Metric 2 – Quality of Hire

The quality of hire is how the employee fits within the organization’s culture and their ability to accomplish their job responsibilities. Different employees will reach full productivity at different rates depending on their skills and experience.  Each employee will have a different starting point, shape, and trajectory on the learning-value curve.

Several variables that can determine the quality of hire are listed here:

  • The employee’s key experiences as they relate to the job responsibilities
  • Their past work and performance
  • A competency assessment
  • Their adaptive learning skills
  • Personality variables as measured by an assessment

Of course, the actual quality of a hire will vary greatly depending on how the candidates are sourced and recruited. Employees with stronger and more developed competencies will achieve their TFP much quicker.

We can also use the quality of hire to justify pay differences between new hires by paying more to those who can show that they are capable of reaching TFP sooner than their peers.  An organization’s decision to invest more in a higher quality of hire will be justified when that new hire reaches their TFP quicker than her peers.

Performance Metric 3 – Quality of Promotion

The quality of a promotion depends on how well the newly promoted manager adjusts and learns their new position. There will be a dip in their learning-value curve after their promotion but if the employee was properly vetted for the promotion and the proper training is administered, the learning-value curve will recover and the employee’s performance will start to provide a solid return on investment.

Most of us can agree that one of the most difficult transitions an employee makes is when they are promoted from a line employee to a supervisor. The employee must shift from being a technical/administrative/functional expert to a management expert.

In addition, when the newly promoted employee becomes the supervisor of people with whom they were peers, they will often fail or struggle for a long period of time. This is where the organization must invest in management training, coaching and effective feedback in order to realize a good ROI.

And this is where the learning-value curve takes a dip.

If the employee’s promotion is successful, their learning-value curve will recover from the dip and begin an upward increase positively impacting their direct reports, systems, and processes.

Performance Metric 4 – Quality of Separation

The loss of good employees can have a tremendous negative impact on an organization’s economic return. Typically, an organization does not measure this impact leaving it a costly and unknown mystery to how serious the impact actually is.

When a good employee leaves an organization, the ROI in human capital is potentially reduced in the following ways:

  • The potential for the employee to add economic value from their performance immediately stops.
  • The organization’s investment in training, experience, and internal networking of the employee is immediately lost.
  • New investments to replace the employee must be made in order to maintain and grow productivity.
  • Loss of potential revenue streams and broken customer relationships may hurt the organization’s profitability.
  • The employee may move to a competitor and take their intellectual capital and customer relationships with them.
  • The remaining employee’s morale and productivity is typically negatively impacted.

The separation costs of a top-performing employee has been estimated to be 75 to 125% of that employee’s annual salary when including lost opportunity costs and adding the direct and indirect costs of hiring, training, onboarding a new employee.

 

The four metrics I just briefly discussed here give organizations the opportunity to apply a dollar amount on the cost or return on investment as they relate to human capital investment as was done above in the Quality of Separation metric above.

I highly recommend you read Hallowell’s essay in Fitz-Enz’s book where he does a great job of explaining the four metrics as they apply to his case study.

Please take this week’s survey, located at the top of the sidebar, about this week’s subject of linking human capital measurements to ROI!

Linking Human Capital Measurements to ROI – Part 1

Fifth Entry in the Metrics and Analytics Series

While looking for ideas for this week’s post and podcast, I came across a very interesting essay in The New HR Analytics book by Jac Fitz-Enz that I feel is very important in understanding how human capital measurements should be made in terms of linking them to an organization’s return on investment (ROI).

The essay is by Kirk Hallowell titled “Roberta Versus the Inventory Control System: A Case Study in Human Capital Return on Investment”.  I’m not going to discuss the actual case study presented in the essay but I want to review the key concepts in the essay as I think they make a great deal of sense in how we should change the way we think about human capital metrics and ROI.

The concepts he discusses identify ways to link an organization’s investments in human capital to their financial returns in the same manner they apply to depreciating or appreciating their tangible assets. Hallowell suggests, and I agree, that accounting metrics and rules need to be modified in order to change the way we think about how we invest in people.

Human Resource costs – recruiting, payroll, benefits, training & development, etc. can typically be a full 70% of an organization’s budget. The fact that most companies don’t have a reliable and consistent method of measuring this much of a company’s budget is concerning to say the least. In addition, human capital costs are always expensed rather than depreciated. This prevents the organization’s leadership from effectively managing and maximizing their human capital return on investment the same way they do with their other tangible asset investments.

When a company invests in their tangible and people assets, they do so with the goal of achieving the same business results but the way the company processes the accounting for each investment is completely different.  Human capital costs are expensed and immediately impact the company’s balance sheet while investments in tangible assets (physical plants, equipment, etc.) are listed as assets and depreciated for up to 30 years.

The result? The tangible assets, which are typically a much greater investment, are recognized as a significantly lower expense on the company’s balance sheet than an initial investment in human capital expenses.

As tangible assets age, they decrease in value and within a certain period of time, they lose all of their value and will need to be replaced. These tangible assets will require maintenance and utility costs to keep them from deteriorating too quickly.

Unlike tangible assets, human capital assets actually increases in value over time. Employees gain experience, expertise, and knowledge becoming more efficient through their work and training. Effective training and management will make the company’s operations more efficient and employees will increase their ability to add value to the organization’s operations. This will happen while the company’s investment in salary, benefits, administration, and training remains more or less consistent.

The return on investment for organizations is always driven by their people but the investment is listed as a nondepreciated expense. Crazy. We have our most valuable asset, our people. We invest in finding the best people we can, train and develop them, and as a result the value of that asset actually increases!  But we treat it simply as an expense rather than an actual appreciating asset!

Hallowell’s solution is to introduce four human capital metrics that will track the return on investment in both the tangible and human capital assets. The four metrics are designed to be event driven, clear and easy to understand, and focus on the highest points of leverage for gain or loss of ROI.

I will explore these four human capital metrics in next week’s post and podcast. This post is a little shorter than usual but if I include the four metrics, it becomes too large of a post so I decided to split this topic into two parts.

Please take this week’s survey, located at the top of the sidebar, about this week’s subject of linking human capital measurements to ROI!