How to Increase HR Contribution by Focusing on Lead Indicators (Stakeholder Value) More than Lag Outcomes (Business Financial Results)

by Dave Ulrich - Rensis Likert Professor, Ross School of Business, University of Michigan; Partner, The RBL Group ([email protected]) and Dick Beatty - Professor Emeritus, Rutgers University, School of Management and Labor Relations ([email protected])

In the last few weeks (months and years), we have heard and agree with the refrain that “HR should be connected to the business.” When we probe what this means, most suggest that HR work should be aligned with business strategy that leads to financial performance (some version of revenue minus or divided by costs).

To build on and evolve this work, we suggest a three-step process of “connecting to the business” (figure 1). These three stages evolve the HR agenda from delivering business strategy and predicting business financial performance to influencing stakeholders who lead the lag business indicators.

Stage 1: Human Capital Predicts Lag Financial Results

By definition, business financial results are lag indicators of how the business performs because they report past results monthly, quarterly, or annually.?

Human capital investments (in talent + organization + leadership + HR) predict and impact business financial results. Great work (by John Boudreau Dr. Jac Fitzenz David Green ???? Brian Heger Mark Huselid and Patti P. Phillips, Ph.D. and Jack Phillips, PhD to name a few) link HR to business financial results, sometimes called human resource accounting, high-performance work systems, or people analytics. These colleagues offer many tools to design and deliver human capability initiatives to deliver a strategy that leads to financial performance.

Human capability initiatives predict business financial performance, so human capability investments may be seen as a lead indicator of lag business results.

Stage 2: Stakeholder Value Determines Financial Results

Revenue growth comes when customers buy more products or services. Customer revenues may come from a higher share of existing customers or discovering new customers. Customers who buy more do so because they have a good experience with the organization. In our work, we have asked executives to divide 100 points across four domains, reflecting what they think their organization does to create a better customer experience and value in a unique way that competitors cannot readily copy (see figure 2).

• Financial: We have access to capital to grow and disciplines to create lower costs that lead to lower prices.
• Strategy/Marketing: We have unique products and services and market position.
• Technology/Operations: We have better operating systems, technology, and infrastructure.
• Human Capability: We have better people, organization, and leadership.

While results may vary by industry and firm strategy, executives generally report 30 to 40 percent of the 100 points in the “human capability” circle. Competitors can often quickly match price (cost), product/service features, and technology infrastructure, but differentiating on human capability is more difficult. In addition, the human capability domain often helps deliver the other three domains:

• Financial results come in part from employee productivity.
• Strategic/marketing results come from alignment of strategy to HR investments.
• Technology/operations success comes from people who design and deliver the latest technology.

When customers have a better experience with the organization because of human capability, they buy more thus increasing the business financial results.

The same logic holds true for investors (who are increasingly paying attention to the intangibles that determine their confidence in a firm’s future financial performance) and for communities (where reputation becomes a factor in increasing financial results).

In stage 1, human capability investments predict what has happened financially; in stage 2, stakeholder value determines future business results.?

Stage 3: Human Capability Drives Stakeholder Value to Lead the Lag Business Results

If stakeholder value is a lead indicator of lag business financial results, then human capability has the most impact when shaping stakeholder value.

To shape stakeholder value with human capability, we suggest three actions for HR and business leaders.

1. Envision the future that affects your organizational ecosystem. Look ahead to determine what is shaping the future of your industry and organization’s position in the ecosystem, including social, technological, economic, political, environmental, and demographic trends. Track where investment bankers are putting the “new” money.
2. Partner with those inside the company who shape stakeholder value. A number of internal groups work to create stakeholder value. Find out from marketing what data they collect from the firm’s customers and end user consumers to determine who the priority customers are and why they are buying. Meet with investor relations colleagues to learn how they are communicating a story for intangible value that gives investors confidence in future earnings. Partner with strategists to help them turn strategic intent into disciplined actions.
3. Spend time with customers, investors, and community citizens outside the company who shape stakeholder value. Learning who the priority customers, investors, and community citizens are and spending time with them likely increases their commitment to the firm. Involve them in hiring, training, compensation, and other human capability efforts. Figure 3 offers some examples of how to do this and a diagnostic to engage priority customers in HR practices. Investor and community citizens should replace the term “customer” in this diagnostic.

These three actions will help leverage human capability initiatives to increase stakeholder value that in turn increases business financial results. These actions will also pivot HR from merely implementing strategy to helping shape and define a business strategy that will create value for all stakeholders?

Conclusion and Implications

HR’s connection to the business includes linking HR investments that deliver strategy resulting in financial results. But HR’s connection can be even stronger when HR engages with external stakeholders who buy, invest in, and socially support the organization. Doing so, they help create strategy and increase future financial results.

This emerging logic in figure 1 helps HR not only prioritize human capability initiatives that deliver strategy and financial results, but it also enables HR to create increased customer demand for the product/service, investor confidence in firm future success, and reputation in the community.

How can you elevate your contribution to business financial results by focusing on stakeholder value?

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Dave Ulrich?is the Rensis Likert Professor at the Ross School of Business, University of Michigan, and a partner at The RBL Group, a consulting firm focused on helping organizations and leaders deliver value.