HR Transformation: Transforming to What?

By Patrick M. Wright, Mike Ulrich, and Erin Burns

For over 20 years HR functions have pursued some form of transformation. On the one hand, one could find this frustrating, thinking it means that they just do not possess the capability to transform. A more reasonable explanation is that HR departments constantly transform because the changes in their organizations require new characteristics in the department. The question is: What are the characteristics currently required that will positively impact the business? In this round of the Human Resource Competency Study (HRCS) we identified and assessed 7 characteristics that we thought would drive business results and thus comprise the transformational target of current HR departments.

Employee Practices – This component of the HR department focuses on the extent to which the organization uses the right set of HR practices to manage employees. Consistent with recent research we asked about practices that elicit high performance and commitment such as performance-based pay, comprehensive training, selecting the best, performance feedback, paying above competitors, employee participation in decisions. But we also asked about the kinds of practices that discourage employee free-riding and suboptimal performance such as having work rules, supervision, and discipline, 

Practice Alignment – We know that HR departments develop and deliver a number of HR practices such as Staffing/recruiting, Compensation and Benefits, Employee Engagement, Learning & Development, Diversity, Equity, & Inclusion, and Performance Management. This characteristic illustrates the extent to which these practices are aimed at supporting and developing key strategic capabilities?

Information and Analytics – We all know that the amount of information is increasing at an exponential rate and firms must find ways to analyze the information to make effective decisions. Thus, this characteristic describes the extent to which the department is building databases, applying analytics, seeing patterns in data, and measuring the impact of HR.

Capability support – As mentioned in previous articles, we view an organization’s capabilities as the combination of people, systems, and processes that enable a firm to do something better than their competitors. This characteristic of the HR department refers to how well does the HR department support building the capabilities the organization needs.

Stakeholder Value – We know that organizations today must meet the needs and demands of a variety of internal and external stakeholders. This dimension defines the extent to which the function designs and delivers practices that add value to customers, investors, line managers, and employees.

HR Department credibility – In past HRCS efforts, the credibility of the HR function had emerged as one critical driver of business results. This characterizes the extent to which the function earns line management trust, gains employee trust, advocates for employees, and holds line managers accountable.

Reliance on HR – A final characteristic consists of the extent to which those in the firm rely on HR to play a critical role in strategic activities such as the creation of business strategy, strategy implementation, restructuring, and culture change. 

In essence these comprise the processes delivered by HR departments (Employee practices, practice alignment, information and analytics), the perspective they take in delivering them (capability support, stakeholder value), and the position they have achieved in the minds of others in the organization (credibility, reliance on HR). 

We ran the analyses examining how these characteristics were related to business results in terms of the performance of the unit compared to competitors in the areas of financial (profits, revenues), strategic (new products, quality of products) customer (satisfaction, market share), employee (productivity, attraction/retention) and social (environment, community) outcomes. Again, in the chart below, the bottom number provides an estimate of how much of the variation across units was explained by the variables, and the other numbers describe the relative importance (out of 100%) of each of the characteristics of the department.

 As you can see in this chart, two findings emerge. First, all the characteristics are positively related to business results. Second, the most impactful characteristics of the departments were, in order, Employee practices, supporting capabilities, and stakeholder value creation. 

Another way to look at these results is to plot the relative effectiveness and impact of these characteristics. As you can see in the figure below, HR Information and Analytics falls in the “Low Impact/Low Effectiveness” quadrant, suggesting a need to better manage this component. Interestingly, HR Reliance, HR Credibility, and Practice Alignment fall in the “Low Impact/High Effectiveness” quadrant, indicating that HR departments have gotten good at these, but they do not have a strong impact on business results. These have been supplanted by the “Outside-In” characteristics of Stakeholder Value and Capability Support that fall in the “High Impact/High Effectiveness” quadrant. Finally, the biggest area of opportunity for HR departments to prioritize is to design and implement the right employee practices to drive performance as this characteristic has the highest impact yet the lowest effectiveness. 

Finally, what is the link between individual competencies and the characteristics of HR departments that most drive the business? The figure below shows how the five competencies relate to employee practices, capability support, and stakeholder value.

As you can see here, the ability to accelerate business through advances in human capability dominates the impact on the key characteristics/activities of the HR department.  This highlights the critical evolution of HR departments from siloed and internally-focused to externally-focused such that those in the department understands the competitive environment, how the firm is differentiating itself, the capabilities necessary to do so, and is able to leverage HR practices and processes to create a competitive advantage. Also, the ability to simplify complexity enables HR professionals to balance the needs of different stakeholders. 

So, what are the key takeaways regarding navigating the impact of the HR department on business results?

1.     Consistent with past HRCS studies, the organization matters more than the individual in terms of delivering business results. The book “Victory through Organization” highlighted this finding which continues to show up in the data. 

2.     HR transformation, while requiring that individual HR professionals get better, is much more than that. It points to the need to transform the HR department to having the right processes, perspective, and position in the organization.

3.     You can begin transforming the department by focusing on three high-impact areas. First, ensure that your employee practices BOTH drive commitment and performance of valuable employees and discourage poor performance to the point of exiting poor performers. Second, in order to support the capabilities, those in the department must identify the critical business capabilities and the key talent within those capabilities that enable your firm to differentiate itself in the marketplace. Finally, the department must take a multiple stakeholder approach (investors, customers, employees, communities, etc.) to all they do. 

Our results show the tremendous value that effective HR departments can bring to their businesses. But they also show that not all departments have yet achieved that contribution. The question for you is not “Are you in a process of transformation?” We are sure you are. The more important question to ask is “Is our HR department’s transformation focused on areas that will drive business impact?”