Unlocking the potential of HR: How can effective operating models and value creation boost your company

In today's fast-paced business environment, Human Resources (HR) has gained immense importance driving organisational success.

Increased focus on mental health and well-being, as well as the impact of people on stakeholder value demonstrates that HR is constantly evolving, with organisations striving to optimise their operating models for enhanced effectiveness.

By combining insights from two key sources to explore how organisations, including start-ups, can optimise their HR function and create value for stakeholders.

We delve into the HR value logic proposed by Dave Ulrich and his colleagues , as well as the findings from the 2023 HR Operating Model Report , providing a comprehensive guide to building an effective HR operating model.

Firstly, we share a few insights obtained from Professor Dave Ulrich and his colleagues, who have extensively examined the core elements of an effective HR function, providing valuable insights into an HR value logic that has the potential to revolutionise HR practices.

Secondly, key findings from the 2023 HR Operating Model, which provides a comprehensive overview of the current state of HR operating models is provided.

Finally, at the third stage of this article, some essential key takeaways for start-ups establishing an HR function from inception are presented.

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1.????Insights from Professor Dave Ulrich and his team

According to Dave Ulrich, HR should be viewed as a value creator for stakeholders rather than just an internal department.

His work highlights the importance of aligning HR actions with the business context and outlines how HR initiatives related to talent, leadership, organisation, and the HR department contribute to the overall effectiveness of the HR function.

By understanding the value HR brings to key stakeholders, organisations can build a compelling business case for investing in HR.

Professor Ulrich and his team present a comprehensive framework for HR functional excellence and discuss ten key dimensions that form the HR value logic and offer practical guidance on how to address each dimension effectively.

These dimensions are presented as follows:

HR Reputation

HR Customers

HR Purpose

HR Design

Human Capability

HR Analytics

HR Digital Technology

HR Practices

HR Professionals

HR Relationships

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The ten key dimensions above cover essential processes, such as strategic alignment, employee experience, customer focus, analytics, digital integration, and teamwork.

Implementing and measuring these dimensions with a survey tool for diagnosis and progress tracking, companies can identify areas for improvement and prioritise actions, therefore, enhancing their HR function and driving value creation.

When focusing on these dimensions, HR leaders can cultivate human capability and deliver stakeholder value.

Also, adopting a data-driven approach and monitoring progress allows organisations to continuously improve their HR function and provide sustainable value to stakeholders.

With a strong focus on stakeholder value, strategic alignment, and ongoing improvement, organisations can unlock the full potential of their HR function and drive success in today's dynamic business environment.

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2. Key Insights from the 2023 HR Operating Model Report

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The Power of Structure

The 2023 HR Operating Model Report confirms the dominance of the traditional three-pillar system, popularised by Dave Ulrich's model. The three-legged stool model suggests that HR function should be divided into three segments in large organisations:

Shared service activities, responsible for providing administrative and basic support functions to the remainder of the business.

HR Business Partners (HRBPs), who are individuals or small teams that work closely with the managers of business units on key initiatives and change management.

Centres of Expertise (COEs), that function as repositories of key technical knowledge on resourcing, reward, employment relations, etc. and can develop policy while providing support to business units and to shared services.

According to Ulrich, at the top of the three-legged model, there should be a small, corporate HR team responsible for the function as a whole, besides providing strategic direction.

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Dave Ulrich’s Three-Legged Stool Model

Source: https://www.aihr.com/blog/hr-service-delivery/

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The COE Hierarchy

With 86% of Chief HR Officers (CHROs) reporting directly to the CEO, it becomes essential for COEs to efficiently report the HR leadership.

The image below reveals a clear hierarchy within COEs, with Total Rewards/Compensation and Talent Management frequently reporting directly to the CHRO.

CEO Reporting: HR Operating Model Report 2023

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Talent Management emerges as a central COE, with other COEs often reporting to it. Additionally, organisations with a formal service centre tend to centralise their operations rather than adopt a regionalized approach.

When looking at the next flowchart, it's evident that when COEs don't report to the CHRO, they usually report to the Talent Management COE. However, there is no consistent rule for COEs that don't report to the CHRO.

The data reveals that People Analytics is more frequently presented to Shared Services and Other HR Functions rather than to the CHRO or Talent Management.

This might give the wrong idea of its strategic role within the organisation or imply that the COE is prioritising reporting over genuine analytics in many companies.

CEO Reporting: HR Operating Model Report 2023

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COEs experienced significant growth in most large and small companies, with additions in Talent Acquisition, DE&I, and People Analytics in over 40% of firms. The most substantial net growth occurred in People Analytics (net +52%) and DE&I (net +43%).

Larger companies (25K+ employees) had positive growth in all COE categories except Assessment. DE&I saw the highest growth, with 58% of firms increasing their workforce, and 18% added over 25% more employees in that area.

Talent Acquisition and People Analytics also had significant growth with 56% and 55% of large firms hiring, respectively.

Growth in last 3-4 years (large companies with 25,000+ employees)

CEO Reporting: HR Operating Model Report 2023

Smaller firms, with less than 5,000 employees, were more cautious, with 45% adding Talent Acquisition staff, 42% adding Learning and Development staff, and 41% adding Talent Management staff. These firms had also a net neutral or negative trend in Employee Relations and Assessment hiring.

Growth in last 3-4 years (small companies with less than 5,000 employees)

CEO Reporting: HR Operating Model Report 2023

The COE growth is generally positive, reflecting the importance given to these functions. However, some COEs show excessive growth compared to the overall business environment, raising concerns about potential layoffs, as seen in Talent Acquisition and DE&I in mid-2023.

Hiring trends differ between large and smaller firms, with larger ones investing more in People Analytics and DE&I, likely due to larger budgets for building these newer COEs.

HR Ratio Numbers and Trends

The ratio of HR employees and HR Business Partners (HRBPs) to all employees is still about the same as it was in the past.

As shown in the picture below, both actual and estimated data show that the average HR: total employee ratio remains close to the historical ratio of 1:100, with observed ratios of 1:99 and 1:95, respectively.

CEO Reporting: HR Operating Model Report 2023

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The following ratio can point to both positive or negative outcomes, since it indicates that HR may have replaced lower-value tasks with higher-value ones or that there's a lack of efficiency in the HR processes.

Furthermore, a similar number of companies have either increased or decreased the ratio of HR employees to total company employees. Approximately 27% of companies somewhat reduced the ratio, while 34% either significantly increased or somewhat increased it.

CEO Reporting: HR Operating Model Report 2023

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The support ratio for HR Business Partners (HRBPs) varied a lot among companies. Some have a small number of HRBPs compared to employees, and there's a trend of shifting more work to service delivery. Some HRBPs are hesitant to give up handling certain tasks, which can be a problem.

When it comes to HRBP support, the ratio also varied widely among respondents, with an average of 1:283 in actual observations and 1:277 in estimated observations.

Some companies reported ratios of 1:500 or higher, indicating leaner staffing of HRBPs and a shift towards more work being handled by service delivery.

However, organisations face challenges as some HRBPs are reluctant to delegate transactional work to service centres, leading to a need for personalised HR support when it may not be necessary.

In a nutshell, we can observe the following HR ratio trends from these findings:

Stable Overall HR Ratio: The average ratio of HR employees to total employees remains close to the historical ratio of 1:100. This suggests that despite the inclusion of value-adding HR functions, the overall HR ratio has not significantly changed over time.

Mixed Changes in HR Employee Ratio: The ratio of HR employees to total company employees has observed both increases and decreases. About 27% of companies reduced the ratio somewhat, while 34% increased it, indicating a diverse range of approaches.

Varied HRBP Support Ratios: The ratio of HR Business Partners (HRBPs) to employees varied widely among respondents. Some companies reported leaner staffing of HRBPs with ratios of 1:500 or higher, indicating a trend towards more work being handled by service delivery.

HRBP Challenges: Some organisations face challenges with HRBPs being hesitant to delegate transactional work to service centres. This can lead to unnecessary personalised HR support, impacting the overall HRBP support ratio.

In summary, the HR ratios are generally stable, but there are different approaches among companies, with some adopting COE hiring and leaner HRBP staffing, while others maintain traditional ratios with potential challenges in delegation.

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3. Overcoming start-up challenges for an effective HR implementation

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When establishing an HR function from inception within a start-up or scale-up, it can present a considerable challenge to benchmark and evaluate your HR practices against those of well-established organisations.

Furthermore, when experiencing rapid growth in a start-up or scale-up, three critical areas often face overwhelming demands:

onboarding

people operations

talent acquisition

To effectively manage this growth, our recommendation is to streamline and automate non-value-added functions such as operations, labour relations, benefits, and onboarding.

Investing in a robust HR Information System (HRIS) that aligns with your budget is essential. Additionally, implementing a chatbot can efficiently handle routine personnel inquiries, freeing up HR resources for more strategic initiatives.

To optimise talent acquisition, we suggest separating it as a distinct function, independent from other HR areas, particularly when calculating the HR-to-total employee ratio. A good rule of thumb for talent acquisition is to allocate 24-36 hires per year per recruiter (equivalent to 2-3 hires per month).

This estimation helps determine the appropriate size of your talent acquisition team. If recruitment activities are concentrated within specific months, alternative solutions like leveraging a combination of internal and external recruiters can be considered and budgeted accordingly.

To align your talent acquisition team's size with your hiring plan or workforce needs, divide the total number of hires by approximately 30 (or adjust accordingly for hard-to-fill roles). This approach allows for proper dimensioning of your talent acquisition resources.

By addressing these challenges strategically and aligning HR functions with growth plans, start-ups can effectively manage the demands of rapid expansion and build a strong foundation for future success.

Unleashing the potential of HR through effective operating models and value creation can position your organisation for continued growth and excellence in today's dynamic business environment.