Transactional Value | What has HR Done to Add Value?

Cost reduction and efficiency improvements are generally the main drivers for HR systems changes and the adoption of a shared services delivery model. Jerry Arnott (Department for Work and Pensions — DWP) emphasises the importance of efficiency improvements within the DWP's HR transformation programme and states that it is critical that HR adds value on essential administrative and support services. This scale of saving is mirrored in other organisations we have worked with.

HR's ability to deliver transactional value is the main litmus test for managers. As Maggie Hurt (Renolds) points out: 'Our clients judge us on getting the basics right, like pay and offer letters — what we might regard as mundane. We then get the attention of our clients and earn the right to contribute at a more strategic level'. HR services delivered at the transactional level are most immediately relevant to day-to-day management and therefore play strongly into tests of competence and relevance. It is essential therefore that HR works with the rest of the business to agree on expectations in the following areas:

• Target cost base (measured through various ratios)
• Service levels
• Quality
• Reporting

Underpinning these tangible measures will be less tangible (but arguably the real determinants of value) measures of responsiveness and experience (the personal touch).

All this is great, and if HR can get all the above right it will be adding transactional value. But we believe HR can deliver more in this area:

1. Data modelling — HR needs to turn information into insight. What is more likely to get the attention of the CEO/CFO, a turnover figure (say 15%) set alongside an industry turnover average (say 13%) or data showing the true costs of turnover: where we are experiencing it; the kind of people leaving, an impact analysis that shows what it costs to lose then replace someone? We believe the latter will, especially if the financial impact can be estimated.
2. Reporting what is useful — we need to report what managers will find useful. This means thinking more deeply about the kind of data we collect and how we present it. Ian Elms recalls that in his time at Kingfisher an annual 'census' was produced showing a breakdown in company demographics, compensation data, etc. This gave the executive team insights about the workforce.
3. Assessing impact on performance — getting under the skin of data so that we can better assess the impact on performance. Other functions do this really well (e.g., marketing, finance) and we have much to learn from these in order to build a compelling story using both narrative and data.

Value Adding HR

Moving from the world of academic research to the experience of HR professionals, we have identified an interesting dilemma that needs to be faced: if we accept that 'value add' is essentially what stakeholders consider to be of value to them (PULL) — how do we also influence stakeholders so that their needs change (PUSH)? Put more simply — if managers consider value adding HR to be excellent HR administration, slick HR processes and timely and helpful case management support, how do we also help managers to understand that HR professionals can add value not only through delivering the basics, but also through delivering business projects more successfully, managing change, or shaping the strategic agenda? Returning to the Economist Intelligence Unit/Deloitte report quoted earlier — how do we influence senior executives so that they see HR and people issues as one in the same?

In conversation with Frances Allcock (BBC), we were able to articulate this dilemma as shown in Figure 3.2. This figure captures well the challenges faced by HR professionals — how do we shift the conversations we hold with our business colleagues so that we not only hold the conversations we need to hold with colleagues but also engage in those areas they don't expect us to? As an illustration, Allcock has observed that one of things managers value from HR is excellent and slick reorganisation — the implementation piece. If HR does this well they get to the table. Yet HR is often unable to get to talk about the really challenging aspects of change because managers either do not have the time or they do not see it as an area where HR can contribute (sometimes with justification).

 

Figure 1: Shifting conversations.

Answering the question 'what do we actually talk to managers about?' will vary from organisation to organisation — you may want to reflect upon Figure 1 to review your own conversations with business colleagues. What is important is that we create value not just by meeting stakeholder needs, but in shaping their thinking and influencing their decisions. As Alison Grace (National Express Group) put it: 'it is about working in ways that make a positive difference to our businesses and that means bringing fresh thinking to the table, challenging assumptions and getting the business to grapple with tough issues from multiple perspectives'.

If changing the conversations we have with colleagues is one of the challenges we need to confront another is measurement. Many HR departments are involved in measuring their company's operational performance against key performance indicators (KPIs). Fewer have a role in measuring and providing hard evidence of the efficiency and value they are adding to delivery of their organisations' strategic objectives.

As Martin Moore (Royal Mail) put it: 'The problem with many HR measures is that we measure what is measurable not what we need to measure'. Sticking to traditional measures of HR effectiveness also induces a way of thinking and working leading to a heavy reliance on the latest fads and fashions of espoused 'best' practice and over-preoccupation with benchmarking.

One commentator, Gary Hamel, has suggested that this is the Achilles heel for HR. He has noted that 'unlike the Finance function, HR does not have an explicit and accepted theory about how it adds value to the business'.

The reason for this is addressed in the research led by Lepak et al. cited above: non-financial benefits of the sort offered by effective HR functions are very rarely based on a set configuration of cause-effect but rather, value is derived through a combination of connecting processes, information, strategy and service delivery aligned to the specific needs of each business. Whereas finance is largely based on a universal model of added value, HR is based on a situation-specific model of added value. In other words, we need to take excellence in people management practices and align these with the specific needs of our organisation.

But where to start?

In our conversations with senior practitioners there is a strong appetite for HR to develop ways of measuring the impact of core business issues. To frame this discussion, we have been able to identify four ways in which HR drives value (see Figure 2):

• Transactional value — running HR administration in ways that capture and provide accurate, timely and insightful information and advice. Measures of transactional value include: costs/value for money, data and information quality, reporting capability and flexibility, delivery against service levels, etc. A test of transactional value will be whether managers get high quality information and advice when they need it and whether this information tells them anything new.
• Process value — putting in place people processes that are efficient (speed, cost, quality), fit for purpose — relevant to the circumstances of your organisation, meaningful and engaging for users and aligned to organisational goals, etc. A test of process value is the experience people have of the process, for example, with regard to selection — does the selection process build commitment and engagement from the first point of contact through to decision?
• Strategic value — participating in shaping strategy so that people and organisational issues are surfaced from the outset and supporting the effective execution of strategy. Tests of value in this context include challenging thinking, aligning people and business strategies, executing strategy in a way that makes change stick, delivering projects and securing stakeholder commitment to change. It also means adding value through shaping organisational design and being confident in manipulating data so that the organisation is able to gain insights concerning the workforce profile and cost structure.
• Reputational value — doing things that help to deliver the strategy and which build a positive internal and external image of the organisation. Examples of this are ethical and sustainable practice, good governance and leadership, effective risk management, being seen as a good employer, etc. A test of reputational value may be that those people you need to attract really want to work for your organisation.
  
  

 

Figure 2: Value drivers.

Clearly, all value drivers are 'strategic' but the sense we have used strategic above is to focus particularly on the delivery of the business change agenda. Each of these ways of value creation also requires a multiple stakeholder approach and a deep understanding of external and business realities. This emphasis on relevance to stakeholders and to your organisation aligns with Lepak et al.'s research in the 'Value creation — what it means and how it is created' section and with the contingency approach to organisational development.

Context | What Is HR's Value Proposition?

Terms such as 'value adding' and 'value creating' are much used in organisations and have become by-words that articulate what HR transformation is seeking to achieve. 'We want to move from transactional to "value adding" HR' is a typical, and justifiable, aspiration for HR transformation. It suggests that even though HR professionals are currently delivering worthwhile work in organisations there is still something missing: a contribution to key business challenges that is not being made currently; contributions that will make colleagues sit up, pay attention and find valuable.

Ask a line manager or business leader what they value from HR and you are likely to get a divergence of opinion. Paying people on time is valued; accurate employee informationis valued; support to managers who are handling difficult disciplinary, sickness or grievance cases is valued; slick people processes are valued; efficient restructuring is valued. We should not delude ourselves that these activities are somehow worthless. They are not. HR adds value through these activities.

But there is still something missing. What about the people issues we are not engaged in, but could be? What about working the data so that we bring real insights to business colleagues?

This kind of 'value add' is what an Economist Intelligence Unit/Deloitte report in 2007 (Aligned at the Top) called 'the big challenge' and their research drew an interesting distinction: 'When senior business executives talk about HR, they focus on administrative activities such as rewards and benefits, performance evaluation and HR operating efficiency. When those same executives talk about people issues (our emphasis), they focus on talent management, workforce productivity and leadership development and, in many cases the HR function isn't even mentioned'.

A KPMG report — HR: Architect or Artisan? (2008) reported the following insight from the CEO of a major high street retailer: 'When the marketing director comes to the executive board meetings he presents data on our consumers, and we are given enormous insight about their buying habits, their aspirations, their concerns and their hopes. We have clear demographic data, and we can predict with real accuracy how patterns will evolve. But when HR presents information about our employees it is less precise, less concise, less insightful and less predictive'.

These CEO insights cannot be dismissed and they set out challenges of relevance and data insight the function must respond to.

We propose to unpick what is meant by value creation referring to recent research and then examine HR practitioner perspectives. We will outline how some HRfunctions are responding to this desire to extend the range of value adding contributions and finally highlight a number of challenges that remain if HR is to create value through people.

What Is HR's Value Proposition?

Terms such as 'value adding' and 'value creating' are much used in organisations and have become by-words that articulate what HR transformation is seeking to achieve. 'We want to move from transactional to "value adding" HR' is a typical, and justifiable, aspiration for HR transformation. It suggests that even though HR professionals are currently delivering worthwhile work in organisations there is still something missing: a contribution to key business challenges that is not being made currently; contributions that will make colleagues sit up, pay attention and find valuable.

Ask a line manager or business leader what they value from HR and you are likely to get a divergence of opinion. Paying people on time is valued; accurate employee information is valued; support to managers who are handling difficult disciplinary, sickness or grievance cases is valued; slick people processes are valued; efficient restructuring is valued. We should not delude ourselves that these activities are somehow worthless. They are not. HR adds value through these activities.

But there is still something missing. What about the people issues we are not engaged in, but could be? What about working the data so that we bring real insights to business colleagues?

This kind of 'value add' is what an Economist Intelligence Unit/Deloitte report in 2007 (Aligned at the Top) called 'the big challenge' and their research drew an interesting distinction:'When senior business executives talk about HR, they focus on administrative activities such as rewards and benefits, performance evaluation and HR operating efficiency. When those same executives talk about people issues (our emphasis), they focus on talent management, workforce productivity and leadership development and, in many cases the HR function isn't even mentioned'.

A KPMG report — HR: Architect or Artisan? (2008) reported the following insight from the CEO of a major high street retailer: 'When the marketing director comes to the executive board meetings he presents data on our consumers, and we are given enormous insight about their buying habits, their aspirations, their concerns and their hopes. We have clear demographic data, and we can predict with real accuracy how patterns will evolve. But when HR presents information about our employees it is less precise, less concise, less insightful and less predictive'.

These CEO insights cannot be dismissed and they set out challenges of relevance and data insight the function must respond to.

We propose to unpick what is meant by value creation referring to recent research and then examine HR practitioner perspectives. We will outline how some HR functions are responding to this desire to extend the range of value adding contributions and finally highlight a number of challenges that remain if HR is to create value through people.

Key Issues and Questions

We then turned to the future and presented a small number of 'big ticket' questions for organisations to address and seven key issues currently faced by the function. We emphasised and reiterated our belief that there is no one single organisational solution for HR as each organisation needed to work out what kind of HR contribution was needed for that organisation in its business context.

But are all questions and issues still valid?

We posed a couple of big ticket questions we believed were key to bringing about successful HR transformation. These questions were:

• What role does the business need the HR function to play when moving beyond the current phase of HR transformation?
• What will HR professionals do that will bring most value to the wider organisation beyond the current phase of HR transformation?

We believe that these questions are still valid. The research cited earlier suggests that HR functions are still not effective at engaging with internal customers and providing a delivery model the business needs as opposed to the one HR wants. We also believe that there is still a gap to be bridged in identifying how HR professionals can add the most value in organisations.

We also identified seven issues we believed still needed to be faced up to build a clearer picture of future priorities in taking HR transformation to its next step. It is worth revisiting these issues to test their continued relevance.

Issue 1: HR Professionals and Line Managers

A common mantra in recent years is that line managers should manage and HR professionals should support them. Yet effective HR management depends on a strong partnership between HR professionals and line managers, where there is mutual recognition and respect and where both sides are working towards a common goal. This kind of relationship does not come easily and will not happen through wishful thinking. An honest review of current relationships needs to be held and the expectations of both sides aired. Some issues that we encounter are the following:

• lack of manager time to build sufficient expertise in HR policies;
• the HR business partners being a one-stop shop — up to a point;
• lack of accountability concerning the way managers manage people.

These points are interrelated. Managers are under enormous pressure to deliver the technical/business aspects of their role, and they feel that they do not have the time to navigate the Intranet and/or attend training to build sufficient expertise to deal with people issues that a good HR professional should be able to help them with. Similarly, there is frustration when managers hear a great deal about the HR generalist being able to support managers on the full range of HR issues, but when they need advice are told to contact a service centre or look things up on the Intranet. At that point in time, they do not feel that HR is adding value. Finally, organisations often pay lip service to the people management aspects of a manager's role — how many line managers are rated as poorer performers if they deliver on the technical aspects of their job but are not good people managers? There are too few, in our experience. Organisations need to face up to these issues in an honest way if an effective HR delivery model is to be implemented.

Comment

The Changing HR function reports that 'the division of people management responsibilities between HR and the line was largely unchanged since 2003, despite HR's wish to have more work transferred to line managers. HR still takes the lead on remuneration and implementing redundancies; the line has prime responsibility for work organisation; whereas recruitment, employee relations and training and development activity is more shared. 

Overall, the principal reasons for HR's lack of success in achieving greater transfer of tasks to the line appear to be line manager priorities, their skills, the time available to them for people management tasks and poor manager self service'.

We believe that this issue of both defining the people management responsibilities of managers and then equipping them with the skills to deliver these responsibilities remains an issue that needs to be addressed.

Issue 2: The Role of Shared Service Centres

Service centres are now a part of all our lives. We deal with them when we contact our bank, utility and insurance companies and even when we order office supplies. We are used to using them and they can be relatively inexpensive — which is a major factor in support of their existence. The first organisations to use them had an advantage over their competitors, but now they are more 'business as usual' with many companies. Costs per transaction can be so low that in some cases they are approaching the cost benefits of fully e-enabled systems, with their attendant development and operating costs. But e-HR costs should, in theory, continue to fall in the future. So, where should organisations be making their investments?

Some larger organisations will develop 'global' service centres, handling all the transactional needs of many divisions and even corporations. Finance, procurement and information technology can all be handled remotely, with information provided on top as all transactions are performed within them.

Consider taking this to the logical extreme. Why not scrap the fancy e-HR system and go down the service centre route? e-HR then simply becomes a message-bearing conduit and storage/enquiry system.

If you believe that this is the future, then consider this possibility. There will still be costs and a need for a business case, but why invest in technology, if economies of scale barely work? Why not invest instead in a service centre, outsourcing tasks and people to those who can provide those services to managers?

Another development could be that e-HR systems become more intelligent, with the result that there are no service centres. What are the implications? You do not incur the costs or have the complexity of outsourcing and/or setting up service centres. But it means that your systems need to be excellent and that they must be used. There is no backup. What happens in a shared-service-centre-free world is that managers and employees have no choice but to do all HR transactions online. In working online, for less frequent and more complex tasks, people will need an expert systems approach that is business scenario based and that will lead people through to the solution. Also, there is an underlying presumption that it is worth managers spending their time completing these more complex transactions, even if the system is well-designed and even infrequent transactions are made easy to undertake.

Some considerations are:

• How realistic is a predominantly e-HR world without the need for a shared service centre(s)?
• If you need a shared service centre(s), where can you get efficiencies of scale, either within the boundaries of HR or through merging back office activities?
• How do you maintain/improve service levels, creating a better customer experience?
• How do you get that balance right between technology and person interfaces with line customers?
• How far do you want to manage transactional activity through relationships or by contracts/service level agreements?

Whether provided in-house or outsourced, there are clearly opportunities to realise efficiencies and improve service levels by merging the activities of HR, IT finance, procurement — all the so-called 'support' functions. Although superficially attractive, some organisations that have tried this route have found that the lack of functional control has resulted in a significant dip in service and quality levels, leading to the shared service centres being returned to functional control and functional specialisation. This experience underlines the need to think through carefully what kind of service you need as a business and the trade-offs you need to make in working through the issues above.

Comment

The Changing HR function reports that 'shared services is a phenomenon for large — rather than small — organisations. Overall, the structure of shared services varies by organisation, especially in a global context. Only 4% of our survey respondents said that they wholly outsourced their HR shared services operation and around 25% outsourced part. We came across other examples where HR shared services had been transferred out of the function but not out of the organisation and we found cross-functional as well as single HR service centres. Outsourcing remains a tactical rather than a strategic matter for most organisations … the exception being where outsourcing was considered to fund technological investment'.

The debate we set out in our first edition still holds. Shared services are not as prevalent as we may have anticipated and the rush to outsource is at best a trickle with much scepticism remaining over the promises of outsourcing. Perhaps the area we overstated in our first edition was the extent to which Web-based HR would develop to a point where it would replace the need for a shared services centre. We see little evidence of this and, whilst technology continues to create new possibilities for HR  there is still a need for organisations to think through the various options surrounding shared services and how HR administration and advisory services are delivered efficiently and effectively in the absence of a shared services centre.

Issue 3: The Role of the HR Generalist

Organisations need to settle on the place of the HR generalist in the HR delivery model. Should the role be assumed by line managers, shared service centres, expert systems, external vendors or in-house strategic business partners?

If there is an in-house generalist presence, there is also a secondary issue to address concerning the level at which the generalist operates. Linked to some of the debate set out earlier there is, in our view, an emerging need for an HR role that sits between strategic business partner and the HR administrator — dare we say it but akin to the old 'personnel officer' role. Driven by manager demand (and a preparedness to pay for this support), organisations need to consider whether there is a role for a cheaper and more effective local partner who does 'HR stuff' one level above the routine transaction processing that individuals and line managers do. In these instances, what organisations may need is access to someone to provide a sounding board 'on the ground' — where managers are based. What we have already noted is a relatively low-level (compared to the potential) exploitation and use of the wealth of information that is gathered and stored by e-HR systems. Some of this, of course, is relatively easy to report on and use. But there is other information, particularly around forecasting, planning and trends, that managers will look at infrequently or not at all. So, the new role is potentially about making the most of the information that is present. It is about proactively looking at the information and taking the analysis of that information to line managers and suggesting ways to deal with it, or asking them what they want to do with it.

This is subtly different from the role of a strategic change agent. What we are suggesting here is that there is someone within the business (not placed in a service centre or down a phone line) available to work with middle management to help them to get far more out of their people. What we are also suggesting is that while a modern manager should be competent at looking after and managing their people, there is a debate to be had concerning whether they should in fact concentrate on their core strengths and what they can do to enhance the health and success of that business.

Taking this suggestion forward, this is explicitly not about trying to bring everyone up to the same standard, trying to iron out weaknesses in management and therefore potentially harming the core business activity. This is about concentrating on strengths. This model recognises that managers are not necessarily appointed as a result of their people management abilities, but more for other attributes and capabilities, such as thought leadership in their fields. The role of this junior HR generalist should be to proactively mine the e-HR system for relevant data, equipped with a mandate to reach line managers and be the credible, value-adding face of HR.

This, we suggest, is a 'grey area' between strategic level work (senior business partners within the organisation who look after people strategy and overall change) and the transactional level, which makes the employee champion role very real and works with the business to get the best out of teams at a lower level. Another added benefit from the line manager's point of view is that there is now a credible face of HR that middle managers can relate to, rather than a faceless service centre or outsourced function that may seem remote from the business.

Similarly, organisations need to explore how a strategic business partner approach should work in practice. In particular, there is the issue of proximity to the business that needs to be resolved: is the HR strategic business partner an integral part of the management team, or is the role played out as a partnership along the same lines as a strategic alliance with an external vendor might be?

If HR evolves to a position where the HR function focuses on strategic change, working primarily on significant projects (addressing the implications of new software and legislation and providing support on specific organisational changes), this indicates a move to a professional services type role — that of an internal consultant. Internal consultancy services may not be new, but having HR play a leading role as an internal consultant is. Taking this a step further, how beneficial would it be for similar-minded experts from other functions to join together to offer a combined set of services to bring solutions that cut across those functions — where relationship managers would work with the business to bring those solutions to the customers in an effective and focused way? This is a model that is very similar to professional service firms.

There may be benefits in this approach, particularly linked to clarifying the value proposition of internal support functions and being able to make better like-for-like comparisons with external providers. There are also significant down-sides, not least the inefficiencies of internal charging and the different dynamic between internal and external support. Having said that, in exploring the generalist role of HR and in particular HR's value proposition, it is worthwhile presenting an internal consultancy model so that the organisation can work out the value it gains through day-to-day contact and involvement in the life of the business, and how much it is prepared to pay for this less tangible value.

Comment

The Changing HR function points to gaps in service provision and one of the options to fill some of the cracks was 'to provide operational support for line managers'. This reinforces the need for the discussion we believe is still absent concerning how to fill the gap between strategic business partner and manager.

We see little evidence of organisations moving to an internal professional services/consulting model in HR — not in terms of resource management and costing at least. Achieving Strategic Excellence suggests that centres of excellence should provide services in a consulting capacity to the business, but this remains aspirational rather than reality. What is clear is that there is an expectation that HR generalists (and specialists) will apply consulting skills if they are to perform effectively in their roles. It is also clear that (as the reportAchieving Strategic Excellence suggests) 'HR suffers from a skills deficit' and we highlighted this as our seventh issue below.

What the HR generalist does, how this role adds value and how people are equipped to perform in this role remains an issue as does the gap that exists between the more strategic HR generalist and manager.

Issue 4: The Reputation of HR

When considering the evolving reputation of HR, one of the things to bear in mind is the question around transactional versus strategic roles: whether the organisation should only see HR in a strategic role and not in the transactional space at all. The question of what creates positive reputation builds on, and complements, some of the arguments discussed earlier. If users/customers/clients experience poor transactional execution, the reputation of HR will be tarnished.

An argument suggests that transactional activities should be separated from strategic HR roles. This would mean that HR functions build reputation solely from their strategic contribution. But if you think about how HR actually gains respect in organisations, it generally starts with doing the transactional stuff which then opens the door for HR to address more strategic issues. If transactional HR is delivered poorly, then developing a role that is more strategic will not get a look-in. Also, if HR is divorced from knowledge and data, then the link between more strategic roles and information will be diminished.

So you need to identify which areas are building and destroying HR's reputation; the activities managers put a value on and how effectively these are delivered. There are implications for HR measurement (see below) and for HR's ability to market itself and its capabilities to the business.

Comment

What Customers Want from HR gives good insight into the issues around HR's reputation. It is clear that whilst HR's reputation has generally risen in recent years, there is still some way to go before the overwhelming view of HR is favourable. This report highlights the need to engage more seriously in finding out what internal customers need and this willingness to engage with the plurality of HR stakeholders is probably a critical challenge if HR is to build a strong and positive reputation in organisations.

Issue 5: HR Performance

The use of benchmarking in HR has improved greatly in recent years, and it is now commonplace in most HR functions. Benchmarking, though, has its limitations: ensuring that there is like-for-like comparison and focusing on lag performance indicators being two of them. But, we recognise that there is an important place for benchmarking metrics, and expect them to be used into the future.

A bigger challenge for the HR function is to measure more clearly the value it contributes to each respective business. This involves talking to line managers more about the performance expectations of HR, and taking more time to link work to these expectations.

So, in considering your next steps in HR transformation, you need to address:

• how HR currently measures its performance;
• how managers measure HR's contribution (whether formally or informally);
• what set of measures is appropriate as a framework for the future.

Linked to issue 4 — the reputation of HR — there is also a fruitful debate to be had concerning how managers want to engage with HR's performance. Annual reports on HR, surveys of HR value delivery, regular management reporting and HR operating plans can all be effective ways of building partnership between the line and HR.

Comment

The Changing HR function reports that 'on measurement, it was noteworthy that HR appeared not just to be assessing its process performance but also considering its broader effectiveness. Thus, virtually all organisations measured HR's efficiency and over half examined HR effectiveness through people management practice and its effect on outcomes such as absence. The main indicators used were business performance, surveys of managers/employees and customer satisfaction metrics. System or policy evaluation still did not appear to be common which is problematic when considering the success of HR transformation'.

Achieving Strategic Excellence concludes that 'the growing attention to HR metrics and analytics seems well placed, considering the potential for improvement and value. It is also important to note that all measurement elements are not equally valuable … Measures often thought to be related to HR effectiveness and strategic influence (such as benchmarking) are actually not related to it … Intermediate measures (such as scorecards and HR programme effects) appear to offer opportunities to enhance HR strategic influence. There also appears to be an emerging measurement emphasis on impact, which is not yet well understood'.

This suggests that some progress has been made in improving the way HR measures its performance and contribution, but there is still a way to go. The limits of benchmarking are becoming more clearly understood and, as HR functions continue to explore the questions we posed earlier, we anticipate that a broader range of measures addressing efficiency, effectiveness and impact emerge.

Issue 6: Organisational Boundaries

Organising to deliver HR is becoming more complex, involving the HR function (which is likely to include generalists, specialists and possibly shared service centres), line managers, employees and external vendors of various types. Where you land organisationally should be driven by the requirements of your business. Some of the broader issues to be addressed will concern the following:

• balance of resources between HR generalist roles and in-house specialist roles;
• types of generalist needed (see above debate on the HR generalist) and their skill levels;
• role of the line manager in managing people and their skill levels;
• need for a shared service centre (transactional) or not and where it is located (in HR, in-house but external to HR, or outsourced);
• level of involvement of external vendors/suppliers/consultants.

Wherever the organisational lines are drawn, the challenges will be in managing the interfaces between the different organisational areas. The more complex the organisation, the greater will be the effort invested in managing these interfaces. As you develop the next step in your organisational model, you should think through these boundary issues: how you integrate the different elements of HR delivery and the investment you will need to make in ensuring a coherent and seamless service delivery.

Comment

The Changing HR function reports that 'the three-legged stool model (shared services, centres of expertise and business partners) attributed to Dave Ulrich was the most common HR structure, although fewer than 30% of the organisations surveyed said that they had implemented the model in full. Where such a model had not been introduced, the most common type of structure was a single HR team incorporating generalists, specialists and administration …. Looking at the components of the three-legged stool model we found a great deal of variation in the formats used'. This was particularly true of the role of business partners/generalists. The report goes on to say, and to align with the Lawler et al. report, that 'the quality of relationships within HR and between it and customers were the key to success not the organisational structure of HR …. Structural reform may not be sufficient to reposition HR …. If HR fails to become more strategic, the cause of the problem may lie elsewhere — the quality of HR staff, a lack of process reform or the people management capability of line managers'.

We contend that all structural change replaces one set of organisational boundary management challenges with a new set. How people work together will contribute to the success of structural change. We remain convinced that in many HR functions there are huge disconnects between generalists, specialists and those delivering HR administration whether they sit in the three-legged stool model or in a single HR team.

Issue 7: HR Capabilities

It remains our contention that HR professionals need to build new capabilities above and beyond the traditional areas of HR. Specifically, they need to build a sound theoretical basis in the areas of organisational behaviour, business finance and economics, and psychology in order to support organisational development and change. Above all else, HR professionals must be recognised first and foremost for their contribution as business people — they must know their business and appreciate the drivers of value in their business. It is from this position that HR professionals will become influencers in their business.

The issues you may need to confront in thinking about your next steps in HR transformation are likely to include:

• what kind of capabilities you need to develop in your HR professionals;
• how your current HR professionals benchmark against these new capabilities;
• what investment you are prepared to make to develop these capabilities;
• what alternatives you have if your current HR professionals cannot step up.

If people are the greatest asset of a business, why is it so difficult to get the most able people into HR? This is not to say that there are no able people in HR — there are, and we have worked with and encountered many. But it is true to say that the profession has a talent deficit, and the demands that should be placed on HR in the future mean that we need to create an environment where people know that they will have an opportunity to work on some of the organisation's most difficult issues. Perhaps this too is an issue that might be explored in your business.

Comment

This remains, arguably, the greatest challenge faced in transforming HR. The lack of capability to perform a business focused, more strategic people role is highlighted in just about all reports. The KPMG report (2008) identifies 'HR practitioners with critical capability gaps' as the number 1 challenge facing the function. The questions posed in our first edition remain valid — arguably more so since we first wrote them. With notable exceptions, investment in HR professionals is generally low, but where we have seen organisations address this we have also seen HR's contribution shift markedly. Linda Holbeche, writing in the CIPD's Impact magazine (Issue 21) sums up the issue well: 'What also became apparent was that many new business partners were underprepared or underpowered for their roles, lacking the skills, confidence or the delivery capability as consultants to ensure that value was being added over what had existed before. Increasingly it was recognised that consultancy, relationship management and third-party management skills together with commercial acumen were prerequisites for effectiveness in business partner roles'.

The issue of talent and career management is also valid. Lawler et al. raise on a number of occasions the need for cross-unit teams and for rotation of people between HR and line functions. The challenge for HR to be a 'must have' experience on the CV of high potentials still lies in the land of hope rather than reality.

The Situation in 2005 | Key Issues for HR

In 2005, we summed up HR's journey in the following terms: 'HR has moved from a broadly administrative and transaction function to one that adds more tangible value to the wider business'. We gave the following reasons for making this statement:

The HR function is actively addressing the transactional aspects of its work. If the quality of HR information had been world-class in the past, then the case for change would have been difficult to argue. However, this has not been the case. HR administration is often deficient and HR information unreliable. Whilst not the glamour end of HR, good HR administration consistently features highly on manager lists of their expectations of HR. 

Transactional HR needs to be done well — but it is not the be-all and end-all of HR management. Fortunately, transactional HR is standardising and alternative options to the old, fragmented, labour-intensive, expensive in-house model now exist. Shared service centres (whether in-house or outsourced) are now present in many organisations, and there is increasing uptake of Web-based HR. The challenges for HR remain justifying organisational capex on Web-based HR and then delivering the full benefits of that capital investment. Ultimately, these solutions must deliver better service to managers so that HR professionals are truly freed to contribute to higher value issues.

There is greater appetite amongst HR professionals to move into the value-adding space. Whilst the horizons of many HR professionals are still focused on 'case work' around sickness management, grievance and disciplinary handling, the role of the HR professional as a 'business partner' has really caught the imagination of the profession. Although there have always been high value-adding HR professionals closely aligned to their line management colleagues, the years since the publication of Ulrich's HR Champions (1997) have given people a vocabulary and focus for the HR role. The challenges remain those of building the capability of HR professionals to move onto the ground of strategic business partnership, and changing the attitudes of line managers who still see HR as an administrative/ advisory function.

The business drivers that are pulling a stronger contribution from HR are still present and arguably stronger now than ever before. People costs remain one of the largest elements (if not the largest element) of organisational fixed costs, and we are hearing much more in recent years about the need to 'value' and 'leverage' human capital. There is now a high level of interest in finding ways of measuring the contribution of people other than as costs. Work undertaken by Lev (2001) and others around the measurement of intangibles is enabling HR to engage with the business more purposefully. Additionally, a growing body of research linking progressive HR to superior business performance is slowly beginning to register on the minds of senior business leaders.