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The HR Scorecard: Linking

People, Strategy, and
Performance
HBSWK Pub. Date: Apr 2, 2001
Maintaining competitive advantage in the new economy will
require incorporating HR function into corporate strategy, say
Brian Becker, Mark Huselid, and Dave Ulrich in their new book. In
this excerpt, the authors explain how to understand and optimize
the ways people create value.

by Brian E. Becker, Mark A. Huselid, and David Ulrich

The Evolving Picture of HR: From

Professional to Strategic Partner
Recent decades have witnessed dramatic shifts
in the role of HR. Traditionally, managers saw
the human resources function as primarily
administrative and professional. HR staff
focused on administering benefits and other
payroll and operational functions and didn't think
of themselves as playing a part in the firm's
overall strategy.

Efforts to measure HR's influence on the firm's

performance reflected this mindset. Specifically,
theorists examined methodologies and practices that are focused at
the level of the individual employee, the individual job, and the
individual practice (such as employee selection, incentive
compensation, and so forth). The idea was that improvements in
individual employee performance would automatically enhance the
organization's performance.

Although such research attempted to extend the range of HR's

influence, it did little to advance HR as a new source of competitive
advantage. It provided scant insight into the complexities of a strategic
HR architecture. And simply put, it didn't encourage HR managers to
think differently about their role.

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In the 1990s, a new emphasis on strategy and the importance of HR

systems emerged. Researchers and practitioners alike began to
recognize the impact of aligning those systems with the company's
larger strategy implementation effort — and assessing the quality of
that fit. Indeed, although many kinds of HR models are in use today,
we can think of them as representing the following evolution of human
resources as a strategic asset:

The personnel perspective: The firm hires and pays people but
doesn't focus on hiring the very best or developing exceptional
employees.

The compensation perspective: The firm uses bonuses,

incentive pay, and meaningful distinctions in pay to reward high
and low performers. This is a first step toward relying on people
as a source of competitive advantage, but it doesn't fully exploit
the benefits of HR as a strategic asset.

The alignment perspective: Senior managers see employees as

strategic assets, but they don't invest in overhauling HR's
capabilities. Therefore, the HR system can't leverage
management's perspective.

The high-performance perspective: HR and other executives

view HR as a system embedded within the larger system of the
firm's strategy implementation. The firm manages and measures
the relationship between these two systems and firm
performance.

We're living in a time when a new economic paradigm —

characterized by speed, innovation, short cycle times, quality, and
customer satisfaction — is highlighting the importance of intangible
assets, such as brand recognition, knowledge, innovation, and
particularly human capital. This new paradigm can mark the beginning
of a golden age for HR. Yet even when human resource professionals
and senior line managers grasp this potential, many of them don't
know how to take the first steps toward realizing it.

In our view, the most potent action HR

managers can take to ensure their
strategic contribution is to develop a
measurement system that convincingly
showcases HR's impact on business the most potent
performance. To design such a action HR
measurement system, HR managers must managers can
adopt a dramatically different perspective, take to ensure

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one that focuses on how human resources

can play a central role in implementing the their strategic
firm's strategy. With a properly developed contribution is
strategic HR architecture, managers to develop a
throughout the firm can understand exactly measurement
how people can create value and how to
system that
measure the value-creation process.
convincingly
Learning to serve as strategic partners isn't showcases HR's
just a way for HR practitioners to justify impact on
their existence or defend their turf. It has business
implications for the very survival of the firm performance.
as a whole. If the HR function can't show
that it adds value, it risks being outsourced.
In itself, this isn't necessarily a bad thing;
outsourcing inefficient functions can
actually enhance a firm's overall bottom line. However, it can waste
much-needed potential. With the right mindset and measurement
tools, the HR architecture can mean the difference between a
company that's just keeping pace with the competition and one that is
surging ahead.

A recent experience of ours graphically illustrates this principle. In a

company we visited, we asked the president what most worried him.
He quickly responded that the financial market was valuing his firm's
earnings at half that of his competitors'. In simple terms, his firm's
$100 of cash flow had a market value of $2,000, while his largest
competitor's $100 of cash flow had a market value of $4,000. He
worried that unless he could change the market's perception of the
long-term value of his organization's earnings, his firm would remain
undervalued and possibly become a takeover target. He also had a
large portion of his personal net worth in the firm, and he worried that
it was not valued as highly as it could be.

When we asked him how he was involving his HR executive in

grappling with this problem, he dismissed the question with a wave of
his hand and said, "My head of HR is very talented. But this is
business, not HR." He acknowledged that his HR department had
launched innovative recruiting techniques, performance-based pay
systems, and extensive employee communications. Nevertheless, he
didn't see those functions' relevance to his problem of how to change
investors' perceptions of his firm's market value.

Six months after our meeting, a competitor acquired the firm.

The sad truth is that the HR executive in this story missed a valuable

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opportunity. If he had understood and known how to measure the

connection between investments in HR architecture and shareholder
value, things might have turned out differently. Armed with an
awareness of how investors value intangibles, he might have helped
his president build the economic case for increased shareholder
value.

The story of Sears, Roebuck and Co.'s recent transformation stands

in stark contrast to this anecdote and shows what companies can
achieve when they do align HR with the larger organization's strategy.
1 After struggling with lack of focus and losses in the billions in the
early 1990s, Sears completely overhauled its strategy implementation
process. Led by Arthur Martinez, a senior management team
incorporated the full range of performance drivers into the process,
from the employee through financial performance. Then, they
articulated a new, inspiring vision: For Sears to be a compelling place
for investors, they said, the company must first become a compelling
place to shop. For it to be a compelling place to shop, it must become
a compelling place to work.

But Sears didn't just leave this strategic vision in the executive suite or
type it up on little cards for employees to put in their wallets. It actually
validated the vision with hard data. Sears then designed a way to
manage this strategy with a measurement system that reflected this
vision in all its richness. Specifically, the team developed objective
measures for each of the three "compellings." For example, "support
for ideas and innovation" helped establish Sears as a "compelling
place to work." Similarly, by focusing on being a "fun place to shop,"
Sears became a more "compelling place to shop." 2 The team
extended this approach further by developing an associated series of
required employee competencies and identifying behavioral
objectives for each of the "3-Cs" at several levels through the
organization. These competencies then became the foundation on
which the firm built its job design, recruiting, selection, performance
management, compensation, and promotion activities. Sears even
created Sears University in order to train employees to achieve the
newly defined competencies. The result was a significant financial
turnaround that reflected not only a "strategic" influence for HR but
one that could be measured directly.

Few firms have taken such a comprehensive approach to the

measurement of strategy implementation as Sears has. Granted,
retail service industries are characterized by a clear "line of sight"
between employees and customers. Thus their value-creation story is
easier to articulate. But that doesn't mean that other industries can't
accomplish this feat. The challenges may be greater — but so are the

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rewards.

Why HR? Why Now?

Consider the following:

In most industries, it is now possible to buy on the international

marketplace machinery and equipment that is comparable to that in
place at the leading global firms. Access to machinery and equipment
is not the differentiating factor. Ability to use it effectively is. A
company that lost all of its equipment but kept the skills and know-
how of its workforce could be back in business relatively quickly. A
company that lost its workforce, while keeping its equipment, would
never recover. 3

This excerpt captures the difference between physical and intellectual

capital — and reveals the unique advantages of the latter. The Coca-
Cola Company’s experience testifies to this reality. According to then-
CFO James Chestnut, after transferring the bulk of its tangible assets
to its bottlers, Coke's $150 billion market value derived largely from its
brand and management systems. 4

The evidence is unmistakable: HR's emerging strategic potential

hinges on the increasingly central role of intangible assets and
intellectual capital in today's economy. Sustained, superior business
performance requires a firm to continually hone its competitive edge.
Traditionally, this effort took the form of industry-level barriers to entry,
patent protections, and governmental regulations. But technological
change, rapid innovation, and deregulation have largely eliminated
those barriers. Because enduring, superior performance now requires
flexibility, innovation, and speed to market, competitive advantage
today stems primarily from the internal resources and capabilities of
individual organizations — including a firm's ability to develop and
retain a capable and committed workforce. As the key enabler of
human capital, HR is in a prime position to leverage many other
intangibles as well, such as goodwill, research and development, and
advertising.

····

Excerpted from The HR Scorecard: Linking People, Strategy, and

Performance HBS Press, 2001.

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