We often hear that people are the most important variable for an organization’s success. Yet a 2006 study by the University of Southern California (USC)’s Center for Effective Organizations found that only 9% of HR leaders report that their company is effective or very effective in connecting human capital practices to organizational performance(n. 1). That leaves 91% who do not believe that their human capital practices effectively connect with organizational performance—a pretty tough self-assessment. How is it that a company’s most important variable is so loosely managed?
Time for a New Approach
It is time for a new, systemic approach to growing human capital. This is an approach that:
- clearly describes what successful human capital is and how it connects to business results
- measures and manages human capital with the same discipline as financial capital, and
- enables company managers to learn from experience to make progressively better human capital decisions.
It is time for Human Capital Management (HCM)—a system designed to create sustained competitive advantage through people.
Human Capital Management holds that business profits are generated and sustained when a company provides products and services that meet customers’ needs better than competitors do—in other words, when the company has a competitive advantage. Businesses create and maintain that advantage over time when their core competencies, or the activities that customers value most, are superior to those of their competitors in the eyes of their current and potential customers(n. 2). HCM is a system for improving the performance of those in critical roles—those with the biggest impact on corporate core competencies.
Not all roles in a company are equally important for customer and shareholder satisfaction. Industry-best sales reps, for example, create more customer and shareholder value than industry-best administrative assistants. In the HCM model, the question “Are our people better than our competitors’ people?” may be more accurately stated as: “Is the performance of those in critical roles superior to those of peers in competitor organizations?” The answer is often knowable.
What does HCM success look like? Success is when a company can state that “our people outperform competitors’ people” in roles that add the most value to customers and shareholders. Success is not world-class talent; it is world-class performance.
If performance improvement of those in critical roles is the goal, then all human capital programs, tools, activities, and even meetings must be evaluated by their impact on making “our people better than the competitors’ people.” For example, if there are four things that big deal makers need to do well to sell big deals, then all programs and developmental activities for deal makers should be focused on driving performance improvements on those four things. In addition to a focused development effort, an effective HCM system requires a data-rich, analytic approach to measuring and managing human capital with the same discipline as financial capital. Certainly, behavior is not as easily measured as financial results, but it definitely can be measured. As a graduate student in psychology, I read a study that showed human fetuses prefer music with human voices to instrumental music. “How can they know that?” I wondered. The answer is reached by triangulating galvanic skin response, blood pressure, and heart rate, and comparing that with children and adults. If researchers can figure that out, we certainly ought to be able to measure workplace behavior and performance. Measuring human behavior and performance is possible. It’s just not being effectively done in most corporations today.
Today’s Approach to Human Capital Management
Today’s approach for improving workforce performance is failing. There are three reasons:
1. No one is accountable for year-over-year human capital performance.
2. Results require a system, not world-class programs.
3. Today’s HR model is misaligned to deliver business results.
Let’s look at each of these reasons.
No One Is Accountable
The head of manufacturing is accountable for year-over-year improvements in manufacturing productivity. The head of marketing is accountable for year-over-year changes in brand equity. The head of sales is responsible for revenue growth. But who is responsible for year-over-year improvements in the company’s most valuable asset—its people? Nobody. Line managers see HR as accountable, but HR sees itself accountable for programs that must be converted into business results by line managers. No one is in charge of human capital performance.
Systems, Not Programs
The HR profession is very adept at program development. Success is most often defined as creating and/or adopting best-practice programs, and HR is organized and managed accordingly. HR consulting firms align their practices with the way their clients are organized: They deliver products and programs for HR subprofessions (such as training, staffing, and compensation). But the data is indisputable: Decades of new and better programs have not delivered great results. The reason is that “world-class programs” cannot deliver performance results. Only systems deliver results.
A Misaligned Model
There is plentiful data demonstrating that HR is not delivering to expectations. The Economist’s “2006 CEO Briefing” cited HR as tied for the least important corporate function, the worst performing of all corporate functions, and second to last in importance for achieving business results for the next three years (n. 3). In addition, the consulting company Accenture’s 2006 High Performance Workforce study found that only 5% of CEOs and 4% of CFOs are very satisfied with their human resource function (n. 4). The same study indicated that 3% of CEOs and 4% of CFOs are very satisfied with their corporate learning function (n. 5). The most important variable for business success is being managed by the least effective corporate function.
Shifting to a New Approach
The modern HR model was created in the 1960s for a personnel department that was responsible for people-related administrative duties and employee relations. It was, and is, based on the premise that the personnel department takes care of administration and employee relations issues so that managers can focus on business results. Today’s model has several barriers that prevent it from adding measurable value for customers and shareholders.
- Today’s model does not have a clear aim. It does not define how human capital contributes to business results. C. K. Phahalad of the University of Michigan Business School has often chastised HR for its lack of theory or defined position on how it adds value. Does your organization have an end-state blueprint (i.e., what success looks like) or a strategy for systematically building to that blueprint? HCS defines how human capital will drive business results and delivers a blueprint of what human capital excellence looks like when it’s “done.
- Today’s model does not define accountability. It is not clear who is accountable for human capital excellence—line managers or HR. Within HR, which unit is accountable for year-over-year improvements in leadership capabilities—staffing, training, compensation, or talent management? Nobody is in charge, and with no one in charge, progress is not possible. HCS defines the organizational capabilities and accountabilities required to deliver the human capital strategy.
- Today’s model is egalitarian. It confuses the important value of all people being of equal worth with the idea that all roles are of equal worth. In fact, all roles are not equally important to customers and shareholders: some provide significantly more value than others. Focusing investments in roles that are most important to customers and shareholders yields greater returns. In a Hollywood movie, the leading actors are more important to the success of the film than members of the lighting team. That is not to say that lighting is unimportant to the film or that the lighting professionals are not first-class people. They just are not as important to the experience of the moviegoer as the lead actors. HCS provides a system for improving performance of those in critical roles.
- Today’s model is ad hoc and disconnected. It begins with disconnected best practices and world-class programs. Managers continually receive new programs and instructions, but in service to what end-state? Growing human capital requires a top-down approach that begins with a clearly defined theory and a blueprint of success. The system must be built and sustained to deliver component parts for the blueprint that are comprehensive and integrated. As previously mentioned, an automobile engine needs interoperable parts to operate, and having most of the parts will not deliver most of the performance. It might deliver none. HCS programs are sufficiently comprehensive and integrated to deliver the Human Capital Strategy.
- Today’s model is undisciplined and unmanaged. It has no ability to measure changes in human capital or to make progressively better decisions about people and organizations. It reliably measures activities such as average days of training per employee, the percent who received a written appraisal, and bonus differentiation between top and bottom performers. What it doesn’t ask is the critical question of whether human capital capabilities and performance are improving over time. HCS measures and manages human capital with the same discipline that one measures and manages financial capital.
- Today’s model is internally focused. It views HR as a supplier and line managers as customers rather than as business partners. HR delivers to the internal customer, even if that is the wrong thing from the perspective of the external customer. HCS views the external customer as the customer whereas HR administrative activities have an internal customer.
- Today’s model is focused on programs rather than results. It defines success as world-class programs rather than world-class people. Look at job ads for talent management roles on any Internet job board or talk to executive search consultants. Companies are searching for professionals who have experience with world-class leadership programs. They are not looking for a track record of building world-class leaders. HCS views programs as a means, not an end.
- Today’s model is reactive. It treats people issues the way a physician treats incoming patients: by reacting to problems and by addressing symptoms. Today’s unfulfilled ideal is HR plans that fully align to annual business plans. However, in addition to reacting to annual business challenges, companies must create the business analogue to a wellness program—a systematic and disciplined—approach for year-over-year human capital growth. HCS is a systematic approach to year-over-year capability and performance improvements.
The bottom line is that when it comes to systematically improving our most valuable asset, the model is wrong. Why else would decades of speeches, articles, and training on strategic HR have failed to move the needle? We have often heard that “Insanity is continuing to do the same thing and expecting a different result.” How many more changes will you make in your appraisal program, incentive schemes, management development courses, and HR partnering workshops before you admit that they don’t really work? It’s not the programs—it’s the model.
Let’s blow up today’s model and replace it with a fundamentally new Human Capital Strategy.
1. E. Lawler, J. Boudreau, and S. Mohrmon, Achieving Strategic Excellence: An Assessment of Human Resource Organizations (Stanford, Calif.: Stanford Business Books, 2006), pp. 21–22.
2. C. K. Phalalad and G. Hamel, “The Core Competence of the Corporation” (HBR OnPoint Enhanced Edition), Harvard Business Review (March 31, 2007).
3. CEO Briefing: Corporate Priorities for 2006 and Beyond, Economist Intelligence Unit, 2006.
4. Accenture, Accenture High Performance Workforce Study, p. 64. Figure II-17 (2006).
5. Ibid., p. 71. Figure II-28.
Adapted with permission of the publisher from The New Human Capital Strategy by Bradley W. Hall. Copyright 2007, Bradley W. Hall. Published by AMACOM, a division of American Management Association. For information about other AMACOM books, visit www.amanet.org/books.