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New HR Metrics:: Scoring on the Business Scorecard

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Organizational Dynamics, Vol . 32, No . 2, pp. 107-121, 2003 ISSN 0090-2616/03/S-see frontmatter
© 2003 Elsevier Science Inc . All rights reserved . doi:10 .1016/50090-2616(03)00013-5
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Available online at w wwsciencedirect.co m

sCIRNC∎(f) DIRuICT •

New HR Metrics:

Scoring on the
Business Scorecard
RICHARD W . BEATTY MARK A . HUSELID
CRAIG ERIC SCHNEIER

he role of the Human Resource function party . But significant challenges await HR
T in firms has changed in parallel with the
economic shift from agrarian to manufactur-
once invited to the party . It must have some-
thing to bring to the table.
ing to services-and now to information . We wish to address what and how HR
Early on, HR was considered a staff function, can contribute to the strategic success of
not integral to the firm . Its role was admin- firms by transforming itself from a partner
istrative or transactional, its work-product (that can be removed or outsourced) to a
often regarded as a commodity . One factor player-on the field, in the game, with the
in changing HR's role is the increased reli- ability to score . The ability to score necessi-
ance on knowledge workers . In our transi- tates a new understanding of the rules of the
tioning economy, observers, both inside and game-a new perspective on what HR is to
outside of organizations, have come to view a contribute, how its systems enable it to con-
firm's workforce as far more valuable . Thus, tribute, and how its ultimate deliverables can
if one views HR's primary role as influencing be measured . The rules of the game mean
workforce mindset, competencies, and beha- that HR should only attempt to score on an
vior, HR's role becomes central to the firm, HR Scorecard integrated with the firm's
for it is people who carry out its strategy. HR Business Scorecard .
professionals need to recognize this change The shift to a services and knowledge
and adapt to it . economy has accelerated interest in the
To enhance HR's organizational contri- "intangibles" that have fueled market capi-
bution, HR professionals not only will need talization growth in the equity markets . Bar-
to transform what they do but also how they uch Lev and others at New York University
are perceived. Early in its history, the "per- offer annual seminars on intangibles . CFO
sonnel" function was a refuge for line man- magazine has reported on how the value of
agers who were polite but ineffectual- knowledge workers in various industries can
employees "too nice to terminate ." Three be captured in financial terms . Several stu-
decades ago, empowered by federal and dies have found that 30 to 40 percent of
state legislation, HR became known as the market appreciation is due to non-tangible
"personnel police," often to the frustration of factors . An Ernst & Young study has shown
line managers. In the ongoing transformation that intangible factors (e.g., strategy execu-
to a services and information economy, HR tion, managerial credibility, strategy quality,
wanted to be seen as a strategic partner, attracting and retaining talent, management
hopefully invited to the strategic planning experience, and compensation strategy)
107


explain much of the variance in the market One problem has been measurement
value of firms. These factors vary across effectiveness . A Conference Board survey
industry; for example, in the computer indus- of senior executives reported, as expected,
try, the quality of management explains as that customer, financial, operational, and peo-
much as 13 percent of the total variance in ple measures were all seen as important but
market capitalization. not equally effective . The test of measurement
Thus, research has demonstrated that effectiveness was the executives' willingness
many targets of HR work can and do differ- "to bet their job" on the quality of the mea-
entially impact a firm's financial outcomes . sures . The survey found significant discrepan-
While this notion is often given lip service by cies among domains, with the greatest
firms, a growing body of evidence shows that discrepancy in people measures . Thus, sub-
what HR does can have a significant bottom- stantial work is needed in the assessment of
line effect. In a major research study, Huselid workforce measures in firms . Below we
found that firms with sophisticated HR sys- explore how to measure the workforce, the
tems (also known as "high performance HR function, and firm leadership with respect
work systems") have a significant financial to their impact on the workforce and ulti-
impact on profits per employee, sales per mately upon a firm's strategic success .
employee, and market value per employee .
These findings have gained the attention of
other academics and executives interested in FROM BUSINESS SCORECARD
better assessment of HR systems, as well as in TO HR SCORECARD
redesigning executive appraisals to ensure
that leaders are held accountable for enhan- Our approach starts with Kaplan & Norton's
cing their workforce's contribution to the Balanced Scorecard, a familiar concept in most
bottom line . firms . While maintaining the scorecard's

FIGURE 1 BUSINESS SCORECARD

FINANCIAL Success
Rewards

T
8TRATEGYNALUE CUSTOMER SUCCESS
WORKFORCE PROPOSITION
SUCCESS
• Mindset a Opsrstlond Excellence
• Competend o ProducUService -11
• Behavior Leadership
O Customer Intimacy

BUSINESS PROCESS
SUCCESS

108 ORGANIZATIONAL DYNAMICS



FIGURE 2 HR SCORECARD

HR Competencles

• Admin . Expertise
• Employee Advocacy
• Strategy Execution
• Change Agency

HR Practices HR Deliverables
STRATEGIC FOCUS
• Communication Workforce Mindset
'Work Design o Operational
Excellence
'Technical Knowledge
• Selection O Product leadership
'Workforce Behavior
• Development o Customer Intimacy
'Measurement
'Rewards

HR Systems
• Alignment
• Integration
• Differentiation

core by retaining the financial, customer and tion/unique solutions (customer intimacy) .
business process success components, we Strategic choice significantly impacts the defi-
have changed the component "Learning, nition of customer success, business process
Innovation, Etc ." to "Workforce Success ." success, and plays an important role in asses-
We call this new scorecard the Business Score- sing what the workforce must do to be suc-
card (Fig . 1) . Also notice that we prefer to cessful .
use the word "success" as opposed to "satis- To make the workforce successful in the
faction ." Clearly firms can go out of business context of the scorecard system, we must
while satisfying customers and employees . specify the major targets of an HR system,
Rather, the objective is to make both custo- or HR's deliverables : workforce mindset,
mers and employees successful in order competencies, and behavior . To produce
to make the enterprise successful . We have these deliverables, components of the HR
also replaced terms such as "mission" and system must be assessed on the competencies
"vision" from the center of the scorecard required of the HR workforce, the HR prac-
with "strategic choice ." For a non-diversified tices used to produce HR's deliverables (e .g .,
firm or for a business unit within a diversi- communication, work design, selection,
fied firm, we believe that a strategic choice development, measurement, rewards, etc .),
(or value proposition) should be articulated, and the HR system's integration and align-
such that the workforce can understand ment with the strategy of the business .
and embrace how the unit intends to be suc- This approach yields an HR Scorecard
cessful in its chosen market . To simplify, we (Fig. 2) that enables the development of HR
chose Tearcy & Wiersema's scheme in which dashboards that capture HR's contribution .
firms pursue value propositions of low-cost Several firms are pursuing such measure-
provider (operational excellence), innovator ments systems and have made substantial
(product or service leadership) or customiza- progress . Boeing, General Electric, South-

109
Corp Ltd ., United Distillers & Vintners and tencies in cultural change, as well as in strat-
Verizon are developing on-line, real-time egy execution . Firms pursuing a product or
metric systems to monitor HR processes service leadership strategy (i .e ., innovation)
and deliverables . would most likely want HR focused on pro-
viding "A players in A positions ." In other
words, the HR focus is to help populate the
firm with the very best R&D or technical/
ASSESSING HR'S innovative talent in order to distinguish itself
COMPETENCIES from its competitors by building applied
innovative and creative products (or ser-
Assessing HR's competencies refers to the vices) that can create large-scale demand
competencies of the HR workforce (i.e ., the and command premium pricing .
people who populate the HR function, their How success in each role might be mea-
strengths and weakness in specific areas of sured is easily understood. Measures of
expected HR performance) . We look at HR administrative efficiency are relatively sim-
competencies through the lens of Ulrich, ple (e .g ., benefits cost per employee, proces-
whose book, HR Champions, analyzes HR's sing cost per transaction, response time for
roles in terms of its focus on people or pro- benefit information requested, etc.) .
cesses, as well as its strategic or operational Employee advocacy measures are somewhat
focus . Thus, these roles can be depicted as a more complex. They involve issues such as
two-by-two matrix . First, the HR function retention rates of critical human capital,
can be conceived as having a process and growth rate of core competency human capi-
tactical focus on administrative efficiency in tal, retention rate of critical human capital
the delivery of HR transactions . Second is during organizational transitions or transfor-
HR's "employee advocacy" role (formerly mation, retention rate of "A" players in "A"
"employee relations"), with an operational positions, etc . Strategy execution measures
focus on serving the workforce (i.e., people) might include : the extent to which the work-
and the growth and retention of critical com- force understands the business's strategy (as
ponents of the workforce . HR's third role is measured by survey), line management feed-
strategic, whereby HR better enables the firm back on the HR system's alignment with
to execute its strategy by aligning HR prac- business strategy, or the HR workforce's level
tices with business strategy. The fourth role is of understanding of the criticality of the HR
concerned with changing the workforce- function's integration . For firms active in
HR's "cultural change" role . Obviously, mergers and acquisitions, another measure
HR functions do not focus only on one role, might be the depth of excess capacity of
nor should they. The point is to determine to executives to export to recent acquisitions .
what extent HR is currently focused on each The cultural change role measures might
role, and where it will need to be focused to include: success rate of external hires brought
enable the firm to be more successful . in to "seed" firm change efforts, employee
The focus of the HR function should knowledge of the status of change efforts,
correlate with the firm's life cycle phase depth of bench strength in change efforts,
and strategic choice . As these shift, HR's measures of employee mindset or mindset
focus must shift . For example, a firm pursu- shift towards strategic goals and objectives,
ing an operational excellence strategy would and certainly management's satisfaction with
want an HR function concerned with admin- HR's contributions to organizational transfor-
istrative efficiency . A firm moving from a mation efforts. Thus, there are some relatively
product leadership to operational excellence straightforward measures of the HR function
strategy (a common occurrence with the in terms of its competencies, all of which are
commoditization of products and services) driven by what the HR function needs to
would likely require significant HR compe- accomplish at any point in time.
1 1 0 ORGANIZATIONAL DYNAMICS
ASSESSING HR'S PRACTICES explores three ways of assessing HR systems :
alignment, integration, and differentiation .
HR practices can be assessed against "best Alignment relates to understanding that
practices," or benchmarking . What can the different business strategies require different
HR function learn from other firms? How cultures. Drawing on the seminal work of
well is it doing relative to others? There are Schuler & Jackson, we use the three business
many best practice studies and many pur- strategies previously mentioned-opera-
veyors of best-practice information. Thus, tional excellence, product leadership, and
one way HR can assess itself and its pro- customer intimacy-to demonstrate this
cesses in delivering basic HR practices (e .g., point. In particular, there are significant cul-
selection, rewards, measurement, training tural differences required of the primary
and development, communications, work workforce that must deliver the firm's value
design, etc .) is to collect best practice data proposition.
from available sources or actually conduct Firms following an operational excel-
site visits . Once the data is gathered, the lence strategy need a workforce that: identi-
function can compare itself against a baseline fies with business processes, is trainable, can
and decide what improvement initiatives to learn rapidly, willingly follows the battle
undertake . Firms of substantial size can build plan, is short-term focused, possesses a
internal scorecards, whereby critical HR mindset that seeks to avoid waste and mini-
practices can be compared across business mize costs, and is driven by incremental
units to determine how well one unit is doing improvement . Because the objective of such
relative to the firm's other business units on firms is to build systems to drive the var-
factors such as retention, labor costs, scarce- iance-and thus all the costs-out of the
talent compensation, customer satisfaction, system, free spirits and ostentatious behavior
etc . are not welcome . The last thing that is needed
There is one caveat in using best practice in McDonald's is a creative hamburger-flip-
assessment. Focusing on one practice or per! Firms that essentially follow this strat-
process in a system to the exclusion of others egy include : Federal Express, Nucor, Wal-
can drive the system out of tolerance, rather Mart, and, of course, McDonald's and most
than enhancing the system's contribution to other fast-food franchisers . Such a value pro-
the firm . This very important point was position offers it "our" way to the customer,
often emphasized by W . Edwards Deming, at a price that is at or below all competitors .
who stimulated attention to operational Ideally, the successful competitor can price
measurement in the United States based the product or service at a level below a
on his work on quality in Japan . Thus, we competitor's cost to produce, gain market
must realize that enhancing a given HR share and thus leverage their operational
procedure or practice can be useful, but in excellence by serving a much broader custo-
doing so we must avoid diminishing the mer base at an even lower price .
efficacy of other components of the HR sys- In product (or service) leadership, inno-
tem . This leads us to HR systems as a third vation is the value proposition . With an
way of diagnosing the impact of the HR operational excellence strategy, the firm's
function on firms . uniqueness or competitive advantage is tied
to cost . In product/service leadership, com-
petitive advantage is tied to innovativeness
ASSESSING HR'S SYSTEMS of the offering . The workforce that produces
innovations often identifies with, values and
We conceive of HR systems as the basic is humbled by the discovery process . This is
components of HR viewed as an intercon- particularly true for the R&D workforce,
nected whole with respect to a firm's stra- which is largely responsible for the innova-
tegy or value proposition . Our discussion tiveness, and the continued uniqueness, of
111
firm offerings . Such a workforce tends to typical of operational excellence . Because
challenge the status quo, is anti-bureaucratic, such firms are delivering a value proposition
has a longer-term focus, is driven by learn- "our way," are trying to eliminate variance
ing, has a greater tolerance for ambiguity, (and thus all avoidable costs) from the sys-
and is willing to take greater risks . It should tem, they must be tight and internally
not be structured or streamlined, because its focused to achieve their strategy . On the
members are expected to be innovative and other hand, product leadership firms, espe-
creative, and think outside the box . Firms cially the R&D workforce responsible for
that generally follow this value proposition creating the value proposition, need to be
include Sony, G1axoSmithKline, Merck, 3M, relatively loose . Just how loose? Fortune
Intel, and Nike. These firms win in their magazine featured a covering showing a
markets by continuing to offer things "the prospective employee saying: "Yo, I'm the
new way" as opposed to "our way," as new corporation, man! I want an outlandish
characteristic of an operational excellence salary, a cappuccino machine, and by the
strategy . way I'm bringing my bird to work ." While
The customer intimacy value proposi- the cover is a caricature, nevertheless flex-
tion offers unique solutions customized for ibility, looseness, and tailoring to creative
the client. Such a strategy calls for a work- employees are important to yield the inno-
force constantly finding and improving solu- vation necessary to leverage the product
tions . Customer needs not only are satisfied leadership value proposition . The challenge
but also anticipated . This requires a work- for line management, and especially the HR
force that identifies with customers, shares function, is to develop a core workforce
"secrets" easily and readily with co-workers focused on an applied innovation (i .e ., an
so that the entire system continuously external focus) that delivers value to a cus-
leverages the firm's value proposition in tomer . Thus, the culture needed for the pro-
order to grow by offering additional solu- duct leadership value proposition to be
tions to the client . Such a workforce should successful is loose and external, especially
constantly seek customer intelligence, be for the core workforce that creates this value
adaptable and flexible, concerned with mak- proposition.
ing results happen for the customer, be quick The customer intimacy core workforce-
studies, and driven by customer success . It is those employees who interface with the cus-
not made up of clones, but employees who tomer-must be externally focused in a rela-
can think, capture and readily disseminate tively tight platform . This enables the
information, and better utilize that informa- capture of customer information (i.e ., custo-
tion in meeting a customer's unique require- mer intelligence) to build and efficiently
ments . Firms following a customer intimacy deploy knowledge capital throughout the
strategy include : the Four Seasons, Airborne, system, such that unique solutions are devel-
Roadway Express, Home Depot, Cott Corp ., oped to leverage the relationship with the
Cable & Wireless, PriceWaterhouseCoopers, customer . The customer solutions culture not
and Dell Computer Corp . The value proposi- only solves immediate customer problems
tion in customer intimacy is customization- but also anticipates future customer needs
you can have it "your way ." based on learning occurring throughout the
Alignment requires firms to understand firm. Learning from customers enables
that different value propositions require dif- further customization and requires a very
ferent cultures . There are many ways of strong external focus that operates through
looking at culture . One relatively straightfor- a smart and efficient dissemination platform .
ward approach is to use two very simple Airborne Express and Dell are examples
dimensions : firm structure (loose vs . tight) where a firm finds unique solutions to cus-
and firm focus (internal vs . external) . Firms tomers' delivery problems but within a sys-
that are tight and internally focused are more tem that is tightly structured to capture

1 1 2 ORGANIZATIONAL DYNAMICS


FIGURE S ALIGNING HR PRACTICES AROUND VALUE PROPOSITIONS

work tteel~t
• tt p tWak • 9enaviar
• Key Pnxxses$ • Consebue cee
• bb oabn • Nomad eesfe

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• Stdd papery sduadar;
. Frmr,rapa prot eu
M~a WaM - QuartBbYve • ProdidNis area • PrcMherkg bed b
• Abandoned ape - Valet kidder aberle
Let • Wtipse . aprrdyaeni • BldWaedpay

• Net sales j head far6adk

aunt
• Teneddsedpna and • PYairOleanM6
• %Saleahomnar • TedaiaNesmreh .gam lean hel nepan
• Teara(rma {aa..IIIt9 wmpefarda awards • Arnibtxeetraa
5aecdartj • OuYide•dabos • Cards
• Maain Wkdtea pair • fper,Cp
New alesyoxU, • AcM kanar6 oompsYsncyyroash • Ercara9e
Cayomar proash • Feedbadkan
Pr ny • W aai qawrArl
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• Fsedtrdcon new
• CeDYr4~
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Acme Iseman . Ononled turard ipry . • e+daidedaraads • dam
Ccadnelod • CuMaawr pwanleas •
• Knowtt* sarstanara' Cugl marMendeir • Nelaprkeg tam reieondep win • System awards cu anaradyoahe
roes uassonnar lWMsaaralewaMa • $u Oman'
leads
• No. afenab horn • Resourod Area • Pbl a kd d taddeta 'Fester Sa lon reeds
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customer intelligence and remain price com- Competency-based pay might also be appro-
petitive . priate for growing the competencies in the
Strategic alignment means focusing HR innovative, technical, and research units
practices on the firm's value proposition, as required by firms pursuing such a strategy .
illustrated in Fig . 3 . For example, in opera- In customer intimacy, customer guaran-
tional excellence one of the best workforce tees, customer retention rates, and customer
measures might be total cost productivity . referrals might be important performance
The best rewards might be based on team measures . Individual rewards for identifying
productivity, since it would leverage the new and better ways of serving customers, as
value proposition by creating "more with well as system-wide team rewards, are
less ." This would create self-funded produc- appropriate for compensating the workforce
tivity gains that can be shared with the work- for further leveraging the value proposition
force that enhanced productivity . of customization .
Product/service leadership measures Another major systems component is
might use sales from new products gener- integration of the HR function . HR practices
ated within, say, the last three years, and are seldom integrated (Fig . 4) . In fact, one
team innovation or revenue growth rewards of the embarrassments of the HR profession
based on new product sales, because these is reliance on many different databases,
metrics are better measures of strategic suc- all describing work or the workforce but
cess in delivering the value proposition cre- using different language . The compensation
ated by the core workforce . Thus, revenue staff has its language for job evaluation,
sharing incentives might be appropriate . training and development uses the language

113


FIGURE 4 COMMON LANGUAGE

Pwlnnn
ow~~ane
MIu4an StMlegy Job
t'fnawtbne Classifications

Independent Activities
Company Valtes
Performance Ratings
Department/Unit
Objectives
Developmental
Competencies
Performance
RI Al~rtaM~ 1

of competencies, skills, knowledges, abilities, system components-measurement, selec-

etc. The selection staff has a specific jargon tion, development, and motivation-need
having to do with job requirements and spe- to be aligned and integrated, with a common
cifications found in job descriptions, different language as well . Since performance mea-
yet from the learning requirements of train- surement is critical for gauging strategic pro-
ing and orientation efforts . Moreover, the gress, it must be consistent with the firm's
performance measurement system often uses value proposition . Because selection, devel-
language entirely independent of workforce opment, and motivation efforts are all
data from other areas of HR . In addition, top designed to enhance performance, it
management can add to the language stew behooves firms to significantly improve their
by using terms such as teamwork, integrity, integration to leverage individual and firm
leadership, etc . in a firm's mission and values performance . There is substantial evidence
statement . Such usage may not be concep- that this does not occur . Surveys report that
tually different from HR's attempts to neither managerial/professional nor hourly
describe work or workforce but may not rein- workers believe HR system components are
force efforts to shape workforce mindset. well integrated .
Based on evidence, we believe that these sys- Do alignment and integration make a
tems need a common language and be sup- difference? They certainly do . Substantial
portive of one another . evidence from Huselid's survey of some
Business strategy, communications one thousand firms indicates that alignment
about a firm's strategy and strategic direc- and integration of a firm's HR systems plays
tion, and the design of work all need to be a critical role, with the impact varying by the
aligned and integrated . Further, HR's basic quality of a firm's work system . Huselid

1 1 4 ORGANIZATIONAL DYNAMICS
 FIGURE S DIFFERENTIATION : YOUR ORGANIZATION'S WORKFORCE(S)

Professional Partners Strategic Capabilities

Contract Services Operational Partners

30

Low Competitive Advantage Value of Human Capital High

Source : Lepak 8 Snell, 1999

refers to these as "fit" and "complement," fit important, what the data shows is that for the
with respect to strategy and complement top 40 percent, or most sophisticated HR
with respect to the components of the HR systems, alignment and integration pay off
system . Huselid's findings demonstrate that substantially, adding another $40,000 to mar-
substantial changes in market value occur ket capitalization per employee . Thus, align-
based on the extent to which HR systems ment and integration of HR systems is not an
are aligned and integrated. For the least academic issue . They impact a firm's finan-
sophisticated one-fifth of firms in terms of cial returns .
HR, merely having an HR system is asso- Finally, a major emerging issue is work-
ciated with >$40,000 increase in market capi- force differentiation . Here we draw on the
talization per employee . However, for the important recent work of Lepak and Snell .
next 40 percent of the sample, lack of align- Fig. 5 illustrates the competitive advantage of
ment and integration do not seem to have human capital in organizations and the avail-
much of an impact on market capitalization . ability of this human capital in the market.
(This may be one of the traps of best prac- Readily available human capital with little
tices, for such firms may be engaging in strategic leverage is referred to here as con-
various efforts to enhance one component tract services . In other words, this is work
of the HR system, without having a greater that is far from core in creating or delivering
impact on the firm as a whole . In fact, best the firm's value proposition and is a candi-
practices may create more variance within date for outsourcing . Strategic capabilities
the HR function and therefore reduce its are those that are narrowly distributed in
impact on the bottom line .) Finally, and most the labor market and have a significant

115


impact on a firm's value proposition. Hence, These individuals may be compensated

the issue is how should a firm leverage its above or well above prevailing rates if a firm
workforce. Another cell of the matrix we call wishes to attract and retain the very best for
professional partners-positions within firms positions that have strategic leverage . In fact
not directly responsible for leveraging its it may be that one cannot pay too much for
value proposition . These positions differ such individuals if they actually provide
depending on a firm's strategic pursuit. For significant strategic leverage . Operational
a manufacturing firm, professional partners partners, on the other hand, probably should
(i .e ., not strategically core positions, yet pro- be paid at market, but with significant group
fessionals not abundant in the labor supply) incentives, especially in systems such as
include units such as law, finance, accounting, operational excellence, where cost reduction
and even human resources . Although profes- is imperative . In other words, assessing HR
sional partners are narrowly distributed in the performance involves not only HR alignment
labor market, they do not directly contribute and integration (relatively new concepts to
to the firm's competitive advantage in its the HR function), but also differentiation-
chosen market . However, operational part- leveraging the HR system to maximize the
ners, although widely distributed in the labor contributions of the core workforce in deli-
market, have a significant impact on deliver- vering the firm's value proposition .
ing the value proposition of the firm .
We concur with Lepak and Snell that
each of these segments may call for a differ- LINKING TO THE BUSINESS
ent focus in terms of HR systems . Contract SCORECARD
services (work generally far removed from
core) might require HR to assume a custo- As shown in Fig. 6, the HR Scorecard must
mer-supplier relationship with the firm, be linked to the Business Scorecard, moving
with HR's responsibility to make sure that HR from focusing on doables to deliver-
the firm is getting the best, least expensive ables. What HR has been engaged in, as
deal from a vendor. Obviously HR practices we have described it, is building competen-
would be important here in terms of mea- cies, aligning practices, and integrating and
surement, selection, and even development, differentiating its systems to provide the
and perhaps rewards to ensure that what is workforce that can best leverage the firm's
contracted for is delivered as specified . Pro- competitive advantage . But what it must
fessional partners would call for special deliver is a workforce . Workforce success is
treatment as professionals; at the same time, the ultimate objective of any HR system .
they are working outside their profession . How might this be assessed if we are truly
They may be competent, but if they were to measure the HR system's effectiveness?
the most competent, most likely they would One way is to measure the mindset of the
be working in the professional firms within workforce by eliciting answers to such ques-
their discipline . Thus, from a compensation tions as :
standpoint, they should probably be paid at • Do employees know and understand
or near midpoint and not much higher . the firm's strategy?
Clearly if a firm finds itself in legal, financial • Do employees know and understand
or accounting trouble, it will likely go outside the status of the firm's success with respect to
to find vendors with more qualified or spe- the pursuit of that strategy?
cialized professionals . • Do employees know and understand
Strategic capabilities, on the other hand, the firm's value proposition and how it is
require the most care by HR because they delivered?
leverage the firm's value proposition . How Workforce mindset has been measured
such individuals are selected, trained, mea- by various surveys . We believe such surveys
sured, and compensated makes a difference . should be much simpler and more frequent
1 16 ORGANIZATIONAL DYNAMICS


FIGURE 6 LINKING HR SCORECARD TO BUSINESS SCORECARD

Business Scorecard

HR WORKFORCE
COMPETENC lES Rewards FINANCIAL SUCCESS
Feedback
• Admlnletrative
Expertise i •Cost
• Empkwa Advocacy I I • Return
• Strategy Execution
• Change agency II
7 i.
HR PRACTICES I
CUSTOMER SUCCESS
WORKFORCE STRATEGIC FOCUS
• Communications SUCCESS • Guapty
•Wak Design © OperatIaal ExeeNUnc . Coat
• Selectb„ o Product Leadership -1e •
• Development
• Performance
T
•
chnlcaI Knowledge
Behavior
o Customer Intimacy
SaMoa
• Werrwty
• Tim.
• Rewards
i
MS SYSTEMS BUSP4ESS PROCESS
SUCCESS
• AlIgnment
• Integration 1 • Productivity
• Dlf .rentisdoa
Ttanaacdorns

than in the past . For example, Sears' survey HR's deliverables can also be measured
data, popularized in the Harvard Business by the competency of the workforce by elicit-
Review, clearly support this. With ten ques- ing answers to such questions as :
tions Sears has been able to create a signifi- • Do employees know and understand
cant measure of workforce success (really a what they are to do?
measure of workforce efficacy) and has • Do employees believe they have the
demonstrated the impact of and improve- skills and knowledge necessary to do their
ments in workforce success on customer suc- job?
cess and firm financial success . • Are employees provided the manage-
Similar results have been reported else- rial support and support systems to do the
where using other scorecards (e .g., by many job to the best of their ability?
statewide Baldrige award winners) . The • What level of competency is necessary
Gallup Organization has used a 12-question in strategic resource positions now (and in
survey that captures factors impacting pro- the future)? Are individuals in these critical
ductivity, retention, profitability, and custo- positions (e.g., sales representatives, custo-
mer satisfaction, as well as explaining a mer service, etc .) delivering the behaviors
significant amount of variance in firm per- expected of them?
formance . Their questions are very similar to • How many truly "A" players are there
Sears' 10-question survey . Research is in "A" positions?
ongoing in this area, and survey data can • How many "B" or "C" players are
help identify measurements of importance . there in "A" positions?
Clearly a relationship exists between work- • How many have passed behavior- or
force behavior, operational success, customer knowledge-based checkouts on specific com-
success, and the financial success of firms . petencies required for success in their jobs?

117
 • Are our leaders behaving in ways that To achieve success HR must have a sig-
elicit "followership"? nificant partnership with line management.
• Do our leaders manage employee per- While it is only reasonable to hold the HR
formance by detailing performance expecta- function accountable for workforce success,
tions, providing feedback, and conducting a line management should also be held
meaningful review with an equitable reward accountable for the same workforce success
conference? metrics . If line managers wish to be success-
• Are our leaders responsible for and ful in delivering on their business model
assessed on their workforce's mindset, com- (e .g ., the Balanced Scorecard), they must be
petency growth and behavior in strategic held accountable for workforce metrics such
positions? as workforce mindset, competency growth
There have been many demonstrations and behavior in delivering the unit's value
of competency measure success, but the proposition.
issue is which competencies to measure . It is not unreasonable to ask what HR is
Clearly competencies must be tied to busi- willing to guarantee management in terms of
ness success. In fact, competencies should workforce mindset, and behaviors . But the
be tied to specific business deliverables corollary is to ask what is line management
(e .g ., operational, customer and financial willing to guarantee the firm, its workforce,
success) . One problem in competency mea- customers, and its investors. Certainly line
surement is that competencies are often in managers should be held accountable for
"free-float" based on a firm's existing popu- financial success, customer success, business
lation, especially the firm's current execu- process success and workforce success .
tive officers, instead of the competencies Workforce success for every manager can
necessary to win the firm's future . Compe- clearly be measured by metrics such as leader
tencies must be tied to business success and behavior (e .g ., through 360 °-or better yet
pass the "So what?" or "Because of?" test . 180°-assessments), workforce mindset and
Such competencies and their measurement workforce competencies . Indeed, if we are
are exemplified by mandated product willing to accept the value of intangibles and
knowledge and testing for sales associates their impact on market capitalization, it
(and executives) at Circuit City and Series 7 would be prudent to have a significant por-
and 9 examinations in financial services to tion of all executive incentive compensation
demonstrate General Electric's "Black Belt" driven by leader behavior and workforce
proficiency . measures for any unit for which a manager
The objective is to drive those behaviors is responsible.
with substantial impact on business process
success that lead to customer success
and ultimately result in financial success .
SUMMARY
Firms that are successful operationally
and with their customers should experience Our objective has been to rethink the mea-
firm financial success . From the perspective surement of "soft-side" functions . While
of HR, it is a continuous feedback loop . such measures may not always have the
Financial success fuels the next generation "hardness" of traditional business metrics,
of employee rewards . Customer success pro- they are a step in the direction-the right
vides the feedback that enables the HR func- measures, on the business's scorecard, and
tion to understand what needs to done to with greater robustness . We believe it is
build better (or different) HR workforce essential that the HR function be assessed
competencies, enhance HR practices and on its deliverables, using simple outcome
determine the necessary steps to improve measures such as the improvement of the
the alignment, integration, and differentia- workforce mindset, its competencies, and
tion of HR systems . critical behaviors . It is equally essential to

1 1 8 ORGANIZATIONAL DYNAMICS
ensure that line managers be held accoun- workforce success is mandatory to deliver
table on the same workforce attributes or the success of the firm's business model as
firms will not be able to deliver the work- intended .
force necessary to make the firm's business
model a reality . Thus, a partnership bet- To order reprints of this article, please call
ween line managers and HR using the +1(212)633-3813 or e-mail reprints@elsevier.com
same attributes for the measurement of

119
 4
SELECTED BIBLIOGRAPHY

For those interested in the concept of human Tearcy and F. Wiersema, The Discipline of
resources as a competitive advantage, see the Market Leaders : Choose Your Customers, Nar-
work of D . Ulrich, especially Human Resource row Your Focus, Dominate Your Market (Per-
Champions (Harvard Business School Press, seus Books, 1997) .
1997) and D . Ulrich and R. W. Beatty, "From On improving various aspects of HR
Partners to Players : Extending the HR Play- systems, see R . W . Beatty and C . E. Schneier,
ing Field," Human Resource Management, "New HR Roles to Impact Organizational
Winter 2001, 40(4), 293-307 . For a discussion Performance : From Partners to Players,"
of the role of quality and measurement, see Human Resource Management, 1996 and The
W . E . Deming, Out of the Crisis (MIT Press, Performance Imperative : Strategies for Enhan-
2000) . On the growing importance of intan- cing Workforce Effectiveness, edited by H .
gibles and the workforce in firm success, see Risher and C . Fay (Jossey-Bass, 1995), a col-
B . Lev and P. Zarowin "Seeing is Believing," lection of 20 essays offering an overview of
CFO, 1999 . An illuminating discussion of the major issues affecting today's workforce.
non-financial measures can be found in Ernst On the issue of linkage, see B . E . Becker,
& Young, Measures That Matter : The Impor- M. A . Huselid, and D. Ulrich, The HR Score-
tance of Non-Financial Measures, 1998 . On the card : Linking People, Strategy and Performance
impact of HR systems on firms, see M . A . (Harvard Business School Press, 2001) . On
Huselid, "The Impact of Human Resource the issue of designing an HR Architecture,
Management Practices on Turnover, Produc- see D . P . Lepak and S . A . Snell "The Human
tivity, and Corporate Financial Perfor- Resource Architecture: Toward a Theory of
mance," Academy of Management Journal, Human Capital Allocation and Develop-
1995, 38, 635-672 . ment," Academy of Management Review,
Our approach to measurement starts 1995, 24, 31-48 . For a discussion of linking
with the concept of the Balanced Scorecard HR Strategies with role behaviors, see R . S .
(R . S. Kaplan and D. P . Norton, The Balanced Schuler and S. E . Jackson "Linking Com-
Scorecard: Translating Strategy into Action petitive Strategies with Human Resource
[Harvard Business School Press, 1996]) . For Management Practices," The Academy of
a useful source on strategic choice, see M . Management Executive, 1987, 1, 207-219 .

Richard W . (Dick) Beatty is professor of human resource management at

Rutgers University and is a core faculty member at the University of
Michigan's Executive Education Center . He received his B .A . from
Hanover College, his M.B .A . from Emory University, and his Ph .D . in
human resources and organizational behavior from Washington Uni-
versity . He has published several books and more than one hundred
articles and is an associate editor of Human Resource Management . He was
president of the Society for Human Resource Management Foundation
and received the society's book award, and twice won the research
award from the Human Resource Planning Society.

120 ORGANIZATIONAL DYNAMICS

 Dr. Mark A . Huselid is an associate professor of HR strategy at Rutgers
University . His current academic research and consulting activities focus
on the linkages between human resource management and measurement
systems, corporate strategy, and firm performance . He is editor of the
Human Resource Management Journal, and his bestselling book The HR
Scorecard : Linking People, Strategy & Performance (with Brian Becker and
Dave Ulrich) was published in 2001 by the Harvard Business School
Press . His new book Workforce Success Metrics : Creating a Human Capital
Scorecard for the CEO (with Brian Becker and Dick Beatty) will be
published by the HBS Press in 2004 .

Craig Eric Schneier is executive vice president, human resources at

Biogen, a biotechnology company in Cambridge, MA . He led his own
management consulting firm in Princeton, NJ from 1991 to 2001, and was
a managing partner in Sibson & Company prior to that . Dr. Schneier held
a professorship at the University of Maryland, and currently teaches in
the Executive Education program at the Tuck School, Dartmouth College .
He is the author or coauthor of several books, including the award-
winning Personnel Administration and Leading Strategic Change .

121

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