THE HR SCORECARD: LINKING PEOPLE, STRATEGY, AND PERFORMANCE

Brian E. Becker, Mark A. Huselid, and David Ulrich
(Harvard Business School Press, 2001)

Book Review by William B. Pugh, J.D., SPHR
Bain Pugh & Associates, Inc.

Introduction

Human capital has become the key element in creating and sustaining value in business. Yet there is no consensus blueprint for recognizing, developing, managing, or measuring this intangible asset. It is not enough for HR managers to be able to explain why and how they do what they do. For human resources to transform to a truly strategic role, HR professionals must be able to measure performance and to link HR’s contribution to the mission of the organization. The HR Scorecard is a management system for filling the gap between what is usually measured in HR and what is actually essential to the firm.

This is not a trendy pop-business read about sixty-second solutions or lost cheese. It is a research-driven analysis of HR, complete with detailed guidelines, a demonstration of in-depth research, case studies, and a prescription for transforming a function long seen as irrelevant to the success of the organization. Although the presentation is sometimes symptomatic of having three authors, the through-line of the vision is consistent.

After a decade of research including data from almost 3000 firms, the authors’ conclusion is: “Firms with more effective HR management systems consistently outperform their peers.” In other words, it’s HR architecture alignment with strategy implementation, Stupid!

HR As A Strategic Partner

1. The economy is driven more by intellectual capital than physical capital, and HR must show its contribution to the creation of value.
2. There must be a focus on the HR “architecture” - the sum of HR function, the broader HR system, and the resulting HR behaviors - and how to measure the HR function in terms of the value-creation process.
3. HR must move from a “bottom-up” perspective emphasizing compliance and administrative support, to a “top-down” perspective stressing the implementation of strategy. It must move from a focus on individual employees, jobs, and practices, to a new source of competitive advantage.
4. The benefits of HR, like most intangible strategic assets, are not always visible; they are known only when aligned with the firm’s strategy implementation system.
5. Linking performance measurement with strategy implementation communicates the intangible value of the firm to financial analysts, thereby adding to the market value of the firm.
6. The measurement of intangible assets, and their relationship to the overall strategy of a firm, will transform traditional accounting procedures that are bases on tangible assets. The alignment of HR to overall strategy and the HR contribution to profits is a key intangible asset.
7. Current accounting methods cast HR as a cost center despite the view of investors and analysts that intangible assets are the most important part of valuing firms.
8. Most firms can demonstrate proficiency in technical HR functions, but find it difficult to develop HR as a strategic player.
9. The High-Performance Work System (HPWS) is a model for an HR systems link with the firm’s strategic goals. Based on data from more than 2,800 corporations, the model maximizes human capital.
10. HPWS firms typically emphasize recruiting, energize training, tie compensation to performance, use teams extensively, have larger HR staffs, and are less likely to be unionized.
11. HPWS firms have clear strategic intent effectively communicated to employees, and they have developed comprehensive measurement systems.
12. The alignment of the HR system with the strategy implementation process will link ultimate financial goals with employee competencies and behaviors throughout the firm. The management of people will be geared toward those competencies and behaviors.
13. Rather than measure only ending financial results, managers must identify and be involved with those strategic implementation elements that create those results.
14. Effective measurement systems guide decision-making and serve as a basis for performance evaluation.
15. A measurement system should provide a clear view of how each employee contributes to success, should force managers to focus only on what matters (no more than twenty-five measures), and should express those few measures in terms everyone understands.
16. The book incorporates Kaplan and Norton’s Balanced Scorecard framework because it measures the value-creation process rather than only the financial results event.

Clarifying and Measuring HR’s Strategic Influence

1. To achieve strategy alignment, a firm must ask: how the firm creates value, what strategies make the firm succeed, and what measurements of performance capture the strategy implementation process.
2. No alignment can occur without a communication plan that ensures that every employee understands the plan for success.
3. Firms must move from measuring only lagging indicators that tell what happened in the past (such as financial metrics) to including leading indicators that assess the status of success factors (such as R&D cycle time and customer satisfaction).
4. Measurement will be different for each firm, but it will come at the points where HR intersects with the firm’s strategic implementation plan, called “strategic HR deliverables” by the authors.
5. One category of HR deliverables is “performance driver,” which is a people-related capability such as employee productivity or employee satisfaction.
6. Another category of HR deliverables is “enabler”, which reinforces drivers, such as changing a reward system to emphasize a different focus in the workplace, or adding skills to the workforce.
7. HR must align its enablers with the performance drivers; it must link training, performance appraisals, hiring targets, succession planning, and pay to the strategy of the firm.
8. Process for linking HR deliverables to strategy implementation:
   • Step 1: Clearly Define Business Strategy. Focus the discussion of implementation of the strategy rather than merely describing the strategy in generic terms.
   • Step 2: Build a Business Case For HR as a Strategic Asset. Get the why and how of HR supporting the strategy implementation.
   • Step 3: Create a Strategy Map: Managers who will implement the firm’s strategy must create a map to represent the way value is created in that particular firm, and to express it in terms of HR deliverables.
   • Step 4: Identify HR Deliverables Within the Strategy Map. Identify drivers and enablers at the firm level.
   • Step 5: Align the HR Architecture with HR Deliverables. Identify how the HR system supports every other link in the firm’s value chain. The alignment must constantly adjust to changing strategies of the firm.
   • Step 6: Design the Strategic HR Measurement System: Develop valid measures of HR deliverables. Go beyond the traditional measurement solely of operational metrics; measure strategic factors in the value chain. If steps 2 through 5 are complete, there will be a link between financial and nonfinancial measures.
   • Step 7: Implement Management by Measurement. Measurement systems create value only when they are carefully matched with the firm’s unique strategy. Best practices are not necessarily portable, and that creates the intangible competitive value.

Creating an HR Scorecard

1. The ideal scorecard for an HR measurement system will include four themes: identifying the HR deliverables, identifying and measuring the High-Performance Work System elements that generate those deliverables, developing a validated competency model that will focus on outcomes, and identifying HR efficiency measures that link costs and benefits.
2. In terms of architecture, the scorecard will include the leading indicators of HPWS and HR system alignment, and the lagging indicators of HR efficiency and HR deliverables.
3. A measurement system must strike a balance between cost control and value creation, and it is more important to understand the reasoning behind the scorecard than it is to mimic any particular model.
4. HR doables are cost-focused with little opportunity to impact the bottom line; DR deliverables are benefits-focused with a connection to the overall strategy. Both must be measured, but the emphasis must be on the value creation of deliverables.
5. Measures of the High-Performance Work System reflect more of what should be rather than what is.
6. HR system alignment measures will link directly to specific deliverables in the scorecard. They will prompt managers to routinely think about alignment issues.
7. Efficiency measures come in two categories: core items represent expenditures that are important but do not contribute to strategy implementation, and strategic items that are designed as investments that produce value.
8. Measures of HR deliverables identify the ways the HR system creates value; if a metric cannot be tied to the strategy map, it should not be included on the scorecard. Measures that describe HR deliverables only in terms of capabilities tend to miss the connection with strategy. To be concrete, focus on HR drivers and enablers that represent the human capital of the firm.
9. Avoid the temptation merely to fill in the boxes on the scorecard; the key is to ask what you want the tool to do. Each item should:
   • Reinforce the distinction between doables and deliverables
   • Enable cost control and value creation
   • Measure leading indicators
   • Assess contribution to the bottom
   line
   • Let HR professionals effectively manage their strategic responsibilities
   • Encourage flexibility and change

Cost-Benefit Analyses for HR Interventions

1. An HR Scorecard measurement system identifies in quantitative terms the gap between current and ideal HR architecture, and it provides data for either an operational or strategic cost-benefit analysis.
2. Determining the return on investment (ROI) of specific HR interventions requires knowledge of finance, accounting, and the process of capital budgeting.
3. To identify the most salient doables and deliverables, consider: strategic importance, financial significance, widespread impact, linkage to a business element of considerable variability, and focus on a key issue, problem, or decision facing line managers.
4. HR must take the view of other business disciplines in presenting its case in terms of money – that is, the language of capital budgeting in the allocation of capital among competing investments.
5. Identifying costs and benefits requires an understanding of fixed and variable costs, sunk costs, and, the most difficult, the financial impact of employee performance.
6. Calculating benefits less costs in HR programs is difficult because the benefits unfold over more than a single year. The calculation should use multiple time periods as well as the time value of the money in terms of today’s dollars – an analysis known as net present value (NPV).
7. Most firms do not routinely measure costs or benefits of HR, and therefore are not focused on ROI. The few firms that do calculate HR costs and benefits, and do so on a level that is objective and precise, are able to identify the programs that are providing value and those that should be discarded.
8. Compared to HR Scorecards, cost-benefit
   analysis are narrower, more project focused, provide only one specific answer, and are generally seen only by the managers involved. Scorecards are developed to identify where the firm should be in the future, and ROI analyses choose the most efficient way to get there.

Principals of Good Measurement

1. Use the seven steps for linking HR deliverables to strategy implementation. Otherwise, there will be a reliance on available (rather than relevant) data, which is a missed opportunity to articulate how HR causes value creation, a failure to convince other business units that they could benefit in line operation performance, and confusion from trying to combine different types or cycles of data.
2. A sound performance-measurement system helps focus on creating value, and it can justify resource-allocation decisions.
3. The measurement of attributes, such as employee satisfaction, is the foundation of a measurement system, but it has little value until the attributes show a relationship to some strategic outcome.
4. Foe measurement numbers to have meaning, they must have context, whether by a comparison to the firm’s historical measurement or to industry standards and benchmarking. Because the relationships among measurements are likely to be firm-specific, benchmarking on HR strategic measures is misguided at best and counterproductive at worst.
5. Concepts and visions are important in communicating the essence of ideas, but they are not measurements because they are too abstract. Clarifying these constructs in terms of specific measurements is the first step toward understanding the value-creation process.
6. The measurement process is not an end in itself; it has value only if it supports subsequent decisions or more effective performance evaluation.
7. Measuring causation in dollars becomes very challenging when dealing in intangible assets because costs are easier to quantify than benefits. Measuring is further complicated by the real world of multiple variables that affect business outcomes. Case studies in the text explain how to analyze these multiples.
8. Among the challenges to implementing a measurement system are: overcoming resistance to change; the temptation to measure everything when wisely using available data can be extremely useful; matching different levels of the organization when comparing data; and accurately gauging the relationship between leading and lagging indicators and the time periods for each.
9. A “top-down” approach demonstrates an understanding of the value-creation process and the construct-valid measures of that process; a “bottom-up” approach starts with available measures and tries to make the best of an existing inadequate system.

Measuring HR Alignment

1. For HR to be a strategic asset, it must 1) align the HR system that produces deliverables tied to the firm’s strategy implementation system, and 2) align the role expectations for the HR function with the individual competencies to put the role into action.
2. A simple measure of internal alignment involves a survey of those who “live with” the HR system and those whose behaviors the system is designed to influence. A short survey of 100 employees and one or two focus groups can provide enough information. The book contains a chart and case study that reveal the extent to which different HR components fit or do not fit, and the values express the range of each relationship.
3. Internal misalignment can occur when there is too much emphasis on operational efficiency and uniformity, or when there is too much emphasis on benchmarking to the neglect of the specific needs of the firm’s own strategy. Practices are not commodities; what works well in one firm will not necessarily work well in another.
4. Internal alignment flows from the extent to which the HR system is designed to implement the firm’s strategy. This is the external alignment from which the internal is constructed.
5. The first step in determining external alignment is to assess the fit between HR deliverables and strategic performance drivers. Collect information from focus groups or other cross sections of employees to determine the degree to which each deliverable enables the appropriate driver. The focus should only be on the HR deliverables within the strategy map.
6. The second step in determining external alignment is to measure the extent to which the HR system produces the appropriate human performance required for the deliverables. Again, data can be collected from focus groups, but the test comes from the experiences and impressions of managers and employees outside HR. It does not matter that this could be very subjective.
7. Strategic human focus is a function of three interrelated elements – skills, motivation, and understanding of the link to strategy. These three elements must connect to the HR system.
8. There are many interdependent factors within HR and between the HR system and the firm’s strategy. Any adjustment can have unintended consequences. These can be understood with what the authors call a Systems Alignment Map (SAM), which is a higher form of measurement.
9. Although the Galileo method of measurement is too complex for this book review, this strategy lets managers understand employees’ perceptions of alignment. The steps are: identify the key strategic drivers, identify the key elements of the HR system expected to enhance strategy implementation, and ask a representative sample of employees to provide a list of paired “alignment” evaluations for all elements in the first two steps. Regardless of individual misconceptions or biases, the aggregate will be balanced through the correct use of those measurement techniques.

Competencies for HR Professionals

1. In the last decade, there has been a growing interest in HR as a profession, as evidenced by the Society for Human Resource Management (SHRM) and the certification assessment that it sanctions, and by graduate degrees at a number of prestigious universities. The knowledge and behaviors defined in these programs are competencies.
2. Of several surveys of HR competencies, the authors focus on one conducted by the University of Michigan from 1988 to 1998, which found that HR competencies could be divided into three domains: knowledge of the business, delivery of HR practices, and the ability to manage change.
3. As the study progressed into 1992 and 1993, other skills were identified, as HR professionals devoted more time to strategic issues and less to more traditional issues. They were becoming more knowledgeable about financial management and external competitive and customer demands.
4. The most recent part of the survey in 1997 and 1998 confirmed the original findings and added two domains: culture management and personal credibility.
5. For the authors, technical competencies need to be in the HR portfolio, but they are probably not essential to the professional’s ability to understand the implications for HR of the firm’s strategy. That is the new competency of the sixth domain: strategic HR performance management.
6. Strategic HR performance management is the process of orchestrating strategy implementation through performance measurement systems.
7. The strategic performance management competency is comprised of: critical causal thinking, understanding principles of good management, estimating causal relationships, and communicating HR strategic performance results to senior line managers.
8. HR has traditionally been the weak link in the effort to adopt strategic performance management as a key competency throughout the firm. HR managers must master what to measure and how to measure it, and they must apply it to the five core competencies.
9. Managing the core competencies includes cultivating the performance of HR professionals, assessing HR performance and rewarding it appropriately, and designing HR development programs.

Guidelines for Implementing an HR Scorecard

1. A high quality HR Scorecard, one that has all of the clearly defined technical aspects of linking strategy with HR architecture, is
2. nothing without acceptance of the change effort within the firm.
3. Using a checklist – any checklist – is more important than which checklist is chosen.
4. The authors’ research provides seven keys and processes for making change happen:
   • Leading change (who is responsible)
   • Creating a shared need (why change)
   • Shaping a vision (what will it look like when finished)
   • Mobilizing commitment (who else needs to be involved)
   • Building enabling systems (how will it be institutionalized)
   • Monitoring and demonstrating (how will it be measured)
   • Making it last (how will it be initialed and sustained)
5. These seven factors: must all be used as a package, can be used to determine the firm’s capacity for change beyond just HR, provide a disciplined approach to monitoring the key factors that need extra attention, and serve as a powerful new language for talking about the implementation of the HR Scorecard.
6. Each of the keys to making change happen should be applied to each element of the HR Scorecard to improve chances for successful implementation.
7. Early successes in implementing the HR Scorecard, even if modest in scope, can build momentum and expectation for future success.
8. Integrate the HR Scorecard with other measures of management success in order to make it more sustainable.
   The HR Scorecard will not fix a poorly run HR function, but the process does provide the means by which you can collect data necessary to address the essential elements of HR architecture. The HR Scorecard can help deliver increased value to employees, customers, and investors. The effort to create your own HR Scorecard is technical. The actual delivery requires that HR professionals have a personal commitment to making a difference in linking HR to firm performance.

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