THE FUTURE OF HR…FROM A BUSINESS PERFORMANCE

PERSPECTIVE

HR’s Role In Building a Performance Culture

LWHRAFebruary 8, 2011

© Dr. John SullivanAuthor, Professor and Advisor to Management

www.drjohnsullivan.com

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Five goals for today

1. To highlight the strategic purposes of HR

2. To help you understand the key components that shareholders expect in a performance driven culture

3. To provide you with some real world examples and action steps

4. To have some fun… while making you think (and maybe even a little uncomfortable)

5. To answer your questions (breakout session)

Performance culture #1 critical priority

Top people concerns among senior business executives are:

1. Creating a high-performance culture (79%)

2. Leadership development (76%)

3. Talent Management (76%)

4. Training (63%)

Why? Because of the business need for “a relentless focus on innovation, productivity, growth, and customer service.

4Source: Aligned at the Top, Deloitte/Economist Intelligence Unit Study, 2007

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What is the definition of a performance culture?

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Briefly, what is a performance culture?

Definition

1. An organization where every talent management, people management and business process is designed and operated for the highest measurable impact on firm performance

2. People management processes related to hiring, rewards, promotion, metrics, development, retention, communications etc. must be primarily based on performance and output

Briefly, what is a performance culture?

Definition

3. The organization must also deemphasize “smoke” but not output factors like…

Tenure

Show up pay

Effort

Experience

Education

Loyalty

Peanut butter treatment7

Even policies can deemphasize common restrictions

Code of conduct…

“Google's respect and affection for our canine friends is an integral facet of our corporate culture.

We have nothing against cats, per se, but we're a dog company”

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Who are the firms with a performance culture?

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Most HR functions don’t produce a perf. culture

25%

Best Practice

65%

Average

9% - Antiquated “so last year”

1%Performance Culture w/Next Practice

Benchmark firms to learn from

Firms that have performance cultures: GE Google Microsoft Oracle Nucor Wal-Mart

Most professional sports teams

US Marines Whole foods Netflix Apple

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A quick snapshot – Netflix (How is there stock doing?)

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Netflix has a performance culture

CEO’s of performance cultures act differently:

* Google and GE also do Topgrading

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Netflix has a performance culture

At Netflix... “cutting smartly” means:

“adequate performance gets a generous severance package.”

Why?

“otherwise managers feel too guilty to let someone go!”

Netflix has a performance culture

“Star” employees demand different treatment:

Netflix Vacation Policy and Tracking

“there is no policy or tracking”

Netflix Policies for Expensing, Entertainment, Gifts & Travel:

“Act in Netflix’s Best Interests”(5 words long) 15

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Why does HR exist?

What are its strategic purposes / outputs?

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What are the strategic purposes of HR?

HR’s accepts accountability for six outcomes:

1. Make a measurable contribution to increasing the stock price >

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Best place to work – shareholder value increase

Source: Great Place to Work Institute (abbreviated chart)

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HR practices impact on shareholder value

Blue = Low Value HR, Dark Purple = Better HR,Light Purple = Best HR

Return to shareholders… Compared to the level of HR practice

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What are the strategic purposes of HR?

HR’s accepts accountability for six outcomes:

1. Make a measurable contribution to increasing the stock price

2. Produce and demonstrate an above-average ROI on employee costs (60% of variable cost/productivity) >

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Can changing the work environment impact productivity?

Results Only Work Environment•Pick your hours•Pick where you work•No in-person meetings required

The business impacts:

When workers switch to ROWE, their productivity jumps by 35%

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What are the strategic purposes of HR?

HR’s accepts accountability for six outcomes:

1. Make a measurable contribution to increasing the stock price

2. Produce and demonstrate an above-average ROI on employee costs (60% of variable cost/productivity)

3. Increasing the ideas and innovations generated by your employees >

Does innovation mean increased productivity?

These are all top firms… but some focus more on innovation… IBM HP Microsoft Apple Google

Pick the firm with the lowest level of innovation and the two firms with the highest level of employee

innovation in recent years.

Comparing firms on their workforce productivity

Workforce productivity (i.e. rev per employee)

Average $208,000 (Average for this

industry)

IBM $246,600 (23% above the average)

HP $406,900 (Nearly double the

average)

Microsoft $722,700 (Over 3.5 times average)

Google $1,303,000 (Nearly 6.5 times)

Apple $1,631,000 (Nearly 8 times the average

& the highest stock value)

It takes 6.5 X more employees at IBM… toproduce the same revenue as Apple (Calculated using 2010 data)

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What are the strategic purposes of HR?

4. Mitigating major risks (i.e. loss of top talent, missed hiring opportunities) Loss of Mark Hurd at HP Loss of Steve Jobs at Apple? Missing an opportunity to land Tiger Woods

on your golf team

ROWE teams mitigate turnover risk - they have a 3.2 % lower turnover rate (The cost of turnover is $102k per employee = $13 million per year savings)

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What are the strategic purposes of HR?

5. Improve your employee’s ability/skills to do an increased volume of current work (capacity) and increase ability/skills to do new work (capability)

What is the value of having a more capable top performer/ game changer in the same job? (i.e. performance differential) >

The performance differential

One top-notch engineer is worth “300 times or

more… than the average

…

we would rather lose an entire incoming class of engineering graduates than one exceptional

technologist.”27

Alan EustaceSenior Vice President, Engineering and Research

The performance differential

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“One great programmer is worth 1000 good programmers.”

Bill GatesChairman

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The HR value proposition calculation

If HR helps land “game changers” the $ impact is…

If you hire a single game changer at Google (where the average employee generates $1.3 million in revenue each year)

And that game changer produces the expected 300x an average employee’s performance ($1.3 X 300)

For every one you hire… you add over $390 million in revenue every year

And if the new hire stays for only two and half years… that single hire will generate over $1 billion in added revenue (Which is why Google is a hiring machine)

O M G!Any questions at this point?

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Finally, the last strategic purpose of HR?

6. Provide consulting help to managers… so that they can improve the hiring and managing of their employees

How do those outside of HR rate our service and contribution? >

HR isn’t meeting executive expectations

HR plays a crucial role in operational success.

We are world-class in people management and HR.

We have adequate or underperforming people management and need significant or radical improvement.

23%

4%

79%

Source: Aligned at the Top, Deloitte/The Economist, 2007

What percentage of senior business leaders believe:

HR isn’t meeting executive expectations

Australian survey reveals perception among senior business leaders:

73 % see HR as ineffective

Approximately 80 % have little understanding of what HR does

Source: HRpulse Survey-Extreme Makeover, Australian Human Resource Institute, November 2007

The “new HR”

Executive search firm… a managing partner assessment

“Even though everyone talks the talk of being a business partners… those HR executives who are actually anticipating the future needs of the business from a strategic and operational point of view are few and far between.”

-Wendy Murphy, Managing Partner, Heidrick & Struggles

Summary

Let’s summarize the purpose of HR:

1. Increase the stock price

2. Increase employee productivity

3. Increase use of successful ideas and innovations

4. Mitigate major risks

5. Increase employee capacity and capability

6. Provide consulting help to managers

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How can performance cultural principles be

utilized?

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Key “shareholder aligned” principles of HR

Shareholder aligned principles should be used as:

a checklist for current program assessment/ audit

Or as a design template for new HR programs (a

screening filter for new ideas)

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Here are nine key shareholder principles with

action steps and examples

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Key “shareholder aligned” principles

1. Dollarize impacts of HR activities Shareholders and executives have no special

affection for "soft" or overhead functions. They understand only “dollars”

Action step – all “HR results” must be annually converted to their dollar impacts on corporate revenue (e.g. the cost of a bad hire and the value of eliminating barriers to productivity)

An example >

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Convert HR metrics into dollars

Example The turnover rate of store managers at a major

discount apparel store was 40% Unfortunately that number gathered only minor

interest Converted to dollars – store sales go down $1

million during the calendar year after a manager leaves

Total revenue impact of store manager turnover… $220 million… gets everyone’s attention

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Key “shareholder aligned” principles

2. A “business problem” perspective Typically overhead departments are internally

focused, rather than being focused on business problems

Action step – rather than attacking "HR problems" like recruiting and retention, the function must target "business issues” and goals like product innovation, increased market share and improved customer service ratings

An example >

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I call these “the questions from hell”

I learned the “bus problem perspective” on HR when a GM asked me “what is the name of the HR program that would…”

Increase his output by 12% Cut labor costs by 8% Increase innovation by 23% Increase customer satisfaction rate by 37% Increase revenue by 6.5%

What would your answer be?

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Key “shareholder aligned” principles

3. Rapid learning In a rapidly changing environment the key

corporate competency is… continuous and self directed rapid learning

Action step–hiring, development and promotion standards must be changed to focus on continuous learning

An example: Google learning speed

And learning everywhere >

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Learn “everywhere” strategy

“Testing on the toilet”

Source: www.flickr.com/photos/gubatron/246489031

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Key “shareholder aligned” principles

4. Prioritized treatment Not all individuals, processes, functions and

business units have the same impact on results Action step – HR must prioritize jobs, key

employees and business units and then allocate the greatest portion of it’s resources to those high priority areas

An example: a bank found that vacant loan officer positions cost $5000 per day, so they prioritized hiring and reduced time to fill by 30 days ($150k per position)

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Key “shareholder aligned” principles

5. Use data based-decision making Functions like finance, customer service and

supply chain have produced superior results by adopting an evidence or “data based approach

Action step – HR must develop algorithms, decision guidelines and provide data that will make it easier for managers to make fast and accurate people management decisions

An example: Google utilizes the “100 foot rule”, employee shuttles, coffee lines & a laundromat, Why?

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Key “shareholder aligned” principles

6. Foster competition Shareholders are capitalists, so they believe in

healthy competition and the need for market forces, even internally

Action step – HR must foster contests and internal competitions to increase referrals, innovations, best practice identification and performance improvement.

Some examples >

Deloitte’s film festival showed their excitement (Yielded 1,000+ videos)

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Internal competitions can build excitement

MGM Grand sends a message that talent triumphs over tenure

Learn more about MGM’s commitment to it’s people: http://bit.ly/fotn55

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This is not a performance culture contestZappos toga party and chug contest on YouTube

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Key “shareholder aligned” principles

7. Agility and flexibility In a fast changing business world, every process

must have the capability of adapting rapidly to changes in the business, economic or the competitive environment's

Action step – HR strategies, budgets & resources must "shift" to meet changing needs and opportunities. If – then scenarios are also required

An example: Jet Blue put together a “work at home” call center, that can instantly ramp up and ramp down hours

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Key “shareholder aligned” principles

8. Predict upcoming events All functions must be forward-looking so they are

not "surprised" by tomorrow's events Action step – every major HR process and

program must have a problem and opportunity forecasting and alert component

An example: CACI has a predictive model to accurately forecast recruiting needs for the year and its internal mobility model is also tied in

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Key “shareholder aligned” principles

9. Broad reporting and transparency The broad distribution of ranked people-

management results by manager makes it hard for individual managers to avoid comparing their results to the best managers

Action step – HR should distribute metrics and thus increase pressure to perform

An example >

A very public disclosure of performance

Let Amy, the low performer, know who she can learn from (Jesse)

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Key “shareholder aligned” principles

And finally, a quick overview of six not previously covered performance culture principles:

10.Build a competitive advantage

11.Root cause and failure analysis

12.Integrated processes

13.Technology everywhere

14.Global capability

15.Aim for top talent

Did I make you… think?

Make you a little apprehensive?

How about some questions?