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sCIRNC∎(f) DIRuICT •

New HR Metrics:

Scoring on theBusiness ScorecardRICHARD W. BEATTY MARK A. HUSELID

CRAIG ERIC SCHNEIER

T he role of the Human Resource functionin firms has changed in parallel with the

economic shift from agrarian to manufactur-ing to services-and now to information .Early on, HR was considered a staff function,not integral to the firm . Its role was admin-istrative or transactional, its work-productoften regarded as a commodity . One factorin changing HR's role is the increased reli-ance on knowledge workers . In our transi-tioning economy, observers, both inside andoutside of organizations, have come to view afirm's workforce as far more valuable . Thus,if one views HR's primary role as influencingworkforce mindset, competencies, and beha-vior, HR's role becomes central to the firm,for it is people who carry out its strategy. HRprofessionals need to recognize this changeand adapt to it .

To enhance HR's organizational contri-bution, HR professionals not only will needto transform what they do but also how theyare perceived. Early in its history, the "per-sonnel" function was a refuge for line man-agers who were polite but ineffectual-employees "too nice to terminate ." Threedecades ago, empowered by federal andstate legislation, HR became known as the"personnel police," often to the frustration ofline managers. In the ongoing transformationto a services and information economy, HRwanted to be seen as a strategic partner,hopefully invited to the strategic planning

party. But significant challenges await HRonce invited to the party. It must have some-thing to bring to the table.

We wish to address what and how HRcan contribute to the strategic success offirms by transforming itself from a partner(that can be removed or outsourced) to aplayer-on the field, in the game, with theability to score . The ability to score necessi-tates a new understanding of the rules of thegame-a new perspective on what HR is tocontribute, how its systems enable it to con-tribute, and how its ultimate deliverables canbe measured. The rules of the game meanthat HR should only attempt to score on anHR Scorecard integrated with the firm'sBusiness Scorecard .

The shift to a services and knowledgeeconomy has accelerated interest in the"intangibles" that have fueled market capi-talization growth in the equity markets . Bar-uch Lev and others at New York Universityoffer annual seminars on intangibles . CFOmagazine has reported on how the value ofknowledge workers in various industries canbe captured in financial terms . Several stu-dies have found that 30 to 40 percent ofmarket appreciation is due to non-tangiblefactors. An Ernst & Young study has shownthat intangible factors (e.g., strategy execu-tion, managerial credibility, strategy quality,attracting and retaining talent, managementexperience, and compensation strategy)

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Organizational Dynamics, Vol. 32, No . 2, pp. 107-121, 2003© 2003 Elsevier Science Inc. All rights reserved.

ISSN 0090-2616/03/S-see frontmatterdoi:10 .1016/50090-2616(03)00013-5

www.organizational-dynamics .com

explain much of the variance in the marketvalue of firms. These factors vary acrossindustry; for example, in the computer indus-try, the quality of management explains asmuch as 13 percent of the total variance inmarket capitalization .

Thus, research has demonstrated thatmany targets of HR work can and do differ-entially impact a firm's financial outcomes .While this notion is often given lip service byfirms, a growing body of evidence shows thatwhat HR does can have a significant bottom-line effect. In a major research study, Huselidfound that firms with sophisticated HR sys-tems (also known as "high performancework systems") have a significant financialimpact on profits per employee, sales peremployee, and market value per employee .These findings have gained the attention ofother academics and executives interested inbetter assessment of HR systems, as well as inredesigning executive appraisals to ensurethat leaders are held accountable for enhan-cing their workforce's contribution to thebottom line .

FIGURE 1 BUSINESS SCORECARD

Rewards

WORKFORCESUCCESS

•

Mindset•

Competend•

Behavior

108 ORGANIZATIONAL DYNAMICS

T8TRATEGYNALUEPROPOSITION

a Opsrstlond Excellenceo ProducUService

LeadershipO Customer Intimacy

-11

FINANCIALSuccess

One problem has been measurementeffectiveness. A Conference Board surveyof senior executives reported, as expected,that customer, financial, operational, and peo-ple measures were all seen as important butnot equally effective . The test of measurementeffectiveness was the executives' willingness"to bet their job" on the quality of the mea-sures. The survey found significant discrepan-cies among domains, with the greatestdiscrepancy in people measures . Thus, sub-stantial work is needed in the assessment ofworkforce measures in firms . Below weexplore how to measure the workforce, theHR function, and firm leadership with respectto their impact on the workforce and ulti-mately upon a firm's strategic success .

FROM BUSINESS SCORECARDTO HR SCORECARDOur approach starts with Kaplan & Norton'sBalanced Scorecard, a familiar concept in mostfirms. While maintaining the scorecard's

CUSTOMER SUCCESS

BUSINESS PROCESSSUCCESS

FIGURE 2 HR SCORECARD

HR Practices

•

Communication'Work Design•

Selection• Development'Measurement'Rewards

HR Competencles

• Admin. Expertise• Employee Advocacy• Strategy Execution•

Change Agency

STRATEGIC FOCUS

o Operational ExcellenceO Product leadershipo Customer Intimacy

HR Systems

• Alignment• Integration•

Differentiation

core by retaining the financial, customer andbusiness process success components, wehave changed the component "Learning,Innovation, Etc ." to "Workforce Success ."We call this new scorecard the Business Score-card (Fig. 1) . Also notice that we prefer touse the word "success" as opposed to "satis-faction." Clearly firms can go out of businesswhile satisfying customers and employees .Rather, the objective is to make both custo-mers and employees successful in orderto make the enterprise successful . We havealso replaced terms such as "mission" and"vision" from the center of the scorecardwith "strategic choice ." For a non-diversifiedfirm or for a business unit within a diversi-fied firm, we believe that a strategic choice(or value proposition) should be articulated,such that the workforce can understandand embrace how the unit intends to be suc-cessful in its chosen market. To simplify, wechose Tearcy & Wiersema's scheme in whichfirms pursue value propositions of low-costprovider (operational excellence), innovator(product or service leadership) or customiza-

HR Deliverables

Workforce Mindset'Technical Knowledge'Workforce Behavior

tion/unique solutions (customer intimacy) .Strategic choice significantly impacts the defi-nition of customer success, business processsuccess, and plays an important role in asses-sing what the workforce must do to be suc-cessful .

To make the workforce successful in thecontext of the scorecard system, we mustspecify the major targets of an HR system,or HR's deliverables: workforce mindset,competencies, and behavior. To producethese deliverables, components of the HRsystem must be assessed on the competenciesrequired of the HR workforce, the HR prac-tices used to produce HR's deliverables (e.g .,communication, work design, selection,development, measurement, rewards, etc .),and the HR system's integration and align-ment with the strategy of the business .

This approach yields an HR Scorecard(Fig. 2) that enables the development of HRdashboards that capture HR's contribution .Several firms are pursuing such measure-ments systems and have made substantialprogress. Boeing, General Electric, South-

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Corp Ltd., United Distillers & Vintners andVerizon are developing on-line, real-timemetric systems to monitor HR processesand deliverables .

ASSESSING HR'SCOMPETENCIES

Assessing HR's competencies refers to thecompetencies of the HR workforce (i.e ., thepeople who populate the HR function, theirstrengths and weakness in specific areas ofexpected HR performance) . We look at HRcompetencies through the lens of Ulrich,whose book, HR Champions, analyzes HR'sroles in terms of its focus on people or pro-cesses, as well as its strategic or operationalfocus. Thus, these roles can be depicted as atwo-by-two matrix. First, the HR functioncan be conceived as having a process andtactical focus on administrative efficiency inthe delivery of HR transactions . Second isHR's "employee advocacy" role (formerly"employee relations"), with an operationalfocus on serving the workforce (i.e., people)and the growth and retention of critical com-ponents of the workforce . HR's third role isstrategic, whereby HR better enables the firmto execute its strategy by aligning HR prac-tices with business strategy. The fourth role isconcerned with changing the workforce-HR's "cultural change" role . Obviously,HR functions do not focus only on one role,nor should they. The point is to determine towhat extent HR is currently focused on eachrole, and where it will need to be focused toenable the firm to be more successful .

The focus of the HR function shouldcorrelate with the firm's life cycle phaseand strategic choice. As these shift, HR'sfocus must shift . For example, a firm pursu-ing an operational excellence strategy wouldwant an HR function concerned with admin-istrative efficiency. A firm moving from aproduct leadership to operational excellencestrategy (a common occurrence with thecommoditization of products and services)would likely require significant HR compe-

110 ORGANIZATIONAL DYNAMICS

tencies in cultural change, as well as in strat-egy execution. Firms pursuing a product orservice leadership strategy (i .e ., innovation)would most likely want HR focused on pro-viding "A players in A positions ." In otherwords, the HR focus is to help populate thefirm with the very best R&D or technical/innovative talent in order to distinguish itselffrom its competitors by building appliedinnovative and creative products (or ser-vices) that can create large-scale demandand command premium pricing .

How success in each role might be mea-sured is easily understood. Measures ofadministrative efficiency are relatively sim-ple (e.g ., benefits cost per employee, proces-sing cost per transaction, response time forbenefit information requested, etc.) .Employee advocacy measures are somewhatmore complex. They involve issues such asretention rates of critical human capital,growth rate of core competency human capi-tal, retention rate of critical human capitalduring organizational transitions or transfor-mation, retention rate of "A" players in "A"positions, etc . Strategy execution measuresmight include: the extent to which the work-force understands the business's strategy (asmeasured by survey), line management feed-back on the HR system's alignment withbusiness strategy, or the HR workforce's levelof understanding of the criticality of the HRfunction's integration . For firms active inmergers and acquisitions, another measuremight be the depth of excess capacity ofexecutives to export to recent acquisitions .The cultural change role measures mightinclude: success rate of external hires broughtin to "seed" firm change efforts, employeeknowledge of the status of change efforts,depth of bench strength in change efforts,measures of employee mindset or mindsetshift towards strategic goals and objectives,and certainly management's satisfaction withHR's contributions to organizational transfor-mation efforts. Thus, there are some relativelystraightforward measures of the HR functionin terms of its competencies, all of which aredriven by what the HR function needs toaccomplish at any point in time.

ASSESSING HR'S PRACTICESHR practices can be assessed against "bestpractices," or benchmarking. What can theHR function learn from other firms? Howwell is it doing relative to others? There aremany best practice studies and many pur-veyors of best-practice information. Thus,one way HR can assess itself and its pro-cesses in delivering basic HR practices (e.g.,selection, rewards, measurement, trainingand development, communications, workdesign, etc .) is to collect best practice datafrom available sources or actually conductsite visits . Once the data is gathered, thefunction can compare itself against a baselineand decide what improvement initiatives toundertake . Firms of substantial size can buildinternal scorecards, whereby critical HRpractices can be compared across businessunits to determine how well one unit is doingrelative to the firm's other business units onfactors such as retention, labor costs, scarce-talent compensation, customer satisfaction,etc .

There is one caveat in using best practiceassessment. Focusing on one practice orprocess in a system to the exclusion of otherscan drive the system out of tolerance, ratherthan enhancing the system's contribution tothe firm. This very important point wasoften emphasized by W. Edwards Deming,who stimulated attention to operationalmeasurement in the United States basedon his work on quality in Japan . Thus, wemust realize that enhancing a given HRprocedure or practice can be useful, but indoing so we must avoid diminishing theefficacy of other components of the HR sys-tem. This leads us to HR systems as a thirdway of diagnosing the impact of the HRfunction on firms .

ASSESSING HR'S SYSTEMSWe conceive of HR systems as the basiccomponents of HR viewed as an intercon-nected whole with respect to a firm's stra-tegy or value proposition . Our discussion

explores three ways of assessing HR systems :alignment, integration, and differentiation .

Alignment relates to understanding thatdifferent business strategies require differentcultures. Drawing on the seminal work ofSchuler & Jackson, we use the three businessstrategies previously mentioned-opera-tional excellence, product leadership, andcustomer intimacy-to demonstrate thispoint. In particular, there are significant cul-tural differences required of the primaryworkforce that must deliver the firm's valueproposition.

Firms following an operational excel-lence strategy need a workforce that: identi-fies with business processes, is trainable, canlearn rapidly, willingly follows the battleplan, is short-term focused, possesses amindset that seeks to avoid waste and mini-mize costs, and is driven by incrementalimprovement. Because the objective of suchfirms is to build systems to drive the var-iance-and thus all the costs-out of thesystem, free spirits and ostentatious behaviorare not welcome. The last thing that is neededin McDonald's is a creative hamburger-flip-per! Firms that essentially follow this strat-egy include: Federal Express, Nucor, Wal-Mart, and, of course, McDonald's and mostother fast-food franchisers . Such a value pro-position offers it "our" way to the customer,at a price that is at or below all competitors .Ideally, the successful competitor can pricethe product or service at a level below acompetitor's cost to produce, gain marketshare and thus leverage their operationalexcellence by serving a much broader custo-mer base at an even lower price .

In product (or service) leadership, inno-vation is the value proposition. With anoperational excellence strategy, the firm'suniqueness or competitive advantage is tiedto cost . In product/service leadership, com-petitive advantage is tied to innovativenessof the offering . The workforce that producesinnovations often identifies with, values andis humbled by the discovery process . This isparticularly true for the R&D workforce,which is largely responsible for the innova-tiveness, and the continued uniqueness, of

111

firm offerings . Such a workforce tends tochallenge the status quo, is anti-bureaucratic,has a longer-term focus, is driven by learn-ing, has a greater tolerance for ambiguity,and is willing to take greater risks . It shouldnot be structured or streamlined, because itsmembers are expected to be innovative andcreative, and think outside the box . Firmsthat generally follow this value propositioninclude Sony, G1axoSmithKline, Merck, 3M,Intel, and Nike. These firms win in theirmarkets by continuing to offer things "thenew way" as opposed to "our way," ascharacteristic of an operational excellencestrategy .

The customer intimacy value proposi-tion offers unique solutions customized forthe client. Such a strategy calls for a work-force constantly finding and improving solu-tions. Customer needs not only are satisfiedbut also anticipated. This requires a work-force that identifies with customers, shares"secrets" easily and readily with co-workersso that the entire system continuouslyleverages the firm's value proposition inorder to grow by offering additional solu-tions to the client . Such a workforce shouldconstantly seek customer intelligence, beadaptable and flexible, concerned with mak-ing results happen for the customer, be quickstudies, and driven by customer success . It isnot made up of clones, but employees whocan think, capture and readily disseminateinformation, and better utilize that informa-tion in meeting a customer's unique require-ments. Firms following a customer intimacystrategy include : the Four Seasons, Airborne,Roadway Express, Home Depot, Cott Corp.,Cable & Wireless, PriceWaterhouseCoopers,and Dell Computer Corp . The value proposi-tion in customer intimacy is customization-you can have it "your way ."

Alignment requires firms to understandthat different value propositions require dif-ferent cultures. There are many ways oflooking at culture . One relatively straightfor-ward approach is to use two very simpledimensions: firm structure (loose vs . tight)and firm focus (internal vs . external) . Firmsthat are tight and internally focused are more

112 ORGANIZATIONAL DYNAMICS

typical of operational excellence. Becausesuch firms are delivering a value proposition"our way," are trying to eliminate variance(and thus all avoidable costs) from the sys-tem, they must be tight and internallyfocused to achieve their strategy . On theother hand, product leadership firms, espe-cially the R&D workforce responsible forcreating the value proposition, need to berelatively loose . Just how loose? Fortunemagazine featured a covering showing aprospective employee saying: "Yo, I'm thenew corporation, man! I want an outlandishsalary, a cappuccino machine, and by theway I'm bringing my bird to work." Whilethe cover is a caricature, nevertheless flex-ibility, looseness, and tailoring to creativeemployees are important to yield the inno-vation necessary to leverage the productleadership value proposition . The challengefor line management, and especially the HRfunction, is to develop a core workforcefocused on an applied innovation (i .e ., anexternal focus) that delivers value to a cus-tomer. Thus, the culture needed for the pro-duct leadership value proposition to besuccessful is loose and external, especiallyfor the core workforce that creates this valueproposition.

The customer intimacy core workforce-those employees who interface with the cus-tomer-must be externally focused in a rela-tively tight platform. This enables thecapture of customer information (i.e ., custo-mer intelligence) to build and efficientlydeploy knowledge capital throughout thesystem, such that unique solutions are devel-oped to leverage the relationship with thecustomer. The customer solutions culture notonly solves immediate customer problemsbut also anticipates future customer needsbased on learning occurring throughout thefirm. Learning from customers enablesfurther customization and requires a verystrong external focus that operates througha smart and efficient dissemination platform .Airborne Express and Dell are exampleswhere a firm finds unique solutions to cus-tomers' delivery problems but within a sys-tem that is tightly structured to capture

FIGURE S ALIGNING HR PRACTICES AROUND VALUE PROPOSITIONS

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customer intelligence and remain price com-petitive .

Strategic alignment means focusing HRpractices on the firm's value proposition, asillustrated in Fig . 3. For example, in opera-tional excellence one of the best workforcemeasures might be total cost productivity .The best rewards might be based on teamproductivity, since it would leverage thevalue proposition by creating "more withless." This would create self-funded produc-tivity gains that can be shared with the work-force that enhanced productivity .

Product/service leadership measuresmight use sales from new products gener-ated within, say, the last three years, andteam innovation or revenue growth rewardsbased on new product sales, because thesemetrics are better measures of strategic suc-cess in delivering the value proposition cre-ated by the core workforce . Thus, revenuesharing incentives might be appropriate .

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Competency-based pay might also be appro-priate for growing the competencies in theinnovative, technical, and research unitsrequired by firms pursuing such a strategy .

In customer intimacy, customer guaran-tees, customer retention rates, and customerreferrals might be important performancemeasures. Individual rewards for identifyingnew and better ways of serving customers, aswell as system-wide team rewards, areappropriate for compensating the workforcefor further leveraging the value propositionof customization .

Another major systems component isintegration of the HR function. HR practicesare seldom integrated (Fig . 4). In fact, oneof the embarrassments of the HR professionis reliance on many different databases,all describing work or the workforce butusing different language. The compensationstaff has its language for job evaluation,training and development uses the language

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FIGURE 4 COMMON LANGUAGE

MIu4an StMlegy

Company Valtes

DevelopmentalCompetencies

of competencies, skills, knowledges, abilities,etc. The selection staff has a specific jargonhaving to do with job requirements and spe-cifications found in job descriptions, differentyet from the learning requirements of train-ing and orientation efforts . Moreover, theperformance measurement system often useslanguage entirely independent of workforcedata from other areas of HR. In addition, topmanagement can add to the language stewby using terms such as teamwork, integrity,leadership, etc . in a firm's mission and valuesstatement. Such usage may not be concep-tually different from HR's attempts todescribe work or workforce but may not rein-force efforts to shape workforce mindset.Based on evidence, we believe that these sys-tems need a common language and be sup-portive of one another .

Business strategy, communicationsabout a firm's strategy and strategic direc-tion, and the design of work all need to bealigned and integrated. Further, HR's basic

1 14 ORGANIZATIONAL DYNAMICS

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system components-measurement, selec-tion, development, and motivation-needto be aligned and integrated, with a commonlanguage as well. Since performance mea-surement is critical for gauging strategic pro-gress, it must be consistent with the firm'svalue proposition. Because selection, devel-opment, and motivation efforts are alldesigned to enhance performance, itbehooves firms to significantly improve theirintegration to leverage individual and firmperformance. There is substantial evidencethat this does not occur. Surveys report thatneither managerial/professional nor hourlyworkers believe HR system components arewell integrated .

Do alignment and integration make adifference? They certainly do. Substantialevidence from Huselid's survey of someone thousand firms indicates that alignmentand integration of a firm's HR systems playsa critical role, with the impact varying by thequality of a firm's work system . Huselid

FIGURE S DIFFERENTIATION: YOUR ORGANIZATION'S WORKFORCE(S)

30

Low

Source: Lepak 8 Snell, 1999

refers to these as "fit" and "complement," fitwith respect to strategy and complementwith respect to the components of the HRsystem. Huselid's findings demonstrate thatsubstantial changes in market value occurbased on the extent to which HR systemsare aligned and integrated. For the leastsophisticated one-fifth of firms in terms ofHR, merely having an HR system is asso-ciated with >$40,000 increase in market capi-talization per employee. However, for thenext 40 percent of the sample, lack of align-ment and integration do not seem to havemuch of an impact on market capitalization .(This may be one of the traps of best prac-tices, for such firms may be engaging invarious efforts to enhance one componentof the HR system, without having a greaterimpact on the firm as a whole . In fact, bestpractices may create more variance withinthe HR function and therefore reduce itsimpact on the bottom line.) Finally, and most

Competitive Advantage Value of Human Capital High

important, what the data shows is that for thetop 40 percent, or most sophisticated HRsystems, alignment and integration pay offsubstantially, adding another $40,000 to mar-ket capitalization per employee. Thus, align-ment and integration of HR systems is not anacademic issue. They impact a firm's finan-cial returns .

Finally, a major emerging issue is work-force differentiation. Here we draw on theimportant recent work of Lepak and Snell .Fig. 5 illustrates the competitive advantage ofhuman capital in organizations and the avail-ability of this human capital in the market.Readily available human capital with littlestrategic leverage is referred to here as con-tract services . In other words, this is workthat is far from core in creating or deliveringthe firm's value proposition and is a candi-date for outsourcing. Strategic capabilitiesare those that are narrowly distributed inthe labor market and have a significant

115

Professional Partners Strategic Capabilities

Contract Services Operational Partners

impact on a firm's value proposition. Hence,the issue is how should a firm leverage itsworkforce. Another cell of the matrix we callprofessional partners-positions within firmsnot directly responsible for leveraging itsvalue proposition . These positions differdepending on a firm's strategic pursuit. Fora manufacturing firm, professional partners(i .e ., not strategically core positions, yet pro-fessionals not abundant in the labor supply)include units such as law, finance, accounting,and even human resources. Although profes-sional partners are narrowly distributed in thelabor market, they do not directly contributeto the firm's competitive advantage in itschosen market. However, operational part-ners, although widely distributed in the labormarket, have a significant impact on deliver-ing the value proposition of the firm .

We concur with Lepak and Snell thateach of these segments may call for a differ-ent focus in terms of HR systems . Contractservices (work generally far removed fromcore) might require HR to assume a custo-mer-supplier relationship with the firm,with HR's responsibility to make sure thatthe firm is getting the best, least expensivedeal from a vendor. Obviously HR practiceswould be important here in terms of mea-surement, selection, and even development,and perhaps rewards to ensure that what iscontracted for is delivered as specified. Pro-fessional partners would call for specialtreatment as professionals; at the same time,they are working outside their profession .They may be competent, but if they werethe most competent, most likely they wouldbe working in the professional firms withintheir discipline . Thus, from a compensationstandpoint, they should probably be paid ator near midpoint and not much higher .Clearly if a firm finds itself in legal, financialor accounting trouble, it will likely go outsideto find vendors with more qualified or spe-cialized professionals .

Strategic capabilities, on the other hand,require the most care by HR because theyleverage the firm's value proposition . Howsuch individuals are selected, trained, mea-sured, and compensated makes a difference .

116 ORGANIZATIONAL DYNAMICS

These individuals may be compensatedabove or well above prevailing rates if a firmwishes to attract and retain the very best forpositions that have strategic leverage . In factit may be that one cannot pay too much forsuch individuals if they actually providesignificant strategic leverage . Operationalpartners, on the other hand, probably shouldbe paid at market, but with significant groupincentives, especially in systems such asoperational excellence, where cost reductionis imperative. In other words, assessing HRperformance involves not only HR alignmentand integration (relatively new concepts tothe HR function), but also differentiation-leveraging the HR system to maximize thecontributions of the core workforce in deli-vering the firm's value proposition .

LINKING TO THE BUSINESSSCORECARDAs shown in Fig. 6, the HR Scorecard mustbe linked to the Business Scorecard, movingHR from focusing on doables to deliver-ables. What HR has been engaged in, aswe have described it, is building competen-cies, aligning practices, and integrating anddifferentiating its systems to provide theworkforce that can best leverage the firm'scompetitive advantage . But what it mustdeliver is a workforce. Workforce success isthe ultimate objective of any HR system .How might this be assessed if we are trulyto measure the HR system's effectiveness?One way is to measure the mindset of theworkforce by eliciting answers to such ques-tions as :

•

Do employees know and understandthe firm's strategy?

• Do employees know and understandthe status of the firm's success with respect tothe pursuit of that strategy?

• Do employees know and understandthe firm's value proposition and how it isdelivered?

Workforce mindset has been measuredby various surveys . We believe such surveysshould be much simpler and more frequent

FIGURE 6 LINKING HR SCORECARD TO BUSINESS SCORECARD

7HR PRACTICES

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•

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than in the past . For example, Sears' surveydata, popularized in the Harvard BusinessReview, clearly support this. With ten ques-tions Sears has been able to create a signifi-cant measure of workforce success (really ameasure of workforce efficacy) and hasdemonstrated the impact of and improve-ments in workforce success on customer suc-cess and firm financial success .

Similar results have been reported else-where using other scorecards (e .g., by manystatewide Baldrige award winners) . TheGallup Organization has used a 12-questionsurvey that captures factors impacting pro-ductivity, retention, profitability, and custo-mer satisfaction, as well as explaining asignificant amount of variance in firm per-formance. Their questions are very similar toSears' 10-question survey. Research isongoing in this area, and survey data canhelp identify measurements of importance .Clearly a relationship exists between work-force behavior, operational success, customersuccess, and the financial success of firms .

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HR's deliverables can also be measuredby the competency of the workforce by elicit-ing answers to such questions as :

•

Do employees know and understandwhat they are to do?

• Do employees believe they have theskills and knowledge necessary to do theirjob?

• Are employees provided the manage-rial support and support systems to do thejob to the best of their ability?

• What level of competency is necessaryin strategic resource positions now (and inthe future)? Are individuals in these criticalpositions (e.g., sales representatives, custo-mer service, etc.) delivering the behaviorsexpected of them?

•

How many truly "A" players are therein "A" positions?

•

How many "B" or "C" players arethere in "A" positions?

• How many have passed behavior- orknowledge-based checkouts on specific com-petencies required for success in their jobs?

117

• Are our leaders behaving in ways thatelicit "followership"?

• Do our leaders manage employee per-formance by detailing performance expecta-tions, providing feedback, and conducting ameaningful review with an equitable rewardconference?

• Are our leaders responsible for andassessed on their workforce's mindset, com-petency growth and behavior in strategicpositions?

There have been many demonstrationsof competency measure success, but theissue is which competencies to measure .Clearly competencies must be tied to busi-ness success. In fact, competencies shouldbe tied to specific business deliverables(e.g ., operational, customer and financialsuccess). One problem in competency mea-surement is that competencies are often in"free-float" based on a firm's existing popu-lation, especially the firm's current execu-tive officers, instead of the competenciesnecessary to win the firm's future. Compe-tencies must be tied to business success andpass the "So what?" or "Because of?" test .Such competencies and their measurementare exemplified by mandated productknowledge and testing for sales associates(and executives) at Circuit City and Series 7and 9 examinations in financial services todemonstrate General Electric's "Black Belt"proficiency .

The objective is to drive those behaviorswith substantial impact on business processsuccess that lead to customer successand ultimately result in financial success .Firms that are successful operationallyand with their customers should experiencefirm financial success . From the perspectiveof HR, it is a continuous feedback loop .Financial success fuels the next generationof employee rewards . Customer success pro-vides the feedback that enables the HR func-tion to understand what needs to done tobuild better (or different) HR workforcecompetencies, enhance HR practices anddetermine the necessary steps to improvethe alignment, integration, and differentia-tion of HR systems .

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To achieve success HR must have a sig-nificant partnership with line management.While it is only reasonable to hold the HRfunction accountable for workforce success,line management should also be heldaccountable for the same workforce successmetrics . If line managers wish to be success-ful in delivering on their business model(e.g ., the Balanced Scorecard), they must beheld accountable for workforce metrics suchas workforce mindset, competency growthand behavior in delivering the unit's valueproposition.

It is not unreasonable to ask what HR iswilling to guarantee management in terms ofworkforce mindset, and behaviors . But thecorollary is to ask what is line managementwilling to guarantee the firm, its workforce,customers, and its investors. Certainly linemanagers should be held accountable forfinancial success, customer success, businessprocess success and workforce success .Workforce success for every manager canclearly be measured by metrics such as leaderbehavior (e.g ., through 360°-or better yet180°-assessments), workforce mindset andworkforce competencies. Indeed, if we arewilling to accept the value of intangibles andtheir impact on market capitalization, itwould be prudent to have a significant por-tion of all executive incentive compensationdriven by leader behavior and workforcemeasures for any unit for which a manageris responsible.

SUMMARY

Our objective has been to rethink the mea-surement of "soft-side" functions . Whilesuch measures may not always have the"hardness" of traditional business metrics,they are a step in the direction-the rightmeasures, on the business's scorecard, andwith greater robustness . We believe it isessential that the HR function be assessedon its deliverables, using simple outcomemeasures such as the improvement of theworkforce mindset, its competencies, andcritical behaviors . It is equally essential to

ensure that line managers be held accoun-table on the same workforce attributes orfirms will not be able to deliver the work-force necessary to make the firm's businessmodel a reality. Thus, a partnership bet-ween line managers and HR using thesame attributes for the measurement of

workforce success is mandatory to deliverthe success of the firm's business model asintended .

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For those interested in the concept of humanresources as a competitive advantage, see thework of D . Ulrich, especially Human ResourceChampions (Harvard Business School Press,1997) and D . Ulrich and R. W. Beatty, "FromPartners to Players : Extending the HR Play-ing Field," Human Resource Management,Winter 2001, 40(4), 293-307 . For a discussionof the role of quality and measurement, seeW. E. Deming, Out of the Crisis (MIT Press,2000) . On the growing importance of intan-gibles and the workforce in firm success, seeB. Lev and P. Zarowin "Seeing is Believing,"CFO, 1999. An illuminating discussion ofnon-financial measures can be found in Ernst& Young, Measures That Matter : The Impor-tance of Non-Financial Measures, 1998. On theimpact of HR systems on firms, see M . A .Huselid, "The Impact of Human ResourceManagement Practices on Turnover, Produc-tivity, and Corporate Financial Perfor-mance," Academy of Management Journal,1995, 38, 635-672 .

Our approach to measurement startswith the concept of the Balanced Scorecard(R. S. Kaplan and D. P. Norton, The BalancedScorecard: Translating Strategy into Action[Harvard Business School Press, 1996]) . Fora useful source on strategic choice, see M .

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SELECTED BIBLIOGRAPHY

Tearcy and F. Wiersema, The Discipline ofMarket Leaders: Choose Your Customers, Nar-row Your Focus, Dominate Your Market (Per-seus Books, 1997) .

On improving various aspects of HRsystems, see R . W. Beatty and C . E. Schneier,"New HR Roles to Impact OrganizationalPerformance: From Partners to Players,"Human Resource Management, 1996 and ThePerformance Imperative: Strategies for Enhan-cing Workforce Effectiveness, edited by H .Risher and C. Fay (Jossey-Bass, 1995), a col-lection of 20 essays offering an overview ofthe major issues affecting today's workforce.

On the issue of linkage, see B. E. Becker,M. A. Huselid, and D. Ulrich, The HR Score-card: Linking People, Strategy and Performance(Harvard Business School Press, 2001). Onthe issue of designing an HR Architecture,see D. P. Lepak and S . A. Snell "The HumanResource Architecture: Toward a Theory ofHuman Capital Allocation and Develop-ment," Academy of Management Review,1995, 24, 31-48. For a discussion of linkingHR Strategies with role behaviors, see R. S .Schuler and S. E. Jackson "Linking Com-petitive Strategies with Human ResourceManagement Practices," The Academy ofManagement Executive, 1987, 1, 207-219 .

Richard W. (Dick) Beatty is professor of human resource management atRutgers University and is a core faculty member at the University ofMichigan's Executive Education Center . He received his B.A. fromHanover College, his M.B.A. from Emory University, and his Ph .D. inhuman resources and organizational behavior from Washington Uni-versity. He has published several books and more than one hundredarticles and is an associate editor of Human Resource Management . He waspresident of the Society for Human Resource Management Foundationand received the society's book award, and twice won the researchaward from the Human Resource Planning Society.

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Dr. Mark A. Huselid is an associate professor of HR strategy at RutgersUniversity. His current academic research and consulting activities focuson the linkages between human resource management and measurementsystems, corporate strategy, and firm performance . He is editor of theHuman Resource Management Journal, and his bestselling book The HRScorecard: Linking People, Strategy & Performance (with Brian Becker andDave Ulrich) was published in 2001 by the Harvard Business SchoolPress. His new book Workforce Success Metrics: Creating a Human CapitalScorecard for the CEO (with Brian Becker and Dick Beatty) will bepublished by the HBS Press in 2004 .

Craig Eric Schneier is executive vice president, human resources atBiogen, a biotechnology company in Cambridge, MA. He led his ownmanagement consulting firm in Princeton, NJ from 1991 to 2001, and wasa managing partner in Sibson & Company prior to that . Dr. Schneier helda professorship at the University of Maryland, and currently teaches inthe 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 .

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