Who Moved My Table?
The issue is not a seat at the table. The issue is the table moved. After all, even in the most “transformed” HR environment, HR is still overly fixated on the role of people as it existed in the industrial age – in service of a company’s value drivers, which at the time were primarily manufacturing assets. In our new economy, intellectual capital (IC) is the new value driver and, as a result, the talent that produces it rules.
Intellectual capital drives the market values of companies across all industries – one just needs to look to the intellectual capital value at companies like Facebook, LinkedIn or Google. IC makes up nearly their entire market values. Even for more traditional, non-tech companies like Walmart and John Deere, IC comprises more than half their value. Knowledge workers have become the most valuable asset for today’s organizations and HR’s challenges are a supply shortage and much higher portability than the manufacturing assets of old.
Yet, in spite of the many attempts at structural transformation, HR has not been able to adjust to this new reality. Our own experience and research have led us to assert three primary reasons as to why HR has been limited in its ability to achieve measurable progress toward its own “transformation.”
1. HR is untethered from business value.
Unconnected to the consequences of the business’s performance, either positive or negative, HR operates in the absence of the same accountability framework within which other business leaders operate. The model that HR operates in hasn’t changed since the industrial era – there is virtually no differentiation of HR deliverables among all of an organization’s roles. At its core, HR does essentially the same thing for all roles, whether it is filling requisitions, compensating employees, planning for succession or managing performance. By failing to link HR strategies to business strategy and value creation for companies in a real, measurable way, HR is hindering its ability to play a genuine role in the success of the organization.
2. HR is operating under the misguided and dated idea that parity equals fairness.
While this philosophy might have worked in a manufacturing-centric era, when talent was not the most important asset, this mindset today can have devastating consequences for a company over time. For companies in high intellectual capital industries like pharmaceuticals or technology especially, when resources are limited, they simply cannot be spread as evenly and thinly as possible but rather must be invested wisely and judiciously. The fact is, some individuals are more critical to a business because of the roles they play and the value the company derives from those functions. Historically, HR has been unable or unwilling to shift its mindset to make talent decisions based on this new context.
3. HR is unable to help senior leaders identify and prioritize the roles which are most critical to delivering on the company’s vision for the future.
HR lacks the leadership and analytical skills to gain a clear understanding of value creation and its consequences for the hiring, development and retention of individuals in critical roles. Without a data-based mentality for decision making and forecasting, HR cannot facilitate the discussions that are necessary to drive significant changes or overinvestment in areas that are critical to the company’s talent strategy. Part of this challenge is that HR professionals themselves tend to be more humanistic than capitalistic. According to findings from The New Talent Management Network, most HR incumbents are in the function because they want to help people. Quite simply, their love for and interest in people typically outweighs their love for and interest in the business.
The bottom line: HR’s most urgent challenge for the future is to transform itself by gaining an entirely new skillset. The administrative skills and humanistic attributes of the industrial age are now obsolete. Attention must be paid to learning how to define and lead change that is guided by a deep understanding of the value creation for an organization. If HR is unable to accomplish this, then it is destined to become obsolete as well.
A New HR Model
Our belief is that it’s not actually a question of HR transforming itself so much as it is the emergence of a new function that will blend two critical business competencies – HR and finance. The fact is, many business leaders, especially entrepreneurs and start-up CEOs, have an almost visceral reaction to the notion of “human resources.” They will do almost anything to avoid hiring HR people because they equate them with bureaucratic minutiae and administrivia. Netflix, which has been credited with “reinventing” HR by doing away with many traditional HR practices like paid time-off policies and formal performance reviews, is a prime example of a company that has taken this tack.
Yet, these same business leaders clearly recognize the importance of talent to their success. Their resistance to HR is due to the perceived administrative burden, rather than the ultimate value they place on taking care of their top talent.
At some point in an organization’s growth, however, it becomes necessary to assemble some type of HR team. It seems evident that a new breed of human capital professionals is required to ensure that a measurable talent strategy can be developed that truly reflects a deep understanding of the connection between talent and the company’s value creation.
In a manufacturing-based economy where tangible capital was the primary means of value creation and the largest expenditure, a close connection between operations and finance was required in order to fund and execute economically sound business decisions. Today, Finance and HR need to build an equivalent relationship since human capital is now the primary means of value creation as well as the largest expenditure in our new economy. This relationship will enable companies to maximize people-related financial outcomes and measure the results of these efforts.
In order to be successful, the role of CFO and the role of CHRO must evolve. These two roles must champion a new way forward that is rooted in an understanding of the impact of intellectual capital on market valuations. The demand for human capital as a method for increasing the value of IC, along with a scarcity of talent, all underscore the need for a new model for talent management that will maximize a company’s relevant intellectual capital.
Key Requirements: Strategy, Leadership, Process
As a first step in establishing this new model, companies should hone their focus on human capital by establishing a strategy that:
1. Facilitates agreement among senior leaders about how intellectual capital (IC) is produced and then designs a strategy that will maximize its production.
2. Determines where IC exists within the organization and estimates the relative value of each IC component.
3. Compares where the organization currently is to where it needs to be in order to understand the talent implications of the most valuable IC components.
4. Agrees to overinvest in talent for critical roles in an effort to avoid gaps.
5. Defines organizational goals that are related to the IC needs of the future.
More than a fine-tuning of the current HR or finance roles, this approach reflects a completely new model that can break through the outdated frameworks and perceptions of ineffective HR roles and functions. While we refer to this new model as the IC Strategy Team in order to illustrate our point, it is less important to focus on having a different organizational structure or a new title and more critical to ensure that this function has an understanding of value creation and an ability to master it.
The new IC Strategy Team that we recommend is truly a hybrid of traditional HR and finance professionals and skills. In addition to focusing on analytics and measurement, this team also will have a deep understanding of the way in which assets are allocated in order to power the business, as well as expertise in how to attract, select and retain a high-performing workforce. A melding of the capabilities of both HR and finance is necessary to produce the appropriate business solution.
After the strategy has been developed and agreed upon by following the steps above, the process that will deliver the targeted results must be defined and clarity about activities, technology, people and measures must be achieved. As discussions around process design progress, organizations must ensure that the effort is focused on three guiding principles: increasing business value, overinvesting in critical roles and measuring efforts and results.
Overinvesting in Critical Talent
Talent processes that are led by an IC Strategy Team will look vastly different than the ones managed by a traditional HR team. Under the new model, there is a laser-sharp focus on differentiating between critical and non-critical roles to guide talent investments.
For instance, under the IC Strategy Team approach, talent acquisition processes would look more like this:
• For critical roles, a team of highly skilled and compensated researchers and recruiters would work closely with hiring managers to find, screen and close the most qualified candidates. This team would rival the strongest search firms in its ability to surgically find and remove talent from other occupations or companies when business needs dictate.
• For harder-to-fill, non-critical roles, a team of highly skilled recruiters would leverage tools and technology to research, target and sell passive candidates.
• The non-critical positions that are considered easy to fill would be supported by junior recruiters who use technology and assessment tools to screen candidates before passing along the most qualified to hiring managers.
To be successful, this differentiated approach must carry over into all talent processes to continuously ensure talent is available for critical roles. Every step that HR takes must support this new philosophy. As a result, a whole host of commonplace HR processes and practices must change since they make little sense in an intellectual capital-driven world.
Take the typical onboarding approach at most organizations. Usually, the formal new hire orientation program is required for everyone and unvaried for anyone. Often led by junior HR or administrative team members, these programs typically focus on the completion of necessary paperwork and lectures related to complying with workplace rules. For a company that has just invested untold resources to entice a top performer to join its ranks, this can be a potentially disastrous first introduction to the organization.
From management training to succession planning and from compensation policies to standard employee engagement surveys, the typical HR approach of parity and equity is undoubtedly antiquated. Although it may be a bitter pill for HR to swallow, the overinvestment in critical talent is an essential strategy for sustaining the creation of business value. Surely the employees working in accounts payable or legal at organizations like Google or Facebook recognize that the product designers and software engineers are more critical to the success of the overall business. If a rising tide lifts all boats, then in fact, the logic behind overinvesting in those key roles rather than the non-critical accounts payable positions becomes crystal clear.
HR’s historical attempt to make things “fair” for employees and mitigate exposure to risk often comes at the expense of successful business outcomes and can have a detrimental impact on the business in the long term. By first charting a path that narrowly targets the best talent approaches for a defined group of critical employees, companies can eventually roll out those practices more broadly across the organization. But the first step must begin with overinvesting in the most critical parts of the business and then moving outward.
Who Will Lead the New Model?
We won’t pretend that this change to a differentiated, IC-focused approach will be simple. In fact, it will be a huge challenge for businesses and especially difficult for the traditional HR function. But it is absolutely necessary in order to drive sustainable growth via intellectual capital for the future.
What remains to be seen is which organizational function will take charge of this opportunity. Will HR be able to truly transform itself and gain the skills and attributes needed to add real, measurable business value? Or will finance hijack HR’s functions and continue to enjoy its comfortable seat at the executive table? If HR cannot find a way to chart its own course and deliver innovative approaches to business challenges, then it must come to terms with being overtaken by faster, better competition. So, the question is – is HR capable of leading a true transformation?
An earlier version of this article originally appeared in Employment Relations Today magazine.