Strategic HR

The CHRO and CFO oversee the two main assets of a company. They have enormous opportunity to add value to the CEO. Yet, they sometimes fall short of expectations.

Their strategic  function is not about setting solid guidelines on depreciation of capital assets, or putting together employee handbooks. Those may be required activities, and if not done right, may cause enormous harm. However, they are not leadership activities.

A good CEO can chart the strategic plan for the company. He can even channel the money, but it is much harder to channel the talent and get everyone aboard. This is where the CHRO can help. However, this involves changing the tone of the HR communications from mandates and legalese to influencing and enabling.

The strategic function of recruiting is not to enforce pay boundaries; it is to get the right people to fill the right jobs. The strategic function of performance reviews is not to get 100% participation; it is to foster career growth. The strategic function of succession management is not to make sure all critical jobs have successors; it is to help find the right successors, wherever they are. The strategic function of benefits is not to pass top heavy tests; but to provide benefits that are best provided via group enrollment. The strategic function of time cards is not to keep record of attendance; but to compute gross margin per product, so we know which products to continue to build.

HR’s strategic function is to breathe, speak, and live this, and to be able to see everything from the lens of the business. The rest is to HR what accounting is to finance. It may sometimes be essential, but it is not strategic.

I have been super lucky to work with HR counterparts who get this. They keep me from the legalese and the HR policies.  They share information with me. They suggest ways I can avoid obstacles. And they focus on helping me get the job done. This is business execution.

A Lever That Won’t Break

The Power of Pull covers a lot of interesting ideas about new ways to look at business and work, but one thing it brought up that I thought was very insightful has to do with levers.

Levers are a very handy tool and we use them all the time without thinking very much about them. If you’ve used scissors, nail clippers, tweezers, a crowbar, a hammer, or a wrench, you’ve used a lever. You push, squeeze, or pull a lever and you can now lift something heavier, cut something tougher, or turn something tighter than you normally could.

Sometimes though, if you push, squeeze, or pull too hard trying to lift something too heavy or cut something too tough, the lever can break. Cut something tough with cheap scissors and they break. Try to lift too heavy a boulder with a cheap or rotting 2×4, and it snaps.

Levers in Business

Debt is a kind of lever for business – with some of your own money and by also taking on debt, you can control more assets than with just your money alone. If you’ve ever put money down on a mortgage you’ve used debt as a financial lever.*

So, businesses use debt as a lever to create more value than they would without the debt. Well, as we’ve seen during this recent economic crisis, financial levers can break, with some pretty nasty consequences.

What if there was another kind of lever we could apply in business that didn’t break? What if it actually became stronger the more you applied it?

The lever that won’t break is Talent. Talent can actually become stronger when it is applied to a challenge, provided the company knows how to turn that challenge into an opportunity for collaboration and development.

Talent is a lever when it collaborates to overcome the challenge. When your talent collaborates, people are gaining the benefits of each others’ knowledge and experience without having to “go it alone” and figure it all out themselves.

As a result, the company creates more value than if people didn’t collaborate. In addition, the collaboration results in more development of the talent than otherwise would have occurred without collaboration.

Collaboration and the “Why”

But the collaboration I’m talking about is not just things like simple process decomposition.  It’s more than just task breakdown, with people performing their particular piece so some larger thing gets done.

It’s also more than people or teams simply exchanging information about facts and figures, plans and forecasts, process steps, etc. – that isn’t what I’m talking about either. You can write that kind of knowledge down and most of the time someone can pick it up and use it without ever having met you or discussed it with you.

The knowledge we’re talking about is the deeper knowledge of “why” – why we are doing something, why something works better one way versus another, and why something is important to consider. This knowledge can only really be exchanged or shared through a deeper level of collaboration.**

Talent, when it collaborates at that deeper level to achieve a shared purpose, provides capability leverage. Because now your company delivers more real value from your employees collaborating than if they had worked alone.

To reiterate, Talent that collaborates is the company’s lever.

And this is a lever that won’t break.

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* (Finance background) Financial leverage in a nutshell is the notion that you can reap larger returns on equity if you borrow at a lower interest rate than what your investment would return normally. You would borrow funds and you use those funds to increase assets (e.g. build a factory) or reduce outstanding equity (e.g. do a stock buyback.) In business, leverage, and its impact on return on equity (ROE), is represented by the (assets/equity) term in the famous Du Pont analysis equation:

(net income/equity) = (net income/sales) * (sales/assets) * (assets/equity)

You can see that increasing the ratio of assets to equity (by increasing debt), increases ROE (net income/equity).

So why not “leverage that sucker to the max”, you ask? That indeed is what financial institutions do – they are typically very highly leveraged. But what’s missing in the Du Pont equation is the notion of Risk. A company’s return on assets, i.e. (net income/assets) is never certain and if it falls below the interest rate far enough, long enough, or for debt levels large enough, the company can go under (i.e. the financial lever snaps.)

** (Epistemology background) This is the difference between “tacit knowledge” vs. “explicit knowledge.” “Tacit knowledge” is very hard to just write down and have somebody else just pick up and really “know” it. For example, designing complex machinery, riding a bike, or making that perfect soufflé all require things such as: time, teaching, practice, or mentoring. You often need a deep level of collaboration to transfer that  knowledge, or at least to make it happen faster. “Explicit knowledge” doesn’t need that collaboration nearly as much. For example, the elevation of Denver, the recommended torque for an engine bolt, and the process steps for turning on the air conditioner are all fairly straightforward facts or processes to communicate to others.

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HR: Why Improve Your Analytical Intelligence?

Hey! Come back!

Before you roll your eyes on this one, start having flashbacks to terrible experiences with calculating standard deviations, or trying to wrap your head around multiple regression analysis, and then run screaming from this post, this is not about you trying to become an expert at statistics! Trust me!

It’s about you understanding how analytical tools and methods can help HR have an impact on applying talent to strategic success. Besides, no less than Josh Bersin said at the recent HR Technology Conference® 2009 Talent Management Analyst Panel, “Get used to it.” And that’s a good way to look at it. Too often, HR has been shut out of strategic input because of the perception that it doesn’t speak the language of analytics sufficiently to measure and understand the relationships between various parts of the business (e.g. Human Capital) and profit (or whatever financial result you wish.) Once you have that better understanding, it will enable you to make a stronger case for why HR can provide valuable input and leadership in business strategy and execution.

By now, we’ve had the importance of measuring pretty well pounded in, particularly in the context of Finance. Increasing your financial intelligence is key to participating more in driving strategic decision-making around applying talent to improve business results. Being able to show to senior management the link between what you know about your company’s talent to financial results entails both measuring talent in terms of levels of performance, competency, skills, connectedness, etc. as well as measuring relationships between those measures and the other parts of the business that drive financial performance. What do analytical skills have to do with measuring those parts and their relationships?

Measuring is not Counting

To help answer that question, let’s take an example from “How to Measure Anything: Finding the Value of Intangibles in Business” by Douglas W. Hubbard. Picture the problem of measuring the population of fish in a lake; let’s say in order to know if a restocking effort was successful or not (a good ROI problem). A lot of people will say, “Drain the lake and count the fish.” They could then report there were exactly 22,573 fish and we’ll say that confirms the restocking investment was a success, although all the fish are now dead.

A better approach (certainly for the fish) entails using analytical methods to estimate the population of fish in the lake. If there is sufficient confidence in the estimate of the population before and after the restocking effort, you will be able to tell if the restocking effort was a success or not. Did you have to know every tiny detail of statistics to make a decision based on these estimates and the confidence level? No. How about to show the before and after picture to some “lake executive” who had to give the green light on the restocking effort? No. You just had to know enough about analytical methods to know that the application of them made sense in this case, and either determine you made the right call or get the point across to that executive.

As the authors of “The Differentiated Workforce: Transforming Talent into Strategic Impact” quoted a general manager, “I couldn’t do a regression analysis, but I knew what one was. And the results…made sense to me.” Further, they write, “Improved analytic literacy has a direct impact on the decision making at several levels in a typical HR organization…At the highest level, improved analytical literacy changes the perspective on the financial resources committed to HR…they consider a significant portion [of the HR budget] an investment.”

Principles of Uncertainty

HR labors under the false assumption that everybody else has “precise numbers” and there seems to be a perception that HR can’t come up with the “hard numbers.” The classic story is of the CEO asking the head of HR if they know the company’s headcount and the response is wishy-washy. The thinking is that people are either working for the company or they are not, so what’s the problem? What’s the count? Sure, in a company of a few hundred people, you might actually have a very precise figure. However, we know that depending on the industry, economic conditions, etc. as the number of employees gets larger, it gets a bit trickier to know the headcount with precision. There is a lot going on and even if you are using an HRMS system, the simple fact that humans are involved and entering transactions (or not), makes the number transient and constantly changing. In other words, one minute, you could see 59,268 and a minute later see 59,273.

This is not that different from the folks in Accounting keeping track of Receivables, the folks in Production keeping track of Inventory, or the folks in Development keeping track of Project Completion. In the case of Accounting and Finance, it gets even more interesting when it’s time to report; for instance, general accounting principles require the company to estimate the amount of Receivables that will be uncollectible and there isn’t any hard and fast equation for doing that. Different methods are used to estimate these values, some of them analytical.

The point, as Hubbard writes in his latest book, “The Failure of Risk Management: Why It’s Broken and How to Fix It” is that measurement is better understood as the reduction of uncertainty about the value of something. Once you see it that way and gain enough analytic literacy to feel comfortable with the results from those tools and methods, you’ll be able to move forward more readily with driving and demonstrating positive impact on strategic business results.

Photo by The Michael

The Failure of Risk Management: Why It’s Broken and How to Fix It

HR: Why Increase Your Financial Intelligence?

When in Rome…

si fueris Romae, Romano vivitomore; si fueris alibi, vivito sicut ibi*

My last post asked: how can the perception of HR’s function as being primarily about governance and compliance oversight be dealt with, in order to allow and encourage its role in maximizing the strategic impact of talent?

A key first step is to learn “the language of business” i.e. Finance. Why? Here’s a list from a book** I recommended a while back, outlining the benefits of financial literacy to HR:

• Move HR from a Tactical to a Strategic Organization – be trusted with organization and talent development investment decisions.
• Evaluate Your Company Critically – spot trends or problems and understand more of the stories behind the numbers.
• Understand the Business – knowing how your company makes money is key to your HR strategy.
• Understand the Bias in the Numbers – have the power to challenge, when called for, the assumptions made by the finance and accounting departments.
• Form Relationships with Finance – help to align more the efforts of finance and HR for their mutual benefit.
• Use Numbers and Financial Tools to Make and Analyze Decisions – improve your ability to make better investment choices regarding projects and programs.

It turns out that Trish McFarlane at HRRingleader is addressing this same step in an “HR 101” series on the Creative Chaos Consultant blog, devoted to what an HR professional really needs to know to be successful. There’s also a great article, “Do HR Managers Have the Skills They Need?” by the same authors of the book, which covers exactly the discussion Beth Carvin and I were having here. Namely, it isn’t all on HR’s head or senior management’s head to enable HR to have a positive impact on strategic use of talent, but a shared responsibility. Here are the factors they listed at the root of the problem:

• Avoidance – HR folks not “dealing with it” and learning about the numbers (as  Josh Bersin and Naomi Bloom said at last month’s HR Technology 2009 Conference(r) Talent Management analyst panel and Naomi’s closing keynote).
• Perception – Even when HR professionals do know the numbers, the business side still retains the outdated notion that they don’t.
• Assumptions – Exhibited when companies don’t encourage their employees to be on the earnings call, for instance, because “it’s too complicated” and “they wouldn’t understand.”
• Trust – A common theme repeated in this blog. In this case, not sharing financial data with employees because you don’t trust them results in people having nothing real to learn from or apply their learning to. Maybe that was the intended effect.

Note that some of the last two issues are not limited to HR, but can be universally applied to all company managers and employees. In fact, there is another article, “The Dismal Financial IQ of US Managers” that covers this pervasive problem and its consequences in more detail. Even though the authors have a vested interest in pointing out these problems (they have a couple of books and a consultancy that address them), the impact is unmistakable.

*”If you are in Rome, live in the Roman way, if you are elsewhere, live as they do there”

– attributed to St. Ambrose (from Wiktionary)

**Financial Intelligence for HR Professionals: What You Really Need to Know About the Numbers by Karen Berman, Joe Knight, and John Case. Despite the drab title, this book is actually quite fun to read (really!) and does not take very long to read (a few hours.) It’s written in a friendly style that comes right out and tells the HR reader which things matter, how they matter, and which things really aren’t as crucial to know so you don’t get distracted by them. Each section is loaded with examples from recent history (especially scandals) linking HR areas of responsibility to financial problems for companies.

Photo by pdbreen