I. THE GOAL: VALUE CREATION 3 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT 4 III. THE IMPLICATIONS: CHANGING THE HR FUNCTION 8

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2 TABLE OF CONTENTS I. THE GOAL: VALUE CREATION 3 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT 4 III. THE IMPLICATIONS: CHANGING THE HR FUNCTION 8 IV. WHAT NEEDS TO BE DONE 9 APPENDIX: CHECKLIST FOR BEST-PRACTICE HR MANAGEMENT 10 2

3 I. THE GOAL: VALUE CREATION I. THE GOAL: VALUE CREATION "People are the company's most important capital." an often cited maxim. If this maxim is indeed true, it immediately raises the question: What should businesses do to derive maximum value from this capital? As part of a comprehensive worldwide HR project, The Boston Consulting Group interviewed leading international corporations to find out how their HR functions create value. The central findings from the interviews supplemented with additional research and BCG project experience are summarized here. Essentially there are three key value levers for companies to pull Strategically controlling human capital as an integral part of business strategy: Linking the HR strategy with business strategy and controlling the value contributed by employees with quantitative and qualitative metrics. our experience shows that differentiated personnel cost control, for example, can lead to savings well above 1 percent of total personnel cost. Realizing this value potential requires considerable change within HR organizations (see exhibit 1). New models are being discussed both theoretically and within the HR community, using buzzwords such as "strategic partner" and "administrative expert." To what extent, however, are those models being implemented? Our research shows that most companies address individual aspects of the central value levers with varying degrees of intensity. Best practices exist in specific areas, but we know of no firm that can serve as a role model on all dimensions. In this report, therefore, we have grouped best practices thematically. We start with the strategic, functional, and administrative HR processes (part II) and then discuss the implications for the HR function itself (part III). Orienting functional HR work strongly towards performance: Aligning operating HR instruments and processes such as recruitment, evaluation, development, and compensation more strongly with performance. Increasingly transferring these tasks to line managers. Increasing the efficiency of the HR processes: Bundling activities in national or regional shared-service units and optimizing processes through automation, standardization, factor-cost reduction, or outsourcing. Using the last value lever alone can lead to cost savings of well over 30 percent of overall HR cost. The value potential of the first two levers is even higher: for example, raising the value added per employee by 1 percent would lead to additional earnings of several hundred millions, depending on company size. 1 Also, 1 Because of multiple factors which influence the companies performance (market developments, competitive dynamics etc.), exact prove of cause and effect is difficult. Studies demonstrating a correlation between excellent HR management and outstanding business enhancement are, however, mounting. For example, an empirical study BCG conducted with Sustainable Asset Management proved that significantly high correlations between people-management practices and financial performance exist (see "Sustainable Asset Management Insight," January 2004). 3

4 I. THE GOAL: VALUE CREATION THE HR WORLD IS CHANGING SIGNIFICANTLY Strategic HR Costs of the HR function 2 7% "HR has to be managed like finance." Randy MacDonald, Senior VP HR, IBM Functional HR (on individual level recruiting, development, compensation, placement, etc.) HR Services 40 50% 50 60% -30% 45% (1) 10 20% 30 40% 50 60% Focus on strategic change Managing human capital Increasingly transferred to line managers, e-enabling Standardization, self services Shared services Outsourcing "HR has to navigate the company through the tides of social change and mobilize people emotionally." Jürgen Weber, former CEO, Lufthansa al "HR is there to help, to guide people through decisions but not do it for them. It's a bit like a selfservice buffet: We will provide tools, learning and development, and data." Vance Kearney, VP HR, Oracle "There are certainly some very significant cost savings in shared services. Processes are simpler and faster and you can refocus the energy of the corporation." Bob Livingston, VP Employee Services, P&G Traditional Trend HR function implications: changes to employee profiles, processes, organization, and controlling (1) Much higher savings at some companies Source: BCG benchmark data, public sources Exhibit 1 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT All respondents agreed that in principle HR work should be further aligned with strategy. Companies can derive maximum value from their "human capital" by systematically managing it. This means especially integrating HR topics into the business strategy while simultaneously establishing HR control systems to measure deficiencies and results. For strategic HR work this means: Explicitly defining the HR strategy: Bestpractice companies annually define and document their HR strategies as a component of their business strategies. They use as a basis for analysis the company's business strategy (for example, competence requirements) and the external environment (for example, job-market trends). The process also includes establishing transparency internally (for example, concerning deficits in leadership or employee commitment). Best-practice companies also quantify their strategic goals and link them to specific measures. These goals concern both quantitative employee parameters (for example, personnel costs, talent pools) and qualitative parameters (for example, specific competencies, leadership behavior), as well as the rough architecture of HR work (focus and shared services, for example). Best-practice companies address topics firm-wide through a few focused initiatives (see exhibit 2) 4

5 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT DEVELOP YOUR HR STRATEGY SYSTEMATICALLY 1 Business strategies Market strategy Portfolio strategy Synergy management HR strategy (1) 2 Internal company factors Current deficits HR focus Management philosophy and selfimage Value added, costs, size of workforce Competencies, motivation, leadership, and culture Key HR activities 3 External environment Legal framework Labor market Technological changes HR controlling Initiative focused on two or three key HR topics (1) The three factors (business strategy, internal company factors, and external environment) can be actively influenced by the HR strategy Source: BCG research; BCG case experience Exhibit 2 Integrating HR strategy and goals into the business planning process: Best-practice companies understand that HR is a key part of the business. Strategic HR topics are integral to the planning process and take up more than 20 percent of the overall planning time. These companies provide their HR function with a clear planning process similar to what they give to their finance department, including dedicated planning formats for HR measures submitted before official divisional planning rounds. Top management participates extensively in HR strategy discussions. Using standardized metrics worldwide for HR control: Best-practice companies control and quantify the impact of HR work with standardized metrics; as many as 150 HR metrics are collected and reported in all regions and divisions. At the same time, best-practice companies consider quantitative goals (personnel costs, valued-added measures) as well as qualitative goals (competencies and motivation measures). One study participant uses a worldwide, uniform survey tool to measure commitment in order to review "soft" factors and develop constructive measures. As another participant put it, "HR has to be managed like finance." Transferring HR goals to individual target agreements: Best-practice companies use target agreements to transmit their HR strategy to the individual level. For example, for all executives at one surveyed company, "identification and development of junior talent" is a goal in their individual target agreements. Actively managing change processes: In their corporate centers or HR networks, best-practice companies charge highly specialized employees with the task of managing M&A topics such as due diligence and post merger integration. Doing so supports, for example, employee development in integration management and cultural harmonization of the merged companies. In addition, 5

6 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT best practice is to develop and internally initiate concepts for cultural change, such as stimulating movement toward a stronger performance culture. In the area of functional HR (HR processes related to employee management), line management increasingly carries out HR responsibilities. In addition, functional HR is moving toward a strong performance orientation. This means Talent development is extended to specialist groups: Top people in functional areas such as sales and R&D have considerable influence on a business's overall performance, so best-practice companies integrate these groups into a comprehensive talent-development process. They establish career models, goal-oriented development processes, and continuing performance management for all business-critical employee groups. Line management has complete HR responsibility: Implementing this widely called for measure is supported through effective, simpleto-use, e-based HR tools; best practice companies also prepare and coach line management to carry out HR work. Examples such as line managers in professional service firms recruiting employees, IT firms using only e-based performance management, and HR being only marginally involved in integrating new employees show how radical the transfer of tasks to line management can be. Performance management uses standardized, value-oriented criteria: Best-practice companies use globally consistent standard performance criteria for all their top and middle management. They not only evaluate financial performance, they also systematically integrate behavior-oriented criteria into the measurement of performance. Promotions and changes in compensation are correlated explicitly with both value-oriented behavior and business performance. Performance management is consistently integrated into all HR processes: Bestpractice companies systematically link performance management with the feedback, development, and compensation process, ensuring a closely defined timeline and a consistent data pool. They also strongly correlate individual performance with compensation; variable components average at least 10 percent for all nonsalaried employee groups and increase steeply as one moves up the hierarchy. Through HR services companies can increase their efficiency significantly by pulling various key levers process standardization, bundling, and optimization of factor costs (see exhibit 3). Some companies have realized cost savings well in excess of 30 percent. Achieving these savings involves applying several best practices: Consistent use of all efficiency levers: Through standardization, automation, and selfservice HR processes can be carried out much more efficiently. By pooling HR services on both the national and regional levels, companies gain additional efficiencies. Through hub-and-spoke concepts and a multitier system, best-practice companies reach an optimal mix between local specificity and regional standardization. Moreover, by moving services offshore they optimize service-staff factor costs. One surveyed company, for example, has efficiently transferred part of its German paycheck processing to Budapest. High attention is given to quality improvements: The quality of services is key to the acceptance of any process changes. Best practice companies even improve quality through continuously assessing customer requirements and measuring satisfaction. In addition, these companies know that effective transition management is crucial that is, preparing the organization for change. Central issues here include high data security, smooth employee migration, professional project management, and a change-management program. 6

7 II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT ADDRESS ALL THREE PRODUCTIVITY LEVERS WITH EQUAL ENERGY AND IN PARALLEL HR services Standardization, automation, and self-service Cost savings (1) Realization of pooling potential Cost savings Factor cost reduction Cost savings A B C Measures A B C Measures A B C Measures Process standardization and automation Delegation of functions to employees and managers Economies of scale Elimination of parallel organizations via harmonization of processes Best-practice sharing Optimization of services' cost structure Infrastructure Wage costs Increasing flexibility to react (1) Net effect after increase in complexity costs/additional IT costs Source: BCG case experience; benchmark interviews Greatest optimization potential exists through activating all levers: in parallel and combination of "A measures" Exhibit 3 Shared services units carry out HR standard services: Best-practice companies centrally provide and efficiently manage standard services such as paycheck processing and personnel data administration by using an internal shared-service center or outsourcing. Even recruiting support, expat management services, and training assistance are centrally managed at least at the country level, for all organizational units. Internal HR shared services are managed as "outsourcing deals": Best-practice companies choose a market-model approach to manage their internal shared services. This includes detailed servicelevel agreements, transparent price determination, and a clear, differentiated governance structure as well as stringent performance control from the beginning. Best practice includes measuring criteria for service quality, such as service availability, accuracy of information, and response time. 7

8 III. THE IMPLICATIONS: CHANGING THE HR FUNCTION III. THE IMPLICATIONS: CHANGING THE HR FUNCTION Implementing these best practice concepts has significant consequences for both the HR function and the profiles of HR employees. These changes also have implications for the company's organizational design. Particularly important are the following: Increase the business orientation of HR employees: Exchanges between HR and other business functions foster a stronger business orientation among HR employees. The goal is to fill about half of all HR leadership positions and about a third of all HR staff positions with employees from other functions. In so doing, HR increases its performance orientation because talent development and performance management are also executed consistently within the HR function itself. Develop HR networks: Best-practice companies work in networks within the HR function to promote development of new instruments and standards. They realize the benefits of using HR's cumulative know-how, using resources efficiently and sharing a worldwide common basis from which to work. Standardize IT platforms worldwide: Bestpractice companies implement consistent HR processes by using shared IT platforms globally. They harmonize systems, for example for performance management or payroll administration on a regional or global level and thereby reduce the complexity of IT-based HR processes. KEY CHANGES FOR THE HR FUNCTION Present Future HR employees Strong functional orientation Function-specific career path Standard HR tools Business orientation Rotation between business and HR Strong performance orientation HR network Separated HR organizational entities Country or regional orientation Integrated, worldwide HR organization International network HR processes Recruitinluatioment Eva- Develop- Placement Local and country-specific IT platforms Highly heterogeneous HR processes Standardized IT platforms Key HR processes uniform worldwide HR organization Corporate Division Division Shared services Mix of different HR organizational models Integration of governance and services in "comprehensive" HR Clear global business partner and shared services setup Separation of governance and services HR controlling Div. 1 Div. 2 Div. 3 Div. 4 Local, unlinked control of HR topics Qualitative orientation Worldwide standardized and segment specific HR metrics Measurement and quantification philosophy Exhibit 4 8

9 IV. WHAT NEEDS TO BE DONE Ensure corporate HR has worldwide governance: Best-practice companies clearly divide corporate HR activities with a worldwide orientation from regional and country-specific HR tasks. They deliver this global governance function with a lean organization with best practice examples showing around 20 FTEs. In addition, they separate the corporate governance function from HR services to avoid conflicts of interest and to optimize service delivery. the transparency of their HR organization, they measure, for example, customer satisfaction with the function, the ratio of HR personnel to total employees, and HR costs on all organizational levels. Several of the surveyed companies have implemented systematic control processes for their overall HR organizations. Exhibit 4 summarizes these fundamental to the HR function. Control the HR function: Best-practice companies implement systematic control processes for their HR function. Using scorecards to improve IV. WHAT NEEDS TO BE DONE As noted earlier, most companies employ best practices only in selected areas. The degree of professionalization in companies' HR functions varies widely and needs to be determined individually (see the checklist below). In general, there seems to be a particular need for action on HR measurement and control. For example, only three of the surveyed companies could pull readily the number of HR employees to total headcount out of their systems. This lack of quantitative data is, in our opinion, a major reason why the HR function often falls so far behind in internal perception in comparison with the finance department. With respect to functional HR work, many companies have many good individual concepts in some of their business units, for example, on performance management or employee development. The biggest challenges in this area often lie in harmonizing these concepts and implementing them consistently throughout the whole organization as well as in reducing complexity and making them easier to use. With respect to HR services most surveyed companies have taken initial steps to bundle and optimize some services, but are nevertheless far from having realized the full savings potential. Ultimately, top management's strong commitment to HR best practices is critical to realizing the full impact on value. To develop a world-class HR function, top management must consider HR topics a high priority; for example, by discussing them thoroughly at each executive board meeting. By asserting daily leadership, top managers can address employee expectations effectively and serve as role models for personnel management throughout the company. 9

10 Appendix Appendix: Checklist for Best-Practice HR Management 2 Strategic HR 1. HR strategy is part of overall company strategy, is defined annually, and is clearly documented. 2. HR strategy is developed systematically by analyzing the business strategy, the external environment, and the deficits within the company. 3. HR strategy is translated into quantitative goals and specific measures. 4. Strategy addresses quantitative goals (e.g., personnel costs), qualitative goals (e.g., leadership, competency requirements), and key areas of HR management (e.g., shared services organization, key HR activities). 5. HR topics and strategy are included in the corporate planning process in a formal way through specific templates and clearly defined processes. Planning of HR topics takes at least 20 percent of the overall corporate planning process time. 6. A few key topics are addressed by companywide HR initiatives. 7. HR metrics are used to continuously control the company HR strategy: they are collected and analyzed on a worldwide, standardized basis and are compulsory for all business units and regions. 8. HR metrics include quantitative metrics (e.g., value added per person/productivity, personnel cost components and headcount development by key employee groups), qualitative metrics (e.g., employee commitment, competence development, leadership indices), and HR process and organization metrics (e.g., HR function cost, HR headcount ratios, recruiting success rates). 9. HR metrics are validated through in-depth analysis of inputs and outcomes (correlation analysis). 10. HR measures are transformed into individual target agreements to hold management accountable for implementation of HR strategy and goals. 11. HR aspects of change processes (e.g., M&A issues restructuring) are competently supported by specialists with in-depth knowledge and ready-to-use tools Note: Best-practices results from interview series and BCG research activities. This list is focused on key practices and does not claim to be fully exhaustive.

11 Appendix Functional HR 1. Line managers are fully responsible for HR work and execute the major share of individual HR work. 2. Key HR tools (e.g., performance appraisal, development systems, compensation system) are consistent worldwide, easy to use, e-based, and fully in use (alternative tools are no longer available). 3. Line managers are prepared to handle their role as responsible "HR managers" through sufficient training, coaching, and if necessary dedicated change programs. 4. A companywide, standardized set of individual performance measures (e.g., financial results, performance evaluation) is applied to at least the first three levels of worldwide management. Other employee groups also have clearly defined performance measures. 5. Performance measures include financial and behavioral performance (e.g. leadership quality) to ensure alignment with company values. There are visible examples that career promotion can fail with lack of behavioral performance. 6. The spread of performance results is monitored and the distribution actively managed. 7. There is a high correlation between performance results and individual compensation: a minimum of 70 percent correlation coefficient with significant share of variable compensation in all employee groups (at least 10 percent of total). 8. Performance management is an integrated process with clearly defined interfaces with feedback and career development processes (e.g., common fixed timeline, integration of outputs in one database). 9. For key HR processes, a defined road map is established that highlights the degree of standardization for each process, tailored to each employee group. 10. Talent is developed systematically. For each talent pool (segment), management responsibilities and processes are clearly defined. 11. All "high-value employees" (e.g., from research, production, marketing, and sales) are included in comprehensive talent and performance management with distinctive career tracks and development programs. 11

12 Appendix HR Services 1. HR shared services are established for major support functions: payroll, personnel administration, recruiting support, learning administration, expat management (internal or outsourced). 2. Even internally, shared services are set up like an outsourcing deal, with clear contractual arrangements including service-level agreements, clearly defined interfaces, and a clear governance model. 3. Performance control of shared services is continuous. Customer satisfaction, in particular, is measured through regular, comprehensive customer surveys to ensure the high quality of HR services. 4. The transition to shared services is secured through effective change management (e.g., top-management commitment and a communications plan), high data security, and well managed staff migration. 5. All HR processes within the shared services unit are standardized and have been through rigorous reengineering. 6. Automation and self-services are used extensively to realize cost savings the intranet is the common platform for standard HR transactions. 7. Services are pooled not only on a country level but also on a regional level. A clearly defined multitier model for HR services has been installed. 8. Within shared services, effective capacity management (handling workload fluctuations) in combination with a flexible work force is in place. 9. Factor-cost reduction is realized by moving selected tasks (lower-tier services) to low-cost countries. 12

13 Appendix HR function 1. Within the HR function, a high share of employees is recruited from other functions (benchmark around 50 percent). In addition, rotation from HR to the business as well as internationally is standard, with an average HR tenure of not more than four years (except from dedicated specialists such as in compensation and legal). 2. Talent development and performance management for HR employees is standard and is executed in the same rigorous manner as for line management. 3. The HR community interacts in a network structure. A council model is used: a top council steers overall HR strategies and goals and topic-specific, temporary working groups develop standard tools and policies. 4. For key HR processes, a defined IT road map has been established that highlights the degree of current and desired standardization for each process, differentiated by employee group. 5. IT platforms for HR are defined globally and introduced to all divisions and regions accordingly. 6. The HR organization is well structured and has a clear definition of responsibilities on the corporate, business-unit, and regional/shared-services levels. 7. Corporate HR is clearly structured: worldwide activities are separated from regional and country HR, and HR services are organizationally separate from governance functions. 8. Corporate HR is lean (no more than 20 FTEs for worldwide activities) and has a high share of strategic activities (HR strategy, control, change management). Strategy and control have dedicated staff resources. 9. Key metrics for the HR function are controlled (HR efficiency measures such as HR cost and employee ratios as well as qualitative metrics such as satisfaction with HR). 10. HR has high accountability and a good reputation within the organization (comparable to the finance function). 11. Top management is highly involved in HR management topics and acts as a role model: (1) Individual top-management actions fit with HR mission statements (e.g., people are our most valuable asset); (2) HR topics are on the agenda at every board meeting; (3) current HR issues are addressed in CEO executive-board-member speeches to manage employees expectations; and (4) like financial reports, dedicated HR reports are compiled. 13

14 The Authors: Gunther Schwarz, Senior Vice President based in Cologne ( Christoph Nettesheim, Vice President based in Berlin ( Ulrich Villis, Manager based in Munich ( Markus Höllmüller, Consultant based in Munich ( For more information you may contact the authors or the leadership of the firm's Organization and HR practice: Ron Nicol, Senior Vice President based in Dallas, leading BCG's worldwide Organization practice ( Rainer Strack, Vice President based in Düsseldorf, leading BCG's European Organization practice ( Layout und Design: Ellen Treml The Boston Consulting Group Amsterdam Athens Atlanta Auckland Bangkok Barcelona Beijing Berlin Boston Brussels Budapest Buenos Aires Chicago Cologne Copenhagen Dallas Düsseldorf Frankfurt Hamburg Helsinki Hong Kong Houston Istanbul Jakarta Kuala Lumpur Lisbon London Los Angeles Madrid Melbourne Mexico City Miami Milan Monterrey Moscow Mumbai Munich Nagoya New Delhi New York Oslo Paris Prague Rome San Francisco Santiago São Paulo Seoul Shanghai Singapore Stockholm Stuttgart Sydney Taipei Tokyo Toronto Vienna Warsaw Washington Zurich