“So why should this organization invest in human capital?”
Over the past two decades, HR executives and corporate strategists have been engaging more deeply. Yet when the conversation reaches the point where corporate strategy asks HR this question so bluntly, it usually indicates the beginning of the end.
Nevertheless, HR leaders respond earnestly by asserting that human capital investment is fundamental to a high-performing workplace, or is a best practice, or all industry leaders are doing it, or simply that it is the right thing to do.
Each of these assertions is usually illustrated by a unique set of measures and anecdotes. But to a corporate strategist, neither inventive HR metrics nor colorful storytelling provides sufficient justification for investing in human capital.
Both HR and corporate strategy have the same goal in mind: achieving competitive advantage. But despite their agreement on what the end is, the two regularly talk past one another regarding means. While HR is preoccupied with the right people, right place, right time, right role, and right training, corporate strategy is much more concerned with what industry, what product mix, what segment, and above all, what value the company is delivering to customers.
All the “right” things HR strives to achieve, and all the “whats” corporate strategy tries to answer are not necessarily incompatible. It is hard to imagine many profitable companies denying that the knowledge, skills, and talent of its employees represent one of the few remaining sources of competitive advantage. However, even the most thorough of organizations can easily trip up on the details of how HR contributes to competitive advantage, and have trouble determining how to measure HR’s contribution.
Interestingly, much of the difficulty arises because there are actually several different ways human capital can drive competitive advantage. Is it a result of the people you have, what they do, or how their workplace is organized? To make matters even trickier, corporate strategy usually can address only one of those questions at a time. And that choice is often influenced by the company’s ability to measure and control inputs and outputs, and at the appropriate levels within the organization.
HR tries to chip in by devising its own metrics that resemble corporate financial strategy metrics as much as possible. But that is going about things backwards. A better task for HR is to evaluate the different views of how human capital achieves competitive advantage, and enable the company’s data to do the talking rather than HR talking up the data.
You’ve got to have the goods: The resource-based view
The most widely accepted view of competitive advantage treats an organization’s resources as the primary source of differentiation. Resources can be tangible (e.g., gas fields, precision machinery), intangible (patents, information), or human (talent, unique skill sets).
In this view, human capital is treated as an accumulative resource that benefits the organization like any other business asset, providing competitive advantage through a transformation of the unique capabilities of individual employees to superior organizational performance.
It is understandably common to hear objections to the term resource, such as, “we are human beings, not resources!” Those raising apprehensions can be reassured that HR and corporate strategy tend to use the term resource in a neutral way, with no implication that people ought to be mechanized. Resource simply denotes something that is measurable. Of course not all human performance activity is measurable, and HR is often limited by shabby data. But conscientious analytics and good manager judgment together go a long way in capturing value-driving behaviors in HR metrics, which in turn puts the humanity in human capital.
An advantage of the resource-based view is its clear analytical framework, where human capital is understood as having four important characteristics: it is valuable, scarce, not easily imitated, and lacks substitutability. Valuable indicates that companies must be willing to pay, sometimes a premium, for continued access to the resource. Scarce does not necessarily denote a dearth of a resource, as if often conceived when considering talent, but rather that there is not enough of the resource to satisfy every organization’s demand. Not easily imitated creates high barriers to entry for competitors. Lacks substitutability means that if a resource increases in price or suddenly becomes unavailable, a substitute of nearly equal price will not be available.
For example, many valuable employees are impossible to replace, and lost knowledge and capabilities cannot be acquired from the labor market. Strategic human capital management seeks to enhance all four characteristics, in addition to clarifying precisely what talent inventory is needed to execute short-term strategy.
In the resource-based view, the two most important features of organizations are specificity of goals, and formalized structures to conduct the flow of performance activity. Therefore, resources tend to be managed at the executive level, often through a sophisticated hierarchy and a well-developed information system. The role of HR is to partner with other business functions to acquire, develop, and source human capital optimally.
Individual performance data and job competency modeling provide much of the data used for analytics using this view, along with HR efficiency metrics. However, it is not necessary or sometimes even feasible to know how HR inputs are transformed into business outputs. Yet it is necessary to know either the HR inputs that are likely most effective, or how to measure or control business outputs.
Success is as success does: The behavioral view
According to the behavioral view, accumulating a lot of high quality human capital is necessary, but not sufficient. To achieve competitive advantage, human capital must perform in a desired manner. Therefore, human behavior is the mediator between business strategy and outcomes. Moreover, successful execution according to the behavioral view depends on repeated observance of desired behaviors and attitudes in the workplace, which relate closely to sustained levels of performance. The role of HR is to direct and assure desired behaviors, so as to maximize the alignment between strategy and business performance, and to assure consistency across work practices.
As with the term resource, HR and corporate strategy also treat behavior in a neutral sense, denoting a measureable set of actions that can enable business outcomes, not something that is to be manipulated through fear or chicanery. The behavioral view assumes that employees usually know what they need to do to perform well, and HR should remove any barriers to people doing so.
Behaviors are typically managed at the unit or subunit level, by division or department managers. A strategic HR function both supplies new information to employees and creates a rubric for managers to reinforce desired behaviors, while simultaneously evaluating the effectiveness of training in achieving such behaviors. In this view it is necessary to know, or to have a solid theory of how HR inputs are transformed into business outcomes, and to be able to provide control, training, and monitoring.
Data that is often used includes evaluations of employee personal characteristics such as level of risk taking, leadership aptitude, conscientiousness, orientation toward quality, engagement, and attitudes toward coworkers.
Good things come in bundles: The configurational view
The last of these three views states that even the right talent doing the right things is not enough to produce competitive advantage. Behaviors require coordination with other organizational resources in order to be effective, by means of configurations of performance improvement initiatives. Yet regardless of strategic objectives, there are optimal configurations whose components are interdependent, including HR practices. In plain terms, the configurational view acknowledges that if you put good people against a bad system, the system always wins. Behaviors are not optimized so much as functions and processes, which if not managed correctly can negate even the best performance behavior from the best human capital.
Consequently, the configurational view seeks to assemble a set of strategic HR practices, or a profile, that drives a single performance outcome, rather than attempting to influence behaviors thought to exert maximum impact on business results, as prescribed by the behavioral view. Such a profile is sometimes referred to as an HR bundle.
The HR function thus drives business results as part of an overall program of superior organization design and development, where HR is complementary to other business functions. In this view it is necessary to know, or to have a reasonably solid theory about how HR inputs are transformed into business outcomes. But it is not necessary to be able to provide control, training, or monitoring. The metrics used vary more than in the other two views, but throughput and feedback metrics tend to be used along with organizational performance. Individual-level metrics are not common.
Put your strategy where your people are
Competitive advantage is not what it used to be. As data becomes an equalizer, global supply chains become more accessible, and consumer goods quickly become commodities, the only way most companies can outperform their competition is to be smarter about creating new markets. Doing so requires a better message along with better products, faster market responses and earlier customer engagement, greater talent and more room for it to perform. The challenge of forming human capital strategy is there are several ways to proceed, some better than others. Yet, if people are truly your most valuable investments, then they belong at the core of your strategy, and deserve the best analytics you’ve got.
This story originally appeared in SAP Business Trends.