Why Doesn’t the HR Function have Institutional Power?
This is a question that has intrigued me over the past forty years is why doesn’t the HR function have the same institutional power like the Finance function. I can remember thinking about this question in the mid 1970’s when a former manager of mine resigned as the Queensland State Human Resources Manager from a major Australian retailer whom I worked for in HR after graduating. Over the seven year period that I knew my manager, both while working for him and after resigning to take up my academic career, Roger was quite a charismatic person who had built a very strong influence on not only running the HR function but also a strong influence on the running of the business in Queensland. In 1978, a decision was made to centralise the majority of the HR function within Melbourne. Within a year of that decision, Roger had resigned from the business. The influence of the HR function then decreased dramatically. At the time I thought about the role of both institutional and personal power within the HR function. It became clear to me that the HR function within organisations is based on personal power while the Finance function, for example, was based on institutional power.
Over the next couple of decades my views on institutional v personal power were further refined. I reached the conclusion that the HR function within organisations is based on personal power because its been my observation that the power base, or influence is this sounds better, of the HR function in all organisations ebbs and flows as different people more through the role of Chief Human Resources Officer. In Finance its quite the opposite. The power base of the Chief Financial Officer remains “institutionalised” and does not vary significantly as different individuals move through the role of CFO. Why this occurs is something I have reflected on over a very long period.
My first reflections on why the type of power is different in HR than Finance goes back to my undergraduate student days. While I completed a Management degree with majors in HR and Marketing, my wife, whom I meet while we were studying completed an Accounting degree. When I look at a typical HR degree, there are typically foundation subjects in behavioural science and management and then there are a series of elective subjects in functional areas of HR: training and development, recruitment and selection, organisational development, industrial relations etc. The only difference between 2nd and 3rd year is that you study more electives as well as having a capping subject on HR strategy. Subsequently I have looked at various HR degree programs from around the world and they broadly follow this same structure. When you look at an Accounting degree there are differences. Looking at the core accounting subjects there is always a similar structure. First year is fundamentally about double entry booking keeping, a concept first codified by Luca Pacioli, a Franciscan friar in 1494. As I regularly tell my wife not much in Accounting has changed in the past 500 years. In second year Accounting the core subject is about consolidating subsidiary account into an overall set of accounts. In third year accounting you learn about Financial and Management accounting, particularly through accounting ratios.
In final year accounting your don’t simply learn about financial accounting and management accounting ratios, you actually learn the interpretation of ratios like Return on Assets, Return on Capital Employed, Quick Assets ratio, Price Earnings ratio etc. In HR we learn techniques and more techniques, in Accounting /Finance you learn techniques as well as the interpretation of financial information. To me, this is the foundational difference as to why Finance has institutional power and HR only has personal power.
Over the past thirty years as my career has focused on workforce analytics and workforce planning I have become more and more convinced that we, the HR profession, must build our own processes in order to build institutional power for the HR function. I believe this will only be achieved by building our people metrics which are held on a similar level to financial metrics. However my thoughts in this area have evolved over the past few years. I no longer believe that people metrics alone are enough, they are necessary but not sufficient. The reason is that as the workforce in any organisation is very heterogonous the aggregate results for any metric, such as Voluntary Turnover, are basically useless because of the large degree of variation between actual results and the aggregated mean metric result we generally report. If the voluntary turnover is say 10% this provides little insight as the turnover results vary dramatically in all organisations based on factors such as tenure (position, organisation, and location), job family/occupational group, organisation unit, job grade, performance rating, etc. The variations is what gives us our insights and we have a major task to build the professional skills so HR practitioners are able to interpret the possible implications of these variations. Building this type of capability is part of the solution for developing our institutional power but its not everything.
I believe the key requirement for building the institutional power base of the HR function is predictive analytics. Its not developing a better mousetrap by finding a new approach to undertaking performance management or recruitment or coaching etc. All of these things are important but don’t make the HR function critical to business success.
While we need to build the capability of the HR function to undertake a broad cross section of applications of predictive analytics, one group is critical in the portfolio. We need to ensure we have a suite of predictive analytics that link various aspect of the workforce to business success. Business success is typically measured by factors such as revenue and revenue growth, profitability and margins, revenue from new products or services. Intermediate, but still critical, are factors such as Net Promoter Scores, Customer Retention, Innovation etc. We need to develop predictive analytics capability so we link people factors such as employee engagement, retention rates, tenure profiles, training investment, recruitment sources, career paths etc to these business outcomes.
In applying predictive analytics to the HR function, one of the biggest challenges will be to institutionalise the process rather than having a one off predictive analytics project. One of the best case studies that I have seen in workforce predictive analytics was the Employee Customer Profit Chain at Sears article published in the Harvard Business Review in January February 1998. To me this was a ground breaking article that quantified the impact employee behavior had on customer impression and in turn on business impact measured through revenue growth. This study however was only a one off project. My single greatest frustration with the HR profession is how little effort has been invested in trying to replicate and extend this type of research project. We will never institutionalise the power based of the HR function unless most companies are undertaking this type of predictive analytics. Equally important they cannot be a one off research project. We must build the capability of the HR function, involving both technology capability and human capability, so this type of predictive analytics study is a continual part of the HR process with organisations and not at best a once off research project like the Sears study of almost twenty years ago. This is the most fundamental requirement for building the institutional power base of the HR function. Wanting to see this happen is why I’m not retired at the Beach, in my case a beautiful location in Queensland called Sunshine Beach which I having been going to for the past thir