Measuring Human Resource management's effectiveness in improving performance.

This article examines the strategic role of HR and its main practices, describes the outcomes of respective categories of HR practices, explains the critical reasons for measuring HR's efforts, and proposes a framework for assessing HR. Ultimately, organizations will be able to utilize the information to determine how particular HR practices correlate with better business results; determine potential areas for investments, expansions, and reductions; justify budget allocations; and be more accountable for each dollar spent within the organization. The framework proposed does not merely explain the cost for each major HR activity, but demonstrates the value of the activity and, hence, the opportunity to determine if it is a worthwhile investment and strategy for creating a competitive advantage.

What value does the HR function contribute to the bottom line of the organization? Over the years, tremendous emphasis has been placed on making HR practitioners strategic business partners and a value-added source within organizations. Traditionally, HR professionals could talk generally and conceptually about employee morale, turnover, and employee commitment as outcomes of HR efforts. Furthermore, the HR function was often viewed as an expense-generator and administrative function and not as a value-added partner. Ulrich (1997b) reiterated that to fulfill the business partnership role of HR. concepts need to be replaced with evidence, ideas with results, and perceptions with assessments.

This article examines the strategic role of HR and its main practices, describes the outcomes of the respective category of HR practices, explains the critical reasons for measuring HR's efforts, and proposes a framework for assessing HR. Ultimately, organizations will be able to utilize the information to determine how particular HR practices correlate with better business results; determine potential areas for investments, expansions, and reductions; justify budget allocations; and be more accountable for each dollar spent within the organization. The framework proposed does not merely explain the cost for each major HR activity, but demonstrates the value of the activity and, hence, the opportunity to determine whether it is a worthwhile investment and strategy for creating a competitive advantage.

The framework has proven its effectiveness at many companies, to show how HR creates value, to utilize information to increase investments in specific HR strategies and eliminate ineffective investments, and to serve as a critical resource in strategic business planning and budget allocation. The companies include Fortune 500 and smaller companies from retail, transportation, and financial industries.

Understanding the Strategic Role of HR

In today's business environment, organizations constantly need to evaluate their internal and external environment for challenges and opportunities to remain competitive and to sustain growth. Political, economic, social, and even psychological changes within our societies have a significant impact on organizations. Given any significant change or event, how ready are organizations to react in order to remain competitive?

Many factors drive changes in organizations today, including the use of technology, globalization, changes in workforce demographics, the elimination of bureaucracies in organizational structures, and the need to find a balance between work and family issues. Understanding the potential of an organization's resources and optimizing the output of such resources, given the changes, provides an impetus for HR to become the key source of creating the competitive advantage for the organization.

To create value and deliver results, HR professionals must begin not by focusing on the work activities or work of HR but by defining the deliverables of that work. HR's roles in building a competitive organization include management of strategic human resources, management of transformation and change, management of firm infrastructure, and management of employee contributions (Ulrich, 1997a). Although these roles are valid and have proven to be value-added in recent years, now there is a critical need to move beyond the strategic business partner role to becoming a player in the business (Ulrich & Beatty, 2001). Players, according to Ulrich and Beatty, contribute to the profitability of the organization, deliver results, and do things to make a difference. The roles of players are to (1) coach, (2) design, (3) construct, (4) change the organization, (5) create followers, and (6) play by the rules. Another perspective on the role of HRM suggests that in leading-edge companies, HR professionals play four key roles: (1) strategic business partners, (2) innovators, (3) collaborators, and (4) facilitators (Schuler & Jackson, 2000). As strategic business partners, HR professionals should understand the nature of the business from strategic, operational, financial, and other aspects necessary to be part of an effective team managing an organization. Functioning as innovators, HR professionals are challenged to search continuously for strategies that will create value for the organization and not merely function in a reactionary mode. Furthermore, HR professionals will also serve as collaborators with senior leaders and all employees to implement business strategies forming the strategic link throughout the organization. Finally, as facilitators, HR professionals function as the change agent providing rationale, support, and readiness for planned changes designed to support the business strategies.

The fundamental role of HRM is essentially to maximize profitability, quality of work life, and profits through effective management of people (Cascio, 2003). Given this premise, it can be easily inferred that HR's role is to help create value to the organization. Exhibit I illustrates some of the external challenges and changes facing organizations, their impact on the organization, and how HR is impacted.

The Importance of Measuring HR's Activities

Even though HR professionals are convinced that their efforts add value to the organization's bottom-line, frequently there is little evidence to demonstrate such belief. A recent survey the author conducted of 54 companies in the midwest revealed that 51 of the companies conducted little or no assessment of their HR department's efforts and therefore could not have provided any quantitative measures of HR's value to the organization. In addition, a study conducted by Becker, et al. (2001) indicated that less than 10 percent of the 968 firms that participated in their study had a formal estimation procedure to measure HRM.

Measurement in most HR departments is usually restricted to processes, measuring costs, and not showing value-added (HRPS, 1993). Each dollar invested must be justified first, strategies to determine maximum worth must be compared, and where to invest needs to be decided, especially as companies scramble to survive the economic conditions following the September 11 tragedy. Pepitone (1997) reiterated that HR leaders should know how to prove the value-added of their services because management is increasingly requiring departments to give evidence of their worth. In addition, Sorensen (1995) stated that the best way for HR to gain credibility in order to make meaningful changes is for practitioners to measure the cost and effectiveness of what they do. And they must put that into language senior executives understand: financial results. HR managers need to measure the cost and effectiveness of their activities far more closely than they have in the past. Many organizations have been forced and are continuing t o determine ways of being more cost-effective. Many of the other functions including finance, accounting, and marketing are able to show a return on investment for their respective efforts, so given the increased emphasis on HR practices, it is imperative for HR to be able to show its effectiveness in creating value for the organization. The new HR is a transformed role comparing itself to any other function, not only through espoused value creation strategies, but also through outcomes, qualitative and quantitative measurements, and direct relationships to profitability.

The simple option of showing HR's value or becoming extinct as a department presents itself to HR professionals; given the strong belief that HR is a source of added value in organizations, there is no choice than for HR professionals to be able to explain quantitatively and qualitatively its strategic role in the organization. Substantial evidence over the years has shown the relationship between HR and organizational performance, as summarized by Yeung and Berman (1997). Some of the studies include MacDuffie and Krafcic (1992), US Department of Labor (1993), Pfeffer (1994), Arthur (1994), Huselid (1995), and Ostroff (1995). Despite these studies, HR still lacks a framework that is grounded in theory, yet practical enough for practitioners to use that shows the major HR activities, outcomes of the respective activities, and how they can be measured. Such a framework is discussed here, one that describes clusters within the HR function and encompasses: (1) strategic planning, (2) selection, (3) training and d evelopment, (4) organization development and change, (5) performance management, (6) reward system, and (7) organizational behavior and theory.

HR Activities and Outcomes