benchmarking hr practices - 1994-libre

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Benchmarking HR Practices:

Approaches, Rationales and Prescriptions for Action

Jean M. Hiltrop

Charles Despres

IMD: The International Institute for Management Development

Chemin de Bellerive, 23

Lausanne, Switzerland

1 March 1994

Publication informationHlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches,rationales and prescriptions for action. Chapter 9 in D.E. Hussey (Ed.),Rethinking Strategic Management: Ways to Improve Competitive Performance.Wiley (1995), pp. 197 - 220.

Contact information Charles Despres

Graduate School of Business, Marseille-Provence (Groupe Ecole Superieure deCommerce, Marseille-Provence) / Domaine de Luminy / 13288 Marseille,France

tel + 33 4 91 82 79 00 / fax + 33 4 91 82 79 01

[email protected]/ [email protected]


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Benchmarking HR Practices: Approaches, Rationales and Prescriptions for Action

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Hlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches, rationales and prescriptions for action. Chapter 9 inD.E. Hussey (Ed.), Rethinking Strategic Management: Ways to I mprove Competiti ve Performance. Wiley (1995), pp. 197 - 220.

I ntroduction

The 1990's have become a period ofglobal competition, streamlinedorganizations and efficient work processesaimed at delivering high quality outputs.

The decade is also characterized bysociopolitical fragmentation, troubled newmarket economies, toppling corporategiants and unprecedented levels ofredundant, technologically-displaced andjobless individuals. Executives in themidst of this swirling confusion areanxious to maintain or improve theircompany's competitiveness, and mostrecognize that the effective managementof human assets is a key to success.

Experienced managers also know that

measuring an event draws attention tothat event, and that tying rewards to themeasurement process will both magnifythe event and sharpen attention.Traditionally, both the object of aperformance management system and themeasurements employed have beenfinancial in nature. This is no longer thecase. Managers now realize that anexclusive focus on such measures asreturn on equity and cash flow ignoresother key success factors in an enterprise

which may prove critical to long-termsuccess. Geanuracos (1994: 18) writes,

At the heart of this new thinking isan understanding that reliance onfinancial measures alone often

undermines the strategies thecompany must pursue to survive

long term. Today's smart firms aresearching for ways to incorporate

into their regular performance

evaluation non-financial measuressuch as quality, market share,

customer satisfaction, humanresources, innovation and learning.

Thus, the danger in traditional methods isthat performance management maybecome finance-driven and myopic,resulting in some organizationalfactorsCless important ones, we wouldargueCbeing optimised at the expense ofothers. Furthermore, when rewards aretied to financial targets the organizationoften alienates employees who have littleunderstanding of how their everyday

transactions connect to overall corporateperformance objectives which,

consequently, produces little perceivedability to affect the "bottom line". Onerecent study (Geanuracos, 1994)determined that only 30% of executivessurveyed expressed satisfaction with theircompanies' performance management

systems: the majority believed thatperformance measures were, among otherfaults, still too financially oriented.

Recognition of these problems, and inparticular the third, has led to a flurry ofwriting on the need to move toward a newparadigm of performance management.The call is to supplement the traditionaland small set of financial performancemeasures with non-financial indicators ofthe processes that lie behind them (Ecclesand Nohria, 1992). Authors such asKaplan and Norton (1992) have evenargued for placing non-financial measures(i.e., customer satisfaction, innovativenessand the development of human resources)on an equal footing with financial criteriawhen determining strategy, promotionsand the allocation of organizationalresources.

The European Foundation for QualityManagement (EFQM), formed by fourteenleading Western European companies in

1988, agrees on this matter. In 1991EFQM established the European QualityAward which is "...awarded [yearly] to themost successful exponent of Total QualityManagement in Western Europe" (EFQM,1993: 2), and the criteria for this awardare pert inent. EFQM developed the modelin Figure 1 to depict the performancecategories that are deemed critical toexcellence in organizational performance.

I nsert Figure 1

It would appear that financial measures

are rather sparse among the EQFMperformance criteria, and so they are.Figure 2 excerpts certain of these criteriain the first four performance categories:

I nsert Figure 2

According to Eccles and Nohria (1992), thejustif ications for this new paradigm arefounded in three fundamental truths aboutperformance management:

1. The use of non-financial measuresencourages managers to adopt abroad and long-term view oforganisational performance.


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2. Measures of non-financial variablestarget events that are meaningful andactionable in managerial experience,e.g. delivery times, market position,the development of organizationalcompetence and employee turnover .

3. Non-financial measures can serve asleading indicators of financial resultsand thus be made legitimate even tothose for whom the bottom line iseverything.

But the task of extending the traditionalapproach to performance managementbeyond common financial measures posessignificant problems. One of the mostdifficult facing both academics andpractising managers is the development of

non-financial measures that deliverrealistic data on a company's currentposition, and which serve well as leadingindicators of future financial performance.

Human Resource ManagementPractices

The human resource management (HRM)function is, at root, a range of activitiesand approaches that allow a firm toattract, retain and mobilise a critical massof human talent. Most efforts to assess

HR performance have been limited to (a)general measures of limited value, such asheadcount or payroll costs, or (b)sophisticated measures that managers aresometimes unable or unwilling to use.Moreover, experience shows thatmanagers seldom review in a systematicway the intent, impact or results of an HRaction or policy. As a result, adjustmentsin human resource policies and practicestend to be based on intuition rather thanmethodical assessment of concrete andspecifiable effects.

Like their counterparts in production,marketing and financial managementmany HR managers are being(understandably) forced to justify in asystematic way the costs of their activities,and to compare their activities and overallperformance measures with those of otherorganisations (Mackay and Torrington,1986). This need to evaluate the value-added effects of HR practices onorganizational products and processesbegan in earnest during the late 1980sand is becoming critical in this, the age ofperformance management.

United Technologies, for example,convened a task force with just this issuein mind during the early 1990s (Dailey,1992). The group surveyed "internalcustomers" of the HR function in each ofUnited Technologies' six major businesses

(Pratt & Whitney, Sikorsky Aircraft,Carrier, UT Automotive, Otis and NordonSystems) with the straightforwardobjective of comparing perceptions ofperformance between HR and linemanagers. The eighteen-item instrumentused is presented in Figure 3.

I nsert Figure 3

The performance categories in thisinstrument are instructive and, generally,the task force found that HR professionals

perceived the quality of their services tobe higher than did line managers. Moreworrisome, HR managers were viewed ascompetent but disconnected from thecompany's strategic direction:

HR professionals stood up for the HRperspective, which is good, but did it quitetraditionally. They were fairly competent,but didn't measure themselves veryrigorously. They did their homework andcame to meetings prepared, but were notseen as very innovative or risk taking. In

short, the message from this survey was,'You're not really a strategic partner.' "(Dailey, 1992: 15-18)

The results of this effort included a two-day conference where 100 HR and 20 linemanagers discussed the findings, setpriorities, charted a new direction, andcascaded the process to corporate andbusiness units.

As United Technologies illustrates, thecompetitive environment is intensifying

and the development of key HRperformance indicators together with theirassociated monitoring systems isbecoming increasingly important. In fact,given the increasing emphasis on costreduction, quality and excellence in manyorganisations, it is surprising that humanresource management has escapedscrutiny for so long.

Approaches to Measuring HR

Performance

How can a forward-thinking organisationdevelop an effective performancemonitoring system in the area of human


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resource management? According toMorgan (1992), there are threeapproaches.

One is to adopt a stepwise procedure,similar to the scientific method, in which

meaningful and reliable variables areidentified. The process begins bydeveloping as many measures as possible,particularly in the HR areas of greatestconcern. Second, measures whosepotential benefit is outweighed by theexpense or difficulty of data collection areeliminated. Third, systems are developedwhich regularly collect the necessaryinformation, preferably devolved to linemanagement, and a commitment is madeto the time and effort needed foranalysing the data and interpreting itsmeaning in the realm of HR strategy.After two or three years (often the timerequired to realise the impact of an HRactivity) it becomes possible to reduce thenumber of measures to four or five keyindicators by eliminating those which onlyconfirm the results of others. Forexample, if employee turnover, jobsatisfaction, absenteeism and so forthwere all perfectly correlated with oneanother, only one of the measures isnecessary; by examining this single

measure a manager would know thecompany's performance for all the others.The relationship between performancemeasures is often complicated and non-linear, however, making multiple measuresa virtual necessity.

Although this approach is laudable in itsattempt to capture all measurable aspectsof HR performance, there is the risk thatthe task of collecting data, analysing themand interpreting the results will be costly,time-consuming and result in no clear

guidelines for action. There is also thedanger of what Eccles and Nohria (1992:160) called creeping numeration, whichrefers to "the temptation to turn everymeasure deemed relevant into a crucialpart of an official measurement system".Indeed, once the decision is made toexpand the class of measures from asingle (financial) category to three or four,and four or five measures are developedfor each category, a company can quicklyhave twenty or more 'key' performance

indicators.

Second, a recent approach to performancemanagement involves the identification ofkey performance indicators that areassociated with a specific HR practice,such as recruitment and selection. Fromthis perspective the wisdom lies in keeping

things simple and avoiding informationoverload, and the implication is that only afew measures are needed to help linemanagers or HR professionals gauge thecurrent state of affairs.

This second approach offers an appealinglogic: if objectives have been defined inadvance, there should be associatedmeasures and thus no difficulty incollecting and interpreting the data. Mostmanagers simply cannot attend to twentymeasures at onceClet alone optimisethemCdespite company rhetoric that mayimplore them to do so. In fact, imputingsignificance to each of these measuresmay only push the problem of devising ameaningful performance measurementsystem down to the level of eachfrustrated individual (Eccles and Nohria,1992). But as Morgan (1992) points out,this method also runs the risk of being toosuperficial. I t is not enough to know thata specific practice or activity has workedto a greater or lesser extent. To be of real

benefit there must be enough informationto understand why the specific outcomehas occurred, and to incorporate thelessons learned.

A third approach to HR performancemonitoring, one which is currently thevogue, is through the process now knownas Benchmarking. Benchmarking denotesa comparison with selected performanceindicators from different organisations,typically in the same industry, or withcomparable organisations that are

considered to be "best in class". The mostobvious points of comparison are withclose competitors, but some organizationshave gone beyond their industry group toidentify best practice wherever it can befound. Xerox, for example, wherebenchmarking has been credited as one ofthe main factors in its 1980s revival, hasbenchmarked railways, insurancecompanies and facilities that generateelectric power.

Successful benchmarking requires carefulselection and manipulation of comparisonmeasures. A recent study (Geanuracos,


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1994) found that while 70% of theexecutives surveyed reported usingbenchmarking to evaluate performance,nearly 60% were benchmarking againsttheir own company's historical record asopposed to competitors or industry

leaders. Clearly, the greatest gain to behad from a benchmarking exercise isprovided through comparisons with otherfirms and different ways of thinking.Indeed, as a programmatic effortbenchmarking serves a number ofpurposes (Glanz and Daily, 1992). First, itenables a company to calibrate how it isdelivering HR practices. By examining theway other organisations accomplish tasksand responsibilities, a company can audititself and identify areas where practices

are within or outside a given norm.Second, benchmarking enables a companyto learn from others' successes andmistakes. Building a continuousimprovement mentality has become animportant goal for many organisations inthe last decade; benchmarking can openminds and create a climate in which activelearning is encouraged.

Third, benchmarking can be used as a toolfor creating the motivation to change. Bylearning what other companies are doing,

line managers and HR professionals canbuild a stronger case for allocatingresources to HRM activities in ways similarto those of successful companies. Finally,benchmarking can be used to help setdirection and priorities for an HR manager.Rather than fall into the trap of trying todo everything well and please everyonewith limited resources (which typicallyresults in no one being satisfied), HRmanagers can use benchmarking to focuson critical activities (Ulrich, Brockbank and

Yeung, 1989). Questions which mayindicate a need for benchmarking HRpractices in an organization include thefollowing:

1. What is most critical to businesssuccess: Cost reduction? Innovation?Quality improvement?

2. What areas are causing the mosttrouble?

3. Which employees contribute most tothe critical success factors?

4. Which attitudes and behaviours arecurrently displayed by theseemployees?

5. Which attitudes and behaviours areresponsible for the trouble areas

identified above?6. What HR policies and practices are

contributing to the current attitudesand behaviours?

7. Which HR policies and practices needto be changed as a result of the abovein order to build on strengths orcorrect weaknesses in our approach toHR management?

8. What are the performance measuresto determine the effect of our actions?

What are the major cost components ofthe change program? Currently, the mostcommon form of HR benchmarkinginvolves salary surveys. I t is the rare HRmanager who steps beyond this, for twoprincipal reasons: (1) the difficulty offinding standard and acceptableperformance indicators similar to thoseused in financial management, such asreturn on capital and cash flow ratios, and(2) the reluctance of companies to divulgesensitive information about their employee

retention, employment costs, and so on.There are other reasons for the lack of HRbenchmarking in contemporaryorganizations, the most prevalent perhapsbeing the mythology that has developedaround personnel work. As Jac Fitz-Enz(1984: 7) observes:

The fundamental belief is that personnel issomething of a complex and mysteriousart. Allegedly, the true and full value ofthe work can only be judged by those whoperform it. Even then, the appraisal is

bounded by subjective criteria. Many ofthe faithful believe that, like virtue,personnel work is its own reward. Termsused to describe results are satisfied,quick, better, interesting, good, important,creative, and other similar non-specificterms .

There are also people who believe thatmeasuring the effectiveness of humanresource management is simplyinappropriate. In their eyes, HRM isdevoted to stimulating and supportinghuman happiness and development, and


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they see no reason to evaluate outcomesin other than humanistic terms.

Benchmarking has its limitations. Whenused solely to emulate rather thanimprove performance, advantages may be

short-lived, time consuming andexpensive. Moreover, the most valuableinformation is generally not derived fromthe actual data, but rather the qualitativeinformation on how and why the dataoutcomes were achieved. Nevertheless, awell established benchmarking processcan help managers set goals and targetsdesigned to make the company the best inits competitive field, and to initiatefocused programs that move the companyfrom its current position. Many firmsstrive for performance improvements bybenchmarking standards of excellencefrom other firms in such areas asproduction, research and development,and market ing. HR can be employed tosimilar competitive advantage, and it issensible to unearth those HR indicatorsthat contribute relatively more to overallperformance than others.

Janssen Pharmaceutica, a wholly ownedsubsidiary of Johnson & Johnson,undertook just such a benchmarking

project in late 1989 (Liebfried and McNair,1992) as a response to competitivepressures rocking the pharmaceuticalindustry. Janssen examined in detail theinternal components of its administrativeoverhead and, by comparing benchmarkswith a select group of peer companies,addressed what was considered a"burgeoning problem that is difficult toanalyze and control" (Liebfried andMcNair, 1992: 143). To begin, thecompany determined that administrative(white-collar) productivity could be defined

through four key elements (Figure 4).

I nsert Figure 4

Management then compared Janssen'sperformance with that of other companiesparticipating in the project. Janssen'smanagers soon determined that achievingwhite-collar productivity improvementswould be impossible unless appropriateperformance measures were developedand installed. Figure 5 displays four suchmeasures that Janssen now uses to

monitor its performance in this area.

I nsert Figure 5

EFFECTI VENESS CRI TERI A FOR HRACTIVI TIES

As noted earlier, developing the specificcriteria which define effectiveness for HRactivities is one of the most difficult

challenges facing line managers and HRprofessionals alike. In this regard thereare two schools of thought. The firstschool advocates monitoring the costs andbenefits of human resourceactivities those associated with theattraction, selection, retention,development, and utilisation of people inorganisations

in economic terms. Theunderlying assumption is that the ultimatesingle measure of HR effectiveness isfinancial ...the "bottom line". To illustratethis point, consider a comment by Cascio(1991) in his book entitled "CostingHuman Resources":

For some time now, I have had theuneasy feeling that a lot of what

we do in human resourcemanagement field is largelymisunderstood and underestimated

by the organisations we serve. Inpart, we in the field are responsible

for this state of affairs becausemuch of what we do is evaluated

only in statistical and behaviouralterms. Like it or not, the languageof business is dollars, not

correlation coefficients.

Although methods for estimating the costsand benefits of HR activities have beenavailable for many years (e.g., Brogden,1946; Cronbach and Gleser, 1965), theyare only beginning to appeared throughthe recent writing of academics such asFlamholtz (1985), Cascio (1991) and Fitz-Enz (1990), and in the form of formulas

and accounting procedures for measuringthe economic worth of the organisation'shuman assets. Figure 6 gives anillustrative example of conducting simpleexit interviews with terminatingemployees.

I nsert Figure 6

This economic approach to measuring HRperformance has the advantage of beingsimple and understandable, but it fails toprovide guidance when implementingeffective HR management programs.Many HR managers (and theirorganisations) understandably feel a need


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for more detailed and comprehensivemeans of assessing their performance,and how their performance compares withother companies over time.

The second school, espoused by

academics such as Ulrich (1989) andKravetz (1988), is to measure the set ofHR practices delivered within anorganisation, and measure thecontribution of each practice to the overallcompetitive advantage of the organisation.A great deal of recent work has appearedwhich attempts to capture in a singleconceptual model the variety of HRpractices deployed by organisations toaugment innovation, improve quality, andbe the lowest-cost producer of goods andservices. In 1984, Schuler introducedsuch a model which identified sixcategories of HR practices: planning,staffing, training and development,

appraisal, compensation and union-management relations. He suggests thatcompetitive advantage accrues tocompanies that identify and developspecific activities in each of these six areas(Schuler, 1984), and that specific activities(such as internal staffing and flexiblecompensation) become important andadvantageous internal competencies. In

addition, selection of HR practices shouldsupport overall corporate strategy andlead to employee behaviours that arefelicitous of it.

After a decade of conceptual and empiricalresearch by Tsui (1984), Kravetz (1988)and others, it is now possible to define keyperformance indicators in most of the sixcategories identif ied by Schuler (Figure 7).

I nsert Figure 7

These indicators can help managers

evaluate how their HR practices relate toboth the operational and strategic level ofthe enterprise, and lay the foundation forcomparing (longitudinally, or sectorially)the effectiveness of HR practices andpolicies between companies, divisions orbusiness units. Another conceptualisationevaluates the effectiveness of HR practicesaccording to six performance criteria(Bernardin and Kane, 1993): quality ofdelivery (in terms of conforming to somepractice ideal, or fulfilling the intended

purpose), quantity (expressed in termssuch as dollar value, number of units, or

number of completed HR activity cycles),timeliness (the degree to which an HRpractice is completed, or a resultproduced, at the earliest time desirable),cost effectiveness (in the sense ofoptimizing the gain or minimizing the loss

from each unit or instance of use ofhuman and financial resources), need forsupervision (the degree to which a personor unit can carry out an HR practicewithout requesting assistance, or requiringintervention to prevent an adverseoutcome), and positive impact(the degreeto which an HR practice promotes feelingsof self-esteem, goodwill, commitment,satisfaction, and co-operation among co-workers and subordinates). Based on thismodel, the most effective managers or HR

professionals are those providing thehighest possible quantityand qualityof HRpractices at the lowest cost and in themost timely fashion, with a minimum ofsupervision and with a maximum ofpositive impact on co-workers,organisational units, and theclient/customer population.

Ideally, the relative weights to be appliedto these six criteria are directly linked toorganisational objectives such asincreased sales, improved productivity

and, of course, return on investment.Strong linkages in this regard areextremely rare, however. As Ulrich (1989)points out, most organisations havedifficulty even measuring overallperformance in a reliable manner, and fewsystematically relate individualperformance to unit or corporateperformance. Moreover, organisationsrarely get down to specifics on all sixcriteria and seldom relate them effectivelyto the objectives of the firm. Nonetheless,

it is widely understood that the linkage is anecessary one if line managers are to beconvinced that HR activities are integral toorganisational objectives, and that theycreate and sustain a competitive edge.

In addition to HR practices, Ulrich et al.(1989) suggest that benchmarks may alsobe developed for the HR competencies ofindividual managers in the organisation.Questions that may indicate a need tobenchmark HR functions include thefollowing:

1. Who are the major customers of theHR function: Line managers? Other


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staff or support functions? Employeeorganizations? External clients?

2. What services are provided to thesecustomers? Is there a reason for theirexistence?

3. What are the major cost componentsof these services?

4. What factors are responsible forcustomer satisfaction?

5. What problems have been identif ied inthe operation?

6. What performance measurements arebeing used to determine theeffectiveness and efficiency of the HRfunction?

7. What are the performance gaps andwhat action is needed to close thesegaps?

Under the umbrella of strategic humanresource management, three sets of HRcompetencies may be identified:knowledge of the business, quality ofservice, and the management of change.Knowledge of the business refers to theextent to which an HR professional (or aline manager with HR responsibilities)understands the financial, strategic and

technological capabilities of theorganisation. Quality of service refers tothe extent to which the HR or linemanager provides high quality HR policiesand services (such as training anddevelopment) to the other members of theorganisation. Management of changerefers to the extent to which an HRprofessional or line manager is able toincrease the organisation's capability forchange through creating meaning,problem solving, relationship influence,

innovation, transformation, and roleinfluence.

According to Ulrich (1989), measures maybe established for specific behaviours ineach of these three domains of HRcompetencies. However, these measuresand behaviours have not been as welldeveloped and researched as theperformance indicators for HR practicesdiscussed perviously. Figure 8 outlines afelicitous approach discussed by Burn andThompson (1993), in which the

organization defines an indigenous set ofindicators, installs measurement

standards, and monitors performance overtime.

I nsert Figure 8

In a similar vein, Storey and Sissons(1993) recently proposed a set of activities

for benchmarking the organization's HRdepartment. Their intent ion is to outline apossible approach to auditing the role andperformance of the function. According tothese authors, a number of steps areinvolved:

Step 1: Decide the composition of theaudit team.

There has to be a representative from theHR function and from among senior linemanagers if the exercise is to have any

credibility. But it is not essential (or evendesirable) that the team is led by the headof the senior HR manager.

Step 2: Identify the function's maincustomers.

The key decision is to clarify who makesthe final decision to buy the servicesprovided by the function. In adecentralized multi-divisional organization,this is likely to be the general managers ofthe strategic business units.

Step 3: Review the HR function's missionstatement.

This statement describes the reason forthe HR function's existence, its principalactivities and its most important values.For instance: "To be the HR/Personnelconsultant of choice for the firm's linemanagers by achieving superior levels ofcustomer satisfaction at lowest costs andhighest speed in the area of employeeattraction, retention and motivation."

Step 4: Review the function's role informulating and implementing theorganization's strategy.

The list of questions in Figure 3 above arerelevant here. This step will also becritical to establishing the link between HRpolicy and practices, on the one hand, andthe organization's overall businessstrategy, on the other.

Step 5: Review the HR function's role in

developing relevant HR policies andpractices.


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For example, what is the firm's policy withregard to recruitment? Is there apreference for internal or externalrecruitment? Is this policy sustainable anddesirable in the new competitiveenvironment? Does it support the need

for high quality human talent? Is thispolicy consistent with other HR policiesand practices, such as rewards, trainingand development, performancemanagement, succession and promotion.Do these policies and practices focus onimproving individual and organizationalperformance?

Step 6: Review the delivery of HR policies

and practices.

Questions need to be asked here in

relation to all the HR activities currentlybeing undertaken by HR or personnel staffwhich could perhaps be done as well orbetter by line managers, by computers, orby external agencies and consultants. Forexample, one recent survey identified anincreasing number of Europeanorganizations that have decided tooutsource some of their traditional HRservices to completely independentbusinesses. An alternative option is toestablish an 'internal consultancy or

business unit' in which the HR functionsells its services both inside and outsidethe organization (Adams, 1991). Theadvantage of this approach is that linemanagers can go elsewhere if they are nothappy with the service they receive fromthe HR function within the organization.

Step 7: Make external comparisons toestablish 'best' practice.As Humble (1988)points out, it does not require an'espionage' network to get the data.Articles in such magazines and journals as

Personnel Management, Personnel Today,and Human Resource Managementcarry agreat deal of useful information aboutwhat other companies in Europe, Asia andthe United States are doing in order todeal with the contemporary HR issues. Inaddition, a considerable amount ofresearch conferences and workshops arecurrently being organized by businessschools and consultancy agencies thatallows progressive HR managers to informthemselves and compare their ownpractices with those of otherorganizations. At IMD, we are alsobuilding and constantly updating a unique

database of HR practices that gives anoverview of developments within theworld's largest organizations today.

Step 8: Review the outcomes of theanalysis.

Look for performance gaps and discussthe policy implications with the maincustomers. Gain their commitment forimplementing the necessaryimprovements. This implies that thoseultimately responsible for implementingthe changes, (1) acknowledge the needfor improving HR policies and practices,(2) understand the differences betweencurrent HR practices and what is desired,and (3) accept and retain full ownership ofthe practical steps toward implementation.

Step 9: Implement the agreedimprovements and measure the progress

against pre-set targets.

The metrics selected should be the agreedupon true indicators of the HR function'sperformance and compare the results withindustry averages, competitors, 'bestpractice' firms, and/or with set targets orprevious performance rat ings. As shownin Figure 8, it is usually feasible to producerelevant ratios of HR performance data.

The most likely ratios should cover unitcosts and appropriate customersatisfaction measures. I f measurementsare not clear or difficult to obtain, twoalternatives are possible (Camp, 1989).One, the process of determiningappropriate HR performance measuresbecomes a key step in the benchmarkingprocess itself. Or, there are approximatemeasures available from other functionalareas that give an indication of how theHR function is performing. For example,lead-times may be used as a proxy for the

effectiveness of a new delivery-orientedincentive scheme.

LI NKI NG KEY HR PERFORMANCEI NDI CATORS W I TH ORGANI SATI ONALEFFECTI VENESS

Obviously, many managers and investorsare interested in knowing if a certainactivity or practice can serve as a leadingindicator or determinant of financialperformance. When such an indicatorgoes up or down, an organisation can take

actions to minimise or maximise theimpact by changing the relevant practice.


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Consequently, over the past few years, anumber of studies have tried to linkspecific HR practices and organisationaleffectiveness in terms of financialperformance, productivity, product quality,innovation, and so on. One such study

was conducted by Kravetz (1988). In abook entitled The Human ResourcesRevolution Kravetz looked for thecorrelation between financial results andwhat he termed human resourcesprogressiveness (HRP) in 150 UScompanies. HRP was defined as theextent to which an organisation is:

...operating in concert with the

current and future workplace,rather than experimenting with

radical programs or spendingexorbitant amounts of money on

human resources programs. Acompany high in HRP understands

the critical importance of people tothe bottom line and operates withthis in mind. (1988: 36)

A firm's score on the HRP index wasmeasured through a fifty-itemquestionnaire pertaining to HR practicesand policies in the following nine areas:

1. Degree of openness of communication

2. Degree of emphasis on people in thecompany culture

3. Degree to which management isparticipative

4. Emphasis on creativity and excellencein the workplace

5. Extensiveness of career developmentand training

6. Effectiveness in maximising employeejob satisfaction

7. Degree of recognition and reward forgood performance

8. Usage of flexitime and part-timeemployment

9. Degree of decentralisation andflattened management hierarchy.

The results showed that human resourceprogressiveness in these nine areas wassignificantly correlated with financialsuccess over a five year period. In

particular, Kravetz concluded that highlyprogressive companies enjoyed

significantly higher sales growth, profitmargins, equity growth and earnings pershare growth than the less progressiveones. For instance, the annualized salesgrowth (five year trend) of high HRPcompanies was 17.5 percent, compared to

10.7 percent for low HRP companies; andthe annualized profit growth of high HRPfirms was 10.8 percent, compared to only2.6 percent for those low in HRP.

In a second study on the same subjectFrederick Schuster (1986) examined therelationship between human resourcemanagement performance as measured bythe Human Resources Index (HRI) andorganisational effectiveness. His intentwas to lay the foundation for thedevelopment of a reliable and practicalinstrument, which could be used as abenchmarking tool by companiesrepresenting a wide range of industriesand sizes. The HRI survey contained 64measures of human resource practices, sixof which were the focus of this research:

1. The assessment centre approach topersonnel selection

2. Flexible or cafeteria approach inreward systems

3. Productivity bonus plans4. Goal-oriented performance appraisal

5. Alternat ive work schedules

6. Organisational development

These six practices were chosen becausethey were though to be related to thegeneral management philosophy whichPeters and Waterman (1982) termedattention to employee needs, and couldtherefore serve as an operationaldefinition of this philosophy. Schuster's

hypothesis and findings were consistentwith Kravetz in that he expected andfound a small but meaningful relationshipbetween the six HR practices and financialperformance (as measured by return onequity and total return to investors). Inparticular, the total utility of the six HRpractices for the average Fortune 1000company was estimated at $7.5 million peryear.

These two studies represent a smallsample of the work currently being donein this field. Their formulat ions andfindings have helped to explore the link


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between HR practices and overallorganisational effectiveness. Of course, itcan be argued that better financialperformance leads to effective humanresource practices (rather than thereverse). While this causal effect is

possible, at this point the data indicatethat the two types of performance gohand in hand. As Kravetz (1988: 43)argues,

It is difficult to envision why acompany would change itsmanagement style, have moreemployees work out of their

homes, or change the company

culture to one strongly orientedtoward people. Many companies,

if they are enjoying great financialsuccess, are not likely to change,

figuring that you shouldn't fixthings that don't need fixing. They

retain their same successfulpractices until these need to beabandoned to address a static or

declining market position. Successis not likely to breed this type of

change.

PRESCRI PTI ONS FOR ACTI ON

This final section of the chapter provides

guidelines for installing an effective HRmeasurement system and is an attempt tooffer practical guidance rather than facileprescriptions, since cookbook approachesto the matter are inappropriate andineffective. Based on the lessons we andothers have learned, HR managers shouldconsider carefully the following factorswhen establishing a system fordetermining the effectiveness of theiractivities or departments.

First, it is important to recognise that the

underlying purpose of a performancemanagement system is change andorganizational change of any type requiresthe active support, preferablyinvolvement, of topmost management. Ata minimum, HR managers should have (a)a clear understanding of what thecompany's principal strategic objectivesare, (b) which proposed or actual HRpractices and policies contribute to theirachievement, and in what ways, and (c)the measures that are or will be linked to

these HR policies or practices.

Change programs require clarity ofpurpose and a good measure of initialmomentum in order to achieve success. I tis therefore advantageous to focus initialefforts on those HR practices which can beaffected by individuals who will be subject

to the measurement system. The leastdesirable course of action is to installmonitoring activities that cannot beinfluenced by the persons involved. Bythis token, corporate training anddevelopment costs should not be allocatedto division managers if these individualshave no control over training anddevelopment activities in their units.

The performance management systems'measurements should be robust. By thiswe mean that no single measure perfectlycaptures all aspects of HR performance,even allowing for time lags (Eccles andNohria, 1992), and an array of differentqualitative and quantitative performancemeasures increases the dimensions alongwhich change can be guided. Thisprinciple of triangulationCthe use ofmultiple measures to bring a target issueor event under controlCalso permitsmanagers to gain a broader sense of theHR practices that contribute to companygoals, since the likelihood is greater that

one measure among the set will relateeffectively to their issues and concerns.

HR managers can avoid the measurementtrap by monitoring key performanceindicators, and only key performanceindicators. The measurement trap springsshut when HR managers are busilyoccupied monitoring sundry measureswhich have little impact in theorganization. As one counter to this wefind it helpful to encourage an open,questioning, even dissenting work culture

which challenges the last best idea setforth. Ideally, line and HR managers willfeel free to challenge traditional measures(e.g., employee turnover and direct labourcosts) since in today's rapidly changingworld, the indicators in use may beirrelevant and focusing attention on thewrong activities (Hora and Schiller, 1991).

It should go without saying the linemanagers need to be actively involvedwhen developing and monitoring an HRperformance measurement system; inpractice, however, it becomes convenientand easy for HR managers to stay within


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Page 12 of 20


their function and work with managers oftheir own stripe. One of the great pitfallsof HR performance measurement systemsis opened when HR managers begin arguethat their actions are undiscussable solong as their performance targets are met.

For HR measures to have real impact inthe organization, dialogue about themeaning and relevance of programs,activities and measures must remain open.Some organizations have enforced thisdialogue through the use of a cross-functional team which monitors thesystem and ensures that relevantmeasures are being used and understood.

Communication is the sine qua non ofeffective change efforts. In thisconnection HR managers must beprepared to regularly communicate, with aproactive attitude, the purpose andspecifics of the performance managementsystem to all involved employees, and beprepared to clarify repeatedly themeasures in use. The assumpt ion thatmanagers and employees understand oraccept the new system is dangerous andconstitutes a serious design flaw.

Analyze the data regularly, at a ratecompatible with their impact on decision-

making, and draw appropriate conclusionsby comparing the key performanceindicators over time. These comparisonsmay be made between business units,and/or against predetermined targets.Current benchmarking efforts assess theHR performance of business units againstcomparable units within the sameindustry, or against units andorganisations that are considered best inclass.

Finally, be ready to change the

measurement system if a particularindicator fails to achieve business goals, orif the costs of collecting and analysing thedata exceed the potential benefits of theiruse. As Eccles and Nohria (1992) pointout, the discipline needed to discontinueirrelevant performance measures shouldnot be underestimated. The benefit ofkeeping the same measures for a periodof time lies in the historical comparabilitythus afforded, and perhaps in longitudinalevaluation of the impact anticipated by theHR practice. The risk is that att ractivenew measures can always be found, and

unless some existing ones are eliminatedcreeping numeration will be the result.


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Page 13 of 20Hlltrop, J. & Despres, C. 1995. Benchmarking HR Practices: Approaches, r ationales and prescriptions f or action. Chapter 9 inD.E. Hussey (Ed.), Rethinking Strategic Management: Ways to Impr ove Competitive Performance. Wiley (1995), pp. 197 - 220.

Figure 1

Figure 2EFQM Performance Criteria

Leadership...how managers take positive steps to:1. communicate with staff2. give and receive training3. assess the awareness of Total Quality4. establish and participate in joint improvement teams with customers and suppliers

People Management...how the organization releases the full potential of its people by:1. integrating corporate and HR strategy2. assessing the match between peoples' skills and organizational needs3. establishing and implementing training programs4. achieving effective top-down and bottom-up communication

Policy and Strategy...how the organizations' policies:1. reflect the fundamentals of Total Quality2. test, improve and align business plans with desired direction3. are communicated and instilled in the organization4. account for feedback from internal and external feedback

Resources...how resources are deployed in support of strategy, including:1. financial2. informational3. technological4. material


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Figure 3United Technologies

Human Resources Practices Survey

Always: 1 Usually: 2 Sometimes: 3 Rarely: 4

To what extent does the Human Resource organization ...___ 1. Understand business direction and what management is trying to accomplish?___ 2. Stand up for the human resource perspective on business issues?___ 3. Staff the HR organization with competent professionals?___ 4. Participate actively in the business planning process?

___ 5. Take appropriate risks?___ 6. Respond in a t imely manner?___ 7. Develop human resource objectives in the context of business priorit ies?___ 8. Do its homework?___ 9. Provide competent advice and support?___ 10. Explore alternative solutions to problems?___ 11. Find ways to balance its functional interests with other needs of the business?___ 12. React quickly to changes in the needs of the business?___ 13. Anticipate business problems?___ 14. Help more than hinder the organization in attaining its business objectives?___ 15. Have people seek its advice?___ 16. Set high standards for evaluating its own effectiveness?

___ 17. Bring a competitive global perspective to the HR function?___ 18. Design solutions to business problems that meet the needs of the business?


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Figure 4

Elements of White-Collar Productivity(Janssen Pharmaceutica)

Effectiveness1. A strong, clear connection between corporate strategy and work activities

Organization1. Overlap / duplication2. Fragmentation3. Inappropriate groupings or functions or alignments of functions4. Inefficient reporting relationships

5. Excessive management layers6. Clarity of mission7. Appropriateness of job design

Motivation1. Turnover2. Performance feedback3. Contribution visibility and recognition4. Group identity5. Teamwork6. Management style7. Career planning and development

8. Training9. Communication

Process1. Value-added activit ies, operations, and steps2. Scheduling and backlog control3. Degree of automation4. Control and transfer points


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Figure 5

White-Collar Performance Measures(Janssen Pharmaceutica)

Productivity1. Units of output / Number of employees2. Units of output / Cost to produce3. Value-added work operations / Non-value-added operations4. Costs to manage / Number of subordinates

Throughput Time1. Time required to process work or complete work products

Quality1. Number of errors / Unit of time2. Error-Free work product transactions / Work product transactions with errors

Others1. Deadline accomplishments percentage2. Customer satisfaction index3. Degree of employee commitment / involvement (organizational climate)

Figure 6

Measuring the Costs of Exit I nterviews

Total cost of exit interviews during a givenperiod = costs of interviewer and interviewee time.

1 Cost of interviewer time = (t ime required prior to interview + time required for interview)X (interviewer's pay rate per period) X (number of turnovers per period)

2 Cost of terminating employee's time = (t ime required for the interview) X (weightedaverage pay rate for terminating employees) X (number of turnovers per period)


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Figure 7

Key HR Performance I ndicators

Recruitment and Selection1. Number of long-term vacancies (over 6 months) / total number of jobs2. Average length of time to fill vacancies3. Proportion of vacancies filled internally through promotion, demotion or lateralmovements of personnel4. Average time spent in a job or function per employee

Training and Development 1. Number of trainee days / number of employees

2. Total training budget / total employment expenditure

Compensation and Rewards1. Total compensation cost / total revenues2. Basic salary / total remuneration3. Number of salary grades / employees

Employee Relat ions1. Number of resignations / Total headcount per year2. Average length of service per employee3. Rate of absenteeism4. Average length of absence per employee

5. Number of supervisors and managers per employee


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Figure 8

A Three- Tier Approach forAssessing Performance in the HR Function

Phase 1: Gather Fundamental Data 1. Specify current activities in the HR department2. Identify the structure of the HR department3. Determine the costs of providing HR services in seven key functional areas:

a. staffingb. developmentc. employee relationsd. organizational evaluation

e. reward systemsf. administrationg. health and safety

4. Determine HR contribution to the "bottom line"

Phase I I : Assess HR Service Delivery1. Determine internal clients' needs forservices in each of the key functional areas2. Determine internal clients' reactions to services delivered in each of the sevenfunctional areas

Phase I I I : Establish Standards

1. Set acceptable standards in each of the seven functional areas2. Audit HR performance in each functional area over time, and make necessaryadjustments


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