Remodeling HR at Home Depot

Home Depot’s announcement last April that it was slicing 1,200 human resource positions—more than 50 percent of its HR staff—by eliminating HR managers from each of its nearly 1,970 U.S. stores sent chills through the HR community.

With the housing market in the doldrums and the economy teetering on recession, the world-leading hardware and home improvement retailer had to make tough decisions. Ten percent of the 5,000 staffers at headquarters in Atlanta had already been let go.

But this broadside at human resources was different and, to some observers, counterintuitive. With more than 330,000 associates and 2,254 stores worldwide, Home Depot continues to face daunting challenges in retention and gaps in worker training and expertise. Its customer service ratings significantly lag those of competitors such as Lowe’s. In addition, Chief Executive Officer Frank Blake must heal wounds remaining from the cultural upheaval wrought by his predecessor Robert Nardelli.

Seven years ago, the company had assigned HR managers to each store to work as business partners with store managers. Now, its leaders have concluded that an HR presence is a luxury they can no longer afford. How could Home Depot expect to address its human capital issues by decimating the HR ranks, eliminating the professionals trained to focus on them?

Where were the HR executives when all this came down? Were they outside the loop while others determined their fate? It turns out they were initiators of and prime advocates for the plan.

Partnership carries responsibilities, and, in this case, HR executives were resolute that they could "take one for the team." They are now convinced they can run HR companywide equally well or better with their streamlined organization, freeing salaries for more sales associates. Today at Home Depot, HR professionals are strategic business partners, sharing decision-making at the highest level.

The Nardelli Regime

No doubt, HR professionals at the company would not be prime movers in shaping their destiny and the future direction of Home Depot had it not been for Nardelli, now CEO at Chrysler. Their ascension began in 2001 when the board put outsider Nardelli in command. It cost $39.7 million in annual salary to snare him from General Electric (GE) after he fell short in the competition to replace GE’s outgoing CEO Jack Welch.

The Nardelli era was anything but dull. In his seven-year tenure, he grew the company, adding stores in the U.S., Mexico, Canada and China. He committed to establishing a wholesale business that some observers thought was drawing attention and resources away from Home Depot’s fundamental retail operations.

Along the way, he wreaked havoc with the philosophy that founders Arthur Blank and Bernie Marcus espoused in 1979. Press-the-flesh retailers who understood the importance of customers and the associates that serve them, they advocated bottom-up, consultative management centered on customers and store employees. They promoted entrepreneurism and creativity in the ranks and offered financial rewards and recognition for sales performance, even stock benefits. They portrayed their philosophy as an inverted pyramid, with customers at the top followed by store employees and the CEO at the bottom.

Home Depot Ownership: Publicly traded on New York Stock Exchange. Symbol HD. 2007 annual revenue: $77 billion. Top managers: Frank Blake, chief executive officer; Tim Crow, executive vice president of HR. Employees: 330,000. Locations: 2,254 worldwide, 206 warehouses and distribution centers. Connections:www.homedepot.com.

Nardelli turned the pyramid upside down. Imposing rigorous controls and metrics, he focused on containing costs and cutting or reducing benefits associates had come to expect. He called the shots, shipping directives through an authoritarian command-and-control structure. "Bob was like the stepfather that made you be a disciplined teenager," says Teresa Duren, vice president for Home Depot’s 780-store Southern Division. "We needed some discipline and process; it made us stronger."

Store Managers: Lords of the Manor

No question, Nardelli inherited an enterprise in dire need of order, direction and discipline. Blank and Marcus built the Home Depot empire by empowering store managers. Typically, store managers employ 150 to 300 associates and oversee "boxes" that each average $38 million in annual revenue. They enjoyed exceptional autonomy as long as they reached revenue targets. In effect, they did their own HR work, relying on district HR managers responsible for supporting as many as 30 stores.

"We didn’t have much of an HR established practice," observes Duren, who has been with the company since 1996.

Nardelli could see, however, that there were potential problems and liabilities that could be addressed only by developing better systems and controls. With his exposure to HR at General Electric—where human capital is a top priority—Nardelli knew Home Depot’s laissez-faire approach was not sustainable in the long run.

Nardelli recruited Dennis Donovan from General Electric to be executive vice president for HR. Donovan came aboard with a compensation package unparalleled for HR executives—and influence to match. Nardelli’s right-hand man, he ushered HR into the C-suite, giving it an active voice in strategic management. "These were great times to be in HR," Duren recalls.

Lacking retail experience himself, Donovan assembled a core of senior HR executives with strong backgrounds in retailing, establishing credentials that the company now seeks in all HR appointments. "For example, the fact that Mike Buskey, our senior vice president of HR, U.S. store operations, knows the business—seasonal, inventory, hurricanes, underperforming [stores]—is what makes him so effective," explains Paul Raines, who was executive vice president, U.S. stores, before leaving Home Depot this August .

Buskey oversees HR in Home Depot’s 1,964 U.S. stores.Raines likes Buskey’s assertiveness. "He’s an invite-yourself-to-the-party kind of executive," Raines says. "The key to success in HR is you’ve got to get in the foxhole with the other people. That’s what it takes."

The line experience makes executives more relevant, agrees Carole Pietak, vice president for the 480-store Western Division. "You have to understand the culture of retail—the hours, the high pace—and be able to juggle."

Human Resources to the Fore

Donovan re-engineered HR operations, installed an extensive array of metrics and moved quickly to create a full-time, exempt HR presence in each store. "You don’t want 1,300 store managers hiring and firing on their own," Duren says. Ideally, candidates for the position would have at least three years of experience in HR and experience in a retailing area similar to Home Depot’s.

And Donovan expected that they would develop into true business partners, providing important perspective for each store manager. "If a particular department isn’t doing well, the merchant will look at the merchandise, the operator will look at the execution. It’s up to the HR person to focus on staffing—the numbers, the quality, ask if we’re scheduling to the peak times. Are we getting bogged down in transactional activities? Do we have the product knowledge we need?" Pietak says.

In January 2006, Nardelli resigned to mixed reviews. He had doubled sales and increased earnings per share, and the wholesale business was showing a profit. But the stock price remained flat, disappointing shareholders and Wall Street. He had become a lightning rod for critics, including shareholder activists, who objected to his compensation package.

One month later, Donovan bowed out, walking away with a cash settlement of $2.96 million and stock valued at

$17 million but leaving his HR blueprint and executive team as his legacy.

Blake Changes Course

Home Depot’s board tapped Vice Chairman Blake to succeed Nardelli. A lawyer, former diplomat and assistant U.S. secretary of energy, Blake also had come from General Electric and had no prior retail experience.

Early on, it became clear that Blake was cut from a different cloth than Nardelli. He is open, consultative and accessible. He listens and learns. "We’re back to our old-school approach preached by co-founder Bernie Marcus," says Raines, interviewed before leaving Home Depot. "All of us are out there. Never go 48 hours without being on the floor of a store."

According to Duren, "Blake is reaffirming our focus on our core values. It’s been a welcome message. The culture has shifted back to realizing we are a retail company that needs to focus on customers."

In February 2007, Blake, staying in-house, promoted Tim Crow as executive vice president of HR to replace Donovan. Crow had been vice president of organization, talent and performance systems. Donovan had hired him in 2002 from KMart, where he was senior vice president for HR.

Crow sits on Blake’s six-person Executive Leadership Team, meets alone with Blake daily and travels with him on store visits. He staffs the board of director’s Leadership Development & Compensation Committee. "I’m involved with everything," he says.

The contrast between Crow’s leadership style and his predecessor’s is as striking as the differences between Nardelli and Blake. Whereas Donovan had no prior retail experience and rarely strayed from the Atlanta headquarters, Crow, a seasoned retailer, lives the business and constantly rubs elbows with associates and managers.

With Crow, "The pyramid is upside down again; we’re back to being associate- and customer-centered," says Leslie Joyce, vice president and chief learning officer. "Under Dennis, we decided what was best for stores. Now it’s more a matter of us asking questions and responding to their needs."

With Crow pushing the agenda, benefits Nardelli took away to cut costs came back and new practices have been adopted to enhance recognition and a sense of ownership and pride, Buskey says. "Even though the economy is tough, we’re doubling the amount of money we give our supervisors when they make their revenue targets. Last year, the average associate got $200" when stores made their targets. "We’ve given our assistant store managers a restricted stock grant when the rest of the world is going the other way."

From the Field Mike Leith, PHR, formerly an HR manager at a Home Depot store in Beaverton, Ore., emerged from the reorganization as a district HR manager for associate relations in District 24. When the news filtered down, he was “shocked.” Still, he understood the rationale. Previously, Leith enjoyed the relationship he had with his store manager and being part of a leadership team. He likes his new job even more. “I get more perspective, a more global view of what’s going on. Your store can be isolated. I’m touching more, and it feels good. What’s great about the new role is that if you’re good at what you can do, you can do it for several managers.” Leith’s HR team covers 10 stores around Portland, Ore. “It’s great to be on a team that’s focused on HR—partnering with the store managers to drive the business,” he says. “This structure has the potential to unlock a lot of energy. Managers and associates may not have an interaction with HR every day, but when they do, it will be positive.” Leith says some store managers were worried about losing their in-store HR manager but are adjusting. “We’ve been very visible in the stores, and they seem pleased.” He spends a half day each week in his “home store office.” Otherwise, he’s on the road. “My laptop and BlackBerry are my good friends.” Celia Scanlon, now a district manager in Fairfax County, Va., says she’s still helping store managers make key decisions, but now she’s helping six instead of one. Constantly on the move, she uses her car as an office. “I have three HR partners who help me out with reviews, performance management, coaching and leadership skills,” she says.

Tough Times Continue

But while the change in attitude and approach to customers has received praise from some critics, Home Depot’s stock and financials continue to falter, exacerbated by the poor economy and housing crisis. When Blake took control in January 2007, a share of stock sold for $39. By this summer, it was trading in the $20s. The company reported that its net earnings for the first half of fiscal 2008 (through Aug. 3) plunged 41 percent compared to the first half of 2007.

Also, customer satisfaction, which in retailing tends to correlate with stock performance, is below par. Home Depot’s score of 67 in the fourth quarter of 2007 put it dead last in the American Customer Satisfaction Index within the grouping that includes Circuit City, Best Buy, Sam’s Club and Lowe’s.

"They’re getting the equivalent of a C-," says Claes G. Fornell, a professor and head of the index at the University of Michigan in Ann Arbor. Lowe’s, in comparison, earned a rating of 75 for the same quarter.

Human Resources Steps Up

As a result, Blake faced a vexing problem: How could he improve customer service, boost staff morale and revitalize Home Depot’s culture while revenues were declining? In November 2007, he announced an initiative called "Aprons on the Floor," aimed at spending $180 million to increase the number and quality of associates in each store. He challenged his senior leadership team to come up with cost-cutting strategies that would raise the money. "This is about an environment forcing change on an organization and people rallying around a back-to-basics message and facing tough decisions," Raines says.

Crow took the challenge to his team. "We began looking at ways to contribute and began to explore ways to provide HR services for less money," says Pietak. Donovan’s HR store managers (HRMs) had been in place for seven years. It was time to take a closer look at how they were faring.

On paper, HRMs’ portfolios included recruitment, staffing, training, career development, associate relations and community relations. Celia Scanlon, now a district HR manager in Fairfax County, Va., describes her former role as HRM at a store in Dale City, Va., as doing everything from A to Z: "I was the right-hand person to the manager. We did everything together from hiring, interviewing, job fairs, performance management, coaching, counseling, training and helping managers write up discipline notes." Sounds good. But those relationships created some issues. Among them:

Dual reporting. "You had a dotted line to a district human resource manager whose portfolio covered up to

30 stores and a solid line to the store manager who wrote your review," recalls Ismay Czarniecki, an HRM in Wappingers Falls, N.Y., from 2001-06, who has also worked in HR at Target and Lowe’s. She says store managers wanted to keep any compliance violations or employee relations issues in-house. "Once you realize how things work, if you want to survive, you go native, giving your loyalty to your store manager."

Keeping accurate records of associate training was especially problematic. Store managers were supposed to allocate time for associates to train, but training took them off the selling floor, says George Marron, one of the first HRM hires in Chandler, Ariz., and now professor of HR management at Marist College in Poughkeepsie, N.Y. "Headquarters staff was always wondering why their programs didn’t roll out on time; the store managers wouldn’t allow us to run them because they kept aprons off the floor," he says.

High attrition and culture clash. Many HRMs had difficulty adjusting to Home Depot’s rough-and-tumble environment. "It’s a demanding position," Buskey says. "This is the toughest retail you’ll see; the jobs are not easy, and the people work hard. We’re not moving pillows and sheets; these are warehouses—drafty and cold."

Czarniecki adds, "They hired professional HR people who expected they’d have a secretary and an office, and it just wasn’t so. Walking into Home Depot, if you see something that needs to be done, you do it. If you don’t know how it’s done, you find out. That’s the culture. … Some people fit, and some did not."

Taxing workload. Some HRMs were working as many as 55 hours each week. "They wanted us to find out what people think, but you can’t get people to talk unless they trust you, and they won’t trust you with harassment and discrimination complaints, for example, unless they know you," Czarniecki says. "You get to know the players by being there—that means you have to be there sometimes until closing, at nights when there are evening crews and on weekends."

It was hard to stay in control and head off problems, recalls Marron. "Every time you turned around, an assistant department manager was saying the wrong thing. There were safety issues and complaints. It went on and on."

Mountains of mundane. HRMs were spending too much time on routine, daily paperwork. "We expected them to be thinking into the future while the store manager worries about the here and now. But it wasn’t happening," says

Pietak. "They were engaged in the transactional stuff."

The Decision Is Made

In consultation with his senior HR team, Crow weighed his options, crafted the reorganization proposal, and presented it to Blake and the executive leadership team. Crow believed he could revamp the HR operation and plow the savings into the stores. After the April 1 announcement, changes were implemented May 1.

"It was my decision; there was no pressure from Frank Blake or other non-HR executives," Crow says emphatically. His rationale: Transaction processing in stores was inefficient; centralizing it would "free HR people to become business partners." And, he concludes, "We’d be better off with a district team that’s more strategic."

Under the reorganization, 230 HR district teams oversee six to 10 stores. District managers have three HR generalists (DHRMs) reporting to them. The generalists each carry responsibility for a function—staffing and development, associate relations, and performance management. "These jobs, without the transactional baggage, are better jobs from an HR perspective," Crow says. "And the store managers haven’t lost an HR manager; they’ve gained three."

Crow expects he’ll receive more accurate and timely feedback: "With one HR person in a store, you might miss what’s going on. Now, I have four sets of eyes and ears rotating through each store."

Releasing HR professionals from reporting to store managers may be an improvement, Czarniecki says. "There are so many legal violations in terms of safety, security and employee relations that HR needs to be removed from the stores in order to approach the situation as a consultant who won’t be influenced by not getting a good review."

The remaining HR transactional activities—like putting people on and off the payroll and transferring them between departments—have been insourced to a 220-person HR phone-access services center in Atlanta staffed by customer service representatives.

Potential savings are substantial: The company is striving to add three associates to the floor of each store by year’s end. The savings from 1,200 HR positions should provide about two-thirds of the resources. "Two full-time associates could replace an HR person," Czarniecki projects.

Some observers question whether the absence of HR on-site in stores will end up costing more in legal and compliance mistakes than the revenue generated by new sales associates.

Based on his experience as an HRM in Phoenix, Marron, who also was a longtime manager at CVS, is wary because the reorganization appears to place more HR responsibilities on store managers. "Unless they’ve made an improvement in the quality of the management since I left in 2004, I’d be concerned," he says. "The managers in the stores were so poorly trained, had so little understanding about dealing with people, it was scary."

Buskey voices confidence that store managers are accomplished enough to function without HR managers continuously by their side. Although store managers are rated primarily by their revenue numbers, he says they’re qualified to handle human capital issues. "Our managers have learned how to integrate the HR functions into their styles," he says.

"If I felt there was a risk that managers would cut corners, I wouldn’t have proposed the change," Crow insists.

The fired HRMs received two months of severance pay and were offered an opportunity to apply for the new district positions or other openings. Many were successful. "We’ve whittled the number of displaced workers down to about 800, but still we’ve lost some really good people," Buskey says.

So far, the reorganization looks like a win-win for the company and HR. "I’ve been doing round tables with district HR managers and the three who support them," Crow says. "They love it. They say, ‘This is a fun job. I can make an impact on the business more than before.’ And the store managers like it as well. They’ve gone from having one HR partner to a team of four."

The service center staffed by customer service people and former store associates is meeting expectations. "We have daily metrics to monitor the call volume, how the calls are being handled, as well as feedback from store managers and district HR managers," Duren says.

How Home Depot Compares

Some retailers, such as Target and Lowe’s, continue to find that a full-time HR presence at the store level remains important. Others, such as Sears, do not.

Ed Lawler, professor of business and director of the Center for Effective Organizations at the University of Southern California in Los Angeles, says that while stand-alone businesses the size of a typical Home Depot store would have an HR person, many retail chains get by with a manager assigned to handle administration and scheduling. Lawler says moving the HRMs out should not affect HR’s strategy role, explaining "There are no strategy issues in the stores—administrative, business and compliance issues are front and center."

In moving routine HR transactions to a service center, Home Depot is in step with many large retailers who outsource or insource this work. Target and Wal-Mart, for example, have service centers. This trend is likely to continue in retailing, suggesting that the number of transactional HR jobs will continue to decline significantly but that remaining jobs will be more influential and will require greater sophistication and business acumen.

Ideally, district HR team jobs at Home Depot will be these kinds of jobs. DHRMs and their managers should have greater opportunities to distinguish themselves and develop leadership skills. "You’ll make more decisions in a day than you’ll make in a week elsewhere," says Tim Hourigan, vice president of performance management. "If you don’t like being involved with the business and being counted on to make tough decisions, this is not the place for you."

In the end, metrics will make or break the case for the reorganization. Crow is looking for growth in sales and improved reports from surveys that ask customers if they would recommend Home Depot to others and if they found associates attentive and responsive. Buskey will be providing data from his HR scorecard that will help round out the picture. "We have four buckets to measure: staffing, learning, performance management and associate relations," he says.

Meanwhile, despite the savings plowed back into sales, there are lingering doubts about the move. "We didn’t want to take the HRMs out of the stores; we knew we were giving something up," Raines concedes. "Do we gain back more through this reinvestment in associates, and will we recover some of what we’ve sacrificed in the stores with the district-level teams?"

Time will tell.

The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.