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Companies with strong people management capabilities such as talent and leadership management and HR strategy and data-driven insights show significantly better financial performance than companies that are weaker in those areas, according to a new report released by the Boston Consulting Group (BCG) and the World Federation of People Management Associations (WFPMA).
The report titled
How to Set Up Great HR Functions: Connect, Prioritize, Impact is the latest in BCG’s annual Creating People Advantage series, which explores emerging trends in HR.
In this year’s survey, 3,507 respondents from 101 countries participated, representing a variety of industries. In addition, 64 HR and non-HR executives at leading companies around the world were interviewed.
The Society for Human Resource Management (SHRM) collaborated with BCG and WFPMA on data collection efforts in the U.S., China and India. In the U.S., 319 SHRM members completed the survey. In China, SHRM collected 71 responses. SHRM India worked with the National HRD Network in India to collect 112 responses.
“As part of SHRM’s ongoing involvement and commitment to the WFPMA, we’ve participated in the survey every two years in an effort to generate data worldwide, and this year we were able to assist in getting more countries into the mix,” said Howard Wallack, SHRM-SCP, vice president for global business development at SHRM. “The biannual results consistently show that there are more commonalities of HR and business challenges across regions that unite the global HR community than divide it—those being leadership, talent management, behavior and culture, HR and people strategy, and employee engagement,” he said.
Top Companies Master HR
The report’s authors segregated the top 100 and bottom 100 companies according to financial performance, as measured by average operating margins and average revenue changes during 2012-2013. “We found that companies that are stronger in people management have a correspondingly higher financial performance. In contrast, companies with the worst financial performance show a greater need for action across virtually all 27 HR subtopics,” the report said.
The authors also looked at the financial performances of
Fortune magazine’s “Best Companies to Work For” in 2014, and compared them with the S&P 500 Index. The 100 best companies—those with the strongest HR performance—outperformed the index by nearly 100 percentage points.
That finding, in addition to the survey results, led BCG to conclude that “great HR functions are critical differentiators that separate high-performing companies from the rest.”
Best-in-class HR functions were found to be set apart by an ability to connect with internal clients in order to link overall business strategy with HR strategy; being able to target investment toward the most urgent organizational priorities; and the ability to generate and report HR analytics, which provide the data for formulating strategic actions.
The areas of greatest difference between high performing and low-performing companies were found in HR internationalization, employee engagement, career models and competencies, and behavior and culture. High and low-performing companies also have different priorities in terms of future importance, with global HR, workforce analytics, recruiting strategy, and career models and competencies significantly more important to high performers than low performers.
“The report shows that while respondents consistently rated ‘HR internationalization’ of low future importance and generally low capability, it’s the single item showing the greatest capability gap between low performing and high-performing companies,” said Wallack. “To me that signals that HR practitioners, particularly in lower performing companies, still seriously underestimate the importance and effects of globalization for growth and strong financial performance.”
Strategic investment is one possible explanation for the superior HR achievement of high performers, according to the report. According to the results, high performing companies are “more strategic in the way they allocate their efforts; they take a systematic approach to improving capabilities; they are able to accurately distinguish high-priority topics from lower priorities; and they can then direct their resources accordingly.”
Low performers, by contrast, “have a more arbitrary relationship” between efforts invested and the importance of areas targeted for improvement, suggesting that lower performing organizations lack a rigorous process for improving HR management. “They struggle to implement governance that effectively targets their resources, and they lack the discipline to enforce alignment with need over time—a necessity for the kind of sustainable improvements that can ultimately impact the bottom line.”
Onus on HR
The survey results also found that data-driven, analytical HR departments that can quantitatively demonstrate supporting the organization’s strategic decisions are more likely to play a strategic role in those organizations.
The use of HR key performance indicators (KPIs) and steering tools such as simulations and forecasts is another differentiator between high and low performers, according to the report.
“HR functions that use people-related KPIs and steering tools to measure areas such as workforce productivity and personnel costs, and then analyze and communicate the results throughout the organization, have a greater strategic role in the organization,” the report said.
HR departments that neglect metrics and analytical techniques “simply cannot play a strategic role. Without a clear, data-driven understanding of how the organization is leveraging its human capital, HR leaders have little to contribute to big-picture strategic discussions.”
HR Areas in Need of Improvement
Both HR and non-HR respondents identified the same human capital areas, such as talent management and leadership, as the areas with the lowest current capabilities and the highest future importance. However, there were significant differences in perception. HR respondents rated capabilities more highly than non-HR respondents and did not consider any areas to be in urgent need of action. By contrast, non-HR respondents categorized nearly half of the 27 HR areas as urgently needing action. Over the past several years, talent management has been consistently rated as one of the HR areas in the greatest need of action.
In many organizations, the HR function is perceived as not meeting the expectations of its internal clients. “To address this misalignment, HR departments must better align with business units throughout the enterprise, to increase the impact of HR and generate stronger business performance,” the report said.
Across most countries surveyed, leadership was ranked as the most urgent HR area in need of action, and talent management was ranked the second most urgent. Beyond those results, however, there were considerable differences in the rankings of HR areas across international regions.
For example, behavior and culture, and employee engagement were all ranked as more urgent in the U.S. than they were in most other regions.
Companies in Brazil are primarily focused on talent management and on rewards and recognition, given the shortage of candidates for many positions and the need to motivate existing employees. “The challenge that we see is a huge lack of qualified professionals in Brazil, which is restraining Brazil’s growth and, consequently, the growth of Brazilian companies,” said Simone Cristina T. Salsa Nunes, a corporate strategic people development manager at Queiroz Galvão, a Brazilian conglomerate.
Talent management is also a challenge for Asian countries. According to Joseph Bataona, an HR director at Indofood Sukses Makmur, “Indonesia has a talent crisis at the national level—in almost every sector, including government. The shortage of talent is not being addressed in higher education, whereby graduates are not really ready for the professional world. There is also a shortage of vocational training. Companies really have to invest more in developing people, even at the entry level.”
For many European countries, demographic challenges, such as an aging labor pool, are compelling companies to adopt strategic workforce planning, which was ranked as far more urgent than the global average.
Roy Maurer is an online editor/manager for SHRM.
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