Management 5984 Strategic Human Resource Management Spring, 2006

Verizon Communications, Inc.: Implementing a Human Resources Balanced Scorecard

Overview

This study discusses the four Perspectives specified in Kaplans and Nortons Balanced Scorecard framework, focusing on their implementation at GTE4). Subsequently the efficiency of Garret Walkers and Randall MacDonalds internal communication strategy is evaluated and in the final chapter a summarizing conclusion is provided.

Introduction

In 1996, J. Randall MacDonald, Executive Vice President of Human Resources at the GTE Corporation was facing the challenge to create an HR strategy supporting GTE's workforce through a major business transformation. Moreover Charles R. Lee, GTEs CEO wanted to know what the company was actually getting back for the money spent on various HR related activities.

The main problems for GTE and other American based telecommunication companies were high employee and customer turnover rates and the declining quality of customer service. A tight labor market made it difficult to find qualified people. There was no system in place at GTE to measure employees performance and MacDonald realized that a quantitative model was needed, showing whether the HR departments activities contributed to the companys financial goals. Balanced Scorecard, a conceptual framework to measure a companys performance, utilizing financial and non-financial measures was selected as a method to quantify intangible realities at GTE.

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The Balanced Scorecard Perspectives

One of the main challenges for GTEs Planning, Measurement and Analysis (PMA) group, the project team responsible for the implementation of Balanced Scorecard, was defining the right measures to evaluate the performance of GTEs human capital. Using feedback from the business presidents, the PMA group and the HR measurement core team defined 118 measures, organized into four Perspectives, (i) a strategic perspective, (ii) a customer perspective, (iii) an operations perspective and (iv) a financial perspective.

The Learning and Growth Perspective

The Four Perspectives implemented at GTE deviated from those defined by Kaplan and Norton4). Instead of using the Learning and Growth Perspective, intended to create a climate that would support organizational change, innovation and growth, a Strategic Perspective was selected. GTE thought that Learning and Growth would be embedded in all of the four perspectives. Interestingly, GTEs HR Balanced Scorecard and associated measures did not provide any indication that continuous learning and the creation of an environment that fosters growth and organizational change were actually embedded in any of the four perspectives. Moreover, the case provided no evidence that organizational or cultural change accompanied the implementation of Balanced Scorecard at GTE.

The Four Perspectives defined by GTE HR should have encouraged Learning and Growth and the creation of a climate of action, introducing the cultural shifts needed to

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motivate, empower and align the workforce behind GTEs attempt to adapt to the changed business environment. The degree of readiness for a culture of Learning and Growth is reflected in the willingness of a companys employees to improve and change the processes, followed to perform daily work routines. Measures to evaluate the workforces readiness should have been the number of proposals, submitted by GTE employees suggesting work flow improvements, and also the number of proposals actually implemented.

The Customer Perspective

Kaplan and Norton defined the Customer Perspective as a strategy for creating value and differentiation from the perspective of the customer. For example Fannie Maes Operations and Corporate Service division (OCS), implementing Balanced Scorecard, had intense discussions about the Customer Perspective, primarily focusing on identifying who its customer actually was4). As an internal support organization OCS had internal customers. Nevertheless OCS decided to explicitly recognize how it provided value to external customers. The Customer Perspective selected at Fannie Mae consequently included internal and external customers4). In contrast, the Customer Perspective defined at GTE did not consider external customers but only focused on internal customers, that is, GTE employees. As a consequence the measures associated with GTEs Customer Perspective did not include any data reflecting the perspective of the companys external customer base, indicating that GTE HR was not interested in measuring the impact of HR activities towards the companys main, if not only revenue contributor.

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To better understand the value that implemented HR activities, focusing on call center staff provided to external customers, HR should have considered external customers in their Customer Perspective. Measures like illustrated in table-1 should have been introduced to evaluate the satisfaction of GTE customers with the support and help provided by call center employees.

Measures to quantify the quality of GTE customer support Percent of support calls escalated to support representatives supervisor (all calls are recorded and can be used as evidence). Percent of support calls where customers provide praise to support representative (all calls are recorded and can be used as evidence). Percent of support calls that are rated excellent (without the knowledge of the support representative, support calls are conducted by a 3d party, hired to evaluate the quality of GTEs customer support). Table 1 Measures to quantify the quality of GTEs customer support

For example understanding the relationship between the costs to improve call center employee workplaces and the percentage of GTE customers that escalated support calls to a supervisor would have helped HR to find out, whether the workplace improvement initiative provided value to GTE customers. In case there would have been a strong and negative correlation between these two measures, HR could have used this insight as a leverage to broaden the workplace improvement activity and could have proved to the CEO, what he was actually getting back for the money spent for this HR initiative.

The Financial Perspective

Regardless of conflicting views at GTE HR about whether a direct relationship between the performance of non-financial measures and financial outcomes could be

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established, Garret Walker and Randall Mac Donald thought that Balanced Scorecard would ultimately provide a reasonably close link to GTEs profitability.

Reducing employee turnover

In 1998, HR started an initiative to reduce the high employee turnover rate in the companys call centers. A subsequent calculation provided by HR demonstrated that the reduction of employee turnover by one percent saved the company $23.60 million. The costs for hiring and training were used as a base for this calculation. Mainly through exit interviews, a lagging indicator, HR found out that the number one factor for employees to leave the company was work environment related. As a response, the size of the cubicles that people worked in was increased and some of the computers were upgraded. Surprisingly, the cost savings calculated by HR did not consider the expenses for improving the work environment. A simple calculation approximates what these costs might have been. The base assumptions for our cost estimates are that the upgrade of one computer costs $2,000 and the enlargement of one cubicle costs $1,000. The cubicle enlargement costs include labor and material and the costs to purchase additional work space. Computers are upgraded for half of the workplaces that are enlarged.

1,000 Workplaces Computer upgrade Cubicle enlargement Total $1,000,000 $1,000,000 $2,000,000

5,000 Workplaces $5,000,000 $5,000,000 $10,000,000

10,000 Workplaces $10,000,000 $10,000,000 $20,000,000

Table 2 Sample calculation: Costs for improving employee workspace

As table-2 shows, the costs for improving workplaces are considerable and should not have been neglected. In case workplaces for 10,000 employees - roughly 10% of GTEs

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workforce - would have been upgraded, the expenses would have almost matched the cost savings calculated by GTE HR. The fact that these expenses were not included in the cost saving estimates demonstrated that GTE HR either tried to make the outcome of their activity look better than it actually was, or that HR was not familiar with finance related business aspects, or both.

Increasing shareholder value

The PMA group conducted an effort to establish linkage effects between HR related efforts and financial outcomes. This activity should demonstrate how improving an employee engagement index would lead to improvement in internal quality, which in turn would lead to improvements in customer service indices and ultimately to increases in market share and shareholder value. The associated GTE HR Linkage Model, meant to explain how HR initiatives contributed to shareholder value, and related measures like Total Shareholder Return could not describe the actual relationship between HR activities and shareholder value. Table-3 shows two measures that could have been linked to help understanding the relationship between HR activities focused on customer service employees and shareholder value.

Linkage between HR activities and share holder value Training costs per call center employees GTE customer turnover rate Table 3 Linkage proposal

Once data for the measures illustrated in table-3 would have been collected over a period of one year, regression analysis could have been used as a tool to evaluate the correlation between these two measures. In case of a strong and negative correlation, a

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subsequently conducted analysis would have shown, whether the extra profits gained by lowering the customer turnover rate were actually higher than the additional training costs for call center employees. If yes, GTE HR should have continued this activity and should have evaluated how the training quality could have been further improved. Otherwise this HR activity should have been reassessed and potentially stopped because it did not provide any measurable shareholder value. Communicating Balanced Scorecard results

The data for all the customer perspective measures came from employee opinion surveys, questioning one-twelfth of the employee population each month. The company was experiencing a 15% to 20% response rate for these monthly surveys. Considering that on average only 15 to 20 out of 100 employees responded it is questionable, whether the data used to model the Customer Perspective actually represented underlying realities. The low survey response rate also questions the success of the PMA groups communication strategy, considered as key to success. By sharing PbViews with more employees and not just with HR staff and the business presidents, the employee survey response rates could have been increased, because GTE employees would have better understood the reasons for HR to conduct these surveys.

The PbViews software was considered as appealing because it got one hundred hits a week. Taking into account that PbViews was provided to all 2000 HR employees this means that per work day 20 HR employees or 1 % of all HR employees, not counting the business presidents, used the PbViews software. A daily usage rate of 1% can not be considered as appealing. Instead it shows that even within the HR department the

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support for the Balanced Scorecard implementation was low. This is another indication that the business rationale for implementing Balanced Scorecards what poorly communicated inside GTE.

Cardinal Health implemented a highly successful and very effective communication program. Introducing Learning Maps, the company helped its employees to better understand the concepts of its workforce strategy3). The maps were simple and easy to understand, providing visual representations of concepts and ideas focusing on topics like (i) the rapidly changing market place, (ii) the companys response to the changed environment and (iii) how Cardinal Health created value for its shareholders3). GTE HR should have adopted the concept of Learning Maps to communicate the reasons for the implementation of Balance Scorecards to all employees. As a consequence, more workers would have understood the reasoning behind this HR initiative and broader support would have been ensured.

Conclusion

The implementation of Balanced Scorecards at GTE was capable to quantify the activities conducted by the HR department and was useable to measure the quality of HR services provided to GTE employees. However implemented measures and associated linkages were not sufficient to quantify the contribution of HR initiatives to share holders value. To foster broader adoption, the underlying rationale for the implementation of Balanced Scorecards should have been better communicated to all GTE employees, as suggested. The Telecommunications Act transformed the regulated world of protected markets and established profit margins into a turbulent and highly

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competitive business environment for the telecommunications giant. Organizational and foremost cultural change would have been required to successfully adapt to the new business climate. To create an environment that would have promoted change, innovation and continuous improvement, more aspects of the Learning and Growth Perspective should have been injected into GTEs linkage model.

Every journey begins with a first step. The implementation of Balanced Scorecards at GTE is considered a move in the right direction. Nevertheless, GTE HR had still a long way to go.

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References: 1. Verizon Communications, Inc.: Implementing a Human Resources balanced Scorecard, Jeremy Scott, 2001, [HBS 9-101-102] 2. Ulrich & Brockbank (2005). The HR Value Proposition 3. The Workforce Scorecard, Mark A. Huselid, Brian E. Becker, HBS Press, 2005, ISBN 1-59130-245-4 4. The Strategy Focused Organization How Balanced Scorecard companies thrive in the new business environment, Robert S. Kaplan, David P. Norton, 2001, HBS Press, ISBN: 1-57851-250-6 5. Designing and Implementing an HR Scorecard, Garrett Walker and J. Randall MacDonald, Human Resource Management, Winter 2001, 2001 John Wiley & Sons, Inc. 6. Fundamentals of Corporate Finance, Ross-Wester-Jordan, McGraw Hill, ISBN 0390-5799-7 7. Data Analysis and Decision Making, Albright, Winston, Zappe, Thomson Brooks/Cole 2003, ISBN 0-534-38367-X

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