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Summary
The essay introduces the framework of the HR scorecard, which is modelled after the
Balanced Scorecard developed by Kaplan and Norton. The first few sections describe
the problems with traditional approaches to viewing HR’s role in business
performance. It explains why HR should be looked at as a strategic asset. The HR
architecture is then described in brief. It highlights the links between the HR scorecard
and the Balanced Scorecard. The nature of HR deliverables including performance
drivers and enablers is explained. The seven-step model explains the details of
implementing an HR Scorecard. The basic benefits of the HR Scorecard are
highlighted. Finally, to highlight the implementation details, a case study of the
Verizon HR scorecard is presented.
Introduction
The new economic paradigm is characterised by speed, innovation, quality and customer
satisfaction. The essence of the competitive advantage has shifted from tangible assets to
intangible ones. The focus is now on human capital and its effective alignment with the overall
strategy of organisations. This is a new age for Human Resources. The entire system of
measuring HR’s contribution to the organisation’s success as well as the architecture of the HR
system needs to change to reflect the demands of succeeding in the new economy. The HR
scorecard is a measurement as well as an evaluation system for redefining the role of HR as a
strategic partner. It is based on the Balanced Scorecard framework developed by Kaplan and
Norton and is set to revolutionise the way business perceives HR.
Based on various studies, it can be concluded that firms with more effective HR management
systems consistently outperform the competition. However, evidence that HR can contribute to a
firm’s success doesn’t mean it is now effectively contributing to success in business. It is a
challenge for managers to make HR a strategic asset. The HR scorecard is a lever that enables
them to do so. Implementing effective measurement systems for intangible assets is a very
difficult task and demands the existence of a unified framework to guide the HR managers. It is
this difficulty that has been the prime reason why managers tend to avoid dealing with intangible
assets as far as possible. In the process firms under-invest in their people and at times invest in
the wrong ways. Another difficulty is, managers cannot foresee the consequences of their
investments in intangible human assets in a well-defined measurable manner and they are not
willing to take the risk. Thus, the most effective way to change this mindset is obvious – to build
a framework just like the Balanced scorecard, which has sound measurement strategies and is
There is one reason for all of this. Human capital is an intangible asset and HR’s influence on
firm performance is difficult to measure. The standard elements of a firm’s resource architecture
that are measured include total compensation, employee turnover, cost per hire, percentage of
employees that undergo performance appraisals and percentage employee satisfaction. The
question to be asked is: Are these the measures crucial to implementing the firm’s strategy? This
is clearly not the case. Interesting attributes would include a committed workforce, competency
development programs, etc. But, it is very difficult to imagine measures for these quantities.
Hence, in the current state of HR there is a clear rift between what is measured and what needs to
be measured.
As mentioned in the introduction, the role of HR is no more just administrative. It has a much
broader, connected and strategic role to play. But, these statements must be substantiated. The
reasons why HR must be considered as a strategic asset must be highlighted. A strategic asset is
something difficult to trade or imitate. They are normally a set of scarce, special or even exotic
resources and capabilities that bestow a firm its competitive advantage. An unlikely paradox is
that the very intangibility of human capital that makes it so difficult to measure and evaluate, also
proves to be the one quality that makes it a strategic asset. Consider the difference between being
able to align employee efforts with the company’s strategic goals and instead having innovative
policies of performance appraisals. The latter is a policy. It is visible to competitors and can be
easily copied. The former on the other hand is a strategic move. It is not easy to imitate since it is
a very circumstantial effort, which depends on the specific firm, its goals and its people. This
proves to be a strategic asset i.e. something that competitors cannot see but that can be utilised to
gain a competitive advantage. It is thus important to align the HR strategy to the overall business
strategy signifying a top-down approach as opposed to a bottom-up approach where each division
such as marketing, HR etc. performs its standard individual roles without a clear outlook towards
the firm’s strategy.
Many firms have realised this and have made efforts to measure HR’s influence on the firm’s
performance. However, most of these approaches seem to focus on the individual, as it is believed
that if one can achieve an improvement in individual employee performance, it would
automatically enhance the performance of the organisation. The point that is missed is the fact
that organisational units, be it individuals or teams, do not function in isolation. The stress is on
streamlining and cooperatively working towards a common goal. The individualistic approach
once again does not show directly, in measurable values, the competitive advantage that can be
gained. Financial policies and numbers and plans on the other hand do. HR is neglected in the
process.
The focus of corporate strategy is to create sustained competitive advantage whereas that of HR
strategy is to maximise the contribution of HR towards the same goal. Thinking about HR’s
influence on the overall strategy of the company requires one to look at all aspects of the HR
architecture. The HR architecture describes the relationship of the HR function, the HR system
and the employee behaviour.
Basically, the firm needs to structure all the elements of its HR system in a way that supports a
high-performance workforce. However, systemic thinking implies stress on the interrelationships
of the HR system components and the link between HR and the larger strategy of the firm. The
laws of system thinking imply the following:
• Problems of today are most likely due to past decisions. It is thus important to look at the
causal nature of past solutions and current problems.
• One should think twice before taking the easy way out or deciding to go with standard
solutions to any problem as this will most likely lead to a crop of new problems in the
future.
• Cause and effect are not closely related in time. There is a lag between cause and effect
and HR’s influence on firm performance is normally much less direct than that of other
performance drivers. This can make it hard to measure as well as be misleading. It is thus
important to look at the leading indicators and not just the lagging indicators. Typical
financial performance measures are lagging indicators and in an attempt to solve financial
problems, the first step is normally to cut costs. It is more important to actually pinpoint
the cause of the problem and look to long-term benefits than short term ones.
Firms with high performance work systems tend to devote considerably more resources to
recruiting and selection. There is a strong emphasis on training and performance management and
compensation is tied to performance. Teamwork is encouraged, there is generally less
unionisation and they have a large and effective HR team. It is important to note, that all these
factors in tandem, not in isolation, lead to better performance, once again showing the systemic
nature of HR’s role in performance enhancement. The effects of these measures are lower
employee turnover, more retention, greater sales per employee and a greater market value for the
firm.
It is also important for the HR system to constantly check for alignment of all its parts i.e. how
much they reinforce or conflict with each other. An example of misalignment is a policy that
encourages teamwork but rewards individual contributions.
In the service sector, the employee-customer relationship is very obvious and visible and so the
impact of value creation is unmistakable. But, in many firms, the value is derived from the
operational processes and quality of work that the employees generate. This is less obvious to
competitors and it cannot be imitated. It is especially in these kinds of firms that the alignment of
HR strategy and policy with the overall strategy of the firm matters the most.
The alignment process begins with a clear understanding of what kind of value the organisation is
supposed to generate and how it should be generated. In the Balanced Scorecard, this is referred
to as the ‘strategy map’ that stresses the relationship between the ultimate goals and the key
success factors at the four important levels of customers, internal operations, people and systems.
Once the firm has a clear understanding of the value-creation process, it can then design an
implementation model that specifies needed skills and competencies and employee behaviours
throughout the firm. The HR management section can then be directed towards generating these
necessary competencies and behaviours. The stress is not just on the creation of sound HR
policies and strategies. How these are implemented is also very important. There has to be a
strong alignment with the firm’s competitive strategy.
A high performance HR system will also tend be unique. This is because it depends on the
particular organisation, its goals, people and strategy. Hence, it proves to be a strategic asset.
Employee Behaviours: As mentioned above the final results of the strategies are mapped to
required employee behaviours. It is important that each employee be trained not just to do his or
her job but also to have a substantially clear understanding of where he or she stands in the big
picture of the overall strategy of the firm. Strategic behaviours are productive behaviours that
directly serve to implement the firm’s strategy. There are two basic categories. Core behaviours
are behaviours that are considered fundamental to the success of the firm, across all business units
and levels. Situation-specific behaviours on the other hand, are more circumstantial behaviours.
These are not required all the time but are absolutely necessary in certain scenarios.
To achieve strategy alignment, firms must engage in a two-step process. As mentioned before,
first the managers must understand the details of how value is created in their firm. Once this is
done, they can design a measurement system based on their understanding. The first step focuses
the organisation on two dimensions of the strategy implementation process namely breadth and
causal flow. Breadth refers to the fact that companies must study more than just financial results
as outcomes of strategy implementation. It must also focus on other key performance drivers.
Causal flow refers to the series of linkages between financial and non-financial determinants of
firm performance. This gives the managers a deeper perspective of why certain financial results
are the way they are. It allows them to link the financial measures to the non-financial measures
of success. The second point is the design of a measurement system. This involves attaching
metrics to the financial and non-financial determinants. The Balanced Scorecard identifies four
key perspectives that directly and completely define strategy measurement and analysis. They
include the financial perspective, the customer perspective (e.g. customer loyalty and
satisfaction), the internal processes perspective (e.g. process quality and process cycle time) and
finally learning and growth perspective (e.g. employee skills) that is the leading indicator.
The next important step is communication. The top management that has done the above analysis
must communicate their findings and decisions to the middle and front-line managers, who in
turn must communicate it to the other employees. In this way, everyone in the organisation is
made aware and can participate in the strategy implementation process. This also helps allocate
resources intelligently and guides employees’ decisions. The Balanced Scorecard model
recognises the importance of both tangible and intangible assets and of financial and non-
financial measures. It focuses on the complex connections among the firm’s customers,
operations, employees and technology and places an important role for HR. The BSC framework
highlights the differences between leading and lagging indicators. Lagging indicators include
financial metrics, which typically reflect only what has happened in the past. Such metrics
accurately measure impacts of past decisions but don’t help in making current decisions or
guaranteeing future outcomes. The leading indicators are the unique indicators for each firm.
They include process cycle time, customer satisfaction or employee strategic focus. These
indicators assess the status of key success factors that drive the implementation of the firm’s
strategy and hence emphasise the future rather than the past.
It is important to note however, that simple changes in an HR practice do not make a difference.
The HR measures describe the whole HR system and changing the system to cross the threshold
mentioned above needs time, effort, insight and perseverance since results are not directly
proportional. This clearly indicates the requirement of an HR transformation rather than a change.
It is this very character of transformation, which is difficult and time-consuming to achieve, that
makes HR a strategic asset.
Along with value creation, there must also be a strong case for HR’s role in strategy
implementation. Strategy implementation rather than strategy content separates the successful
from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement one.
These basic questions generate a wealth of information about how well a firm’s HR has been
contributing to the success of the organisation. Along with these discussions, it is useful for the
company to conduct surveys within the organisation to identify the extent to which each
employee understands the organisational goals. Once the whole picture of the firm’s value chain
is highlighted, the firm can then translate the information into a conceptual model using language
and graphics that make sense to the members of the organisation. The model should then be
tested for understanding and acceptance amongst the leaders and the employees.
The strategy map essentially contains predictions about which organisational processes drive firm
performance. The company can validate these hypotheses only after achieving the goals set for
each of the performance drivers and then measuring their impact on overall firm performance.
The graphical nature of the strategy map helps the senior management as well as the employees
have more confidence in the strategy implementation plan.
To clarify the HR Scorecard framework it is important to summarise a case study. The next
section explains the details of the HR scorecard developed by Verizon, a leading
telecommunications provider in the United States.
While management tends to make decisions about how to invest in human capital, few companies
have an effective process to measure the value created by this most valuable asset. In Verizon,
they believed that HR could effectively manage the value created by thorough investments in
employees. Managers knew was how much was paid to reward, hire, train, develop, and provide
benefits to employees. What managers needed to know, however, was where the investments
were most effective and valuable. Some of the questions that did not have answers at that time
were:
To answer these questions, management needed more information not just simple cost figures.
Management needed to track the financial results while monitoring progress in developing human
capital and acquiring the talent and capabilities needed for business success. The Balanced
Scorecard was developed by Kaplan & Norton, 1996 and provided the ideal system that leverages
the traditional financial and efficiency measures that were available for Human Resources with
metrics of performance from three additional perspectives namely, customers, internal business
processes, and learning and growth.
The biggest problem was communicating and reinforcing the linkage between HR actions and
business results. The business had a clear strategy and targeted business results. The HR Strategy
was directly linked to the needs of the business and expressed in terms of HR strategic thrusts.
The prime objective was to effectively communicate and execute on strategic intent, motivate and
track performance against organisation and business goals, and to align HR actions with business
results.
The Team:
A newly formed HR Planning, Measurement, and Analysis team was created to design and
implement a tool that would quantify HR’s contribution to the business. The Balanced Scorecard
model, which was at the time a leading edge corporate performance assessment tool, was selected
as the framework to adapt and build an HR Measurement model. J. Randall MacDonald served as
the senior executive for the HR measurement initiative. This role was critical to the success of the
project. Randy MacDonald actively influenced his senior leadership team within HR to secure
their buy-in and to hold them accountable for supporting the project. The newly formed Planning,
Measurement, and Analysis team included a director and four employees solely dedicated to the
design, development, implementation, and operation of the HR Measurement System. An HR
Measurement core team included eight subject matter experts representing each of the functions
within HR and the business units. The core team members were instrumental in assuring
alignment of the measurement model and communicating and training HR departments on the
applications and uses of the HR Scorecard. The Balanced scorecard model complements financial
measures of past performance with measures of drivers of future performance. Unlike other
accounting models, the Balanced Scorecard incorporates valuation of organisations’ intangible
and intellectual assets such as high-quality products and services, motivated and skilled
employees, responsive internal processes and innovation and productivity. The HR Scorecard
approach used slightly modified the initial Balanced Scorecard model, which at the time was
— Strategic Perspective
• Measures success in achieving the five strategic thrusts. Since the basis for the HR
Balanced Scorecard is achieving business goals, the aligned HR Strategic objectives are
the drivers for the entire model.
— Operations Perspective
• Measures HR’s success in operational excellence. The focus was primarily in three areas:
staffing, technology, and HR processes and transactions.
— Customer Perspective
• Includes measures of how HR is viewed by the key customer segments. Survey results
were used to track customer perceptions of service as well as assess overall employee
engagement, competitive capability, and links to productivity.
— Financial Perspective
• Addresses how HR adds measurable financial value to the organisation, including
measures of ROI in training, technology, staffing, risk management, and cost of service
delivery.
The Process:
A deliberate approach to the project was clearly defined and communicated to each member of
the team and to the HR organisation. The project was established and organised into four major
components: Planning and Alignment, Assessment, Development, and Implementation.
• Planning and Alignment set the foundation for the project. Project plan, objectives, and
milestones were established. Team education and training was imparted on business
performance management, the balanced scorecard methodology, and its application to
HR measurement.
• Assessment focused on understanding what was used at that time as measures to evaluate
HR performance and to assess the relative value to the business.
• Development began the actual process of designing the HR measurement model.
Defining the measurement criteria and scorecard measures, establishing targets, defining
Beginning with a clear understanding of the business strategy and goals, the HR team worked
with the business leaders and HR leaders to determine the key questions to be answered for the
business and to determine what key drivers of the business would translate into clear people
requirements. The outcome was an understanding of what questions need to be answered and of
the competitive capabilities required for current and future business success. This provided the
detail to build a strategy map, which would support the design and development of the HR
Balanced Scorecard. Fig. 2 describes the process followed to determine people requirements and
business drivers.
The people requirements defined the HR Strategy that then translated into specific HR initiatives
that should directly support the attainment of HR Strategy. Having this alignment allowed
Fig 2: The people requirement and business driver determination process [2]
In addition to aligning the scorecard measures to the business objectives, they developed causal
links between the objectives and the measures. For example, one of the financial objectives,
Minimise HR Cost, was expected to be an outcome of the HR Strategy. To create a clear line of
sight across the perspectives, they linked Minimise HR Cost back to objectives in the Customer,
Operations, and Strategic Perspectives that were performance drivers for these outcomes. This
cause and effect relationship described that if HR integrated the organisation, implemented
technology enablers and optimised service delivery through streamlined processes the costs for
service delivery would decrease and reduce overall HR expense.
Once they had defined the link from the financial objectives, HR focused on the critical human
capital requirements defined by the business. Previously, HR Performance measurement at
Verizon had focused solely on improvement of administrative and transactional efficiency such as
the error rate in employee benefit processing and the number of training hours delivered per
month. The focus was expanding to include new processes for the HR organisation to develop
exceptional service delivery and increased employee value while ensuring a focus on cost and
value.
As the measurement model was being developed to support the business’s people requirements,
the objectives became clearer. HR recognised that the employees would need to expand their
skills and increase their productivity to provide the new products and services that business would
provide.
Providing workforce solutions and ensuring alignment and a strategy-focused workforce all
contributed to a more capable and skilled employee population.
Early Results:
An early benefit of the HR Scorecard work was that it provided a process for the senior HR team
to focus on a clear and common objective: to establish a common strategy for HR in support of
business objectives. The high level strategy was for everyone to be a partner to the business.
Rarely, however, did all of the HR leadership agree on how to implement the strategy because
each person had a different opinion about what being business partner really meant and whom
exactly the customer was. Taking strategy and translating it into a measurement and management
model gave specific and operational definitions for being a business partner and targeted business
customers.
Training and communication material was used extensively to reinforce understanding of the new
management tool. An interactive teaching tool was developed to train HR professionals to use the
HR Scorecard results in problem-solving workforce issues. Verizon realised that measures do not
manage, and simply tracking results was not the only intended use of the HR Scorecard. The
value was to use the information provided in the scorecard and take action to influence and
improve business performance. For example, one of the most important areas to manage in terms
of cost was employee turnover. Turnover, particularly within target front-line workforce centres,
was critical to productivity and expense control. High turnover results in lower productivity,
higher training, and staffing and occupational health costs. The impact is across the board and
affects business profitability.
Starting in 1998, with a new disciplined process using the HR Scorecard, HR professionals
tracked and analysed turnover statistics, determined reasons for turnover, calculated the negative
financial impact, prescribed solutions, tracked improvement rends, and showed dramatic results.
In partnership with the business leadership in targeted call centres (where operators give minor
technical assistance and forward problems to specialists), significant costs were avoided by
reducing the regretted turnover.
Linkages between business processes and value chains to human resource actions and services
were clearly defined as the HR Scorecard became a business tool understood and used across the
The HR balanced scorecard served as a catalyst to pull together the two HR leadership teams
during the merger integration planning. The process of defining the role and strategy of HR in the
new company provided a common objective for integrating the HR leadership team. Articulating
a common strategy and business alignment for HR services provided a positive perspective—a
clear focus on the customer and a shared sense of the enormous potential to deliver world-class
programs. The newly merged company faces a highly competitive environment where a
competitive cost structure, consistent revenue growth, controlled expense, and excellent
investment management are critical to win in the market place. The Verizon HR Scorecard
continues to provide the forum for HR leaders to actively discuss performance and future targets.
HR leaders now have a tool, which supports a focus on tactical excellence while ensuring
alignment with business strategy.
References:
[1] Becker, Huselid, Ulrich; The HR Scorecard (2001)
[2] Garrett Walker and J. Randall MacDonald; Designing and implementing an HR Scorecard;
Human Resource Management, Winter 2001, Vol. 40, No. 4, Pp. 365–377
[3] Arthur K. Yeung; Measuring human resource effectiveness and impact; Human Resource
Management; Fall 1997, Vol. 36, No. 3, Pp. 299–301
[4] Dave Ulrich; Measuring human resources: An overview of practice and a prescription for
results; Human Resource Management, Fall 1997, Vol. 36, No. 3, Pp. 303–320
[5] Arthur K. Yeung, Bob Berman; Adding value through human resources: Reorienting human
resource measurement to drive business performance; Human Resource Management, Fall 1997,
Vol. 36, No. 3, Pp. 321–335
[6] Richard E. Wintermantel, Karen L. Mattimore; In the changing world of human resources:
Matching measures to mission; Human Resource Management, Fall 1997, Vol. 36, No. 3, Pp.
337–342