monitor group

Human Capital Strategy

PULLING AHEAD OF THE COMPETITION …AND STAYING THERE
MONITOR GROUP
Monitor Group is a family of professional service firms, linked by shared ownership,
management philosophy, and knowledge assets. Each entity in the Group is dedicated
to providing products and services which fundamentally enhance the competitiveness
and capabilities of our clients. We operate globally in a closely-linked network, sharing
our core assets — knowledge, expertise, skill and capital. Those assets are brought to
bear for the benefit of our clients through a blend of channels including;
• consulting interventions;
• management development programs;
• customized software and intelligent tools;
• cutting-edge market research;
• venture capital and advisory services; and private equity.

LATTICE PARTNERS™
Lattice Partners™ helps companies build sustainable competitive advantage through
their organizations, leadership teams, and people. We adopt a highly pragmatic
approach in our interventions:
• Seamlessly combining structural, process, and incentive design with
coaching and counseling capabilities
• Using software technology to make diagnosis and intervention fast
and cost-effective
• Integrating broadly across our experience in general management
consulting and expertise in human capital disciplines

Our range of tools and interventions help clients sense and adapt to changing
competitive and leadership dynamics, improve organizational performance, and build
institutional capability.

ACTIVITIES, PROCESSES AND SYSTEMS (APS)

APS (Activities, Processes and Systems) is Monitor’s center of expertise on Operations
Strategy. APS helps companies make the critical choices about how to configure their
assets and operations in order to drive sustained success in the marketplace. Specific
areas of focus include: overhead management; manufacturing and supply chain strategy;
product, customer and channel profitability. APS works closely with its sister business
units, such as Lattice Partners, to offer clients integrated solutions to their most pressing
operational challenges.

Copyright © 2006 by Monitor Group All Rights Reserved

HUMAN CAPITAL STRATEGY
Changing the Value Equation
In most organizations, business leaders con-
front a stubborn dilemma. On the one hand,
they know that managing their people well is
vital to winning in the market. With wrench-
ing changes from restructuring, off-shoring,
and industry consolidation; turnover in top
management; and heightened competition
for skilled workers — now, more than ever,
companies need a clear and compelling hu-
man capital strategy. On the other hand, the
pressure to cut human capital spending is re-
lentless. In short, the business needs human
capital initiatives that create more strategic
value…yet cost less.
The Missing Link
In response to these pressures, many compa-
nies have focused their attention on the HR
function. Company after company has set
about transforming its HR function — setting
up new centers of excellence, redefining the
role of the HR business partner, establishing
shared service centers, and outsourcing basic
Human Capital Strategy — The Missing Link
Competitive Strategy
What are our goals
and aspirations?
Where will we play?
How will we win in
chosen markets?
What capabilities must
be in place to win? Performance
Management
What management
systems are required?
functions. Though such efforts have saved
real money and started to move HR into more
strategic roles, few companies have fully re-
alized their human capital potential. Indeed,
in many organizations, there remains a per-
sistent disconnect between business strategy
and HR functional strategy. What these orga-
nizations lack is a clear and coherent human
capital strategy to link their business and HR
choices (SEE FIGURE 1).
In many organizations, there remains a
persistent disconnect between business
strategy and HR functional strategy.
In developing a human capital strategy,
there are three important principles to keep
in mind. First, a human capital strategy
1
should be grounded in the firm’s competi-
tive strategy, which can be articulated as a
cascade of choices:
• What are our goals and aspirations
(e.g., mission, vision, values)?
FIGURE 1
HUMAN CAPITAL STRATEGY − Changing the Value Equation
Human Capital Strategy
Attraction
Leadership Deployment
Culture
HR Function Strategy
Networks Investment
Values
 • Where will we play (e.g., markets, customer
segments, geographies)?
• How will we win (e.g., choice of business
model, value proposition)?
• What organizational capabilities must be
in place?
• What management systems are needed?
Second, for a human capital strategy to be
truly robust, it must not only consider the
strategy of today but also its potential evo-
lution in the future. This evolution will be
driven by a range of external uncertainties,
such as whether the competition for top tal-
ent will occur on a regional or global basis.
The pools from which the company sources
talent, the consistency of rewards and recog-
nition, and the choice of career paths for top
2
talent will all vary depending on how this
uncertainty plays out. Robust human capi-
tal strategies factor in a range of potential
uncertainties (SEE FIGURE 2) and assess their
overall implications.
Finally, in addition to being grounded in the
external competitive reality, effective hu-
man capital strategies start with a simple
premise — people are an asset of a company,
not unlike its physical, financial, knowl-
edge, and social assets. Though human assets
clearly have distinctive qualities relative to
other assets (e.g., personal choice, individual
variability), they can be deployed using a
similar lifecycle management approach. For
each organizational capability required to
support the business strategy, the key dimen-
sions of human capital choice are:

Examples of Human Capital Related Critical Uncertainties FIGURE 2

REGIONAL Competition for Talent GLOBAL

HEAVY Regulatory Constraints in HR Management LIGHT

LOW Adoption of Online HR Services HIGH

GEARED TOWARD Organizational Priorities GEARED TOWARD

COST CUTTING GROWTH

TRADITIONAL AND Dominant Type of Organizational Structure NETWORKED OR

HIERARCHICAL VIRTUAL

Sources Of Leadership
TOP-DOWN Innovation and Change BOTTOM-UP
MONITOR GROUP

• Attraction: how will we attract and retain
the required talent?
• Deployment: what are the pivotal roles in
the organization and what performance
must we have from people in those roles?
• Investment: what new skills and compe-
tencies must we develop in our people and
through what means?
• Networks: what are the key organizational
interfaces where collaboration matters (e.g.,
marketing — sales) and how can we estab-
lish the right person-to-person connections
across these interfaces?
• Performance Management: how will we
measure and reward success?
• Culture and Values: what sets of norms,
principles, and behaviors should we
espouse and how do we embed them in
the organization?
• Leadership: what kind of leadership system
do we need and how can we enable a
diverse range of leadership styles?
For a human capital strategy to be
truly robust, it must not only consider
the strategy of today but also its
potential evolution in the future.
Rethinking the HR Function
A well specified human capital strategy can deliver a range
of business benefits — greater organizational alignment,
better execution against the organization’s key capability
requirements, improved yields in recruiting, higher levels
of talent retention, and greater employee engagement and
productivity. But perhaps the most immediate impact is
in redefining the role of the HR function. Effective human
capital strategies require companies to view HR not as a
monolithic function but rather as a portfolio of distinct
activities that deliver different kinds of value:
1. Strategy enabling — the critical few activities that drive
advantage in the marketplace by directly supporting
the firm’s human capital strategy (e.g.; talent man-
agement, organizational strategy)
2. Risk mitigating — activities that mitigate downside risk
(e.g.; continuity planning, labor relations)
3. Efficiency enhancing — discretionary investments that
reduce costs and enhance productivity (e.g.; employee
portal/self-service administration)
4. Basic services — transactions that keep the business run-
ning (e.g.; benefits administration, employee records)
Dividing HR into these activity classes allows executives
to more effectively manage the investment portfolio. Just
as financial investors expect different risk and return pro-
files from equities and bonds, business leaders should 3
hold each HR activity class to different standards and ex-
pectations. Benefits administration, for example, should
be managed to be as efficient as possible while meeting
standard (undifferentiated) quality levels. On the other
hand, the potential enterprise benefits of a carefully de-
signed and well-executed talent management program
far outweigh the associated HR costs — in this case, the
discussion should be focused not on how much the pro-
HUMAN CAPITAL STRATEGY − Changing the Value Equation
gram costs but how to drive and measure the value that
it creates.
It is no longer okay to put HR under a single management
structure, apply a single set of performance measures and
rewards, source people from the same hiring pools, and
train them to a common set of competencies. Doing so
has the benefit of allowing for quick and easy compari-
sons with other companies and simple ways to keep score
(headcount and spending benchmarks). But it also erodes
HR’s value just when the company needs it most. Ignoring
the different activity classes drives hundreds of companies
to virtually identical approaches to staffing, objective set-
ting, performance management, talent, and employee en-
gagement. This march toward standardized best practice
really creates undifferentiated average practice, and can
lead companies to inadvertently eliminate the things they
do that are truly distinctive.
 CASE STUDY
Undiscovered Savings—and Value
ASSESSMENT
Companies that articulate their human capi-
tal strategy and assess the implications for
HR often find significant cost savings — in
our experience, anywhere from 15-25% of
addressable costs. Yet the most profound
change is not the reduction in headcount
and low value activity or a faster move to
outsource basic services. Rather, it is the re-
balancing of the HR investment portfolio,
which often results in greater spending on
strategy enabling and risk mitigating activi-
ties, as well as a renewed focus on improving
the ROI for efficiency enhancing activities.
Take, for example, the case of a leading
health care provider. HealthCo risked losing
4 its market leadership because of regulatory
and competitive pressures — not to mention
a public crisis of confidence stemming from
HealthCo Corporate and Embedded Overhead
Corporate
Embedded
12%
88%
$MM
TOTAL Facility Billing/ HR/
MONITOR GROUP
Admin Collection Education
Med Records/ IS
Transcription Communication/
Business Dev.
glaring quality issues. As part of its turn-
around, the company sought to dramatically
reduce non-clinical support spending while
reestablishing itself as a leader in the quality
of patient care.
HealthCo began by taking a close look at its
overhead spending, and discovered that while
they traditionally only looked at “corporate”
overhead spending — that took place in cor-
porate and regional headquarters — in reality
this represented only a fraction of their total
overhead activity, with the majority being
“embedded” within individual facilities in
their medical network (SEE FIGURE 3).
Within the HR function, for example, for ev-
ery dollar spent by corporate, five additional
dollars were being spent in the facilities, fre-
quently with high degrees of duplication and
very little coordination or sharing of best
practices.
FIGURE 3
Medical Corp. Regional Facility
Affairs Other Operations Admin
Marketing/ Finance Legal Facilities
Management
 User Perceptions of Importance and Performance
for Corporate HR Services
HIGH
Nurse Communications/
Online Services
Performance
Leadership Skills Training
International Nurse Recruiting
LOW
LOW
To supplement the cost data, HealthCo also
conducted an internal survey of all of its fa-
cilities’ leadership teams, to assess the value
that corporate overhead functions were cre-
ating for the line. Figure 4 shows the results
for the HR function: every point on the chart
represents a specific service that corporate
HR was performing to support the facilities,
with each service being evaluated in terms of
its importance to the line and how well it was
performing. As the chart shows, the majority
of corporate services were deemed by users
to be of limited value, including a number of
services meant to support the recruiting and
development of nurses.
Notably, when asked about the general im-
portance of recruiting and retaining nurses,
facility leaders declared that this was one of
their most critical strategic challenges. They
FIGURE 4
Nurse Recruitment/Retention
Importance HIGH
5
just felt that corporate recruiting services
were disconnected from the realities of their
markets, highly ineffective and therefore not
to be counted on. Unfortunately, their efforts
to do their own recruiting at the local facility
level were not succeeding either, largely be-
cause individual facilities did not have the scale
HUMAN CAPITAL STRATEGY − Changing the Value Equation
to invest in developing professional recruiting
functions. As a result, the number of nurse
The most profound change
is the rebalancing of the HR
investment portfolio.
openings had been steadily increasing across
the HealthCo network, with a corresponding
increase in expensive contract (temporary) la-
bor hours and costs (SEE FIGURE 5).
 HealthCo Corporate and Embedded
Nurse Hires/Openings Overheadof
as a Percentage
60% RN Hires as a Percent of Total Hires
RN Openings as a Percent of Total Openings
Contract Labor Costs
50%
40%
30%
20%
Year 1
6
CASE STUDY
SOLUTION
All of this was of particular concern given
that HR-related activities would need to
play a critical role in HealthCo’s strategic
turnaround. Specifically, HealthCo’s overall
objectives were to improve the quality of pa-
tient care while continuing to drive earnings
growth. To do so, they developed a strategy
that consisted of focusing on higher margin,
complex procedures and developing a unique
in-patient care experience within the com-
pany’s regional clusters of medical facilities.
Nurse practitioners, with deep clinical exper-
tise and the ability to deliver consistent and
high quality patient care, were central to this
strategy. However, as Figure 4 above dem-
onstrates, the nationwide shortage of nurses,
MONITOR GROUP
competitive labor markets, and unionized la-
bor pools made it extremely challenging to
execute the strategy. As a result, HR leader-
ship faced the all too common dilemma: de-
Totals FIGURE 5
Cost
Year 2 Year 3
velop and execute a winning human capital
strategy that is critical to the firm’s success,
and simultaneously find ways to cut overall
HR spending. Led by top line and HR execu-
tives, HealthCo launched a systematic human
capital and HR overhaul. Specific elements of
the human capital strategy included:
• Attraction: Targeting early career nurse
practitioners, with an employee value
proposition focused on superior learning
and development programs to build deep
clinical expertise and policies to support
flexible engagement; Deployment: Creating
regional resource pools that supported
flexible engagement, and defining career
progression paths that enabled greater
choice of specialty for early career nurses;
• Development: Shifting the mix of learning
and development programs — scaling back
generic training programs and reinvestment
of savings in best-in-class specialty training;
 HR Investments Before and After Redesign
Benefits Labor Recruiting
Relations
• Networks: Creating formal mechanisms
for senior practice specialists across the
country to share best practices and define
national quality standards and policies;
• Performance Management: Changing
measures and rewards to focus on demon-
strated expertise and patient care, rather
than tenure;
• Culture and Values: Defining and embed-
ding a quality of care culture at every
patient touch point; and
• Leadership: Redefining the role of the
Chief Nursing Officer to lead development
of practice expertise.
CASE STUDY
RESULTS
The HR function required a significant trans-
formation in order to deliver on this human
capital strategy while at the same time driv-
ing efficiencies in HR spending. Specific
elements of the HR program included:
• Investing in regional nurse recruitment and
resource management capabilities — in par-
FIGURE 6
Employee Research/ Compensation
Relations Reporting
ticular, hiring skilled recruiters to manage
7
nurse recruiting and deployment across all
of the facilities in a particular labor market
(strategy enabling)
• Working jointly with organized labor to
develop and execute key human capital
initiatives (risk mitigating)
• Moving to on-line and outsourced learn-
HUMAN CAPITAL STRATEGY − Changing the Value Equation
ing programs for basic training (efficiency
enhancing)
• Developing shared services for benefits ad-
ministration, employee records and vendor
negotiation/management (basic services)
The result was a significant rebalancing of
the HR activity portfolio (SEE FIGURE 6).
Overall, this led to a 15% reduction in HR
spend with an equivalent level of savings
expected in contract labor costs as a result
of filling nurse vacancies. Most importantly,
it enabled significant reinvestment in patient
care and quality management systems to
drive increased patient satisfaction.
 Getting Started
Companies should revisit their human capi-
tal and HR functional strategies when they
do not have convincing answers to or clear
alignment among line and HR executives on
the following questions:
1. Capabilities. Is it clear what organizational
capabilities are required to support the
competitive strategy?
2. Human Capital Priorities. Is it clear what
initiatives, focused on the specific em-
ployee segments, are needed to deliver the
required organizational capabilities and
engage each segment? Can executive
leadership articulate the company’s top 5
human capital priorities?
4. Mode of service provision. Have HR and
the line appropriately divided responsibil-
ity for delivering on the human capital
strategy? Has the company considered the
full range of options for providing key HR
activities (e.g., shared service centers, cen-
ters of expertise, automation, outsourcing)?
Human capital strategy gives companies the
tools to answer these questions and to break
out of the HR dilemma. The result is an HR
function that succeeds not only on the usual
benchmarks, but on the only one that really
counts: pulling ahead of the competition,
and staying there.

3. HR Priorities. Are there clear and compel-

8 ling links between the competitive, human
capital and HR functional strategies? Where
is the HR function over- or under-delivering
relative to its strategic priorities? Is there a
system that tracks HR value creation relative
to strategy, needs, and costs over time?
MONITOR GROUP
SAMEER SRIVASTAVA is a Partner in Monitor Group and a co-founder of
Lattice Partners, the firm’s human assets and organizational strategy unit. He
has helped clients drive major organizational change initiatives and align their
organizations with competitive requirements. He holds a degree in Economics
from Harvard College and an MBA from Harvard Business School.

AMBAR CHOWDHURY is a Partner in Monitor Group and a leader of

APS, the firm’s operational strategy unit. Previously, he was an assistant
professor of mathematics at the University of Connecticut. Ambar received his
PhD from the University of Notre Dame and his BA from Oxford University,
both in mathematics.

DOUG MACKENZIE is a Partner in Monitor Group and the leader of

Lattice Partners’ West Coast practice. Before Monitor, he was a Senior Vice
President and head of Worldwide Human Resource Development (HRD) at
American Express Company, where he also served as Corporate Chief Quality
Officer. He earned his Masters of Business Administration from the Harvard
Graduate School of Business, and a Bachelor in Environmental Economics from
Colorado College.
 CONTACT

Monitor Group
Two Canal Park
Cambridge, MA, 02141
10 p 617.252.2000
f 617.252.2100

Sameer Srivastava
p 617.252.2475
sameer_srivastava@monitor.com

Ambar Chowdhury
p 617.252.2856
ambar_chowdhury@monitor.com

Doug MacKenzie
p 415.278.5885
doug_mackenzie@monitor.com

www.monitor.com
www.latticepartners.com
www.adaptiveoverhead.com
MONITOR GROUP