AN INVESTMENT PERSPECTIVE OF HUMAN RESOURCE MANAGEMENT The The Strategic Strategic View View of of Human Human Resources Resources •• Employees Employeesare arehuman humanassets assets –– Increase Increaseininvalue valuetotoorganization organizationand andmarketplace marketplacewhen when investments investmentsofofappropriate appropriatepolicies policies&&programs programsare areapplied applied •• Effective Effectiveorganizations organizationsrecognize recognizethat thatemployees employeeshave have value value –– Much Muchas asorganization’s organization’sphysical physical&&capital capitalassets assetshave havevalue value •• Employees Employeesare arevaluable valuablesource sourceof ofsustainable sustainablecompetitive competitive advantage advantage Sources Sources of of Employee Employee Value Value •• Technical TechnicalKnowledge Knowledge –– Markets, Markets,processes, processes,customers, customers,environment environment •• Ability Abilityto toLearn Learnand andGrow Grow –– Openness Opennesstotonew newideas ideas –– Acquisition Acquisitionofofknowledge knowledge&&skills skills •• Decision DecisionMaking MakingCapabilities Capabilities •• Motivation Motivation •• Commitment Commitment •• Teamwork Teamwork –– Interpersonal Interpersonalskills, skills,leadership leadershipability ability Adopting Adopting an an Investment Investment Perspective Perspective •• •• •• •• •• Determines Determineshow howto tobest bestinvest investin inpeople people Costs Costs –– Out-of-pocket Out-of-pocket –– Opportunity Opportunity Human Humanassets assetsbecome becomecompetitive competitiveadvantage advantage Required Requiredskills skillsbecome becomeless lessmanual, manual,more moreknowledgeknowledgebased based Appropriate, Appropriate,integrated, integrated,strategy-consistent strategy-consistentapproach approachisis needed needed AA Dilemma Dilemma •• Failure Failure to to invest invest in in employees employees causes causes –– Inefficiency Inefficiency –– Weakening Weakening ofof organization’s organization’s competitive competitive position position •• Human Human assets assets are are risky risky investment investment •• Require Require extra extra effort effort to to ensure ensure that that they they are are not not lost lost Research Research Findings Findings •• HR HRpractices practicesdirectly directlyrelated relatedto toprofitability profitability& &market market value value •• Primary Primaryreason reasonfor forprofitability: profitability: –– Effective Effectivemanagement managementofofhuman humancapital capital •• Integrated Integratedmanagement managementof ofhuman humancapital capitalcan canresult resultin in 47% 47%increase increasein inmarket marketvalue value •• Top Top10% 10%of oforganizations organizationsstudied studiedexperienced experienced391% 391% return returnon oninvestment investmentin inmanagement managementof ofhuman humancapital capital HUMAN HUMAN RESOURCE RESOURCE METRICS METRICS •• Wall WallStreet Streetanalysts analystsstill stillgenerally generallyfail failto toacknowledge acknowledge human humancapital capitalin inassessing assessingthe thevalue valueof ofan anorganization organization and andthe theeffect effectthat thathuman humanresources resourcescan canhave haveon onstock stock price price •• This Thisisisrooted rootedin inthe thefact factthat thatthere thereare areno no“standard” “standard” metrics metricsor ormeasures measuresof ofhuman humancapital, capital,much muchas asthere thereare are for forother otherorganizational organizationalassets assets •• Exhibit Exhibit1.4 1.4lists listssome someCommon CommonHR HRMetrics Metricswhile whileExhibit Exhibit 1.5 1.5displays displaysthe themeans meansof ofcalculating calculatingfive fivecommon common metrics metrics However, However,the theappropriate appropriatemetrics metricsfor forany anygiven given organization organizationwill willbe bedependant dependanton onthat thatorganization’s organization’s strategy strategy HR HR Metrics Metrics Are Are Complex Complex •• 90% 90% of of Fortune Fortune 500 500 organizations organizations evaluate evaluate HR HR operations operations on on basis basis of of three three metrics: metrics: –– Employee Employeeretention retentionand andturnover turnover –– Corporate Corporatemorale morale –– Employee Employeesatisfaction satisfaction •• These These metrics metrics do not not necessarily necessarily illustrate illustrate how how HR HR impacts impacts –– Profits Profits –– Shareholder Shareholdervalue value Mercer Mercer Model Model of of Measuring Measuring HR HR Impact Impact •• •• •• •• •• •• •• Identify Identifyproblem problemHR HRcan canimpact impact Calculate Calculateactual actualcost costof ofproblem problem Choose ChooseHR HRsolution solutionthat thataddresses addressesproblem problem Calculate Calculatecost costof ofsolution solution Calculate Calculatevalue valueof ofimprovement improvement66to to24 24months monthsafter after implementation implementation Calculate Calculatespecific specificreturn returnon oninvestment investment ROI ROIin inhuman humanassets assetsoften oftennot notrealized realizeduntil untilsome sometime timein in future future Investment-Oriented Investment-Oriented Organization Organization •• Sees Sees people people as as central central to to mission mission & & strategy strategy •• Mission Mission statement statement & & strategic strategic objectives objectives espouse espouse value value of of human human assets assets in in achieving achieving goals goals •• Management Management philosophy philosophy encouraging encouraging development development & & retention retention of of human human assets assets •• Does Does not not treat treat human human assets assets in in same same ways ways as as physical physical assets assets Investment Investment Orientation Orientation Factors Factors •• Senior Senior Management Management Values Values & &Actions Actions –– Managers Managersneed need“investment “investmentorientation” orientation”toward toward people people •• Attitude Attitude Toward Toward Risk Risk –– Investment Investmentininhuman humanresources resourcesinherently inherentlyriskier riskier –– Human Humanassets assetsnever neverabsolutely absolutely“owned” “owned” •• Nature Nature of of Skills Skills Needed Needed by by Employees Employees –– The Themore moremarketable marketableemployee employeeskills, skills,the theriskier riskierthe the firm’s firm’sinvestment investmentininskill skilldevelopment development Investment Investment Orientation Orientation Factors Factors •• Utilitarian Utilitarian (“Bottom (“Bottom Line”) Line”) Mentality Mentality –– Attempt Attemptmade madetotoquantify quantifyemployee employeeworth worththrough through cost-benefit cost-benefitanalysis analysis –– ““Soft” Soft”benefits benefitsofofHR HRprograms programsdifficult difficulttotoobjectively objectively quantify quantify •• Availability Availability of of Outsourcing Outsourcing –– Given Givenavailability availabilityofofcost-effective cost-effectiveoutsourcing, outsourcing, investments investmentsininHR HRshould shouldproduce producehighest highestreturns returns&& sustainable sustainablecompetitive competitiveadvantages advantages Reading Reading 1.1 1.1 The The India India Way: Way: Lessons Lessons for for the the U.S U.S ““India IndiaWay” Way”isisdistinct distinctfrom fromU.S U.S.business businessmodel modelin infour four fundamental fundamentalways; ways; ••most mostimportant importantgoal goalas asserving servingaasocial socialmission mission ••importance importanceof ofmanagement managementof ofhuman humancapital capital ••persistence persistenceof ofengaged engagedemployees employees((jugaad) jugaad) ••focus focuson oninnovations innovationsin invalue valuechains chains Reading Reading1.2 1.2 Strategic StrategicHuman HumanResource ResourceManagement Managementas asEthical Ethical Stewardship Stewardship ‘‘‘‘the thehonoring honoringof ofduties dutiesowed owedto toemployees, employees,stakeholders stakeholders and andsociety societyin inthe thepursuit pursuitof oflong-term long-termwealth wealthcreation” creation” HR HRplays playsthis thisrole rolevia via •knowledge •knowledgeofofthe theoperations operationsofofthe thefirm firm •understanding •understanding how howtotoimplement implementsystems systemsby bywhich whichorganizations organizationscan canmaximize maximizehuman human performance performance •understanding •understandingofofthe theempirical empiricalvalue valueand andcost/benefit cost/benefitcontribution contributionofofhigh highperformance performance systems systems •ability •abilitytotocommunicate communicateeffectively effectivelytototop topmanagement managementand andBoards BoardsofofDirectors Directorsininaa convincing convincingmanner manner ... experienced3 91% 3 91% return returnon oninvestment investmentin inmanagement managementof ofhuman humancapital capital HUMAN HUMAN RESOURCE RESOURCE METRICS METRICS •• Wall WallStreet Streetanalysts analystsstill... acknowledge human humancapital capitalin inassessing assessingthe thevalue valueof ofan anorganization organization and andthe theeffect effectthat thathuman humanresources resourcescan canhave haveon... Integratedmanagement managementof ofhuman humancapital capitalcan canresult resultin in 47% 47%increase increasein inmarket marketvalue value •• Top Top10% 10 %of oforganizations organizationsstudied