September 2011
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Transforming HRD Into an Economic Value Add

Wednesday, September 14, 2011
Transforming HRD Into an Economic Value Add

How much economic value does your HRD function generate for your organization? If you do not know the answer, here's help to determine whether you are a cost center or an economic value add (EVA), as well as what you can do to increase your strategic value to your organization. Keep in mind that there are only two ways to add economic value: reduce costs of what you provide, or increase the impact HRD solutions have on your organization's revenues.

Challenges for the HRD leader


As HRD leaders, you face three major challenges to becoming a strategic source of EVA: These challenges derive from senior management, the people using your services, and within the HRD function.

Challenge 1: From senior management. The first challenge will manifest itself in two ways. First, senior management sees itself as HRD's customer. Often, what they ask for is not what they need. Senior management is not the true customer, however. The people participating in programs are the customers. To become an EVA, we must transform senior management into "investors" and participants into "customers."

The second challenge from senior management is driven by the belief that HRD is not a source of revenue or profit growth. And for good reason - historically, HRD hasn't been. But by linking HRD solutions to specific business results, such as revenue-related metrics, senior management will begin to see us as a source of competitive advantage.

Consider the following scenario: The president of International Company X asked me to conduct a Management by Objectives Workshop for its Brazil division. This assignment made the president my customer, and the Brazil division management team my targets for change.

To transform the president into my investor and the Brazil division into my customer, I spent the first week interviewing all managers to determine current functionality and problems. The second week I set aside to design and conduct sessions tailored to eliminating problems managers were encountering when managing by objectives.

Challenge 2: From program participants. In most cases, participants view programs and services as the end game rather than a means to increased business performance. For example, when participants are asked why they attend a workshop on Effective Presentations, most typically answer "to learn how to make more effective presentations." The answer we want them to give is "to improve the performance of my department by making more effective presentations."

Consider again the example of International Company X. In that case, my real job was to help the Brazil division determine where its functionality currently stood, define the business performance it wanted to accomplish, and help it identify and remove obstacles.

Challenge 3: From within HRD. The third challenge will come from within your own HRD function. HR has long looked upon itself as the group that delivers world-class HR services and views the organization as its client. In this scenario, HR is only responsible for the quality and cost of what it does. HR colleagues may not be happy with your use of measurements that focus on how your solutions improve the organization's performance.

For example, I was recently asked to facilitate a session on performance reviews with all of an organization's HR managers, as well as discuss with them what needed to change for the appraisal process to add greater value. I initiated the session by asking the HR managers two questions:

  1. How many of the managers in your division would use the performance review process if they didn't have to? The answer was none.
  2. Do managers in your division believe that the performance review process adds value? The answer was no.

Then I asked HR, what value was created by performance appraisals? Their responses were typical: "so employees will know how well they are doing and where they need to develop." No answers focused on improving business performance.
If you decide you want to become a strategic driver of economic value, there are two concepts you need to keep in the forefront as you build your plan for change. The first concept is how companies create economic value and the second is the structure of organization in terms of roles of operations and roles of management and staff.

How companies create economic value

There are a handful of ways organizations create economic value:

  • It can increase the price it charges for its products and services.
  • It can decrease the cost in making or delivering its products and services.
  • It can increase the amount of products and services it sells.

If you are not making an impact on one or more of these items with your products and services, then you are a cost of doing business. In traditional HRD organizations, the only way HRD (and other staff functions for that matter) could add economic value is by decreasing the costs of for providing solutions.
Roles of operations; roles of management and staff

Organizations have two basic components: 1) operations and 2) management and staff. Operations is comprised of all employees (not managers) who are directly involved in the manufacture, distribution, delivery, and sale of an organization's products or services.

Management and staff (that includes HRD) are comprised of people who support operations in carrying out responsibilities. This group cannot directly create economic value except by reducing their own costs. Management and staff play one or more of four roles in supporting operations:

  1. Protect the organization from significant economic loss. An example of this would be the training HRD provides on affirmative action, employment law, or safety.
  2. Support current operations needed to maintain performance at its existing level, such as skills training for new hires.
  3. Provide services that will improve the organization's performance now. For example, help design a high performance manufacturing plant.
  4. Enhance future performance. For instance, provide a high-potential identification and development process for key executive positions.

The first, second, and fourth roles fall under "costs of doing business." The third role, improve the organization's current performance, adds economic value.
What can you do to add greater value?

HRD managers must take action if they are to add greater value to the function and, more importantly, become a source of competitive advantage for the organizations they support.

Examine your mission statement and make necessary changes. This is a strategic process in which you are deciding the role your function needs to play to add the greatest value possible to your organization.


Determine what role HRD plays and decide if you need to be a strategic partner or a cost center? As a strategic partner, HRD must be able to identify the human resource challenges affecting the organization's business strategies and develop and execute plans that will address them.

As a cost center, HRD is an important and required part of the organization that does create value, just not economic value. Its challenge is to deliver the HRD services that are necessary to support and protect existing operations and provide services that will enhance future performance at the lowest possible cost.

Identify what performance measures you will use. The metrics you choose must include the degree behavior must change, and how the change in behavior was a result of improved business performance.

For example, HRD determines that an organization experiencing serious labor problems is the result of managers failing to listen to employees. To address the issue, HRD provides training on listening skills, but what are the measures? How well the supervisors learned to listen or the degree to which the labor climate improved?

Conduct an HRD survey to determine to what degree you are a source of EVA. Where are there important gaps? What barriers are preventing you from initiating change? (See Figure 1.)

Develop a plan for transforming your HRD organization into a greater source of economic value. Here are steps to follow to develop your own plan.

  1. Assess your HRD organization with input from senior management.
  2. Determine what you want your transformed function to look like in the future, including its mission, structure, strategies, metrics, and working relationships with key constituents.
  3. Obtain input and support for Step 2 from within your own HR organization as well as among senior management.
  4. Inform those affected by changes what you will be doing differently and why. Get their input as well.
  5. Determine metrics you will use to measure success
  6. Implement your plan.

Bottom line

In the Harvard Business Review article "A New Mandate for Human Resources," Dave Ulrich wrote "Should HR be done away with? This debate arises out of serious and widespread doubts about HR's contribution to organizational performance." Ulrich went on to say "But the truth is HR has never been more necessary. Achieving organizational excellence must be the work of HR." It is now 2011. Where is your HRD organization?

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I think that defining key org needs and defining how to address them is key. I liked the specific business examples in this article.
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Good article. It is critical to be able to measure success to show the organization what impact HRD has on it economic value. Without those measurements of impacts HRD will still be looked at as a cost unit.
Can you elaborate on how to measure the success? This is an area I am not familiar with. I hear it all the time, but looking for practical tools and tips!
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