"It's time to get serious about HR," said Tom Peters - dubbed the world's top management guru - while pacing the stage at March's London Business Forum. "In every organisation, the person with the second-highest pay should be the HR director."
You could almost hear the collective intake of breath. There were hundreds of senior executives present, and most had been expecting tips on how to boost their leadership skills or margins. Now they were being told to put HR at the centre of their business plans, supported by all the spending they could afford.
Yet within a few minutes, most had converted. They had learned that staff quality would soon become the key differentiator for companies in the West as a result of inexorable trends, such as the increased poaching of service-industry work by India and China.
They had also learned about Dennis Donovan, executive vice-president of HR at Home Depot, the world's largest chain of DIY stores.
Home Depot sells around 44,000 kinds of building materials, lawn and garden products. It has 1,901 stores - most of which are in North America - and employs more than 325,000 people. It also operates in Mexico, Puerto Rico and China, where it currently has two sourcing offices and will soon begin to open retail outlets.
The company's rate of expansion in recent years has been huge. When Donovan joined in 2001, Home Depot had 1,319 stores and 251,488 staff. These figures have since grown by 44% and 29% respectively. The last four years of its 27-year history have seen the strongest growth, and the HR function has done more than simply make this possible: it has added to the momentum.
Donovan was the first executive hired by Robert Nardelli, when he became chief executive in December 2000. The pair previously had the same working relationship at General Electric (GE), and since the mid-1980s, they had shared the view that HR should be at the core of any organisation, particularly one that had the potential to expand rapidly. They recognised that the phrase 'our greatest asset is our people' was no longer a platitude, but a necessary motto for any company that wanted to maintain its competitive advantage.
Nardelli is reported to have said of Donovan: "He's not a back-room, second-chair member of staff." He's also reported to have paid Donovan a whopping $21.5m (£11.3m) for his first year at Home Depot, in line with the ranking suggested by Peters (a recent survey of HR directors' pay estimates Donovan's total annual pay package is now $6.4m (£3.4m) - the second-highest of any HR director in the US).
His value is also reflected clearly in the amount of influence he enjoys at the company - more like that of a traditional chief operating officer than a traditional HR director. He helps to mould and disseminate company policies; he involves himself in everything from the financial performance at store-level to supply-chain management, to the procurement of new IT systems; and he meets major shareholders every eight weeks and addresses a conference of analysts twice a year.
Donovan believes a great HR director is one who "builds an infrastructure enabling the CEO to fulfil their central mission, which is to bring about change within their organisation".
Making the difference
Speaking from Home Depot's headquarters in Atlanta, Georgia, Donovan told Personnel Today: "Companies that change, win, and companies that don't, lose. It is effective leaders, teams of reformers and talented individuals who ultimately make the difference."
Governing Donovan's approach to HR is a strategy he developed at GE. It begins with a complete understanding of the context in which any given organisation is operating. For Home Depot, this meant looking at not only the DIY retail market but also the views of every stakeholder group - staff, shareholders and the communities in which the stores were situated. You have to go beyond the vision and mission statements and really "understand how things limit your ability to be competitive," Donovan suggests.
The next step is dubbed SOAR (Strategic Operating and Resource Planning), "a process that focuses on expanding growth horizons by integrating industry and economic data into the business model". This highly advanced benchmarking and target-setting process uses industry data to compare Home Depot with its competitors, establishing best practice and the latest ideas for improving efficiency. Economic data is used to identify sources of future growth for the company, whether geographical, or in terms of the development of existing operations.
The HR department doesn't escape from this process - Donovan's aim is to make its success as quantifiable as that of any other department.
"The R in SOAR really stands for human resources," Donovan points out. "When you come out of the SOAR cycle, you have [departmental] strategy pretty clearly delineated."
Next comes effective execution, which Donovan believes has the following four prerequisites:
- A sense of direction shared by the entire organisation, which depends on effective leadership at every level, as well as a uniting cause, spread from the top of the organisation down
- People: "A high-performing, diverse, workforce"
- Effective processes: "You can't have systemic change on a continuous basis without process," Donovan says. "I see a lot of organisations that think systems are the answer when, in fact, processes are, and systems merely automate processes. Unsuccessful launches of enterprise systems are usually the result of lousy process design"
- Organisational structure: "Structure is the enabler for direction, people, processes and systems to work together," Donovan says.
All these factors need attention, he stresses. "Just ticking a couple of boxes is not the answer. That is like taking two sick people to a hospital, putting them in a room and thinking they will just get better on their own."
The final stage of his overarching strategy is to "backward integrate change into your suppliers". Donovan explains: "You probably cannot be six-sigma (see below) unless your suppliers are six-sigma. So you have to think beyond the walls of your company. If the change process you create enriches your suppliers, then it will make you far more competitive."
Of course, these general principles had to be adapted for the unique set of challenges faced by Donovan at Home Depot. "We looked at the success rate of store managers, and it was clearly not where we wanted it to be," he says. "This was due to our growth - on average, we open a new store every 48 hours. At the time, we were only looking internally to satisfy that demand for leaders."
He immediately hired several hundred experienced retailers from external sources to enthuse staff at flagging stores. Then he set up a mass-hiring process, so that Home Depot could assess management applicants much more thoroughly.
With this in place, Donovan says: "We could determine people's leadership ability, their business knowledge and competency to learn by using one hiring standard across the company."
He also encouraged Home Depot to look beyond the retail industry for potential store managers - for example, since the Store Leadership Programme was formally established in 2002, Home Depot has recruited around 530 junior military officers out of a total of 900 recruits.
"There are about 125 [military] academy graduates in that group," Donovan says proudly. "These are people with tremendous global experience. Their leadership skills have already been developed before they come to us, under the toughest of conditions."
Another early goal was to have an HR manager in every store within 12 weeks. Donovan's team told him they would normally have needed 12 weeks just to talk about such a huge programme. Nevertheless, they succeeded. "We got 37,000 applications," Donovan says. "We interviewed 3,000 people, divided into 97 three-day career forums, and finally picked 1,300, of which 800 were from outside Home Depot."
One of the reasons he wanted an HR presence at every store was to supervise continuous staff development - he has set up a variety of programmes to maintain skill levels and cultivate leaders. However, it is also because he is a great believer in the incentive power of performance metrics.
"We've rolled out more than 300 process-based initiatives out of HR since I've been here," he says. One is a mandatory 360-degree review that every manager must undergo each year. The results are fed into the performance management assessment for each individual, with a direct impact on their pay package - basic, bonus and equity.
Donovan says his data-gathering at Home Depot and other companies proves even the lowest-level manager has a direct influence on everything from accident rates to the gross margin achieved per worker hour. However, no employee is ever treated merely as a number.
Donovan's initiatives may have helped to link the performance of each employee to the bottom-line, and kept the company comfortably in the Fortune 500 with net earnings of $5bn on sales of $73.1bn in the year to January 2005, but ultimately, his view of staff development is humane.
"There are two things I attribute success to: surrounding yourself with high-achievers, and 'scar tissue'," he says. "The scar tissue has a better yield than anything else - if you don't fail a few times, you never learn and never succeed."
Dennis Donovan's CV
Donovan has a bachelor's degree in industrial relations and an MBA from the University of Massachusetts. He also has a Juris Doctor degree from Western New England College School of Law. He joined General Electric in 1972 in the Corporate Human Resource Leadership Programme, and rose to hold management positions in a variety of business units such as power systems, consumer products, turbines and power generation. In 1998, he joined the defence group Raytheon as senior vice-president for HR before joining Home Depot in 2001. He is a fellow of the National Academy of Human Resources, and a member of the board of advisers at the Employment Policy Foundation, the Human Resource Institute, the Center for Advanced Human Resources Studies and the HR Policy Association. He is also on the board of directors at Jobs for America's Graduates (JAG).
Explanation of six-sigma
Six-sigma is a statistical term used to describe a very low failure rate in a product, service or procedure.
It was originally used by Motorola in the mid-1980s to describe a manufacturing standard under which fewer than four in one-million products would experience a fault.