Charting the evolution of strategic HR

Transforming HR from traditional administrative cost centre to dynamic
strategic function is a huge challenge for the profession. Jane Lewis explores
the thinking behind HR strategy

Few HR professionals are in any doubt that the greatest challenge facing the
profession is its transformation into a dynamic, strategic function. But
although many organisations have taken the first step towards this goal –
throwing off HR’s traditional role as an administrative cost centre in favour
of a more a business-oriented approach dedicated to adding value – there
remains a considerable stumbling block. Namely: what is actually meant by
strategic HR?

As Amin Rajan points out in Tomorrow’s Organisation: "It is now widely
accepted that the term ‘strategic HR’ has been much used, misused and
abused". Indeed, the tendency of some in the profession to see ‘strategy’
as some kind of life-belt to justify their continued existence in organisations
has done a good deal to harm the credibility of strategic HR. Much of what is
now often grandiosely referred to as strategy is, in reality, simply HR

This article charts the evolution of strategic HR, and how it incorporates
concepts such as human capital, knowledge management and the role of ‘the
learning organisation’. Above all, we seek to show why, in the words of Lynda
Gratton, associate professor of organisational behaviour at London Business
School, people policies have to be "at the heart of any effective business
strategy", and no longer just on the sidelines.

The rise of human capital

The concept at the heart of strategic HR is a new understanding of the
intrinsic value of human or intellectual capital. Indeed, it is impossible to understand
why the remit of HR has changed so dramatically in such a comparatively short
space of time without exploring how and why human capital has come to assume
such a pivotal role in the modern organisation.

When did we first start exploring the strategic importance of people to
business? It is possible to detect the steady evolution of the idea throughout
the 20th century – from the employee-friendly environment pioneered by Thomas S
Watson at IBM in the 1930s, to the writings of Guy Hunter in the 1950s. Yet the
debate about whether people are a cost to business or a strategic asset has
been going on a good deal longer and was controversial from the start. When the
18th century Whig economists began adopting Adam Smith’s idea that the real
wealth of a nation lay in its people, Jonathan Swift retaliated satirically
with a "Modest Proposal", that if this was really the case, the poor
could prosper by raising children for slaughterhouses.

Nonetheless, it took an explosive combination of factors in the 1990s to
translate the somewhat nebulous notion of human capital into firm business
practice. Thanks to a sustained economic boom, the growth of service industries
and the liberating power of IT, the idea that people, not financial, capital
was the scarce resource began to take hold. "In this decade, it is only
people who can sustain the competitive advantage of a company [through] the
ability to create rarity, value and inimitability," claimed Gratton. She
argued that most corporate strategies – built around a combination of
technology and capital – were dead because they failed to incorporate a human

If the rhetoric wasn’t enough to sway the old guard, the figures certainly were.
Whereas at the start of the 1990s a company’s stock market valuation was
invariably gauged by studying its earnings and fixed assets and adding a token
amount for goodwill, by the end of the decade a seismic shift had taken place.

When accountants Ernst & Young came to look at the issue, they found
that the largest slice of most companies’ market capitalisation was held in
intangibles – primarily, the talent, knowledge and teamwork of its staff. In
high-tech companies like Nokia, the percentage was as high as 95 per cent; but
even ‘old economy’ stalwarts like BP, despite its huge investments in oil
platforms and exploration equipment, notched up a significant 74 per cent.

The upshot was that even companies operating in the same sector with similar
earnings could experience widely differing stock valuations. Those ignoring the
new emphasis on ‘intangibles’ invariably found themselves penalised by the
markets. As Judy Lewent, chief financial officer of Merck & Co – one of the
companies in the vanguard of the human capital movement – conceded, when it
came to assessing the underlying health of a company "looking at the
accounting system alone doesn’t capture anything really".

How people strategy became mainstream

One of the immediate consequences of the new value being placed on human
capital was a major change in how companies looked at strategy, says Gerry
Johnson, professor of strategic management and director of at Strathclyde
University, author of Europe’s best-selling strategy textbook Exploring Corporate
Strategy. Hitherto, the fields of strategy, corporate planning and people had
been worlds apart – strategy-making was a rarefied, almost theoretical science,
conducted behind closed doors in boardrooms and only then beamed down to the
organisation as a whole.

Now came the realisation that "the idea of a grand plan was ridiculous
– all about intent but not about action". Whether or not it was actually
true that the business environment was inherently more unstable and prone to
flux than it had been a decade ago, "people certainly felt this was the
case". The new thinking was that only nimble, fleet of foot organisations,
capable of responding quickly to market change, could sustain competitive
advantage. And to assess a company’s ability to make that change, you had to
dig down to the very fabric of the organisation. "How can an organisation
understand what its competencies are if it doesn’t ask its people?"

In 1997, Sumantra Ghoshal, professor of strategic leadership at the London
Business School, summed up this shift towards a more "individualised
organisation" by arguing that the crucial role of top management now was
to create the conditions in which individual managers could thrive.

As a strategist, he claimed to have embarked on a long journey away from
"the wonderful, elegant world of business strategy" to the
"messy world of people". There was no point building magnificent
strategies, or fine organisational structures, if "managers were not a
match for these designs". What this meant in practice, he said, was that
the old conventions of "strategy, structure and systems" – on which
all MBAs had been brought up – should be scrapped in favour of "purpose,
process and people", a liberating new philosophy which acknowledged the
role played by knowledge as the chief source of competitive advantage.

The move away from ‘admintrivia’

But if the case for a new era of strategic people management had been made
in theory, what was going on in practice? More to the point, how were HR
professionals rising to the new challenge? Had they, indeed, even recognised

In Britain, the establishment in 1992 of the Leading Edge Research
Consortium – a major collaboration between London Business School and eight
organisations including Lloyds, Hewlett-Packard, Glaxo, BT and Kraft Foods –
showed that at least some companies were taking the matter of strategic HR
seriously. But it took just one article to really crystallise the debate in the
minds of most of the profession.

In 1996, Tom Peters, writing in Fortune, echoed Swift with a ‘modest
proposal’ of his own. He argued that since HR seemed either unable or unwilling
to throw off its bureaucratic image and obsession with ‘admintrivia’, it should
be abolished altogether on the grounds that it achieved very little and
frequently acted as a brake on positive change. One senior HR professional, he
reported, had told him that most people in the industry were still
"bureaucratic record keepers and ‘you-can’t-do-that’ pseudo police".
Only about 10 to 15 per cent of HR people could be described as business
managers making a value-adding contribution to their companies. If HR was to
escape the fate of dying ‘unmourned’, concluded Peters, it would have to change
its tune. "But it’ll take demolition and salvage – big-time re-engineering
– to transform HR," he says.

Creating a learning organisation

Fortunately for the profession, it had a champion on hand to make the case
in its favour – and to point out that if HR needed a transformation, so too did
the corporate organisation as a whole. In A New Mandate for Human Resources,
published in 1998, Dave Ulrich, professor of HR at the University of Michigan,
made the case that "HR has never been more necessary" in the battle
to win competitive advantage because it was responsible for "defining an
organisational architecture" that could best tap market opportunities.

"Sooner or later, traditional forms of competitiveness – cost,
technology, distribution, manufacturing and product features – can be
copied," he wrote. "You must have them to be a player, but they do
not guarantee you will be a winner."

The real source of competitive advantage in the modern economy, he claimed,
lay in how an organisation was structured. "Winning will spring from
capabilities such as speed, responsiveness, agility, learning capacity and
employee competence. Successful organisations will be those that are able to
quickly turn strategy into action." If this wasn’t the remit of HR, it was
difficult to see what was.

Indeed, Ulrich argued that, henceforth, HR should see itself as "an
agent of continuous transformation".

Managing knowledge

As well as playing a pivotal role in determining how a company should
organise itself to meet the challenges of the market, Ulrich also outlines a
second key role for the HR strategist: managing intellectual capital and
knowledge. "From now on, successful companies will be the ones that are
the most adept at attracting, developing and retaining individuals." Thus
an important component of strategic HR is creating a cultural environment and
framework that not only taps into individual talents, but encourages knowledge

What this means in practice is breaking down hierarchies and walls, and
leading people rather than managing them. As Peter Neff, CEO of the French
pharmaceutical giant Rhone-Poulenc’s US subsidiary, has remarked: "Our
success in the future will depend on our ability to tap the collective wisdom –
that is the accumulated judgements, perceptions, experiences, intuition and
intelligence – of all our employees." Far from policing people, HR’s
strategic role is to set them free. "Bureaucracy is its own worst enemy.
It inhibits people from doing their jobs and stifles ideas that can give
customers what they need."

Player or partner?

Clearly an important part of HR’s strategic role is therefore formulating
policies which encourage the distribution of knowledge throughout the
organisation and act positively in terms of recruiting and retaining talent.
But policy-making alone is not strategic HR. The real point, says Katie Truss,
visiting fellow at the London Business School and a prime mover behind the
Leading Edge consortium, is that "there’s a pronounced difference between
strategic HRM and the strategic role of the HR function".

At the heart of the question is how the HR function is perceived in any
organisation. Some influential academics, notably the University of Bath’s
professor of human resource management, John Purcell, have argued that in most
companies HR remains an essentially a "downstream" function. Thus,
its main role is to act as a partner to mainstream business, aligning the
formulation and implementation of HR strategy with overall business objectives
that have already been defined.

This approach is certainly one that seems to have been readily accepted by
much of the profession. In a survey conducted last year, Birkbeck College’s
Raymond Caldwell found that many HR directors replied to the question of how
they saw their strategic role "with considerable realism". Responses
varied from "HR is oversold if it is too strategic" through to
"it’s the P&L people who have to make the strategic difference",
to the bold summation that "we are not partners, and not players".

But to many at the forefront of the strategic debate, this kind of
willingness to assume a downstream role is not so much realist as defeatist.
Indeed, Kevin Green, managing director of Qtab, a consultancy which has
purposefully styled its remit as "offensive people strategy", claims
he took "this strident view" because he had become so frustrated with
the profession’s apparent willingness to remain on the back foot.

"The point is that if you are ‘aligning’ HR strategy [with business
strategy] you’re already too late – the actual strategy has already been set
without your input. Unless HR is prepared to take on a [leading strategic
role], the high ground will be taken by other functions. We need to be at the
vanguard of intellectual capital, knowledge management and employer
branding," Green says.

Fellow consultant Paul Kearns agrees: for him, the definition of strategic
HR has to be about "giving a business a competitive advantage". Thus
"a good HR strategist will bring something to the business" rather
than simply reacting to what others have decreed. As Gratton has pointed out in
Living Strategy, real strategic HR is about developing ways of putting people
where they belong – at the centre of the business, not on the sideline. The
notion that people are our greatest assets is "a truism not a cliché"
she says, and if companies are going to survive and prosper in a knowledge
driven economy, "corporate strategy must reflect this".

So should the eventual goal of HR be to assume the major strategic role in
most companies? Not everyone goes quite so far. "I’m not going to argue
that HR should make strategy," says Ulrich. "Strategy is the
responsibility of a company’s executive team – of which HR is a member."

Moreover, the particular input that HR can make will clearly vary according
to the remit of the organisation and where it is in the business cycle, says
Shaun Tyson, professor of HRM at Cranfield School of Management. "If
you’re fighting for survival, for example, HR may have an input but the [real
onus] of strategy-making will fall on the finance department." Similarly,
if a new product range is being launched, the department at the vanguard of
strategy-making is likely to be marketing. Nonetheless, HR will still have a
major role to play in ensuring that that strategy becomes holistic.

"Even an apparently marketing-led strategy will have a people side to
it. How is the new range going to be sold and introduced within an
organisation? What does it mean in terms of how the company is positioning
itself? What does it mean for the company’s brand values?"

What should a strategic HR function look like?

At the heart of the debate about the strategic role of HR is how the
function should be structured. Those keenest to promote a partnership role have
often described a kind of consultancy role. As one remarks: "The HR
function of the not-too-distant future will be a small, highly-leveraged,
cost-effective internal management consultancy. Most of the functions
associated with HR today will be outsourced or administered by line business

But HR’s strategic role as corporate architect, as defined by Ulrich, surely
indicates that the function needs to become more tightly integrated into the
main body of the organisation, rather than less. Some companies have taken this
to its logical conclusion by merging their strategic HR function with other key
departments. Microsoft’s former finance director in the UK, for example, has
now become director of people, profits and strategy. Given this kind of
competition from other departments, if HR is to retain the initiative for
devising people strategy, argues Kearns, a seat on the board is a sine qua non.

Placing a value on strategic HR

After nearly a decade spent defining, refining and justifying the importance
of strategic HR in the modern corporate environment, what exactly has been
achieved? Undoubtedly there will be some who will dismiss the movement towards
"people-centricity" as just another side-effect of the economic boom.
Certainly, an embarrassing number of companies at the vanguard of the movement
have either gone bankrupt (Worldcom), been disgraced (Enron) or have suffered a
catastrophic decline in their market value (Nortel, Reuters). Moreover, despite
continued efforts to link strategic HR management with bottom line
profitability, no real connection has yet been proved.

Despite finding optimistic evidence of a connection between improved
business performance and HR strategy in some of the companies he studied, even
the US pioneer, Mark Huselid of Rutgers University, was forced to conclude there
were problems with causality. Did a strong HR function actually cause the
business to be more successful, or was the function’s strength merely a
reflection of the fact that the business was successful anyway?

But the drive to define the success or otherwise of strategic HR in such
narrow financial terms may well have been a red herring, says Tyson.
"There is probably a relationship, but strategic HR should be seen much
more in terms of creating a cultural climate and organisational framework in
which success occurs, rather than as a direct cause [of profitability]."

Linda Holbeche at Roffey Park agrees: too much emphasis on monitoring the
immediate return on investment of HR strategy can have the effect of backfiring
on the profession, she says. "If the rationale for doing it is driven by
‘Oh my God, we’ve got to prove we’re doing something worthwhile’, it forces HR
into precisely the policing role which, ironically, it is seeking to

Just because something cannot be measured, doesn’t mean that it is not
working. Arguably, the ultimate measurement of whether a strategic HR policy
has proven successful will be an organisation’s continued survival and
prosperity in its market.

What is the future for strategic HR?

"I hope for a time when there will be a much clearer recognition that
building people strategies and organisational designs actually does directly
build business success," says Holbeche. The problem at the moment, she
says, is that "those acting strategically tend to be individuals rather
than teams. There is no solid track record of loads of people, doing loads of
good things – and until there is, there will always be a sense of mystique
attached to strategic HR."

Kearns concurs: "The reality is that despite all the talk, there’s still
not much of it around." But if we are still as far as ever from achieving
the holy grail of strategic HR, we are at least closer to providing its
definition. The big change, concludes Tyson, is that HR and organisational
development are finally coming together. "It’s probably the route
forward," he says.

This change may sound arcane, but it is revolutionary. If you accept
Gratton’s analysis that in a 21st century knowledge economy, people, rather
than any other corporate asset, are "the source of sustained competitive
advantage", then strategic HR must go far beyond merely implementing
policies that echo or complement existing business strategy.

The rightful place of HR strategy is thus at centre of the organisation,
defining its future direction and shaping the means of obtaining its goals. Far
from being a minor coalition partner, the strategic HR function must now take
responsibility for setting the agenda.

Case study: What strategic HR means to the Department for International
Development  (DFID)

Lynette Carrington, deputy head of
HR policy at the DFID provides some answers

Q: Establishing a precise
definition of strategic HR seems a process fraught with difficulty. What does
it mean to you?

A: For me, it’s the ‘how we get there’; it’s putting
people issues into a strategic environment. In this department, we have a new
permanent secretary, Sumar Chakrabarti, who is very much a people person, and
that leadership characterises and determines the culture. The department not
only recognises the value of strategic HR, but has made it central to top-line

Q: What are you doing to make your
HR function more strategic?

A: We are working closely alongside the business, taking
a partnership approach. We’re there to help the organisation deliver and if
something gets in the way of that it’s our job to remove it. A main aim is
greater devolvement of people management to the line, and more accountability
in the line for people. We are about to benchmark the function against what
other departments and international [organisations] are doing.

Q: How does this differ from what
was going on in the past?

A: Although HR has always had a presence at the
management board, our focus was much less strategic – public sector HR was all
about dealing with personnel issues – servicing the organisation at an
operational level. We’ve gone from tea and sandwiches to strategy. Our role is
more about influencing and negotiating; we’re looking at where we need to steer
the organisation. The move to sustainable development has changed the HR agenda
– it’s not so much what we do, as how we do it. We need to encourage different
behaviours and recruit different types of people.

Q: What do you hope will be the
main impact of the strategy on the organisation?

A: DFID has one main strategic objective: the
elimination of world poverty by 2015. Our HR strategy can contribute directly
to this by improving the department’s management capability to achieve this
goal. At a business level, it has to be almost a way of life. The process would
be slower and a lot more painful without our input.

Q: How would you respond to
criticism that strategic HR is all mouth and no trousers?

A: The point is that organisations don’t deliver –
people do. My experience is that if HR doesn’t get involved strategically at
the front end of [a project], you spend an enormous amount of time picking up
the pieces at the back end. And the cost of that is often unquantifiable – no
one notices once a project has been completed. There is no point sitting down
with heads of department saying ‘you’ve got to do this’ unless you’re in a
position to tell them why a policy will make the difference to achieving the
organisation’s goals.

Case study: What strategic HR
means to the Nestl‚ UK Group

Nigel Holt, HR policy manager at
Nestl‚ UK Group provides some answers

Q: Establishing a precise
definition of strategic HR seems a process fraught with difficulty. What does
it mean to you?

A: While I wouldn’t use the term ‘strategic HR’, what it
means to me is HR working as an equal partner with the business units to help
identify and resolve issues that promote the commercial development of the
organisation. This is not HR as the conscience of the business units, or
promoter of the current HR flavour. HR should deliver its service requirements
to the business (personnel administration, payroll, policies and high-quality
recruitment) before it looks to get accepted as a strategic business partner.
But this service role is not the only role of HR.

Q: What are you doing to make your
HR function more strategic?

A: First, by getting the basics right – good customer
service for all the information and administrative work. Also, by creating a
structure that recognises an HR business partner role. Finally, by training the
business partners and giving them tools and methods to get into the strategic
arena. This year, for example, our business partners are leading a process of
identifying the ‘people requirements’ falling out of each business unit’s
medium term (three-year) plan. These people objectives have been defined by the
business units, not by HR. But HR is enabling the process and owning agreed
supply solutions.

Q: How does this differ from what
was going on in the past?

A: Before, our HR role was very generalist. Although
senior HR managers did get involved in developing the organisation, they were
also involved in much more operational work. The removal of the admin and
routine work forces the ‘organisational development’ question to the top of the
agenda. The business will only relate to this if it sees real value from the
intervention process.

Q: What do you hope will be the
main impact of the strategy on the company?

A: Improved business performance; improved overall
quality of service from HR, as well as lower cost of HR service.

Q: How would you respond to
criticism that strategic HR is all mouth and no trousers?

A: ‘Try it and see’ would be my immediate response to
the challenge. You can’t expect to have the mouth (strategic and developmental
involvement in the business), unless the trousers (admin and customer facing
support roles) are delivering the basics. One isn’t better than the other, they
are complementary. It’s just about positioning your priorities, setting your
structure, getting the right skills and asking people to do the things the
organisation needs to succeed.

Case study: What strategic HR
means to Standard Life

Stephen McCafferty, HR development
director, Standard Life provides some answers

Q: Establishing a precise
definition of strategic HR seems to be a process fraught with difficulty. What
does it mean to you?

A: Although it’s important to have some input in
developing leadership capabilities, culture and values, we don’t waste a lot of
our time worrying about our HR strategy. We’re much more interested in doing
the right job for the business.

Q: What are you doing to make your
HR function more strategic?

A: We are listening to the business, trying to
understand what direction the company is moving, its goals and plans – and then
looking at how we can support these. The business strategy at Standard Life is
growth, so the questions we’re addressing are: do we have the right skills to
support this? And, how can we take existing values and plant them in new
markets elsewhere in the world?

We’re looking at developing the right leadership requirements
and skills. We don’t see people-centricity as being the sole domain of HR, we
have to be pragmatic about it. I can only persuade top managers that a
people-centric business  might be a good
idea. It’s their job, not ours, to deliver it down the line.

Q: How does this differ from what was going on in the past?

A: We haven’t had a big bang – our role has kind of
evolved. We’ve tried in the past to do smart HR stuff around a scorecard, but
no-one paid a blind bit of notice. I’m quite cynical about what a lot of that
stuff actually achieves. We’ve evolved by listening more, by building
relationships and asking the business what problems it is trying to solve, then
proposing solutions.

Q: What do you hope will be the
main impact of the strategy on the organisation?

A: We’re not interested in measuring what impact we have
on the bottom line – no one’s saying to me: ‘how are you measuring you’re
value-add’. In fact, we’d be laughed at if we tried to do that. Our impact is
measured through our day-to-day activity of supporting the business’ long-term
growth plans.

Q: How would you respond to
criticism that strategic HR is all mouth and no trousers?

A: I think it’s probably right. Strategic HR should be
about being clear as to where the business is going – and about how and where
you can help the business to achieve these objectives.

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