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Traditional HR Valuations Fall Short

June 23, 2001
Related Topics: HR Services and Administration, Featured Article
Traditional models of HR are inadequate for addressing the competitive needs oftoday's organization. They focus too much on activity levels, cost reductions,and internal processes to have a significant impact on the business. The consequenceis that HR frequently finds itself struggling to gain credibility among executivesand line managers. In fact, if HR persists in using such models, it could easilyfind itself outsourced. Here are the current valuations, and their shortcomings:
Activity based

With activity-based measurements, the value of an HR department is determinedprimarily by level of activity. For instance, figures such as number of employeescompleting training and number of employees hired are frequently cited asevidence of providing value to the organization. Of course this presumes thata particular HR activity inherently adds value.

So where trained employees are believed to be productive employees the perceivedcontribution of the HR department is greater when more training is conducted.The obvious question here is whether or not activities, in this case training,actually do contribute to business results and if so in what ways and to whatdegree? The difficulty lies in making a direct connection between activitylevel and actual business outcomes.

HR costing

In HR costing, the costs of HR activities are measured and tracked. HR costinghas been useful in showing management the services it receives for the overheadcharged, and in justifying budgets necessary for carrying out activities. Insuch organizations, finding ways to reduce hiring and other costs and improvetransactional efficiencies becomes the impetus behind improving HR value.

Many HR departments with a focus on cost engage in process re-engineering projectsto show improved value. Reduced time to respond to an employee-benefits questionor negotiation of lower insurance-plan premiums is seen as evidence of improvement.

In terms of improving the business, no one would dispute the value of reducingoverhead costs. From a marketplace perspective, however, a case could be madefor outsourcing HR services when cost is the sole or primary determinant ofHR value.


This has become a popular method for touting progressive HR practices and value.In benchmarking, HR departments determine their costs, workloads, and practicesto compare them to those of other organizations or standards based on a surveyof similar companies. HR managers in organizations committed to benchmarkingoften generate monthly reports for senior management showing costs and activitylevels as compared to local and national norms and publicized HR practice leaders.

When benchmarked data is the criterion for excellence, HR assesses its valueto the business by excelling and demonstrating improvement. Aside from the obvious difficulty ofcomparing one company or industry to another, there is a question as to theability of benchmarked organizations to connect their practices to businessresults. Most benchmarking programs focus on cost, activity level, and similarityto other businesses, and are therefore subject to the same weaknesses inherentin gauges centered on activity level.

Client surveys and satisfaction indexes

These have become popular in many organizations that regard the satisfactionof internal clients as the ultimate score sheet for HR success. In other words,what the client wants becomes the center of attention for HR professionals.If a client feels that HR has resolved an employee problem, or responded quicklyto a training or employment need, the client is satisfied, and the HR departmenthas fulfilled its purpose.

In this environment, Likert scale ratings, commonly referred to as "smilesheets," measures of complaints, and focus-group statements gauge HR'svalue. Such client satisfaction indicators can be useful in determining employeeand management perceptions of human resource department effectiveness. However,they fail to demonstrate that what a client wants from HR necessarily has bottom-lineimpact.

HR as a profit center

This is also a common approach to valuing HR activities. The concept of anHR profit center is that HR activities, by their nature, save the company moremoney than they cost. An example of the profit center view is where advertising,interviewing, training, productivity, and other costs are added together todetermine organization turnover costs. By improving selection and hiring processes,HR staff can reduce turnover and support greater productivity.

Theoretically, this offsets the cost of HR services and adds to the bottomline of the business. This method effectively introduces the impact of humanresource strategy into the HR value equation and raises the conversation abovethe mere level of service cost and efficiency. However, even the profit centermodel falls short when it comes to the ultimate business contribution of HR.

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