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HR Transformation v2.0: It's All About the Business

Mercer Human Resource Consulting

March 03, 2008

The definition of HR transformation has evolved out of a number of perceived and real pressures on the HR function. The function is expected to support the business, provide the right direction for the people management strategy, and then execute the strategy. It also has to demonstrate an improvement in value, yet at the same time carry out cost-heavy administration.

In response to these challenges, the transformation process that many companies have embarked on involves examining the HR strategy and how it supports the business strategy, and then changing the HR operating model to achieve optimum delivery. – Delivering on the Promise of HR Transformation, October 2004

When these words were written, Mercer Human Resource Consulting had completed its first global survey of HR transformation. More than 1,100 respondents shared their experiences in 2003, painting a picture of HR functions around the world enthusiastically transforming to become more active strategic contributors and business leaders. Up to 86 percent of respondents by region reported HR transformations either currently in process or planned for the next year. From a low of 7 percent in Asia to a high of 25 percent in the US, other companies indicated they had already completed transformation projects.

These companies could already point to significant progress. In the US, for instance, more than half of the respondents (54 percent) had assessed the needs of HR customers, and nearly as many had implemented a new HR organization structure (46 percent), audited their HRIS (46 percent) and implemented a new HR service delivery strategy (42 percent). A majority said their firms had developed human capital strategies linked to their business strategies. And in many parts of the world, HR leaders were becoming more involved in strategic business discussions and decisions.

But the picture had a few flaws. HR leaders increasingly viewed their function as strategic, but far fewer had staff with the necessary business-related skills to make substantive contributions. HR leaders and their staffs still spent considerable time on transactional activities, not the high-level strategic partnering that their leaders aimed for. HR metrics focused on “satisfaction,” which does not measure value or impact. And while many organizations had developed a human capital strategy, they stopped short of operationalizing that strategy fully across the organization.

Three years later, it was time to refresh the view of HR. Mercer conducted the 2006 Global HR Transformation Study, which garnered nearly 1,400 responses across Asia, Australia, Europe, Latin America, New Zealand and North America. Which portrait of HR would predominate in 2006?

Mercer’s study confirms, unequivocally, that HR transformation is alive and well around the world. Half of the 2006 respondents (50 percent) said they are currently in the midst of an HR transformation, while 12 percent more completed one within the past year and another 10 percent plan to begin a transformation within the next year.

However, based on the 2006 study findings as well as Mercer’s work with leading organizations globally, it is clear that a second wave of transformation is now under way. This new wave – let’s call it Transformation v2.0 – differs significantly from the initial wave. Transformation v1.0, which started 10 to 15 years ago, focused largely on operational excellence and improved HR service delivery through process and technological enhancements.

At the same time, it opened the door to a more strategic role for HR – one that has not yet fully materialized. In Transformation v2.0, HR is challenged to deliver on those strategic expectations – to make the human capital strategies a reality. HR can do so through a disciplined focus on business.

One question in the 2006 study neatly illustrates HR’s current challenge: What skill level (in each of 26 areas) will be required to meet future needs? The answer: 72 percent of respondents gave the highest rating – “must have advanced skill level” – to “interpersonal skills.” Only 59 percent gave that rating to “business understanding,” 49 percent gave it to “business strategy skills,” and 19 percent to “financial skills.”

Would three-quarters of a group of CFOs, CIOs or marketing chiefs answer the same way? Mercer’s point of view is that HR cannot afford to be known primarily for its interpersonal skills if it wants to sit at the strategy table. HR must be all about business.

Read the full paper here

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