Creating People Advantage 2014-2015

Creating People Advantage 2014-2015

          
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Creating People Advantage 2014-2015: How to Set Up Great HR Functions

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    The Link Between Financial Performance and HR Capabilities

    A central finding of our survey is the correlation between HR capabilities and financial performance. We segregated the top 100 and bottom 100 companies according to financial performance, as measured by average operating margins and average revenue changes during the previous two years (2012 and 2013), and we included only companies with at least 50 employees. (See Exhibit 6.)

    exhibit

    We found that companies that are stronger in people management have a correspondingly higher financial performance. Among high per­formers, no HR subtopic is designated as being in urgent need of action.

    In contrast, companies with the worst financial per­formance show a greater need for action across virtually all 27 HR subtopics, with ­seven clearly in the red zone and three more at the border.

    This has been a consistent finding in previous Creating People Advantage reports and in publicly available research. Looking at the publicly listed companies that made Fortune magazine’s “Best Companies to Work For” ranking in 2014, and their share prices over the decade from 2004 to 2013, it is clear that the most successful people companies consistently outperformed the market, by nearly 100 percent.

    In our survey data, there was a troubling difference in capabilities between companies that are high performers and those that are low performers. (See Exhibit 7.)

    exhibit

    This was greatest in HR internationalization, social media, employee engagement, career models and competencies, and behavior and culture.

    High- and low-performing companies also have different priorities in terms of future ­importance. HR internationalization, HR and workforce analytics, recruiting strategy, HR and people strategy, and career models and competencies are significantly more important in high performers than in low per­formers.

    One possible explanation for the superior HR achievement of high performers is their strategic allocation of investment. (See Ex­hibit 8.)

    exhibit
    exhibit

    Our analysis shows a strong relationship between the levels of effort invested and the future importance of the subtopics being addressed. That is, high performers are more strategic in the way they allocate their efforts; they take a systematic approach to improving capabilities; they are able to accurately distinguish high-priority topics from lower priorities; and they can then direct their resources accordingly, potentially improving their financial performance.

    We found that low performers, by contrast, have a more arbitrary relationship between efforts invested and the importance of areas targeted for improvement. Investments tend to be misaligned; the most important issues don’t necessarily win the greatest investment. 

    This suggests that low performers don’t have a rigorous process in place for improving their people-management practices. Many companies lack a way to clearly identify the subtopics that are most important to their organization. They struggle to implement governance that effectively targets their resources, and they lack the discipline to enforce alignment with need over time—a necessity for the kind of sustainable improvements that can ultimately impact the bottom line.

    The alignment issue also arises when looking at the urgency of specific HR subtopics. Again, top performers are more strategic in the way they invest their efforts, focusing on the subtopics that they deem to be most urgently in need of action.

    For example, consider Pirelli, a leading tire manufacturer, which systematically prioritizes its HR processes to allocate investment according to urgency. As Christian Vasino, the company’s chief human resources officer, explains, “We conduct an annual internal survey to map the perceived sense of priority and satisfaction among 12 HR processes. The outcome of the survey was discussed within HR’s top management as a starting point for developing the people strategy.” Through this assessment, the company is now able to focus on its most urgent areas, which they define as strategic workforce planning, recruiting and on-boarding, training and development, and employee engagement.


    Market performance was measured by the S&P 500 index.