Monarch Management Review, Vol1,Num1,Oct-2010-Mabrouk

Monarch Management ReviewManagement Research UGSM-Monarch Business School - Volume 1, Number 1, October 1, 2010www.ugsm-monarch.com

The Monarch Management Review is the scholarly journal of management research and practice from UGSM-Monarch Business School.

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CSR As Mythology - Dr. Jeffrey Henderson 7

EVA: Pros And Cons - Dr. Igor Pustylnick 16

Empirical Testing of Technology Spillovers 37Among Trading Partners - Dr. Fadi Fawaz

The Subjective Field of Ethics: 55A Philosophical Panorama - Dr. Norman Madarasz

The Value Added of the Human Resource Function 80of the Enterprise- Dr. Ali Mabrouk

Comparing The Five Factors of Production In Southeast 25Wisconsin - Dr. Gary Keller

Research& Review

FeaturedArticle

The Monarch Management Review 1

From The Editor ............................................................................................................................................ 2New Researcher Contribution Program ............................................................................................ 3Abstracts ............................................................................................................................................ 4

ArticlesCSR As Mythologyby Dr. Jeffrey Henderson ................................................................................................................................. 7

EVA: Pros And Consby Dr. Igor Pustylnick ....................................................................................................................................... 16

Empirical Testing of Technology Spillovers Among Trading Partnersby Dr. Fadi Fawaz ........................................................................................................................................... 37

The Subjective Field of Ethics: A Philosophical Panoramaby Dr. Norman Madarasz ................................................................................................................................. 55

The Value Added of the Human Resource Function of the Enterpriseby Dr. Aki Mabrouk ......................................................................................................................................... 80

Featured Article - Exemplary Contribution Comparing The Five factors of Production of For-Profit Firms And Not-For-Profit Organizations in Southeast Wisconsin

by Dr. Gary Keller ............................................................................................................................................ 25

Editorial Policy ............................................................................................................................................. 103

The Monarch Management ReviewVolume 1, Number 1 - October 1, 2010

Contents

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“Senior Executives often include a slide of Maslow’s hierarchy in their presentations. They know that employees will find fulfillment only if

they’ve been given the chance to exercise their higher order capabilities --- initiative, imagination, and passion.”

! ! ! ! ! ! Management Guru - Gary Hamel


The Monarch Management ReviewVolume 1, Number 1 - October 1, 2010

Abstracts

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CSR As Mythology - Dr. Jeffrey Henderson

In “CSR As Mythology” author, Dr. Jeffrey Henderson, brings to the foreground several issues existing within the state of affairs of CSR study that force a re-evaluation of the efforts produced by academics and scholars within the domain.

Principally, the issue that academics since the early 1950s have felt the need to take a secular view of an inherently moral discourse is shown to have yielded sparse advances in the field of business in society literature up to present day. Coupled with the application of adherence to anachronistic social myths the domain of CSR study has been stripped of its soul by those very people charged with its livelihood. This fact is illustrated by Dr. Henderson to be the limiting factor behind the study of CSR and the primary reason why many investigators claim that the domain of CSR study is presently bankrupt.

Within the article, Dr. Henderson reviews the contributions of Dr. Joseph Campbell and his theories of mythos as applied to the domain of CSR studies. The premise is addressed that true social change will not take place until society replaces the anachronistic archetypical myths that reinforce the orientation of conflict based economic systems for those of a more cooperative form. Inspiration for change can be found in the timeless writings of major figures such as management Guru Peter Drucker who is shown to have taken a homo-centric view of the practice of management, as compared to the often cited writings of Milton Freidman who champions the profit-centered view that tends to deny corporate social responsibility.

EVA: Pros And Cons - Dr. Igor Pustylnick

EVA is a proprietary analysis tool trademarked by Stern Stewart. In the recent years many consulting companies attempt to use EVA for the evaluation of the company performance. This short paper discusses pros and cons of using EVA and gives the reader an idea of when and where the use of EVA makes the most sense.

Comparing The Five Factors Of Production Of For Profit Firms And Not For Profit Organizations In Southeast Wisconsin - Dr. Gary Keller

Assessing and explaining how corporate leaders utilize the factors of production at their disposal has been researched and debated traditionally by scholars but more recently the popular media. Over the centuries numerous economic and management theories have been proposed to resolve why some companies with equal access to labor, capital, land and ideas have succeeded while others collapsed. Traditionally, examinations of how managers classify and utilize the factors of production have centered on the private (i.e. for-profit) sector. However, on a global basis not-for-profit organizations (NPOs) or non-governmental organizations (NGOs) are Vo

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making an increasingly important contribution to their national economies. For example, in the United States in 2007 there were 1,569,572 tax-exempt organizations accounting for 8.11% of all wages and salaries paid with $2.6 trillion in total assets (National Center for Charitable Statistics, 2010).

This study compares and contrasts how managers in the private and public sectors located in two counties in southeast Wisconsin ranked the factors of production, defined as: financial resources, employees, management practices, materials, and technology. The data for this research project was derived from two studies designed to correlate firm/organizational management practices and economic outcomes of for-profit (Keller 2009) and not-for-profit firms (Keller, 2010) located in two counties located in the state of Wisconsin (USA) Racine and Kenosha.

Empirical Testing of Technology Spillovers Among Trading Partners - Dr. Fadi Fawaz

Previous literature suggests that trade contributes to knowledge and technology spillovers among trading partners. Using panel data and country-specific fixed effects, we show that the technology of a country is explained by existing technology of its major trading partners. We build an endogenous growth model for OECD countries for the 1960-2000 period; we draw the residuals to measure the Total Factor Productivity (TFP) of each country. Then using spatial econometrics, we regress the TFP of each country on previous TFP of its major trading partners. In addition, we run a Random Coefficient Model, to let this relationship vary randomly by country. Finally, we run the endogenous growth model again, but now it includes the Spatial lag term as an explanatory variable.

The Subjective Field of Ethics: A philosophical Panorama - Dr. Norman Madarasz

Most approaches of ethics in disciplines other than philosophy do not tend to emphasize the singular dimension in which it acquires its binding force and consequential implications. This dimension is the field of the subject. Subjectivity today is a vast concern in the social sciences. Most models of subjectivity stipulate the existence of at least a minimal concept of mind, i.e. of an interior field in which language, perception, intentionality and higher order inferences merge into synthesized experience. Often this mental synthesis projects a purpose that then translates into action. Inevitably, when one contemplates the field of the subjective conditions behind ethical conduct, one considers the philosophical models at the origin of the paradigms prevailing in the contemporary epistemological field. Our aim will be to distinguish some of the main paradigms of subjectivity generally encountered in ethics.

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Volume 1, Number 1 - October 1, 2010Abstracts

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The Value Added of the Human Resource Function of the Enterprise: Dr. Ali Mabrouk

HRM forms one of the most significant areas in determinig the success of the enterprise. A number of studies have noted the importance of HRM activities in the success or failure of a company, where business survival is directly correlated with the HRM function. People are increasingly being seen as the most critical asset of a company.

The strategic role attributed to the HRM department demands that it should be well managed in order to get the best out of the organization. Managing the human resource department demands measuring the performance of that department. HRM measurements transform human resources capabilities into measurable strategic value-add items that are then made transparent to the organization in order to improve connection with leadership across the company. In order to demonstrate the added value of HRM to the entire company, several possibilities have to be taken into consideration. In this article Dr. Mabrouk takes the reader through a review of these methodologies which include: measurement, linking, aligning of employees and the use of the HR balanced scorecard.

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Introduction

To d a y ’ s h u m a n r e s o u r c e management (HRM) function has evolved over the years from a pure administrative function to a more business-oriented strategic partner. Additionally, “there has been a shift in the focus of the workforce from the machine worker of 100 years ago to the knowledge workers of today. It will be up to HR to tap that human capital and u n l e a s h i t s i n h e r e n t g r e a t e r value” (Pepitone, 2000). Organizations, their behavior, and employees have changed, which subsequently has altered the character and responsibility of the human resource function over time.

HRM is, in the broadest sense, the relationship between the employer and the employee. Thus, HRM activities are cross-functional and are integrated into all of the business processes of the

company. Specifically, in today’s business-oriented and strategic HRM, in addit ion to performing basic administrative functions such as planning, organizing, staffing, leading, and controlling, there is also a strong focus on tasks that address the overall workforce environment via activities such as recruiting, selecting, training, compensat ing , appra is ing , and developing employees.

Today, HRM is key to the success of a company in order to align people to the organization's objectives and bus iness s t ra teg ies . HRM specifically focuses on securing, maintaining, and utilizing an effective work force, which an organization cannot survive without. However, the role of human resources is continually changing and evolving. In such an e n v i r o n m e n t , i t h a s b e c o m e increasingly important to measure, document and communicate the value

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1The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk

Dr. Ali Mabrouk, Ph.D. holds the position of Professor of Business Strategy as well as Director of Research at UGSM-Monarch Business School. Dr. Mabrouk also sits as a member of the Academic Council of the school. He holds the German Computer, Electrical and Information Technology engineering degree, Dipl.–Ing., from the University of Stuttgart in Germany. He is also the holder of a dual executive MBA degree from the Grande Ecole de Commerce ESSEC in Paris and the Mannheim Business School (Germany). He also is a holder of a Doctorate in Business Administration by Research from SMC University in Austria jointly with the Universidad Mayor de Santiago in Chile. His doctoral thesis investigated inter-firm collaboration and its performance measurement in the airline industry. Dr. Mabrouk has been a researcher at both the Fraunhofer Institute and the University of Braunschweig in Germany.


that the human resource function adds to the business. HRM can create value for a company by finding ways to improve workforce performance, increase productivity, and advance overall employee satisfaction by contributing to positive financial results for the organization (Pepitone, 2000).

In order to properly address the question of how HRM adds value to the business, f irst a comprehensive evaluation must be done that assesses where HRM can contribute to overall c o m p a n y p e r f o r m a n c e . T h i s assessment encompasses tangibly measuring a wide range of strategic, operational and administrative functions that both directly and indirectly improve the bottom line. Then, in order to increase the visibility of this value-add, the contribution of the human resource function can be expressed in financial terms similar to most other key performance indicators (KPIs) in the business strategy. The most simple equation for this is (1):

This formula, however only shows a portion of the overall HRM picture, as it is not always possible to express such benefits in monetary terms. Moreover, “it is becoming increasingly more common for human resource

departments to market or sell their services as a way of communicating their value added.” (Wintermantel & Mattimore, 1997) We will explore this issue more in Part 3 of this article where we cover in-depth the different possibilities available to measure the value added of the human resource function.

In the course of this article, the intention is not only to show the areas, in which HRM can add value, but also to investigate and analyze different models / KPIs that can be used to make these results visible to key decision makers.

While it is clear that companies expect HRM to add more value, studies have shown that one of the best ways in which to do this is by evolving HRM into a real business partner that directly improves performance of the business. This can be accomplished with effective talent management, robust change management, successful alignment of employees to the business strategy,

and a host of other HRM value-added activities that impact overall business effectiveness (Lawler, 2005).

The article is organized as follows: First, a brief overview of the

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(1) Value-Add = Impact on Performance - Consumption of Resources


foundations of HRM is given, and then the different roles of HRM in a company are determined. Depending on these roles, the goals for HRM are outlined. As HRM is working cross-functionally, the different stakeholders involved or addressed are then defined. These stakeholders expect a certain added value from the activities conducted by the HR department. In order to quantify the added value, specific methods need to be applied. The following chapter focuses on measuring the value added by HRM to the company. A framework o f d i f f e r e n t m e a s u r e m e n t methodologies and utilities are given. The studied methods highlight different areas of the measurements (financial, statistical or systematic) as needed by the different stakeholders. In a further section, the typical critical success factors (CSF) for HR managers to adequately demonstrate the added value of their department are identified.!

Goals of Human Resource Management

The HRM department, leaders within the company, and the workers council are all applying the same goals for human HRM. (Olfert, 2006) These are:

1. Economic Goals: These goals focus on the optimal utilization of

human resources, minimization of costs, increases in productivity and leveraging effectively the creativity of employees.

2. S o c i a l g o a l s : T h e s e g o a l s complement economic goals and focus on improv ing work ing conditions and the overall work environment for the employees (e.g. work place layout, industrial safety, c o m p e n s a t i o n , w o r k t i m e organization, conditions of work, personnel development, etc.) to improve productivity and increase the overal l value-add to the business.

3. O t h e r G o a l s : L e g a l a n d organizational goals are also important in order to ensure that all employees are treated fairly and within the boundaries of the law.

Overall, the main objective of HRM is to achieve business goals through the alignment of the human resource strategy with the overall business strategy by monitoring and adjusting the aforementioned goals as appropriate.

Personalization of the Human Resource Function

Within every company the HRM department needs to define a unique HRM strategy that is closely aligned to

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the targets of the overall company. Within this charter, a clear definition of the roles that the HRM department as a whole should play as well as the role of the individual human resource manager needs to be outlined. Furthermore, it is important to determine in what capacity these human resource managers will serve their stakeholders in order to assist the overall company in goal achievement. Two extreme positions for the HRM role can be identified: (Bechtel, 2007)

1. Passive Service Provider: In this capacity, HR managers are willing to fulfill only the specified requirements of their customers, but not more. In this way, they are completely reactive to the demands of their customers and cannot react in a proactive manner. A key drawback to this approach is that it often inhibits the HR manager’s ability to execute and live a long-term HR strategy as they are focused completely on operational tasks, and rarely are able to look at the strategic activities of the team.

2. Strategic Business Partner: In this r o l e , t h e h u m a n r e s o u r c e department plays an active part in the operation of the company. The human resource managers create instruments to meet the overarching strategic goals of the company and are expected to fulfill the needs of

both the internal and external customers in a proactive manner.

While these examples reflect the extreme points on the continuum, a more realistic view is a combination of b o t h a p p r o a c h e s . I n p r a c t i c e , companies adopt some hybrid form of each approach based on the i r respective industry sector, the operative s i tuat ion of the company, their competitors, and other market factors.

Perhaps a more practical and less extreme view of the role that HR professionals play is that which has been outlined by Dave Ulrich who c h a l l e n g e s h u m a n r e s o u r c e professionals to define the value they create for customers and employees. This perspective dictates that for HRM, delivering results means focusing on the outcomes and achievements of the human resource department and their contributions made to the business. He describes a framework that shows four key roles that human resources professionals must fulfill to focus on both strategic and operational aspects in both the long and short term in order to add the greatest value to the organization. Such human resource management activities range from managing processes to managing people and are described as follows: (Ulrich, 1997)

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1. Strategic Partners: translate business strategy into action. They systematically assess and align HR practices with business strategy, match organizations to systems, and design, integrate and operate these systems to ensure effective organizations. Overall, their focus is on executing strategy by building new organizational capabilities and p e r f o r m a n c e m a n a g e m e n t programs that are linked to desired outcomes.

2. Administrative Experts: improve processes and reengineer business processes to match the associated human resource processes (or vice versa), rethink value creation and how work is performed as well as measure human resource results in terms of efficiency (cost) and effectiveness (quality). Overall, their focus is on building an efficient infrastructure.

3. Employee Champions: listen and respond to employees and find the right balance between demands on employees and those resources available to assist employees while promoting employee contributions. Their focus is on increasing e m p l o y e e c o m m i t m e n t a n d capability.

4. Change Agents: understand how to implement change and can apply

these transformation methodologies in the organization. They lead reengineering efforts by being a role model and executing such changes first within the human resource function. They serve as catalysts for change, facilitators of change and designers of systems for change with a focus on creating a renewed organization.

This model was revised in 2005 and a fifth role was added with minor revisions to the descriptions of the remaining roles, as follows below: (Ulrich, 2005)

1. Employee Advocate: As an employee sponsor or advocate, the human resource manager plays an integral role in organizational success via their knowledge about and advocacy of people. This advocacy includes expertise in how to create a work environment in which people are mot ivated, contributing, and happy. This is accomplished by fostering effective m e t h o d s o f g o a l s e t t i n g , communication, and empowerment through responsibility, which in the end increases employee ownership in the organization.

2. Funct iona l Exper t : Th i s i s essentially about human resources not only possessing a body of e x p e r t k n o w l e d g e b u t a l s o

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leveraging it to improve decisions and deliver results. This includes resolving human resource practices issues like recruitment, promotions, transfers, measurements, rewards, training and development. The human resource expert has to contribute their knowledge to issues like work process design, internal communicat ions, organizat ion s t r u c t u r e s a n d l e a d e r s h i p development, all of which may not be under the human resource department’s direct influence.

3. Human Capital Developer: People are increasingly being seen as an organization’s most critical asset, thus an important role for human resou rce managemen t i s i n enhancing these human assets th rough deve lopment o f the workforce. Examples of activities undertaken by people in this role include creating individual training plans for employees to develop a particular skill or competency and acting in the role as coach.

4. Strategic Partners: The human resource manager should assist the line managers to reach their goals by assisting in the development and implementation of strategy. This involves playing an active role in crafting strategies, playing the devil’s advocate to help refine and test the workability of strategies, as

well as to play a developmental role in raising the standard of strategic thinking in the management team.

5. Human Resource Leader: In this role, the human resource manager acts as a role model of good leadership. To accomplish this, they need to first lead and value their own function before developing other leaders. Therefore hiring, training, performance management and communication with the human resource function must remain a top priority. Ulrich talks about effective human resource leadership, setting c lear goa ls , be ing dec is ive , communicating inside and out, managing change and defining results in terms of value-add for investors, customers, line managers and employees.

Each of these roles is important as they all add value and contribute to the overall function of human resource and the organization. Depending on the priorities of the company, the human resource manager has then to adjust the focus of activities. For this sake, the human resource manager should consult and exchange with other involved parties in the company such as the chief executive officer, the financial officer, the legal counsel and the key line managers in order to develop a common understanding and

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deduce the legitimate expectations for the human resource activities.

Definition of Stakeholder Requirements

The main stakeholders of HRM are existing and prospective employees of the company, the leaders and the shareholders. The personnel task portfolio of the human resource department is: (Olfert, 2007)

1. Planning: is a part of business planning and involves personnel p l a n n i n g o f i n d i v i d u a l employees, e.g. career planning a n d c o l l e c t i v e p e r s o n n e l planning, which operation’s groups, specialized divisions and/or the whole company concern, e.g. personnel status planning, personnel requirement planning, collective personnel ope ra t i ona l p l ann ing and personnel expenditure planning.

2. Recruitment: Recruitment is responsible to find the right employees at the right time for t he r i gh t r o l e . I t i s a l so sometimes called personnel marketing and includes the tasks o f i n t e r n a l a n d e x t e r n a l recruitment.

3. Placement: This task focuses o n g e n e r a l p e r s o n n e l employment from the f i rst working day of each employee through the expiration of their contract.

4. M a n a g e m e n t : P e r s o n n e l management is responsible for the controlling and monitoring of daily people related activities w i t h i n h u m a n r e s o u r c e management. They have the g o a l o f r e d u c i n g o v e r a l l personnel expenditures, limiting headcount f luctuation, and sh r ink ing absences wh i le increasing productivity.

5. Compensation: These activities a re cen te red on a l i gn ing personnel remunerat ion to corresponding organizational and financial achievements.

6. Development: In this area a focus is put on the personnel development of employees to preserve and improve the general qualifications of people so that they can contribute more completely to the current and future growth of the company.

7. Administration: focuses on the c o n s t r u c t i o n o f p e r s o n a l i n f o r m a t i o n s y s t e m s , t h e c r e a t i o n o f p e r s o n n e l

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documents, the set up of basic master data about employees, the completion of legal and general human resource related correspondence as well as the execution of a broad-spectrum of related administrative tasks.

8. Support: is focused on rounding out the overall compensation package of the employee, above a n d b e y o n d m o n e t a r y compensation. General services f o c u s o n d e l i v e r i n g a l l mechanisms, measures, and achievements for overall social welfare.

9. Controlling: is a core function of author i ty on operat iona l ly associated activities, including p l a n n i n g , c h e c k i n g a n d controlling of human resources.

At this level, it is clear that the activities of HRM cover the whole life-cycle of an employee within and after the engagement period with the company. As these emp loyees represent the most valuable asset of the company and there is a need to optimize the return of this asset, HRM is predetermined to fulfill this specific role.

Measuring Human Resource Added Value

Several approaches can be found in the literature to measure HRM and the majority emphasize the role that HRM plays in creating real value for a company. While there are several different types of value that HRM can provide, few are easily measured. This poses a particular challenge, as Peter Drucker states, “if you can´t measure it, you can´t manage it” (Drucker, 1991). As such, it is imperative for a human r e s o u r c e s m a n a g e r t o c l e a r l y demonstrate the value-add HRM provides to a company. To do this, many performance outcomes of HRM can be captured and used to outline the t a n g i b l e c o n t r i b u t i o n t h a t t h e department makes. In the next section, several different ways to highlight the value-add of HRM will be explored as well as outlining the corresponding tangible contributions made to overall corporate performance.

The Link Between Human Resource Strategy And Business Performance

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Clearly, this is a desired effect of HRM, and when one attempts to

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connect the dots between business s t r a t e g y, H R M , a n d c o m p a n y performance, it quickly becomes apparent that the key areas where HRM can have a great deal of impact a r e i n t h e a r e a o f e m p l o y e e e n g a g e m e n t a n d i n c r e a s i n g competitive advantage.

However, in order to add value in these areas, HRM needs to be involved from the start in the overall strategic business planning process of the company to be able to understand and to align its strategy with business needs. Today, most ‘best in class’ companies are integrating HRM as a true value-added partner in their business planning and strategic decision making in order to ensure and sustain competitive advantage. This is c r i t ica l , as f rom a compet i t ion p e r s p e c t i v e , m a n y c o m p a n i e s differentiate themselves by leveraging their human capital as a valuable r e s o u r c e t h a t p r o v i d e s t h e m considerable advantages over their competitors. Brand value increasingly depends on the worth of intangible assets such as knowledge, core competencies, and organizational capabilities that is captured within the human capital of the company. (Ulrich & Smallwood, 2005) As a result, in recent years, many organizations have tried to capitalize on increasing the value of these intangible assets by investing in the development of their employees.

Within a company, it is possible to evaluate the effectiveness of the human resource depar tment in performing their various roles and their contribution to the company as a whole, as described earlier.

Most of the administrat ive aspects of HRM are necessary to maintain the people in a given organization. However, understanding and evaluating the value of the skills that the company needs to find, attract, hire and lead these personnel while simultaneously developing their abilities to lead, constitutes the challenge of b u i l d i n g a n d m a i n t a i n i n g t h e organization for the future.

In looking at this contribution in more detail, there is consensus that the HRM contribution to organizational outcomes is a function of three interrelated processes. The first process is composed of defining the h u m a n r e s o u r c e s t r a t e g y a n d formulating the policies, programs and practices. The second process consists of shaping the human capital base, and ‘exploiting it’ in terms of worker motivation to maximize the full potential of human capital. The third process emphasizes the enhancement of o rgan iza t iona l pe r fo rmance by influencing the degree to which motivated and gifted workers are provided with the opportunity and the means to contribute to operational

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d e c i s i o n - m a k i n g . T h e s e t h r e e interrelated processes are shown in Figure 1.

At this stage, the human resource manager should define the outcomes of each of the above-mentioned activities and spec i fy the cor respond ing performance indicators.

Goal Setting

As the Senior Vice President of human resources for PepsiAmerica has stated: (Greengard, 2005)

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6$&'/+(;%/?A$)78$'%-'%1#$%B$9%1/%'@))$''C>!

As long as goals with measurable targets are set, the human resource value-add can easily be proven and it is easily seen if the end results are positive for the business. Therefore, it is of the utmost importance to derive the HRM strategy and goals directly from the overall business strategy so that these can then be cascaded to individual employees. In order to ensure clear alignment between the business and HRM objectives, it is equally important to measure bottom-

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Figure 1: Interrelated Processes of Human Resource Management

Source: Adapted from Bamberger Peter, Meshoulam Ilan (2000)


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line savings and contributions that HRM delivers to be able to clearly express in financial terms the value-add the function provides. This is due to the fact that while ‘every process has a cost’, a company must maximize the return on these HRM investments and apply such costs intelligently to get maximum return. (Smith & Marinakis, 1997) Subsequently, the establishment of such financial objectives for HRM has to also be accompanied by a robust performance management process which follows up on the committed

targets and achieved results in order to d e l i v e r t r a n s p a r e n c y t o t h e organization.

Differentiated Perspectives For Performance Evaluation

There are a number of ways to evaluate human resource practices and human resource management as a whole. In order to demonstrate the added value of the human resource program, the human resource manager

Figure 2: Perspectives of Performance Evaluation

Source: Mabrouk (2010)


should consider the three types of evaluations as illustrated in Figure 2.

As depicted, productivity serves as an important driver of financial performance and HRM involvement plays a central role in ensuring success. Specifically, the human resource manager can emphasize the link between the performance of his department and that of the bottom-line: as i n the case o f ope ra t i ona l performance (voluntary turnover, absenteeism and productivity). Since operational performance is directly linked to the financial performance of the company (safeguarding profitability, liquidity and solvency) by means of productivity, it is possible for the human resource manager to demonstrate in th is way, the va lue-add of h is department. In other words, to determine the extent to which the activities of HRM influence the financial performance of the company, it is important for the human resource manager to pay attention not only to f inancial outcomes, but also to intermediate operational criteria that indicate how financial results are achieved.

Financial Evaluation

The first and probably most ambitious method for a human resource manager to demonstrate the value-add of his department consists of measuring the costs and benefits of different human resource strategies and individual human resource practices in financial terms. This demand seems to be vital for the human resource managers in today’s world, as “in a world in which financial results are measured, a failure to measure human resource policy and practice implementation dooms this to second-class status, oversight, neglect, and potential failure”. (Pfeffer, 1994) In the following, two of the basic approaches for the financial evaluation of HRM are discussed.

Return on Investment

The basic approach here is to calculate the cost of a human resource intervention (e.g. training), and then to determine the benefit in monetary terms of the achieved results (e.g. improved productivity or a reduction in absenteeism). To calculate the ROI of a human resource intervention program, the human resource manager needs to

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(2) ROI = Net Benefits / Intervention Cost


calculate the total costs and benefits of the program using Formula (2). (Saks, 2000)

Using this method, the human resource manager is able to show the bot tom- l ine contr ibut ion of any intervention to line managers (such as production managers). However, the difficulty of this method becomes obvious when trying to consider ‘soft’ measures such as communication, learning and interpersonal skills, which make part of a human resource intervention. These soft measures are much more difficult to quantify in monetary terms than are ‘hard’ measures such as absenteeism, productivity and labor productivity. These formulas and measures should be derived from a listing of activities and the variables associated with those activities.

Human Resource Accounting

The second approach is based on ‘ h u m a n r e s o u r c e c o s t i n g a n d accounting (HRCA)’ method. Human resources can be considered as (intangible) assets for the company. The main goal of the HRCA method is to try to put these intangible assets (for example in the form of goodwill) into a financial accounting framework and try in this way to influence the company’s management decision-making and learning processes. HRCA is then “the process of identifying and measuring

data about human resources and communicating this information to interested parties”, (Flamholtz, 1985) w h i c h a i m s t o “ i m p r o v e t h e management of human resources from an organizational perspective by increasing the transparency of human resource costs, investments and o u t c o m e s i n t h e m a n a g e m e n t accounting rituals, such as profit and loss accounts, balance sheets and investment calculations”. (Cascio, 1991)

The human resource manager could, for example, think of generating human resource profit and loss accounts. This can illuminate the financial value-add of human resource management. Figure 3 is an example that a human resource manager could use for this purpose.

Here value-add is measured by the share of personnel costs contained in the gross margin. Since the remaining gross margin after deduction of personnel costs must be sufficient to pay for investments, interest, taxes and returns for the owners, the personnel costs are to be kept on a designated level.

HRCA seems to be an interesting concept, but it seems not to have gained popular acclaim or adoption, as there has not been a serious effort to develop generic and cross industry measures to date. Moreover, HRCA has failed to develop much in the way

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of practical applications. Pfeffer (1997)remarks that due to the low standing of HRM in many companies measurement is highly desired, but consequently is quite difficult to achieve due to the political roadblocks that are in place that prohibit this.

Figure 3: Human Resource Income Statement

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">#&C3#@7!,!DEEF

Statistical Evaluation

The statistical evaluation of human resource strategy and practices includes basic descriptive indices such as measures of central tendency. Such statistics allow the human resource manager to make statements about the correlation between human resource practices and outcome variables. The human resource manager should regularly gather human resource metrics, translate these performance metrics into incremental financial value, and adjust the timeframes and scale of the value to fit each stakeholder. If the metrics are especially sensitive, short reporting cycles allow the human resource manager to gain support from key stakeholders and sponsors before formal reports are made. The following table illustrates some examples of the rat ios that the human resource manager can use.

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Human Resource RatiosHuman Resource RatiosHuman Resource Ratios

Strategic Planning

External Staffing

Strategic Planning

HR Staffing

Acquisition of Employees

Cost Per Hire

Acquisition of Employees

Acceptance Rate


Human Resource Management Audit

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$8(;@(7+.%1#$%$:$)78$+$''%/<%1#$%$+7&$%

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That is to say the evaluation of the conducted activities, policies and systems based on the evidence collected. A human resource manager should conduct such an audit to demonstrate the human resource alignment with the company business strategy. This includes the systematic assessment of how HRM is contributing to the company achievement of business goals. Figure 4 illustrates the

typical steps that should be conducted within an audit process.

To demonstrate to the rest of the organization that the human resource unit is a partner with a positive influence on the bottom-line of the business, the human resource manager must be prepared to measure the results of human resource activities and then communicate that information to the rest of the organization.

The audit could be conducted either by the internal audit department of the company or by external consultants specialized in the human resource management field.

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Employee Training & Development

Training Days Per EmployeeEmployee Training &

DevelopmentTraining Budget Per Employee

Organizational Development & Change Supervision

Performance Management & Rewards System

CompensationPerformance Management & Rewards System Rate of Performance

Appraisals

Organizational Behavior & Theory Early Resignation Rate


Human Resource Benchmarking

Once the human resource manager has gathered the information on the performance of his department, a comparison can then be made aligning the results to some standard best practice. One approach to assessing HRM effectiveness is benchmarking, which compares specific measures of performance against data on those measures from other organizations believed to be applying best practices. This includes the comparison of cost and other

efficiency-based performance outcomes associated with activities of the human resource function.

As illustrated in Figure 5, a human resource manager can conduct benchmarking in a number of different ways, with real pay-backs realized through:

• G e t t i n g a s e n s e o f t h e o r g a n i z a t i o n ' s p o s i t i o n o r performance, relative to previous years, or as compared with similar organizations

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Figure 4: Human Resource Audit Process



• U n d e r s t a n d i n g t h e r e l a t i v e strengths and weaknesses of its current people practices, in relation to perceived ‘good practice’.

However, reliance only on the types of benchmarking measures

stated above could lead to considerable failures in measuring the human resource’s important contributions to company success. Moreover, such a unilateral reliance can also encourage an approach to human cap i ta l management that is counterproductive.U

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk

Figure 5: Human Resource Benchmarking


Human Resource Balanced Scorecard

The balanced scorecard (BSC) translates a company’s strategy into measurable objectives. The BSC not

only includes financial measures, but a l so comp lements these w i th operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement ac t iv i t ies . These


operational measures are the drivers of future financial performance.

Traditionally, the BSC displays the following four perspectives: (Kaplan & Norton, 2005)

2 Financial Perspective: Financial performance measures indicate whether the company's strategy, implementation, and execution are c o n t r i b u t i n g t o b o t t o m - l i n e improvement. Typical financial goals are pro f i tab i l i ty, growth, and shareholder value.

2 Internal Process Perspective: The internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction – factors that affect cycle time, quality, employee skills, and productivity, for example. It is important to identify and measure the company's core competencies and the critical technologies needed t o e n s u r e c o n t i n u e d m a r k e t leadership. Companies should d e c i d e w h a t p r o c e s s e s a n d competencies they must excel at and specify measures for each of these.

2 Learning and Growth Perspective: This perspective focuses on the continuous improvement of the organization with regards to their existing products and processes and

the ability to introduce new products. Only through the ability to launch new products and continual ly improve operating efficiencies can a company penetrate new markets and increase revenues and margins – in short, grow and thereby increase shareholder value.

2 Customer Perspective: Customers' concerns tend to fall into four c a t e g o r i e s : t i m e , q u a l i t y , performance/service, and cost. Lead time measures the time required for the company to meet its customers' needs. Quality measures the defect level of incoming products as perceived and measured by the customer. The combination of performance and service measures how the company's products create value for its customers.

From an HR perspective, the BSC approach works quite well if the goals are selected in a way that HR is able to set measurable targets that showcase precisely how HR is creating v a l u e . A n e x a m p l e o f h o w t o accomplish this in the four BSC perspectives is outlined as outlined in Figure 6. Questions that may be asked include:

- What is our return on our investment in our people?

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- Is our service delivery effective and efficient?

- Are our human assets aligned with future needs?

- Are we serving the needs of our customers?

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Figure 6: Balanced Scorecard Perspective

Source: Halikova, Hoyal &Osgood (2003)


Critical Success Factors

For the human resource manager to be able to demonstrate the value-add of his department to the company performance, some critical factors need to be met, these are:

2 Know the Business: To provide the foundation for value, the human resource manager and his staff should have a deep understanding of the business they are working for, its key chal lenges and st rategic direction. The human resource manager should know who the key external customers are and have periodic interactions with them in sales, operat ional, or service situations. Moreover, they should spend time periodically in production units and understand the needs of production managers. In addition, the human resource manager is expected to know how the company o p e r a t e s f i n a n c i a l l y . B y understanding the business, its n e e d s a n d h o w i t f u n c t i o n s financially, the human resource manager will not only be in a better position to develop innovative solutions to critical business issues, but also to demonstrate the value-add of the department to the company.

2 Monitor the Environment: To be a proactive strategic partner in the

company, the human resource manager should understand the forces outside the company that could affect its future success. This includes a wide range of issues including:

-Technology shifts -Key industry trends and issues -Globalization issues -Outsourcing and off-shoring trends -Demographic shifts in workforce segments -Legal and regulatory issues

Defining The Human Resource Vision And Building Alignment

The human resource manager should have a healthy understanding of the business’ operations, the key strategies and challenges of the company and should be aware of the relevant environmental forces. This provides a basis not only for defining a human resource strategy that enhances the value of the company, but also demonstrates the added value of his department to the company. For a company whose future success depends heavily on product innovation, the human resource manager should address i ts approach to ta lent acquisition, development and retention. When bus iness s t ra teg ies and challenges are used to focus on the vision, the human resource manager

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then can more closely align the human resource processes and practices with business needs. This alignment is a key step in adding value to the business.

Conclusion

HRM forms one of the most significant areas in determinig the success of the enterprise. A number of studies have noted the importance of HRM activities in the success or failure of a company, (Terpstra & Oison, 1993) where business survival is directly correlated with the HRM function. People are increasingly being seen as the most critical asset of a company. The main miss ion of the HRM department is therefore to “get the right person at the right place at the right time”. This statement summarizes the responsibility of the department and sets at the same time the framework for measuring its performance in achieving this mission.

The strategic role attributed to the HRM department demands that it should be well managed in order to get the best out of the organization. Manag ing the human resource department demands measuring the performance of that department. HRM measurements transform human resources capabilities into measurable strategic value-add items that are then made transparent to the organization in

order to improve connection with leadership across the company. In order to demonstrate the added value of HRM to the entire company, several possibilities have to be taken into consideration.

One approach to measure the value-add of HRM is to determine the financial impact that HRM has on the company. This can be exhibited either through the use of the so-called “human resource accounting” method or by determining the return on investment (ROI) of the intervention of the human resources department to enhance the output (quality/quantity) of certain processes.

The HRM manager can also emphasize the link between the performance of the HRM department and the bottom-line; that is operational performance. Since the operational performance is directly linked to financial performance of the company through improved productivity, it is possible for the HRM manager to demons t ra te the va lue -add by reviewing key operational criteria and their impact on overall financial result achievement.

One key aspect of the HRM contr ibut ion to overal l company performance is the ability to assist in the alignment of employees to the company business strategy. In addition,

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HRM can also perform a self audit in order to identify its own strengths and weaknesses which are then compared with benchmarks from other similar companies in order to truly assess the HRM performance.

M o r e o v e r, u s i n g a h u m a n resource balanced scorecard helps the h u m a n r e s o u r c e m a n a g e r t o communicate the HRM and corporate strategy throughout the department, to align departmental and personal goals to the strategy, and to link the strategic objectives to long-term targets and annual budgets.

In order to fulfill the task described above, human resource managers needs to not only understand the business strategy of the company, they need to have a healthy understanding of the operations of the business, the key strategies and challenges of the

company, as well as be aware of the changes in the overall business environment. This knowledge can then be used to set up the appropriate HRM structures and processes in order to meet the needs of the organization. Having established these structures, the HRM manager then needs to assist the organization in setting the goals and key performance indicators (KPIs) for the employees. For tracking purposes, a performance management process needs to be in place in order to measure and follow up on these KPIs.

To sum up, a HRM department that manages to prioritize its investments and link these investments to improved business performance is placing itself at the heart of value creation within the company and can clearly show the contribution that they make to the financial performance of the company as a whole.

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References

1. Bamberger, Peter and Ilan Meshoulam, “Human Resource Strategy: Formulation, Implementation, and Impact” 2000, Thousand Oaks, CA: Sage Publications.

2. Bechtel, Roman “Strategie als dynamische HR-Aufgabe”, www.personalwirtschaft.de, 02, 2007.3. Berthel, Jürgen & Becker, Fred G., “Personal-Management: Grundzüge für Konzeption betrieblicher

Personalarbeit” 8. Auflage, 2007.4. Cascio, W.F., “Costing human resources: the financial impact of behavior in organizations”, 3rd ed.,

1991 PWS-Kent, Boston.5. Dessler, G. (2005): “Human Resource Management”, Tenth Edition. Upper Saddle River, NJ: Prentice

Hall.6. Drucker, Peter, “Practice of Management”, New York, Harper Business, 1991.


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Resource Management, Summer 2005, Vol. 44, No. 2.13. Kaplan, Robert & Norton, David, “The Balanced Scorecard: Measures that drive performance”, The

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effects on firm performance: an implementation of the competing values framework”, International Journal of Human Resource Management 14:4, June 2003.

16. Pepitone, James, “HR’s new role: creating value”, HR Focus, January 2000.17. Pfeffer J., “Competitive advantage through people”, Harvard Business School Press: Boston, MA.,

1994.18. Pfeffer, J., “Pitfalls on the road to measurement: The dangerous liaison of human resources with the

ideas of accounting and finance”, Human Resource Management, Vol. 36, No. 3, 1997.19. Phillips, Jack, “Accountability in Human Resource Management”, Gulf Publishing, 1996.20. Saks, A. M., “Research, measurement, and evaluation of human resources”, Canadian edition -

Scarborough, Ontario, Nelson Thomson Learning, 2000.21. Schmeisser W. & Clermont A. “Personalmanagement”. Herne/Berlin 1999.22. Smith, M., Marinakis S. “Measuring HR value added from the outside in”, Employment Relations

Today, Autumn, 1997.23. Spoginardi M., “Conducting a Human Resources Audit—A Primer”, Employee Relations Law Journal,

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Entrepreneurship Theory and Practice, 27(3), 1993.25. Ulrich D., “Human Resource Champions – The next agenda for adding value and delivering results”

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Citation: This article may be cited as:

Mabrouk, A. “The Value Added of the Human Reseource Function of the Enterprise”, The Monarch Management Review, UGSM-Monarch Business School, Vol. 1, Num. 1, Oct. 2010, pp. 80-102


103

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