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TABLE OF CONTENTS

I. THE GOAL: VALUE CREATION 3

II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT 4

III. THE IMPLICATIONS: CHANGING THE HR FUNCTION 8

IV. WHAT NEEDS TO BE DONE 9

APPENDIX: CHECKLIST FOR BEST-PRACTICE HR MANAGEMENT 10

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"People are the company's most important capi-tal."—an often cited maxim.

If this maxim is indeed true, it immediately raises thequestion: What should businesses do to derive maxi-mum value from this capital?

As part of a comprehensive worldwide HR project, TheBoston Consulting Group interviewed leading interna-tional corporations to find out how their HR functionscreate value. The central findings from the interviews—supplemented with additional research and BCG proj-ect experience—are summarized here.

Essentially there are three key value levers for compa-nies to pull

■ Strategically controlling human capitalas an integral part of business strategy:Linking the HR strategy with business strategy andcontrolling the value contributed by employeeswith quantitative and qualitative metrics.

■ Orienting functional HR work stronglytowards performance: Aligning operating HRinstruments and processes such as recruitment,evaluation, development, and compensationmore strongly with performance. Increasinglytransferring these tasks to line managers.

■ Increasing the efficiency of the HR pro-cesses: Bundling activities in national or region-al shared-service units and optimizing processesthrough automation, standardization, factor-costreduction, or outsourcing.

Using the last value lever alone can lead to cost sav-ings of well over 30 percent of overall HR cost. Thevalue potential of the first two levers is even higher: forexample, raising the value added per employee by1 percent would lead to additional earnings of severalhundred millions, depending on company size.1 Also,

our experience shows that differentiated personnel costcontrol, for example, can lead to savings well above 1percent of total personnel cost.

Realizing this value potential requires considerablechange within HR organizations (see exhibit 1). Newmodels are being discussed both theoretically and with-in the HR community, using buzzwords such as "strate-gic partner" and "administrative expert." To what extent,however, are those models being implemented?

Our research shows that most companies address indi-vidual aspects of the central value levers with varyingdegrees of intensity. Best practices exist in specificareas, but we know of no firm that can serve as a rolemodel on all dimensions. In this report, therefore, wehave grouped best practices thematically. We start withthe strategic, functional, and administrative HR pro-cesses (part II) and then discuss the implications for theHR function itself (part III).

I. THE GOAL: VALUE CREATION

I. THE GOAL: VALUE CREATION

1 Because of multiple factors which influence the companies performance (market developments, competitive dynamics etc.), exact prove of cause and effect is difficult. Studies demonstratinga correlation between excellent HR management and outstanding business enhancement are, however, mounting. For example, an empirical study BCG conducted with Sustainable AssetManagement proved that significantly high correlations between people-management practices and financial performance exist (see "Sustainable Asset Management Insight," January 2004).

All respondents agreed that in principle HR work shouldbe further aligned with strategy. Companies can derivemaximum value from their "human capital" by system-atically managing it. This means especially integratingHR topics into the business strategy while simultane-ously establishing HR control systems to measure defi-ciencies and results.

For strategic HR work this means:

■ Explicitly defining the HR strategy: Best-practice companies annually define and docu-ment their HR strategies as a component of theirbusiness strategies. They use as a basis for analy-sis the company's business strategy (for example,

competence requirements) and the external envi-ronment (for example, job-market trends). Theprocess also includes establishing transparencyinternally (for example, concerning deficits inleadership or employee commitment). Best-prac-tice companies also quantify their strategic goalsand link them to specific measures. These goalsconcern both quantitative employee parameters(for example, personnel costs, talent pools) andqualitative parameters (for example, specific com-petencies, leadership behavior), as well as therough architecture of HR work (focus and sharedservices, for example). Best-practice companiesaddress topics firm-wide through a few focusedinitiatives (see exhibit 2)

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I. THE GOAL: VALUE CREATION

II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT

THE HR WORLD IS CHANGING SIGNIFICANTLY

"HR is there to help, to guide people through decisions but not do it for them. It's a bit like a self-service buffet: We will provide tools, learning and

development, and data."Vance Kearney, VP HR, Oracle

"There are certainly some very significantcost savings in shared services. Processes are

simpler and faster and you can refocus the energy of the corporation."

Bob Livingston, VP Employee Services, P&G

Costs of the HR function

HR function implications: changes to employee profiles, processes, organization, and controlling

(1) Much higher savings at some companiesSource: BCG benchmark data, public sources

Trend

1100––2200%%

4400––5500%%

22––77%%

Traditional

5500––6600%%HR Services

5500––6600%%

3300––4400%%

Strategic HR

Functional HR (on individual level recruiting, development, compensation, placement, etc.)

-30%–45%(1)

• Standardization, self services

• Shared services• Outsourcing

• Focus on strategic change

• Managing human capital

• Increasingly transferred to line managers,e-enabling

"HR has to navigate the company through the tides of social change and mobilize people emotionally."

Jürgen Weber, former CEO, Lufthansa

"HR has to be managed like finance."Randy MacDonald, Senior VP HR, IBM

al

Exhibit 1

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II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT

■ Integrating HR strategy and goals intothe business planning process: Best-prac-tice companies understand that HR is a key part ofthe business. Strategic HR topics are integral tothe planning process and take up more than 20percent of the overall planning time. These com-panies provide their HR function with a clear plan-ning process similar to what they give to theirfinance department, including dedicated planningformats for HR measures submitted before officialdivisional planning rounds. Top managementparticipates extensively in HR strategy discussions.

■ Using standardized metrics worldwidefor HR control: Best-practice companies con-trol and quantify the impact of HR work with stan-dardized metrics; as many as 150 HR metrics arecollected and reported in all regions and divi-sions. At the same time, best-practice companiesconsider quantitative goals (personnel costs, val-ued-added measures) as well as qualitative goals(competencies and motivation measures). One

study participant uses a worldwide, uniform surveytool to measure commitment in order to review"soft" factors and develop constructive measures.As another participant put it, "HR has to be man-aged like finance."

■ Transferring HR goals to individual tar-get agreements: Best-practice companies usetarget agreements to transmit their HR strategy tothe individual level. For example, for all executivesat one surveyed company, "identification anddevelopment of junior talent" is a goal in theirindividual target agreements.

■ Actively managing change processes: Intheir corporate centers or HR networks, best-prac-tice companies charge highly specialized employ-ees with the task of managing M&A topics such asdue diligence and post merger integration. Doingso supports, for example, employee developmentin integration management and cultural harmo-nization of the merged companies. In addition,

Initiative focused on two or three key HR topics

DEVELOP YOUR HR STRATEGY SYSTEMATICALLY

(1) The three factors (business strategy, internal company factors, and external environment) can be actively influenced by the HR strategySource: BCG research; BCG case experience

Business strategies• Market strategy• Portfolio strategy• Synergy management

Internal company factors• Current deficits• HR focus• Management

philosophy and self-image

External environment• Legal framework• Labor market• Technological changes

3

1

HR strategy(1)

HR controlling

Value added, costs,size of workforce

Competencies, motivation, leadership, and

culture

Key HR activities

2

Exhibit 2

best practice is to develop and internally initiateconcepts for cultural change, such as stimulatingmovement toward a stronger performance cul-ture.

In the area of functional HR (HR processes related toemployee management), line management increasing-ly carries out HR responsibilities. In addition, functionalHR is moving toward a strong performance orientation.This means

■ Line management has complete HR re-sponsibility: Implementing this widely called formeasure is supported through effective, simple-to-use, e-based HR tools; best practice compa-nies also prepare and coach line management tocarry out HR work. Examples such as line man-agers in professional service firms recruitingemployees, IT firms using only e-based perform-ance management, and HR being only marginal-ly involved in integrating new employees showhow radical the transfer of tasks to line manage-ment can be.

■ Performance management uses standar-dized, value-oriented criteria: Best-prac-tice companies use globally consistent standardperformance criteria for all their top and middlemanagement. They not only evaluate financialperformance, they also systematically integratebehavior-oriented criteria into the measurementof performance. Promotions and changes in com-pensation are correlated explicitly with bothvalue-oriented behavior and business perform-ance.

■ Performance management is consistent-ly integrated into all HR processes: Best-practice companies systematically link perform-ance management with the feedback, develop-ment, and compensation process, ensuring aclosely defined timeline and a consistent datapool. They also strongly correlate individual per-formance with compensation; variable compo-nents average at least 10 percent for all non-salaried employee groups and increase steeply asone moves up the hierarchy.

■ Talent development is extended to spe-cialist groups: Top people in functional areassuch as sales and R&D have considerable influ-ence on a business's overall performance, sobest-practice companies integrate these groupsinto a comprehensive talent-development pro-cess. They establish career models, goal-orienteddevelopment processes, and continuing perform-ance management for all business-critical em-ployee groups.

Through HR services companies can increase theirefficiency significantly by pulling various key levers—process standardization, bundling, and optimization offactor costs (see exhibit 3). Some companies have real-ized cost savings well in excess of 30 percent.

Achieving these savings involves applying several bestpractices:

■ Consistent use of all efficiency levers:Through standardization, automation, and self-service HR processes can be carried out muchmore efficiently. By pooling HR services on boththe national and regional levels, companies gainadditional efficiencies. Through hub-and-spokeconcepts and a multitier system, best-practicecompanies reach an optimal mix between localspecificity and regional standardization. More-over, by moving services offshore they optimizeservice-staff factor costs. One surveyed company,for example, has efficiently transferred part of itsGerman paycheck processing to Budapest.

■ High attention is given to quality im-provements: The quality of services is key to theacceptance of any process changes. Best practicecompanies even improve quality through continu-ously assessing customer requirements and meas-uring satisfaction. In addition, these companiesknow that effective transition management is cru-cial—that is, preparing the organization forchange. Central issues here include high datasecurity, smooth employee migration, profession-al project management, and a change-manage-ment program.

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II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT

■ Shared services units carry out HR standard serv-ices: Best-practice companies centrally provideand efficiently manage standard services such aspaycheck processing and personnel data admin-istration by using an internal shared-service cen-ter or outsourcing. Even recruiting support, expatmanagement services, and training assistance arecentrally managed—at least at the country level,for all organizational units.

■ Internal HR shared services are managed as "out-sourcing deals": Best-practice companies choosea market-model approach to manage their inter-nal shared services. This includes detailed service-level agreements, transparent price determina-tion, and a clear, differentiated governance struc-ture as well as stringent performance control fromthe beginning. Best practice includes measuringcriteria for service quality, such as service avail-ability, accuracy of information, and responsetime.

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II. THE PROCESSES: VALUE-ORIENTED HR MANAGEMENT

ADDRESS ALL THREE PRODUCTIVITY LEVERS WITH EQUAL ENERGY AND IN PARALLEL

Greatest optimization potential exists through activating all levers: in parallel and combination of "A measures"

Process standardization and automation

Delegation of functions to employees and managers

Standardization, automation, and self-service Realization of pooling potential

Economies of scale

Elimination of parallel organi-zations via harmonization of processes

Best-practice sharing

Factor cost reduction

Optimization of services' cost structure

• Infrastructure• Wage costs

Increasing flexibility to react

HR services

Measures

Cost savings(1)

A B CMeasures

Cost savings

A B CMeasures

Cost savings

A B C

(1) Net effect after increase in complexity costs/additional IT costsSource: BCG case experience; benchmark interviews

Exhibit 3

Implementing these best practice concepts has signifi-cant consequences for both the HR function and theprofiles of HR employees. These changes also have im-plications for the company's organizational design.Particularly important are the following:

■ Increase the business orientation of HRemployees: Exchanges between HR and otherbusiness functions foster a stronger business ori-entation among HR employees. The goal is to fillabout half of all HR leadership positions andabout a third of all HR staff positions with employ-ees from other functions. In so doing, HR increas-es its performance orientation because talentdevelopment and performance management arealso executed consistently within the HR functionitself.

■ Develop HR networks: Best-practice compa-nies work in networks within the HR function topromote development of new instruments andstandards. They realize the benefits of using HR'scumulative know-how, using resources efficientlyand sharing a worldwide common basis fromwhich to work.

■ Standardize IT platforms worldwide: Best-practice companies implement consistent HRprocesses by using shared IT platforms globally.They harmonize systems, for example for perform-ance management or payroll administration on aregional or global level and thereby reduce thecomplexity of IT-based HR processes.

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III. THE IMPLICATIONS: CHANGING THE HR FUNCTION

III. THE IMPLICATIONS: CHANGING THE HR FUNCTION

KEY CHANGES FOR THE HR FUNCTION

HR employees

HR controlling

Div. 1 Div. 2 Div. 3 Div. 4

HR network

HR processes

Develop-ment

Place-ment

Eva-luation

Recruit-ing

HR organization

Division Sharedservices

FuturePresent

Worldwide standardized and segment specific HR metricsMeasurement and quantification philosophy

Local, unlinked control of HR topicsQualitative orientation

Business orientationRotation between business and HRStrong performance orientation

Strong functional orientationFunction-specific career pathStandard HR tools

Integrated, worldwide HR organizationInternational network

Separated HR organizational entitiesCountry or regional orientation

Standardized IT platformsKey HR processes uniform worldwide

Local and country-specific IT platformsHighly heterogeneous HR processes

Clear global business partner and shared services setupSeparation of governance and services

Mix of different HR organizational modelsIntegration of governance and services in "comprehensive" HR

Corporate

Division

Exhibit 4

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IV. WHAT NEEDS TO BE DONE

■ Ensure corporate HR has worldwide gov-ernance: Best-practice companies clearly dividecorporate HR activities with a worldwide orienta-tion from regional and country-specific HR tasks.They deliver this global governance function witha lean organization with best practice examplesshowing around 20 FTEs. In addition, they sepa-rate the corporate governance function from HRservices to avoid conflicts of interest and to opti-mize service delivery.

■ Control the HR function: Best-practice com-panies implement systematic control processes fortheir HR function. Using scorecards to improve

the transparency of their HR organization, theymeasure, for example, customer satisfaction withthe function, the ratio of HR personnel to totalemployees, and HR costs on all organizationallevels. Several of the surveyed companies haveimplemented systematic control processes fortheir overall HR organizations.

Exhibit 4 summarizes these fundamental to the HR func-tion.

As noted earlier, most companies employ best practicesonly in selected areas. The degree of professionaliza-tion in companies' HR functions varies widely and needsto be determined individually (see the checklist below).

In general, there seems to be a particular need foraction on HR measurement and control. For example,only three of the surveyed companies could pull readi-ly the number of HR employees to total headcount outof their systems. This lack of quantitative data is, in ouropinion, a major reason why the HR function often fallsso far behind in internal perception in comparison withthe finance department. With respect to functional HRwork, many companies have many good individualconcepts in some of their business units, for example,on performance management or employee develop-ment. The biggest challenges in this area often lie in

harmonizing these concepts and implementing themconsistently throughout the whole organization as wellas in reducing complexity and making them easier touse. With respect to HR services most surveyed compa-nies have taken initial steps to bundle and optimizesome services, but are nevertheless far from havingrealized the full savings potential.

Ultimately, top management's strong commitment to HRbest practices is critical to realizing the full impact onvalue. To develop a world-class HR function, top man-agement must consider HR topics a high priority; forexample, by discussing them thoroughly at each exec-utive board meeting. By asserting daily leadership, topmanagers can address employee expectations effec-tively and serve as role models for personnel manage-ment throughout the company.

IV. WHAT NEEDS TO BE DONE

Strategic HR

1. HR strategy is part of overall company strategy, is defined annually, and is clearly documented.

2. HR strategy is developed systematically by analyzing the business strategy, the external environment,and the deficits within the company.

3. HR strategy is translated into quantitative goals and specific measures.

4. Strategy addresses quantitative goals (e.g., personnel costs), qualitative goals (e.g., leadership, com-petency requirements), and key areas of HR management (e.g., shared services organization, key HRactivities).

5. HR topics and strategy are included in the corporate planning process in a formal way through spe-cific templates and clearly defined processes. Planning of HR topics takes at least 20 percent of theoverall corporate planning process time.

6. A few key topics are addressed by companywide HR initiatives.

7. HR metrics are used to continuously control the company HR strategy: they are collected and ana-lyzed on a worldwide, standardized basis and are compulsory for all business units and regions.

8. HR metrics include quantitative metrics (e.g., value added per person/productivity, personnel costcomponents and headcount development by key employee groups), qualitative metrics (e.g.,employee commitment, competence development, leadership indices), and HR process and organ-ization metrics (e.g., HR function cost, HR headcount ratios, recruiting success rates).

9. HR metrics are validated through in-depth analysis of inputs and outcomes (correlation analysis).

10. HR measures are transformed into individual target agreements to hold management accountablefor implementation of HR strategy and goals.

11. HR aspects of change processes (e.g., M&A issues restructuring) are competently supported by spe-cialists with in-depth knowledge and ready-to-use tools.

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Appendix

Appendix: Checklist for Best-Practice HRManagement2

2 Note: Best-practices results from interview series and BCG research activities. This list is focused on key practices and does not claim to be fully exhaustive.

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Appendix

Functional HR

1. Line managers are fully responsible for HR work and execute the major share of individual HR work.

2. Key HR tools (e.g., performance appraisal, development systems, compensation system) are consis-tent worldwide, easy to use, e-based, and fully in use (alternative tools are no longer available).

3. Line managers are prepared to handle their role as responsible "HR managers" through sufficienttraining, coaching, and if necessary dedicated change programs.

4. A companywide, standardized set of individual performance measures (e.g., financial results, per-formance evaluation) is applied to at least the first three levels of worldwide management. Otheremployee groups also have clearly defined performance measures.

5. Performance measures include financial and behavioral performance (e.g. leadership quality) toensure alignment with company values. There are visible examples that career promotion can failwith lack of behavioral performance.

6. The spread of performance results is monitored and the distribution actively managed.

7. There is a high correlation between performance results and individual compensation: a minimumof 70 percent correlation coefficient with significant share of variable compensation in all employeegroups (at least 10 percent of total).

8. Performance management is an integrated process with clearly defined interfaces with feedback andcareer development processes (e.g., common fixed timeline, integration of outputs in one database).

9. For key HR processes, a defined road map is established that highlights the degree of standardiza-tion for each process, tailored to each employee group.

10. Talent is developed systematically. For each talent pool (segment), management responsibilities andprocesses are clearly defined.

11. All "high-value employees" (e.g., from research, production, marketing, and sales) are included incomprehensive talent and performance management with distinctive career tracks and developmentprograms.

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Appendix

HR Services

1. HR shared services are established for major support functions: payroll, personnel administration,recruiting support, learning administration, expat management (internal or outsourced).

2. Even internally, shared services are set up like an outsourcing deal, with clear contractual arrange-ments including service-level agreements, clearly defined interfaces, and a clear governance model.

3. Performance control of shared services is continuous. Customer satisfaction, in particular, is meas-ured through regular, comprehensive customer surveys to ensure the high quality of HR services.

4. The transition to shared services is secured through effective change management (e.g., top-man-agement commitment and a communications plan), high data security, and well managed staffmigration.

5. All HR processes within the shared services unit are standardized and have been through rigorousreengineering.

6. Automation and self-services are used extensively to realize cost savings—the intranet is the commonplatform for standard HR transactions.

7. Services are pooled not only on a country level but also on a regional level. A clearly defined mul-titier model for HR services has been installed.

8. Within shared services, effective capacity management (handling workload fluctuations) in combi-nation with a flexible work force is in place.

9. Factor-cost reduction is realized by moving selected tasks (lower-tier services) to low-cost countries.

HR function

1. Within the HR function, a high share of employees is recruited from other functions (benchmarkaround 50 percent). In addition, rotation from HR to the business as well as internationally is stan-dard, with an average HR tenure of not more than four years (except from dedicated specialists suchas in compensation and legal).

2. Talent development and performance management for HR employees is standard and is executed inthe same rigorous manner as for line management.

3. The HR community interacts in a network structure. A council model is used: a top council steersoverall HR strategies and goals and topic-specific, temporary working groups develop standard toolsand policies.

4. For key HR processes, a defined IT road map has been established that highlights the degree of cur-rent and desired standardization for each process, differentiated by employee group.

5. IT platforms for HR are defined globally and introduced to all divisions and regions accordingly.

6. The HR organization is well structured and has a clear definition of responsibilities on the corporate,business-unit, and regional/shared-services levels.

7. Corporate HR is clearly structured: worldwide activities are separated from regional and country HR,and HR services are organizationally separate from governance functions.

8. Corporate HR is lean (no more than 20 FTEs for worldwide activities) and has a high share of strate-gic activities (HR strategy, control, change management). Strategy and control have dedicated staffresources.

9. Key metrics for the HR function are controlled (HR efficiency measures such as HR cost and employ-ee ratios as well as qualitative metrics such as satisfaction with HR).

10. HR has high accountability and a good reputation within the organization (comparable to the financefunction).

11. Top management is highly involved in HR management topics and acts as a role model: (1)Individual top-management actions fit with HR mission statements (e.g., people are our most valu-able asset); (2) HR topics are on the agenda at every board meeting; (3) current HR issues areaddressed in CEO executive-board-member speeches to manage employees expectations; and (4)like financial reports, dedicated HR reports are compiled.

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www.bcg.com

The Boston Consulting Group

The Authors:

Gunther Schwarz, Senior Vice President based in Cologne (e-mail: schwarz.gunther@bcg.com)

Christoph Nettesheim, Vice President based in Berlin (e-mail: nettesheim.christoph@bcg.com)

Ulrich Villis, Manager based in Munich (e-mail: villis.ulrich@bcg.com)

Markus Höllmüller, Consultant based in Munich (e-mail: hoellmueller.markus@bcg.com)

For more information you may contact the authors or the leadership of the firm's Organization and HR practice:

Ron Nicol, Senior Vice President based in Dallas, leading BCG's worldwide Organization practice(e-mail: nicol.ron@bcg.com)

Rainer Strack, Vice President based in Düsseldorf, leading BCG's European Organization practice (e-mail: strack.rainer@bcg.com)Layout und Design: Ellen Treml