Reflecting on the past and looking to the future: the importance of business structure

In the 1990s, the HR field was working to support competitive advantage through something called 'strategic HR'. At a simple level, strategic HR meant that different business strategies (winning through cost, product innovation, customer service or geographic expansion) would be better implemented by aligned HR practices. In this process, many advocated moving HR thinking and work from administrative to strategic, day-today to long term, and transactional to transformational. Other functional areas were also separating the administrative from strategic work (for example, managing money was separated into finance and accounting; managing information was separated into data centres and information systems). My work HR Champions1 argued that HR had to deliver both administrative and strategic work.

Many tried to figure out how to organise HR departments to deliver both administrative and strategic work. Some of the routine, standardised, transaction work of HR was done through shared services, which included outsourcing and service centres heavily dependent on technology. While this transaction work had to be done efficiently, the more strategic work required both specialised expertise and generalised business application. This led to the centres of expertise HR professionals who could offer deep technical insights, tailor solutions to unique business requirements, and share knowledge across business units and to embedded HR professionals who would customise solutions to their unique business strategies, become advisers on talent and organisation to the business leaders, and serve as a primary course of contact for business leaders.

The basic goal of this HR governance logic was to provide both strategic insights and administrative efficiencies at the same time.

Over the past 15 to 20 years, HR work has become more granular. The outcomes of HR are not just administrative efficiency or strategic execution. The outcomes of HR have become the capabilities that an organisation requires to win in its marketplace. These capabilities likely include talent and leadership, which are essential for any strategy, but also include capabilities such as innovation (in product, market, services, business models), agility (speed of change or flexibility), collaboration (teamwork, crossfunctional teams, merger or acquisition integration), customer service, efficiency, managing risk, changing culture, and so forth. The capabilities represent what an organisation is known for and good at doing and vary depending on an organisation's strategy. Capabilities represent the outcomes of HR that enable strategy to happen, ensure customer share over time, and increase investor confidence as intangibles. The HR department should be governed to ensure that these capabilities can be defined and delivered.

In evolving the HR department, we start with HR as a business within a business. As such, the HR organisation should be structured in a way that reflects the structure of the business. Companies typically organise along a grid of centralisation–decentralisation, which leads to three basic ways in which a company operates (see Figure 7): holding company, functional organisation or diversified/allied organisation. The HR department should mimic the structure of its business operations.

Figure 7: Alignment of business organisation and HR organisation

Functional organisation: When the company comprises a single business, it competes by gaining leverage and focus. The role of HR in the single business is to support that business focus in its people practices. As long as the organisation remains primarily a single line of business, HR expertise most logically resides at corporate, establishing company-wide policies (there are no centres of expertise, but functional specialists), with HR generalists in the plants or divisions responsible for the implementation of these policies. They do so because there is no meaningful differentiation between the business and the corporation. Smaller businesses are functional organisations by scale and probably 20% of larger businesses continue as functional businesses.

Holding company: When the company is composed of multiple, unrelated businesses that are managed independently, it is best described as a holding company. While pure holding companies are rare (probably about 10% of all businesses), we see some resurgence of holding company structure associated with the rise of large and well-capitalised private equity and investment firms such as Carlysle, Berkshire Hathaway and Blackstone. For example, Berkshire Hathaway owns or controls Dairy Queen, NetJets, GEICO Insurance and Fruit of the Loom. Or another example of a holding company could be News Corp that owns to name a few companies HarperCollins, News UK (that is, The Sun, The Times) and BskyB. Each of these separate businesses has their own independent HR organisation with a full range of HR specialists serving that business. There are few corporate or generalist HR professionals.

Diversified/allied businesses: Most large companies are neither pure single businesses nor are they true holding companies. They lie somewhere in between, either in related or unrelated spectra of diversification. They create operating or business units to compete in different markets, yet try to find synergy among them. They have shared services, centres of expertise and embedded HR. Like any professional services firm, the job of HR is to turn their knowledge (in specialised centres) into client results (through embedded HR professionals). This is the dominant logic for many HR organisations today in large multi-divisional companies. Some have called it the 'Ulrich model', although I did not create it, but observed, researched and wrote about it. HR leaders used this model to offer more granular HR solutions to business problems.

Table 2: Functional HR, shared services and dedicated HR

DimensionFunctionalShared or professional servicesDedicated
Business organisationSingle businessRelated or unrelated diversification; often a matrixHolding company
Design of HR policiesPerformed by corporate functional specialistsAlternatives created by specialists in centres of expertiseDesigned and delivered by functional specialists within a business
Implementation of HR practicesGoverned by corporate specialistsGoverned by local HR professionals who select options from centre of expertise menuGoverned by local HR specialists embedded in the business
AccountabilityCorporate HRSplit between operations and HRLocal business leader
Services orientationStandardised services across the corporationTailored to business needs with consistency through learning and sharingUnique services for each business
FlexibilityMandates use of internal resourcesHas flexibility as governed by the centres of expertiseEach business creates what is required
ChargebacksBusiness units pay an allocation of HR costsBusiness units pay for use of serviceBusiness units fund their own HR costs
LocationStrong corporate presence with HR generalists on siteWherever makes senseSmall corporate HR office, with HR staff at local level
Skills requirements for HRTechnically expert in design and deliveryDesign expertise, but also consulting and supportBusiness expertise and technical specialty in business
Wealth-creation criteriaCorporate shareholder valueHR value-creation for line managers, employees, customers and investorsBusiness unit profitability

In recent years, some have tried to figure out 'what's next' in how HR departments will be organised. The challenge again starts with the business and the most basic question is, 'how will the business be organised?' The basic business structure challenge remains grounded in the centralisation– decentralisation grid and debate, and so does the HR department challenge. Some have misinterpreted our work as advocating that HR should be organised through shared services in all business settings. One well-intended study interviewed HR leaders in government agencies and SMEs and they critiqued the shared services logic. Duh! These organisations were functionally driven and should not create an HR organisation that is different from the business organisation.

Many have created a straw man of the business partner logic by saying that it is outdated, but then proposing exactly what the HR business partner logic proposes. This week, I received this blast email:

Clearly, the democratic Way of Resourceful Humans has emerged as the most exciting alternative to structure a vanguard Human Resources strategy beyond the Predict & Control derived HR Business Partner concept.

I cherish innovative HR thinking and practice by building on and evolving what exists. HR business partner logic starts with how to win in the marketplace, emphasising how to win with customers and investors. Creating better talent, leadership and organisation capabilities remains at the heart of this logic. It is useful to learn and move forward in the HR field by defining new required organisation capabilities and ways for HR to deliver these capabilities.

We are doing a fascinating cloud or open source project on the future of HR. We have asked about 60 to 70 'thought leaders' (loosely defined with a mix of academics, consultants, association leaders and senior HR leaders) to answer the question, 'What do HR professionals need to know or do to be effective in today's and tomorrow's business world?'

As we have culled their answers, not one essay has referred to how the HR department is organised. The obsession with some about how to organise an HR department seems to not be the most important part of HR's agenda to deliver value. This finding is consistent with our research that asked over 20,000 HR and non-HR clients to rate what HR departments should focus on to deliver business value. The highest ranked in terms of 'how well done' and lowest ranked in terms of 'delivering business value' was reorganising the HR department.

We find that HR professionals deliver the most value when they focus on:

  1. Perspective of outside in: Make sure that the HR work links to external stakeholders. This means aligning HR not only with business strategy but also with general business conditions (for example, social, technological, economic, political, environmental and demographic global changes), but also with external stakeholders such as customers, investors and communities.
  2. Outcomes of talent, leadership andcapabilities: HR professionals have to make sure that their HR work delivers talent (competence, commitment and contribution of the workforce), leadership (at all levels of the company) and capabilities (unique identity of the workplace).
  3. HR practices: Ensure that HR practices are aligned to business demands, integrated with each other, and innovative to offer new and creative ways to build agility into the organisation.
  4. HR professionals: Continually upgrade HR professionals to demonstrate competencies that enable them to drive business results by positioning their organisation to win, managing change and agility, offering integrated HR solutions, building personal credibility, using information to make informed decisions, and managing paradoxes inherent in business success.

These seem to be some (clearly not all) of the issues for HR professionals moving towards responding to the incredible opportunities facing the profession.

1. ULRICH, D. (1997) HR champions. Boston, MA: Harvard Business School Press.

About the author

Dave Ulrich

Dave Ulrich is the Rensis Likert Professor of Business at the Ross School, University of Michigan and a partner at the RBL Group, a consulting firm focused on helping organisations and leaders deliver value. He studies how organisations build capabilities of leadership, speed, learning, accountability, and talent through leveraging human resources. He has helped generate award-winning databases that assess alignment between strategies, organisation capabilities, HR practices, HR competencies, and customer and investor results.

He has published over 200 articles and book chapters and over 25 books. He edited Human Resource Management from 1990-1999, served on the editorial board of four journals, on the board of directors for Herman Miller, board of trustees at Southern Virginia University, and is a Fellow in the National Academy of Human Resources.

 

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