Point of View

HR Transformation v2.0: It’s all about the business

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

In response to these challenges, the transformation process that many companies haveembarked on involves examining the HR strategy and how it supports the business strategy, and then changing the HR operating model to achieve optimum delivery.”Delivering on the promise of HR transformationMercer 2004

But the picture had a few flaws. While HR leadersincreasingly viewed their function as strategic, theirstaffs often lacked the skills to carry out this changingrole or to make substantive business contributions. HRleaders and teams alike still spent considerable timeon transactional activities – not the high-level strate-gic partnering work that their leaders aimed for. HRmetrics focused on “satisfaction,” which does notmeasure business value or impact. And while manyorganisations had developed a human capital strategy,they stopped short of operationalising that strategyfully across the organisation.

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

When these words were written, Mercer had completedits first global survey of HR transformation. More than1,100 respondents shared their experiences in 2003,painting a picture of HR functions around the worldenthusiastically transforming to become more activestrategic contributors and business leaders. Up to 86 per-cent of respondents, by region, reported HR transforma-tions either currently in process or planned for the nextyear. From a low of 7 percent in Asia to a high of 25 per-cent in the US, other companies indicated they hadalready completed transformation projects.

Companies could point to significant progress. In theUS, for instance, more than half of the respondents (54 percent) had assessed the needs of HR customers,and nearly as many had implemented a new HR organ-isational structure (46 percent), audited their HRIS (46 percent) and implemented a new HR servicedelivery strategy (42 percent). A majority of respon-dents said their firms had developed human capitalstrategies linked to their business strategies. And inmany parts of the world, HR leaders were becomingmore involved in strategic business discussions and decisions.

HR transformation defined

For purposes of our study, HR transformation isdefined as the process of recreating or reinventingthe HR function – such as re-engineering, restructur-ing, implementing new systems or a new HR servicedelivery model, outsourcing or co-sourcing – withthe specific intent of enhancing HR’s contribution tothe business.

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HR Transformation v2.0:It’s all about the business

Mercer’s study confirms, unequivocally, that HR trans-formation is alive and well around the world. Half ofthe 2006 respondents (50 percent) said they are cur-rently in the midst of an HR transformation, while 12 percent had completed one within the past yearand another 10 percent plan to begin a transformationwithin the next year. (See Exhibit 1.)

One question in the 2006 study neatly illustrates HR’scurrent challenge: What skill level (in each of 26 areas)will be required to meet future needs? The answer: 72 percent of respondents gave the highest rating –“must have advanced skill level” – to “interpersonalskills.” Fifty-nine percent gave that rating to “businessunderstanding,” 49 percent gave it to “business strategyskills” and only 19 percent gave it to “financial skills.”

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

Through this paper, Mercer will examine both ver-sions of HR transformation and answer some criticalquestions:

� Is HR making progress – and in the right direction?

� Where hasn’t HR made progress and why?

� How is HR transformation similar and differentaround the world?

� How can organisations position themselves forsuccess in the next wave of HR transformation?

� What will the successful HR function of the futurelook like?

We are currently in the midst of a transformation process

We have no current plans to transform HR

We plan to begin a transformation within the next year

We completed an HR transformation more than 12 months ago

Exhibit 1 The state of HR transformation globally

18%

10%

50%

11%

We have completed an HR transformation in the past 12 months12%

However, based on the 2006 study findings as well asMercer’s work with leading organisations globally, it is clear that a second wave of transformation is nowunder way. This new wave – let’s call it Transformationv2.0 – differs significantly from the initial wave.Transformation v1.0, which started about 10 years ago, focused largely on operational excellence andimproved HR service delivery through process andtechnological enhancements.

At the same time, it opened the door to a morestrategic role for HR – one that has not yet fully mate-rialised. In Transformation v2.0, HR is challenged todeliver on those strategic expectations – to make thehuman capital strategies a reality. HR can do sothrough a disciplined focus on business.

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Human capital strategy defined

Human capital strategy is a set of managementpractices – a “system” – that

� produces the right workforce for the business, and

� manages it in ways that optimise overall firmperformance.

Transformation v1.0: A look back to the beginning

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n the early to mid-1990s, USfirms entered the first wave of HR transformation. Centring

on the nuts and bolts of HR,they swept away musty ideasabout how to carry out HRactivities. Innovative companies re-engineered HR processes, intro-duced new service delivery modelssuch as self-service, took automa-tion to new levels, outsourced non-core activities and stream-lined their HR organisations.

This first wave of change reverber-ated around the world. Companiesof all sizes, across all regions andindustries, focused on HR andinvested in Transformation v1.0 –and many of these earlier develop-ments were captured in Mercer’s2003 study.

HR transformation initiatives wereoften driven by broader organisa-tional changes. In 2003, US respon-dents cited two primary drivers in a virtual tie: leadership changes inthe HR organisation (30 percent)and changes in the business-wideorganisation (29 percent). European,Asian, Australian and Canadian HR executives identified “aligningHR with corporate objectives,”“making HR a strategic function”and “responding to changes in thebusiness context” as the key cata-lysts behind their transformationefforts. Surprisingly few respon-dents – only 10 percent in the USand 26 percent in Asia, for example– linked HR transformation to cost-reduction mandates.

Companies emerging fromTransformation v1.0 pointed toprogress in a number of essentialareas. Most respondents in 2003had focused on the HR infrastruc-ture, comprising talent, technology,processes and organisation. Morethan three-quarters of organisa-tions globally had deployed anintranet to support programmeand process delivery. Two-thirdshad integrated processes withchanging technology, and 50 per-cent had completed some form oforganisational change. Indeed, thereorganisation or redesign of theHR function was the number onetransformation activity, with three-quarters having completed workover the past year or planning todo so in the coming year.

Outsourcing also gained traction inv1.0, especially in the US, as organi-sations sought more efficient andcost-effective ways to handle vari-ous HR operations. Respondentsworldwide in 2003 most frequentlyoutsourced training (ranging from29 percent to 58 percent by region),relocation services (14 percent to 48 percent by region) and benefitsadministration (13 percent to 48 percent by region). About one-quarter of all respondents acrossregions outsourced payroll. Yetdespite these growing numbers,those outsourcing decisionsseemed more opportunistic than strategic.

Against this backdrop of accom-plishments, respondents sawoptimisation of HR technology and the effective development anddeployment of HR skills as boththe greatest enablers of HR trans-formation and the greatest barriers to successful HR transformation inthe future.

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I

The shift begins: What’schanging and why

Over the past few years a shift has begun. While many organisa-tions are still in some stage ofTransformation v1.0, others havemoved on to address new HRchallenges and prepare for the“next generation” of HR. Signs of this shift emerged in the 2006study findings.

Changes at the topMany HR leaders today are rela-tively new to their current jobs. Infact, more than two-thirds of therespondents have been in theircurrent role for four years or less,and more than a third have beenin the role for less than two years.While many of these HR leadershave significant experience infunctions or roles outside HR –most notably customer service,legal, finance, general manage-ment and HR consulting – 61 per-cent have spent 10 years or morein the HR function. (See Exhibits 2and 3.)

This suggests two things: First,organisations are actively makingchanges at the top of HR, searchingfor leaders who can meet today’snew demands and requirements.Second, while diverse businessexperience can contribute to thecredibility and success of HR exec-utives, the length of time most HRleaders have spent in HR suggeststhat they view HR as a true profes-sion and have dedicated theircareers to HR.

In addition, 67 percent of HR leaders now report to the CEO,compared to 54 percent in 2003,signalling the growing importanceof HR within organisations.

HR’s evolving prioritiesOne of the clearest signs of a shiftcame in response to a questionabout HR’s principal functions orareas of priority. While 40 percentof respondents listed human capi-tal strategy as a principal functiontoday, 64 percent expect it tobecome a principal function withintwo to three years. (See Exhibit 4.)

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55% 14% 10%5%15% 2%

General management

HR consulting

Customer service

Manufacturing

Operations management

Legal

Information systems

Public relations/communications

Sales/marketing

No experience < 2 years 2–4 years 5–7 years 8–10 years 10+ years

21% 23% 18%13%18% 7%

39% 23% 6%15%5%12%

57% 13% 5%8%4%14%

47% 17% 4%8%11%13%

51% 13% 3%15%4%14%

Finance

37% 16% 13%14%6%13%

Exhibit 2 Work experiences of today’s HR leaders

51% 21% 7%4%16% 1%

41% 23% 9%5%18% 3%

56% 14% 9%5%12% 3%

10+ years61%

8%

8–10 years14%

6%

5–7 years14%

18%

2–4 years8%

33%

Less than 2 years3%

36%

Total HR experience Current role

Exhibit 3 Time in job for today’s HR leaders

Respondents said that talent man-agement and leadership develop-ment ranked as principal functionsof HR today, followed closely byoperational excellence and changemanagement. Human capital strat-egy ranked fifth on this list.

Respondents then were asked toidentify the principal functions of HR over the next two to threeyears. For this time frame, humancapital strategy jumped to the topof the list while HR operationalexcellence fell to the sixth spot.These findings support the idea

that HR has been focused on “get-ting its house in order” in the earlystages of HR transformation andnow plans to focus more time andresources on strategy-related mat-ters, including putting the humancapital strategy into operation.

Transformation initiatives are differentThe transformation initiativesundertaken to date appear to bequite different from those plannedfor the future. The most commontransformation initiatives com-pleted by respondents includeimplementation of a new HRorganisational structure, assess-ment of

HR customers’ needs and require-ments, assessment of the HR func-tion’s effectiveness, design of anew strategy for delivering HRservices, and audits of currentHRIS technology. The most com-mon initiatives to be launched inthe next 12 months include talentdevelopment strategy for improv-ing HR skills, redesign of HR workprocesses, design of new strategiesfor delivering HR services, andevaluation/implementation of newHRIS technology. These findingsare consistent with the notion thatorganisations have made progressand are moving on to the nextwave of HR transformation.(See Exhibit 5.)

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Human capital strategy

Talent management

Leadership development

Organisation development

Change management

Operational excellence within the HR function

Succession planning

Workforce planning

Industrial relations

Organisation design

Risk management

Now 2–3 years

Exhibit 4 Principal HR functions

64%

40%

55%

49%

52%

49%

40%

35%

38%

42%

32%

46%

24%

27%

31%

24%

32%

19%

21%

18%

18%

17%

Redesign of HR work processes30% 10%60%

Design of a new strategy for delivering HR services38% 51% 11%

Evaluation/implementation of new HRIS technology24% 50% 26%

Strategy for attraction/retention of the HR staff23% 47% 30%

Assessment of HR functionís effe ctiveness38% 44% 18%

Assessment of HR customers’ needs/requirements44% 42% 14%

Implementation of a new HR organisational structure45% 41% 13%

Audit of current HRIS technology35% 39% 26%

Decentralisation of selected programmes to the business27% 37% 36%

Talent development strategy for improving skills within HR18% 66% 16%

Changes in reward strategy for HR staff19% 35% 46%

Outsource any part of the HR function24% 28% 48%

Completed

Exhibit 5 Shifts in HR transformation initiatives

Planning to complete in the next 12 months

Not under consideration for the next 12 months

Acquiring key talent/lack of available talent 1 1 2 2 1

Retaining key talent 2 3

Increasing workforce productivity

Constraints on headcount (“making do with less”)

Resourcing and managing HR issues in “new geographies” for the company

Driving cultural and behavioural change in the organisation 2 3 1 1 3

Implementing people changes resulting from changes due to operational performance

Lack of consensus around the organisation’s strategy/direction

Coping with an aging workforce

Workforce planning

Succession planning

Building leadership capability 3 3 1 3 2 2

Encouraging organisational innovation

Increasing line manager capability to handle people management responsibilities

Increasing the return on investment in remuneration

Measuring the contribution of human capital to business performance

Managing human capital during and after an acquisition or merger

Reducing overall human capital costs

Different challengesChanging demands on HR give rise to new challenges. The topchallenges cited by HR leaderstoday revolve around attractingand retaining key talent, drivingcultural and behavioural change in the organisation, and buildingleadership capability. Again, thisrepresents a shift from the earlier

stages of HR transformation, whenthe focus was on process andtechnological improvements.(See Exhibit 6.)

Still the status quoNot everything has changed, andwhat remains the same is as sig-nificant as what is different.

On a positive note, for instance,the drivers of HR transformationremain much the same as seen in the 2003 study. Most transfor-mation efforts are driven byorganisation-wide transformationprocesses or changes in the broaderorganisation. Few are driven bycompany-wide cost mandates.(See Exhibit 7.)

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Exhibit 6

Top HR challenges

Australia/ Latin NorthGlobal Asia New Zealand Europe America America

However, the time spent performingvarious HR activities has remainedmuch the same, and so have HRskill sets, despite expressed inten-tions to change both of these areas.This is not as positive.

This study and its predecessorshave reported that HR leaderseverywhere are increasinglyviewed as strategic contributors.Sixty-seven percent of 2006respondents said that HR is seenas a strategic partner and partici-pates in strategy decisions and/orstrategy discussions. Yet the over-all HR function still spends overhalf of its time on traditional HRactivities: transactions, record-keeping and delivering services.Participants in both the 2003 and2006 studies reported their wish to change these proportions. The2006 respondents would like to cut

transaction/recordkeeping time inhalf, from 27 percent to 14 percent,and increase strategic partneringtime accordingly, from 15 percentat present to 27 percent. (SeeExhibit 8.)

But how realistic are these goals?Just as HR activities remain tradi-tional, so do its skills. When askedto rate their staff’s skills in 26 areas,the strongest were soft skills andthose related to routine HR tasks.The weakest skills were precisely in the areas in which HR needs tocontribute more effectively.

HR leaders are aware of this prob-lem. When asked to identify thethree most significant barriers andareas of opportunity to enhanceHR’s future role, leaders identifiedthe skills/competencies of HR staffas a leading barrier but the topopportunity for improvement todevelop a more strategic HR pro-file. Another significant barrier wasthe inability of line managers tomanage their people within thehuman capital context of the nearfuture. Along with skill gaps, thelack of a human capital focusamong line managers affects HR’sability to execute its carefullyhoned talent strategy.

What’s driving the change?

These developments are nothappening in a vacuum. A con-fluence of forces in the broaderbusiness world – and indeed, thebroader world – is paving the wayfor these changes in HR.

Talent is more critical than ever tobusiness success today. Historically,competitive advantage could begained by access to financial orphysical capital, technologicalprowess, operational efficiencies ormarketing savvy. Today, a compa-ny’s competitive advantage residesin its people. How an organisationattracts, retains, rewards, motivatesand develops its people can becomean enduring source of competitiveadvantage because it is so difficultto copy.

And human capital strategies aremoving to the forefront of corpo-rate consciousness. Sixty percentof 2006 survey respondents saidthat their organisations havehuman capital strategies linked to their long-term objectives.Furthermore, organisational lead-ership increasingly views humancapital as a source of value ratherthan as an operational cost.

In addition, a variety of key human capital challenges loomson the horizon.

� Aging workforce – At manyfirms, especially those in indus-tries that rely on a tenuredworkforce, a large portion of the workforce is approachingretirement or is already eligibleto retire. The problem varies by country, but industries mostaffected by aging workforceissues include utilities,oil and gas, chemicals, aero-space/defense, insurance andhealth care. Employers musttransfer the skills and knowl-edge of these retiring workers to those who replace them.

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Exhibit 7 Drivers of HR transformationIt was part of a broader organisation-wide transformation process

39%

Responding to changes in the organisation

26%

Leadership changes in the HR function12%

CEO/business leader mandate for change in the HR and/or other staff functions

10%

HR was not adding value in its existing role

6%

Company-wide cost reduction mandate5%

Change in domestic market environment or regulation

2%

Current (%) Desired (%)

Exhibit 8 How HR spends its time

Delivering HR services29%

25%

Transacting/recordkeeping27%

14%

Strategic partnering

27%

15%

Designing HR programmes or systems15%

22%

Compliance/auditing14%

12%

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� Skill shortages – In part due toaging workforce issues, manyindustries face acute shortagesof mission-critical workers, suchas nuclear and petroleum engi-neers in the energy industry andnurses in the health care indus-try. In some locations, decliningbirth rates are shrinking theworkforce. In the US, for exam-ple, the number of available jobsis predicted to outpace the num-ber of available civilian workersbeginning in 2007. Even the pop-ulous economic powerhouses ofChina and India are confrontingshortages. In China, multilingualand culturally flexible profes-sionals and managers are eagerlysought by both local and inter-national firms. This demand hasled to double-digit wage infla-tion and an 87 percent turnoverrate for professionals. In India,the demand for engineers andother accomplished graduateshas produced a quality shortfall:Of the 3 million graduates eachyear, 75 percent have receivedsubstandard preparation and are unemployable.

� Generational issues – There areat least four generations ofworkers currently in the work-force. What younger workerswant from the employmentrelationship is distinctly differ-ent from what older workerswant. Employers must be able to understand these newgenerations of workers if theywant to attract, motivate andretain them.

All of these factors present risks tothe organisation. Through effectivemanagement of an organisation’stalent, HR can help mitigate thesepeople risks and maintain compet-itive advantage.

Conclusions and contradictions

Several contradictions are evidentin the 2006 study findings and inMercer’s work with organisationsworldwide:

� The lack of business-focusedskills in HR is widely cited as abarrier, but there are no aggres-sive plans to “skill up” or other-wise implement staffing plansto address this situation. In fact,HR leaders seem particularlyreluctant to replace HR staffwho do not possess the neces-sary skill sets for the future.

� HR wants to be a strategic player,but beyond the top HR executive,the function remains largelyfocused on transactional work.

� HR wants to deliver more valueto the organisation, but it is notusing metrics that documentand demonstrate the value it provides.

� Most organisations today havean articulated human capitalstrategy, but they cannot deliveron it due to shortcomings withHR structure, staff, processesand technology.

Transformation v1.0 was a mix ofundoubted accomplishments in“cleaning house” and improving HRefficiency and cost-effectiveness,along with some shortcomings.Organisations have addressed thebasics, picked the low-hanging fruit and taken v1.0 as far as it cango. In doing so, they’ve prepared the ground for the next wave of transformation.

The remaining gap is not in themechanics of HR or in the develop-ment of human capital strategies.The ultimate challenge ofTransformation v2.0 is translatingthat strategy into day-to-dayactivities and decisions. Simplydeveloping a human capital strate-gy is not enough. Executing thatstrategy is how HR will make asignificant and noticeable differ-ence to the business.

Transformation v2.0: Moving HR forward

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12

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iven both the specific pres-sures on HR from externalforces and greater expecta-

tions from internal stakeholders,Mercer believes that Transformationv2.0 should focus on these areas:

� Upgrading HR skills broadly tosupport the function’s strategicmandate

� Operationalising the humancapital strategy throughout the organisation

� Considering the bifurcation ofHR into two critical roles

� Developing and using bettermetrics to evaluate HR’s per-formance and its impact on the business

� Gaining a truly global perspective

� Establishing effective governance

Ability to walk the strategy talk

As mentioned earlier, HR leadersappear to have made solid stridesin becoming strategic partners.Today’s HR leaders have broaderexperience and greater comfortwith the CEO and board than inthe past. Many HR leaders are newto their job, suggesting that organi-sations are looking for a new kindof HR leader. Two-thirds of 2006respondents have held their cur-rent position for four years or less,though three-quarters have beenin HR for over eight years.

Along with HR experience, theseleaders are bringing varied workbackgrounds to the job. Seventy-nine percent have had HR consult-ing experience; 63 percent, generalmanagement; 61 percent, customerservice; and 59 percent, public rela-tions and communications.

In addition, 67 percent of HR lead-ers now report directly to the CEOand 59 percent have significantcontact with the board on issuesbeyond remuneration, such astalent management; successionplanning; and the human capitalimplications of mergers, acquisi-tions and other changes. HR leadersreport that they are increasinglyseen as strategic partners and par-ticipate fully in strategic decisions.

Yet when these leaders were askedto assess the skills of their staffs,a very different picture emerged.They rated their staffs weakest onthe following skill sets:

� Financial skills

� Business strategy skills

� Organisational assessment/organisational design

� Cross-functional expertise

� Cost analysis and management

Where did they think their staffswere strongest?

� Interpersonal skills

� Recordkeeping/data maintenance

� Team skills

� Functional HR experience

� Customer service

G

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Financial skills

Weak Sufficient Strong

Exhibit 9 Current skills of HR professionals

Business strategy skills

Organisational assessment/organisational design

Cross-functional expertise

Cost analysis and measurement

Cultural change/transformation skills

Change management

Project management

HRIS data analysis and reporting

Process management/process improvement

Business understanding

Coaching/facilitation

Conflict management

Vendor management

Counselling

Technology understanding

Consultation/negotiation skills

Leadership

Client relationship management

Knowledge of compliance/corporate governance

Interviewing and assessment

Customer service

Functional HR experience team skills

Team skills

Recordkeeping/data maintenance

Interpersonal skills

51% 40% 9%

50% 37% 13%

48% 38% 14%

47% 41% 11%

47% 39% 14%

44% 39% 17%

44% 39% 17%

40% 45% 15%

37% 44% 18%

36% 45% 19%

35% 45% 20%

34% 43% 23%

34% 44% 22%

34% 52% 14%

33% 43% 24%

31% 52% 17%

30% 48% 23%

28% 48% 23%

26% 49% 26%

25% 50% 25%

19% 44% 37%

15% 47% 39%

15% 45% 40%

12% 44% 45%

10% 48% 43%

9% 43% 48%

When these skill rankings arecompared to HR leaders’ top chal-lenges, the disconnect becomesapparent. For example, leadersexpect change management andcultural change transformation tobe major undertakings in the yearsahead. But the relevant skills arelargely missing or inadequate tobring this about. Similarly lackingare “must have” skills for con-tributing to the business, whichinclude at least basic financialskills (66 percent), and advancedskills in consultation/negotiation(65 percent), business understand-ing (59 percent), organisationalassessment/organisational design(51 percent), and business strategy(49 percent). (See Exhibits 9 and 10.)

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Interpersonal skills

Desirable but not required Must have basic skill level Must have advanced skill level

Exhibit 10 Future skill requirements for HR professionals

Team skills

Interviewing and assessment

Functional HR experience team skills

Consultation/negotiation skills

Leadership

Change management

Cultural change/transformation skills

Business understanding

Conflict management

Coaching/facilitation

Customer service

Counselling

HRIS data analysis and reporting

Organisational assessment/organisational design

Business strategy skills

Client relationship management

Process management/process improvement

Project management

Knowledge of compliance/corporate governance

Cost analysis and measurement

Technology understanding

Cross-functional expertise

Recordkeeping/data maintenance

Financial skills

Vendor management

1% 26% 72%

1% 31% 67%

3% 31% 66%

1% 34% 65%

4% 31% 65%

4% 32% 64%

5% 32% 62%

5% 35% 60%

2% 39% 59%

4% 40% 56%

5% 39% 56%

5% 40% 54%

5% 44% 51%

7% 42% 51%

7% 44% 49%

9% 44% 46%

7% 51% 43%

9% 55% 36%

7% 57% 36%

9% 59% 32%

11% 60% 29%

16% 55% 29%

14% 62% 25%

15% 66% 19%

22% 61% 17%

6% 41% 53%

Invest in skill development for existing staff

Use outsourcing/external suppliers to supplement internal capability

Rotate HR staff to line roles

Rotate line staff to HR roles

Replace current staff with new hires

Little or no intent

Moderate intent

Exhibit 11 Plans to enhance HR skills

Major intent

2% 32% 66%

36% 47% 17%

50% 38% 11%

54% 36% 10%

60% 35% 6%

Given the clear recognition of theskills shortfall, we would expect to see rapid and innovative actionto fill the gaps. Indeed, two-thirdsof respondents have put on theirto-do lists for next year a talentdevelopment strategy for improv-ing skills within HR, and 18 per-cent have already completed sucha strategy. While only 23 percenthave a strategy to attract andretain HR staff, 47 percent plan to create one within the year.

Yet two-thirds of respondentspreferred to invest in skill develop-ment for existing staff rather thantake more aggressive steps, such as replacing current staff with newhires or even making rotationalassignments (HR staff to line rolesor line staff to HR roles). Skilldevelopment for existing staff was the same approach stronglyfavoured in 2003’s survey, but the2006 skill assessment does notindicate much success in improv-ing skills. (See Exhibit 11.)

The HR function cannot moveahead and further transform itselfwithout the upgrading of HR staffskills. HR leaders must confrontthis challenge directly and imme-diately in Transformation v2.0.

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Bringing human capitalstrategy to life

Clearly, many important strideswere made during Transformationv1.0. Business leaders came toappreciate the importance ofhuman capital to business success,organisations developed humancapital strategies linked to busi-ness strategies, and HR leadersjoined the ranks of top strategicdecision makers within theirorganisation. But the effortstopped short of completion.

Having a human capital strategy –even one that is clearly articulatedand widely disseminated – ismarkedly different from havingthat strategy implemented effec-tively throughout the organisation.For most organisations today, ahuman capital strategy is no longerjust a book or a binder on a shelf.But most continue to fall far shortof translating that strategy intoeffective, aligned day-to-dayactions and decisions across allparts of the business. They havenot yet been able to fully connectall critical parties – including seniormanagers, line managers andsupervisors, and employees – totheir appropriate roles and respon-sibilities in the process of managingthe organisation’s human capital.

Mercer’s study shows that in manyorganisations, HR and line man-agers do not see eye to eye onhuman capital issues and expecta-tions. HR needs to work with linemanagers to define the respon-sibilities, accountabilities andprocesses – as well as benefits – oftheir participation in this essentialfunction. Each group must under-stand what is expected of itselfand the other.

To help all parties deliver on theexpectations of Transformationv2.0, technology will play a vitalrole. Organisations need to provideline managers and other directsupervisors (as well as employees)with well-designed programmes,processes, tools and information to manage human capitalfunctions, including recruiting,performance management, careerdevelopment and succession planning, among others.

Technology will enable line man-agers to assume their humancapital role efficiently and helpalleviate the argument that HR issimply shifting its work to others.At the same time, organisationsmust also provide training, com-munication and change manage-ment to support this transition.

To bifurcate or not?

To bifurcate means to divide intotwo branches. How does this applyto HR? Consider that HR can bedivided into two primary areas ofresponsibility, roughly described as strategic and transactional. Theemphasis in recent years has beenon HR’s growing strategic role andresponsibilities – such as develop-ing a human capital strategy,consulting to the business andmanaging talent across the enter-prise. But much of HR’s work is andwill continue to be transactional,devoted to smooth and efficientadministration and recordkeeping.There may be new and better waysto manage the transactional side ofHR – such as outsourcing – but itwill always exist.

Even the names “strategic” and“transactional” imply that one areais more important than the other.But that’s not so. Both parts areessential to a high-performing HRfunction. However, they do notnecessarily need to be managed in the same way – or even by the

same leader. That’s the basis of theargument for bifurcation.

At its core, this argument calls forthe separation of the HR role intotwo roles – chief human resourceofficer (with strategic responsibili-ty) and HR controller (with transac-tional responsibility). The financefunction offers a useful parallel. Infinance, responsibilities are dividedbetween the chief financial officer(with responsibility for businessalignment and strategy) and thecontroller (with responsibility forefficient and effective operations).

Mercer’s study shows that thiskind of bifurcation is already underway in HR. More than 40 percent ofthe 2006 respondents report thattheir organisation already has anHR controller position. The HR con-troller is responsible for managingHR budget, costs, vendors, metricsand service delivery. This positionwould oversee global shared servic-es, centres of excellence, best prac-tices and outsourcing, with a strongemphasis on quantifying and meas-uring the business impact of HRpolicies and programmes.

This definition of the HR con-troller’s domain also aligns withthe broader trend toward multi-function shared services centresthat typically handle finance, HR,IT and, increasingly, travel andprocurement operations as well.The existence of an HR controllerrole means that HR will be well-positioned as a key player indesigning and executing theseshared-services strategies.

Mercer believes there is tremen-dous value in pursuing a bifurcatedapproach in HR. The division ofroles allows the chief humanresource officer to focus on creat-ing and implementing the humancapital strategy, while the HR con-troller works on enhancing opera-tions and administration.

Strategic transacting: Not a contradictionDespite its virtues, organisationsmust resist the temptation to overdo bifurcation and minimisethe importance of transactions.The most successful transforma-tions do not aim to make transac-tions go away, but to manage themas effectively as possible and toensure that all transactional workis aligned with the overall humancapital strategy. That is why theconcept of strategic transacting is a useful corrective. It links thestrategic and transactional sides ofHR and ensures that the transfor-mation is benefitting the company.

Consider the example of the hiringand on-boarding process. A strictconstructionist would probablyplace it in the “transactional”bucket. But the consequences ofdoing it poorly become strategicquite rapidly: Even with carefullychosen hires, inept on-boarding canlead to high turnover, which drainskey talent from the company, andeventually diminishes its competi-tiveness. That’s a strategic issue.

So sharpening the strategictransaction focus helps HR leadersto recalibrate the value of transac-tions. Not that such work mustnecessarily be done internally –again, outsourcing is a viableoption for many organisations –but it has to be done well and in line with the human capitalstrategy. Indeed, the strategictransaction lens provides anexcellent guiding principle foroperationalising the HR strategy at all levels.

Time for hard metrics

Let’s return for a moment to thestrategy table and the functions sit-ting around it. What do they havein common? They are all viewed asprofessional. They know their sub-jects, are expected to add value, areviewed as a source of expertise andhave business impact. They manageto numbers and are forced to beoutcomes-oriented. For HR to jointhose ranks as an equal, it too mustmanage to hard metrics.

But is it in fact managing this way?Mercer’s study shows that HR cus-tomer satisfaction remains the topmeasure of the effectiveness of theHR function, used by 68 percent ofthe respondents. HR cost is anoth-er common measure, used by 54percent. An equal number (54 per-cent) considers HR programmeeffectiveness to be a measure ofoverall HR effectiveness. Think of the reaction if the financedepartment were to use customersatisfaction as its top performancemeasure. (See Exhibit 12.)

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HR programme effectiveness

HR customer satisfaction

HR cost

Impact on business operations/outcomes

HR staff/employee ratio

Exhibit 12 How organisations measure HR effectiveness

54%

68%

54%

43%

39%

Line manager effectiveness as people managers

Processes in place to lead/facilitate organisational change

37%

HR operational measures (for example, transactions, error rates, service utilisation)

Workforce productivity

Increased customer usage of HR staff for more strategic interventions

Shift in staff time spent to higher-value-added activities

No specific measures

43%

40%

33%

33%

28%

12%

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So what should HR try to quantify?A true business partner will pro-vide the organisation or a businessunit with operating statistics andmetrics to help run the business.From a people perspective, thoseshould include the organisation’shuman capital statistics andtrends over time. HR partners will have answers to the followingquestions at their fingertips andwill know what they mean to the business:

� How is the organisation attract-ing talent?

� How will turnover patterns and age demographics impactgrowth plans?

� How well do internal staff fit the skills profile needed inthe future?

� Are the company’s developmentand succession plans working to fill the pipeline with qualifiedfuture candidates?

� Is the company retaining its top performers?

� Where inside the company canthe necessary skills and compe-tencies for certain jobs be found?

� Are certain HR policies, pro-grammes or practices having thedesired effect or, perhaps, unin-tended consequences?

This information is not necessarilyeasy to get. It requires that theorganisation actually track thesethings in its HR, finance and otherorganisational systems. It meansthat the company must developaccepted definitions of turnoverand retention, etc., that are usedconsistently across the company. Itmeans that HR partners (a partneris an HR professional assigned to abusiness unit in a strategic role tosupport its leaders in defining andmeeting the unit’s human capital

needs) must understand how tointerpret the wealth of data anddraw conclusions for their busi-ness unit leaders. And it requiresunderstanding of statistics, thebusiness plan and the currentenvironment. This is a tall orderfor many organisations today, butone that can be accomplished.

Going global

Organisations everywhere arestruggling with the challenges andimplications of global businessexpansion. The same is true for HR.As organisations expand acrossgeographic boundaries, HR mustreassess how it functions, how itsupports the business and how itdelivers services.

Transformation v1.0 was con-cerned primarily with domesticservice delivery. But for thoseorganisations that compete – orwant to compete – in a globalarena, v2.0 must focus on the globalservice delivery model if they areto achieve the benefits of globalexpansion. Organisations mustfirst align their global HR strategywith how the business is run. Atruly global firm will have differentHR requirements than a firm runas a portfolio of businesses orseries of multinational businesses.HR strategists must understandthe scale/economics, language, cul-tural and regulatory requirementsfor regional shared services, anddetermine how centres of expert-ise look in a global model and howHR partners are aligned. HR mustconsider the different modelsrequired to serve regions withthousands of employees acrossnumerous countries as well asthose with a few hundred employ-ees in one or two locations.

HR programmes and service deliv-ery methods are mature andproven in some regions but justemerging in others. Accordingly,HR programmes and service deliv-ery may well be outsourced insome areas and supplied by in-house staff elsewhere. The globalmodel almost certainly will incor-porate multiple answers.

The 2006 study results have clearlyshown that HR issues are similaracross the globe. The next step ishow to consistently address theseissues in both mature and emerg-ing markets, and how to adapt theHR service delivery model to do so.

Establishing effectivegovernance

Despite all the best intentions,HR transformation efforts are notalways as successful as anticipatedat many companies. Either thetransformation did not producethe desired results, or the results,while initially positive, simplydidn’t “stick.”

What’s missing from many of theseless-than-optimal transformationefforts is the power of HR gover-nance. Historically, the oversight ofthe HR function was the responsi-bility of the top HR executive alongwith the HR leadership team. Giventhe changing, expanded and vitalrole of HR in managing an organisa-tion’s human capital, this is simplyno longer enough.

Governance goes far beyond thenotion of an HR advisory commit-tee, which exists in many organisa-tions. HR’s critical stakeholdersshould do more than merely adviseand suggest. HR governance refersto the process of broadly engagingall key stakeholders – the organisa-tion’s business leaders, financialand technology leaders, line man-agers and others – in the actualmanagement and operation of theHR function on an ongoing basis.

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Executed well, the concept of HRgovernance translates easily intopractical solutions, guidelines andmethods. HR governance can con-tribute significantly to the successof the HR function and the broaderorganisation. It is the glue thatholds an HR transformation efforttogether, makes it work and makesit “stick.”

Simply put, HR governance is theact of leading the HR function andmanaging related investments to:

� Optimise performance of theorganisation’s human capitalassets

� Fulfil fiduciary and financialresponsibilities

� Mitigate enterprise HR risk

� Align the function’s prioritieswith those of the business

� Enable HR executive decisionmaking

Governance is not a strategic objec-tive. It is a systematic approach to management that enables thefunction to achieve strategic andoperational objectives. There arefive core elements in an HR func-tion’s system of governance.

� Structure and accountability out-line the design of the guidinggroup (called a council) itself aswell as its relationships withinvolved stakeholders. A charterdocument usually articulates thecouncil’s areas of focus based onstrategic, operational and func-tional accountabilities. Thecharter may also address roles,meeting structures and protocols.

� Effective councils link stronglyto structure and refer to the per-sonal, interpersonal and groupeffectiveness of the council andother involved stakeholders.

� Philosophy and operating princi-ples describe, at a minimum,the function’s risk tolerance,approach to delegating authorityand expected level of manage-ment autonomy at business unitor geographic levels.

� Core management activitiesinclude HR strategy develop-ment, business planning,oversight of rewards plans andprogrammes, HR resource allo-cation, and HR staff develop-ment/ leadership succession.Through these core manage-ment activities, the council setsdirection and priorities, ensureseffective execution over time,and enforces internal controls.

� Performance monitoring refersto the framework and metricsused to evaluate and communi-cate the function’s operationaleffectiveness, compliance andcontribution to business success.

As HR continues to transform itselfand play a more vital role in theoverall operations of the organisa-tion, effective HR governance willbecome more important.

What will success look like inTransformation v2.0? Envision anorganisation in which the humancapital strategy is in operationthroughout its businesses and functions. HR leaders are fullyengaged with fellow businessleaders in strategic discussionsand decisions. All levels of HR staffunderstand business issues andneeds, and apply that knowledgeacross all aspects of their mission.HR has “cleaned house” so thatadministrative and recordkeepingactivities are carried out efficientlyand in line with strategic, financialand service goals. The HR functionitself has clear goals and equally

clear metrics for evaluating itsperformance. And HR professionalscan focus on identifying and man-aging talent to build the business,working in close partnership withbusiness and line managers.

Mercer’s 2006 Global HRTransformation Study suggests thatgood progress has been madetoward this vision of HR. But morehas to be done. If HR commits to being “all about the business,”it will ultimately realise its goal of becoming a true businesspartner that helps organisationssuccessfully address the humancapital aspects of their businessstrategies and challenges.

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For more information on Mercer’s 2006 Global HR Transformation Study, including a listing of regional study contacts, visitwww.mercer.com/globalhrtransformation.

Achieving success

About Mercer

Mercer is the global leader for trusted HR and related financial advice,products, and services. In our work with clients, we make a positive impacton the world every day. We do this by enhancing the financial and retire-ment security, health, productivity, and employment relationships of theglobal workforce.

Mercer has more than 15,000 employees serving clients from more than180 cities and 42 countries and territories worldwide.

As a wholly owned subsidiary of Marsh & McLennan Companies, Inc.,we can also provide access to the complementary consulting services of our sibling companies, Oliver Wyman, Lippincott and NERA Economic Consulting.

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