The HR Value Chain

 Summary prepared by David H. Rodbourne ~ Vice President
Minnesota Center for Corporate Responsibility

How do I convince my CEO or general manager that work/life is important? Change the nature of the conversation!

In a rapid fire speech to AWLP conferees, Dave Ulrich outlined a logic, a line of argument that he described as a revolutionary wave of the future.

Here is Ulrich’s argument. It is driven by the question – how does what we do inside the firm – all of our internal practices – create value outside the firm? Internal practices build employee commitment. Employee commitment, in turn, builds customer commitment. Customer commitment builds earnings and investor results (value for shareholders).

Turn it around and it reads like this. If you want profitability to go up, you must first get customer commitment to go up, and to do that, you’ve got to get employee commitment to go up. Employee commitment is something that effective executives worry about.

Ulrich said that companies that give employees "VOI²C²E" get committed employees. The acronym stands for: Vision, Opportunity, Incentive, Impact, Community, Communication, and Entrepreneurship. By the way, for Ulrich, employee satisfaction does not equal employee commitment. We need to measure commitment not satisfaction.

Ulrich cited Sears research linking measures of employee commitment to customer satisfaction and profitability. A drop in employee commitment can predict a subsequent drop in earnings. On the flip side, Sears learned that a 5% increase in employee commitment led to a 1.3% increase in customer commitment and a 0.5% increase in profitability.

Are there other ways that internal practices affect stock value? Ulrich says Yes. Between 1960 and 1990 the correlation between earnings and shareholder value ranged from 75%-90%. Starting in 1990 the link weakened. Today earnings predict only 45% of stock price. What accounts for the other half? Potential for future growth. To predict that potential, investors are starting to look more closely at a firm’s "intangibles." These include five elements: speed to market, talent, culture or mindset, quality of leadership, and boundaryless behavior (team work, integration, connectivity).

If your competitor’s PE ratio (price earnings ratio) is higher than yours, it may be because the market perceives your competitor’s intangibles as stronger and more likely to deliver future earnings growth. What does HR have to do with a PE ratio? You can help your firm close the gap by improving your intangibles.

As Ulrich puts it, "Our job in work/life is to build programs so that these soft assets, these intangibles will show up in the value of the stock." Does the market care? Ulrich reported that General Electric devoted three hours of its recent meeting with market analysts to presentations by its HR executive on culture, leadership, and people systems – including work/life. The stock jumped 6 points in the next week adding $20 billion to GE’s market value.

Who holds the "recipe" for these intangibles? Who can help create the soft assets that build future value? Human Resources. HR professionals need to think, talk, and act in terms of "deliverables" not "doables." Doables are the number hired, number trained, programs implemented, etc. Deliverables for the firm of the future are the five "intangible" elements mentioned above. Success for HR is not doing more but delivering more.

You need to build this case for your firm. To do it, Ulrich advised, you need three pieces of data: data on employee satisfaction, retention, commitment, data on customer satisfaction and tenure, and data on profitability. Ulrich underscored the importance of measuring employee commitment on a regular basis with a variety of indicators like retention, productivity, and a "pulse check."

Ulrich thinks we are beginning to see a transition in management thinking – a wave building to a tsunami. We are starting to define value creation in terms of output not face time. The employee deal is no longer one size fits all. He cited a building trend toward "mass customization" of the employee deal. If you give me this output, the firm will give you this flexibility.

Ulrich’s admonition to work/life professionals was unflinching: "If you can’t build the bridge between what you do in work/life and investor results, you better have a very, very committed CEO – and even then you aren’t likely to sustain your effort. Work/life shouldn’t happen just because of the personality of the senior executive. Work/life is a business imperative. When we think of how it helps employees, the customer, and the investor, we build a business case that the intangibles become tangible."

The Speaker: Dave Ulrich is professor of business administration at the University of Michigan. He is editor of Human Resource Management Journal and has been listed by Business Week as one of the top ten educators in management and the top educator in human resources. He has consulted and done research with over half of the Fortune 500 companies.

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