The temptation to start structure discussions with “box-painting” is still great.

However, this has nothing to do with the goal of structuring personnel-related activities in such a way that optimal strategy execution can be achieved.

The structure of an HR organization should emerge as the result of a systematic analysis. In addition to the corporate structure, the degree of (de)centralization and digitization are important consistency factors. In the good case, both have already been incorporated as part of the definition of the HR core strategy. Therefore, the ultimately relevant HR core strategy is not only the starting point for the development of a strategic HR portfolio, but also for the development of an HR Target Operating Model (TOM).

In general, this is understood as a view of the logical interrelationships of how an organization creates added value for customers and generates revenue.

Why is there a need for HR TOM?

Many HR functions are currently adapting their business models to better align with changing business needs, positively impact the business, and improve performance and response for their internal stakeholders.

McKinsey authors Durth, Gandhi, Komm and Pollner, in their paper “HR’s new operating model” highlight eight so-called innovation shifts that are driving HR’s new operating models: Adopt agile principles, excel along the employee experience journey, re-empower frontline leaders in the business, offer individualized HR services, productize HR services, integrate design and delivery with end-to-end accountability, move from process excellence to data excellence, and automate HR solutions.

What are the components of HR TOM?

Numerous current publications on this topic, e.g. from AIHR, Deloitte, Gartner, Kienbaum, Mercer, and PwC, essentially work off the “3-pillar model” by Dave Ulrich, which has been further developed several times, and adapt this model along the consistency factors mentioned above.

Gery Bruederlin rightly points out the importance of a demarcation line. This defines which HR services should be provided centrally for the entire company and which are to be provided specifically and decentrally for a business unit or a region. Where this line runs is agreed with the relevant stakeholders as part of the HR core strategy.

Depending on this, it is worked out

  • how the role of the HR business partners should be designed,
  • which administrative HR services can be bundled in one or more regional HR service centers, and
  • how HR experts can be organized in so-called centers of expertise.

In principle, the HR business partner embodies the decentralized principle. HR Service Centers represent a standardized and highly automated approach and thus follow a central principle. In practice, company-wide, regional and divisional HR Service Centers can be found. Both the centralized and the decentralized principle can be applied to the center of expertise, depending on whether the focus is on customer orientation and thus effectiveness or process orientation and thus efficiency.

How is HR TOM designed?

This depends to a large extent on the core HR strategy developed and the roles and responsibilities aligned with it. An HR investment strategy – high quality, high decentralization and high stability – has the following structural characteristics, for example:

  • Divisional or matrix structure, which focuses on differentiation and effectiveness,
  • decentralized provision of HR services, which is why the proportion of HR business partners is relatively high at around 40% and only non-strategic, administrative activities are centralized in shared services; this accounts for around 30%.
  • The share of outsourced “commodities” is small at around 10%.
  • HR specialists account for around 20% of HR resources.
  • As far as digitization is concerned, differentiating innovations predominate over streamlining automations and standardizations. A high business focus can lead to different approaches in individual business areas. All of this in turn favors distinctly decentralized forms of organization.

The result of these structurally relevant alignments is an HR organization with a high level of decision-making authority that operates at eye level with the business units. HR assumes the role of an equal decision-maker and is established as a member of the management body in the company. Both a service center and a profit center can be considered as a management principle.

HR transformation is challenging! To examine the transformation process, the Conference Board has developed a framework that helps companies first assess where they are in their transformation process and then determine necessary steps to achieve the target picture.

Research results from McKinsey indicate: Of the 12 operating model elements, three stand out as having an outsized impact on organizational efficacy:

  • Governance: The structure, authority, and membership of bodies that make critical decisions about the direction of the organization and how it is run.
  • Culture: The organization’s health, particularly its ability to align, execute, and renew itself faster than its competitors.
  • Workforce planning: The organization’s approach to ensuring it has the resources, capabilities, and capacity required to deliver value.

Organizations that prioritized effective practices in these elements were two to three times more likely to be perceived as effective than those that did not have clear strengths in these areas.

Conclusion

An HR Business Model or Target Operating Model represents the link between vision & strategy and organizational structure. It is the way the HR function is organized to create value for its internal customers and stakeholders. Effective HR business models help HR departments deliver its services and value proposition to its customers in an efficient manner.

Under today’s volatile business conditions, an effective HR business model requires a higher level of clarity, automation, flexibility, and collaboration than in the past to ensure roles work together to drive strategic impact and operational excellence.

The general principle that structure follows strategy has unfortunately not been followed sufficiently in practice to date. Consistency between HR strategy and HR structure is an essential guarantor for a high-performance HR function.

A differentiation of the components of an HR business model would have gone beyond the scope of this article.