Transformation everywhere: Alliance for Transformation (Politics), Sustainable Transformation (PwC), The Circus of Transformation (Roland Berger), Workforce Transformation (Haufe); the list could be extended indefinitely. But how does transformation succeed? How do you recognize a successful transformation?

In August 2022 I last wrote about “Transformation: paths and results” focussing on a culture of change, key success factors in transformation processes and expected results. Since then – the corona pandemic has just leveled off – wars and “China scenarios” have kept us on tenterhooks. We are also dealing with skills shortages, raw material prices, supply chains, new technologies and business models, ESG reporting requirements and much more.

So how does transformation succeed? I am convinced that, in addition to the board and the management team, the human resources function is the main enabler for success. I´d like to specify this on three points – there are certainly many more: the HR and data culture, the HR business model, and the role of the Chief HR Officer (CHRO) or Chief People Officer (CPO).

HR and data culture

Heiwig and Wittwer use a nice “image”: transformation as a couple’s dance: HR sets the pace. Transformation – they wrote – has something to do with orchestration and synchronization. The HR managers are already succeeding in many things. Nevertheless, the music often still plays without them. Why is that?

Companies interact with different types of capital to create value – financial, physical and people-centered. The latter is increasingly talked about, but rarely analyzed in detail. This is now slowly but steadily changing thanks to the CSRD. HR should set the pace here and adopt a mindset that is focused on business results. After all, human capital is a crucial source of competitive advantage and resilience. In particular, a holistic view of capital should be sought. Below are some insights on this topic:

  • Effective human capital management requires the integration of operating models, culture, incentives, talent and innovation.
  • Qualitative and quantitative analyses of human capital management make it possible to identify value drivers for sustainable value creation.
  • The Human Capital Return on Investment (HC RoI) is an accounting-based quantitative key figure that is used alongside the Employee Economic Value Added (EEVA) and other metrics to evaluate the effectiveness of human capital management.
  • The HC RoI correlates positively with future excess returns over multiple time horizons and across sectors. Companies with a higher HC RoI create more sustainable value.
  • HC RoI analysis is already used by well-known companies as part of a broader investment and engagement process and provides insights into why companies with similar levels of labor investment may achieve different results.

The disclosure of human capital data by companies remains inadequate; more extensive and comprehensive disclosure would benefit all stakeholders. The statement that the data is not available is a pretext. How many years have we been told this? How much financial capital has been invested in HR systems, databases, etc. since then? The HR and data culture necessary for a transformation requires a basic understanding of holistic capital management, whereby HR is jointly responsible for important value drivers in the sense of a cause-and-effect approach.

HR business model

The HR strategy and HR business model are developed and implemented in accordance with the outlined HR and data culture. I dealt with the latter in detail here about a year ago. With regard to the implementation of such business models, I notice the following:

  • Digitalization and HR IT managers primarily focus on streamlining HR processes (inside-out perspective). Above all, however, they should look at digitalization from the perspective of enabling the business (outside-in perspective: sales growth and profitability).
  • New requirements from the business areas could be focused on even more consistently; particularly in skills management, platforms for learning experiences, internal talent marketplaces, and AI in talent acquisition.
  • Investments in HR IT remain high. This increases the pressure on those responsible to deliver ROI and adapt to changing business needs as quickly as possible. This should also be reflected in the strategic roadmap for HR IT transformation.
  • With current issues such as mental health and well-being in the workplace, human-centered EVP, hybrid work productivity and human-AI collaboration, HR departments are more dependent on the knowledge of other departments or external experts and should redefine the question of value creation depth for themselves in line with their core HR strategy.
  • For the HR structure, this means: In the future, COEs (management dimension) will tend to streamline and focus on governance tasks, HR services (service dimension) will expand and focus on both costs and value creation. HR business partners (business dimension) will become more differentiated and, depending on the chosen HR core strategy of the business area, will be positioned differently – both quantitatively and qualitatively.

Dave and colleagues at The RBL Group have compared nine HR business models and show ways to best build and evaluate the three dimensions mentioned above in terms of value creation based on a holistic view of capital.
Josh focuses on moving from a process-centric push model to an employee-centric pull model as part of HR transformation. The work needs, wishes and ideas of employees are the focus, not the process design itself!

In practice, I would like to see a more methodical approach and more consistency in implementation.

Role of the CHRO

In a recently published Mercer “Voice of the CHRO” survey, one of the questions asked was: What do you wish you had known when you were starting as a CHRO? The top three answers were:

  • Greater depth in HR data analytics and insights,
  • greater depth in non-HR topics (e.g., finance, operations), and
  • how to work with the board.

Many CHROs would like to have

  • a better strategic thinking and focus,
  • greater access to overall business strategy and financial performance,
  • the ability to ensure that the value proposition of HR is set out and understood.

When asked: How do you see the CHRO role changing? the following answers were given most frequently:

  • More strategic managing in the face of greater disruption,
  • increased use of technology and automation, and
  • greater dependence on predictive analytics.

As a result, CHROs will review their entire consistency triangle: from HR strategy, HR business model and HR structure, to relevant HR competencies. These include strategic thinking, execution and communication, as well as openness to transformation and data-based decision-making.

Conclusion

A profound transformation requires a change in corporate culture and philosophy. Sustainability, for example, is not just simple change in the sense of change management, but a transformation! It is also important to shed light on the business mission and, if necessary, redefine the purpose of the company.

Using the example of digitalization and HR IT, I´ve tried to make it clear that agile approaches are necessary. Business models and structures should become more flexible based on a “stable” purpose and value framework and aligned with the strategy.

HR professionals are predestined to recognize moods in the workforce and actively address them in transformation processes. Key HR value drivers are qualitative in nature, but have an important early warning function for “hard figures”; the holistic view of capital outlined at the beginning. This needs to be made transparent and actively managed.

CHROs are required, on the one hand, to keep an eye on costs, but on the other hand to attract and retain talent and to make an innovative, measurable contribution to company growth. HR business models should reflect this spectrum. According to McKinsey, this makes the work of CHROs more complex. Their self-assessment outlined in the article is encouraging and gives hope.