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October 1, 2010

UGSM-MONARCH

The Monarch Management Review is the scholarly journal of management research and practice from UGSM-Monarch Business School.

Monarch Management Review Management Research UGSM-Monarch Business School - Volume 1, Number 1, October 1, 2010 www.ugsm-monarch.com

Research & Review

Featured Article

CSR As Mythology - Dr. Jeffrey Henderson

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EVA: Pros And Cons - Dr. Igor Pustylnick

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Empirical Testing of Technology Spillovers Among Trading Partners - Dr. Fadi Fawaz

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The Subjective Field of Ethics: A Philosophical Panorama - Dr. Norman Madarasz

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The Value Added of the Human Resource Function of the Enterprise- Dr. Ali Mabrouk

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Comparing The Five Factors of Production In Southeast Wisconsin - Dr. Gary Keller

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The Monarch Management Review Volume 1, Number 1 - October 1, 2010 Contents

From The Editor ............................................................................................................................................ New Researcher Contribution Program ............................................................................................ Abstracts ............................................................................................................................................

2 3 4

Articles CSR As Mythology by Dr. Jeffrey Henderson .................................................................................................................................

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EVA: Pros And Cons by Dr. Igor Pustylnick .......................................................................................................................................

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Empirical Testing of Technology Spillovers Among Trading Partners by Dr. Fadi Fawaz ...........................................................................................................................................

37

The Subjective Field of Ethics: A Philosophical Panorama by Dr. Norman Madarasz .................................................................................................................................

55

The Value Added of the Human Resource Function of the Enterprise by Dr. Aki Mabrouk .........................................................................................................................................

80

Featured Article - Exemplary Contribution Comparing The Five factors of Production of For-Profit Firms And Not-For-Profit Organizations in Southeast Wisconsin by Dr. Gary Keller ............................................................................................................................................

Editorial Policy

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“Senior Executives often include a slide of Maslow’s hierarchy in their presentations. They know that employees will find fulfillment only if they’ve been given the chance to exercise their higher order capabilities --- initiative, imagination, and passion.” ! ! ! ! ! ! Management Guru - Gary Hamel

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The Monarch Management Review Volume 1, Number 1 - October 1, 2010 Abstracts CSR As Mythology - Dr. Jeffrey Henderson In “CSR As Mythology� author, Dr. Jeffrey Henderson, brings to the foreground several issues existing within the state of affairs of CSR study that force a re-evaluation of the efforts produced by academics and scholars within the domain. Principally, the issue that academics since the early 1950s have felt the need to take a secular view of an inherently moral discourse is shown to have yielded sparse advances in the field of business in society literature up to present day. Coupled with the application of adherence to anachronistic social myths the domain of CSR study has been stripped of its soul by those very people charged with its livelihood. This fact is illustrated by Dr. Henderson to be the limiting factor behind the study of CSR and the primary reason why many investigators claim that the domain of CSR study is presently bankrupt. Within the article, Dr. Henderson reviews the contributions of Dr. Joseph Campbell and his theories of mythos as applied to the domain of CSR studies. The premise is addressed that true social change will not take place until society replaces the anachronistic archetypical myths that reinforce the orientation of conflict based economic systems for those of a more cooperative form. Inspiration for change can be found in the timeless writings of major figures such as management Guru Peter Drucker who is shown to have taken a homo-centric view of the practice of management, as compared to the often cited writings of Milton Freidman who champions the profit-centered view that tends to deny corporate social responsibility. EVA: Pros And Cons - Dr. Igor Pustylnick EVA is a proprietary analysis tool trademarked by Stern Stewart. In the recent years many consulting companies attempt to use EVA for the evaluation of the company performance. This short paper discusses pros and cons of using EVA and gives the reader an idea of when and where the use of EVA makes the most sense.

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Comparing The Five Factors Of Production Of For Profit Firms And Not For Profit Organizations In Southeast Wisconsin - Dr. Gary Keller Assessing and explaining how corporate leaders utilize the factors of production at their disposal has been researched and debated traditionally by scholars but more recently the popular media. Over the centuries numerous economic and management theories have been proposed to resolve why some companies with equal access to labor, capital, land and ideas have succeeded while others collapsed. Traditionally, examinations of how managers classify and utilize the factors of production have centered on the private (i.e. for-profit) sector. However, on a global basis not-for-profit organizations (NPOs) or non-governmental organizations (NGOs) are

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The Monarch Management Review Volume 1, Number 1 - October 1, 2010 Abstracts making an increasingly important contribution to their national economies. For example, in the United States in 2007 there were 1,569,572 tax-exempt organizations accounting for 8.11% of all wages and salaries paid with $2.6 trillion in total assets (National Center for Charitable Statistics, 2010). This study compares and contrasts how managers in the private and public sectors located in two counties in southeast Wisconsin ranked the factors of production, defined as: financial resources, employees, management practices, materials, and technology. The data for this research project was derived from two studies designed to correlate firm/organizational management practices and economic outcomes of for-profit (Keller 2009) and not-for-profit firms (Keller, 2010) located in two counties located in the state of Wisconsin (USA) Racine and Kenosha. Empirical Testing of Technology Spillovers Among Trading Partners - Dr. Fadi Fawaz Previous literature suggests that trade contributes to knowledge and technology spillovers among trading partners. Using panel data and country-specific fixed effects, we show that the technology of a country is explained by existing technology of its major trading partners. We build an endogenous growth model for OECD countries for the 1960-2000 period; we draw the residuals to measure the Total Factor Productivity (TFP) of each country. Then using spatial econometrics, we regress the TFP of each country on previous TFP of its major trading partners. In addition, we run a Random Coefficient Model, to let this relationship vary randomly by country. Finally, we run the endogenous growth model again, but now it includes the Spatial lag term as an explanatory variable.

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The Subjective Field of Ethics: A philosophical Panorama - Dr. Norman Madarasz Most approaches of ethics in disciplines other than philosophy do not tend to emphasize the singular dimension in which it acquires its binding force and consequential implications. This dimension is the field of the subject. Subjectivity today is a vast concern in the social sciences. Most models of subjectivity stipulate the existence of at least a minimal concept of mind, i.e. of an interior field in which language, perception, intentionality and higher order inferences merge into synthesized experience. Often this mental synthesis projects a purpose that then translates into action. Inevitably, when one contemplates the field of the subjective conditions behind ethical conduct, one considers the philosophical models at the origin of the paradigms prevailing in the contemporary epistemological field. Our aim will be to distinguish some of the main paradigms of subjectivity generally encountered in ethics.

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Volume 1, Number 1 - October 1, 2010 Abstracts The Value Added of the Human Resource Function of the Enterprise: Dr. Ali Mabrouk HRM forms one of the most significant areas in determinig the success of the enterprise. A number of studies have noted the importance of HRM activities in the success or failure of a company, where business survival is directly correlated with the HRM function. People are increasingly being seen as the most critical asset of a company. The strategic role attributed to the HRM department demands that it should be well managed in order to get the best out of the organization. Managing the human resource department demands measuring the performance of that department. HRM measurements transform human resources capabilities into measurable strategic value-add items that are then made transparent to the organization in order to improve connection with leadership across the company. In order to demonstrate the added value of HRM to the entire company, several possibilities have to be taken into consideration. In this article Dr. Mabrouk takes the reader through a review of these methodologies which include: measurement, linking, aligning of employees and the use of the HR balanced scorecard.

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk Dr. Ali Mabrouk, Ph.D. holds the position of Professor of Business Strategy as well as Director of Research at UGSM-Monarch Business School. Dr. Mabrouk also sits as a member of the Academic Council of the school. He holds the German Computer, Electrical and Information Technology engineering degree, Dipl.–Ing., from the University of Stuttgart in Germany. He is also the holder of a dual executive MBA degree from the Grande Ecole de Commerce ESSEC in Paris and the Mannheim Business School (Germany). He also is a holder of a Doctorate in Business Administration by Research from SMC University in Austria jointly with the Universidad Mayor de Santiago in Chile. His doctoral thesis investigated inter-firm collaboration and its performance measurement in the airline industry. Dr. Mabrouk has been a researcher at both the Fraunhofer Institute and the University of Braunschweig in Germany.

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Introduction To d a y ’ s h u m a n r e s o u r c e management (HRM) function has evolved over the years from a pure administrative function to a more business-oriented strategic partner. Additionally, “there has been a shift in the focus of the workforce from the machine worker of 100 years ago to the knowledge workers of today. It will be up to HR to tap that human capital and unleash its inherent greater value” (Pepitone, 2000). Organizations, their behavior, and employees have changed, which subsequently has altered the character and responsibility of the human resource function over time. HRM is, in the broadest sense, the relationship between the employer and the employee. Thus, HRM activities are cross-functional and are integrated into all of the business processes of the

company. Specifically, in today’s business-oriented and strategic HRM, in addition to performing basic administrative functions such as planning, organizing, staffing, leading, and controlling, there is also a strong focus on tasks that address the overall workforce environment via activities such as recruiting, selecting, training, compensating, appraising, and developing employees. Today, HRM is key to the success of a company in order to align people to the organization's objectives and business strategies. HRM specifically focuses on securing, maintaining, and utilizing an effective work force, which an organization cannot survive without. However, the role of human resources is continually changing and evolving. In such an environment, it has become increasingly important to measure, document and communicate the value

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk that the human resource function adds to the business. HRM can create value for a company by finding ways to improve workforce performance, increase productivity, and advance overall employee satisfaction by contributing to positive financial results for the organization (Pepitone, 2000). In order to properly address the question of how HRM adds value to the business, first a comprehensive evaluation must be done that assesses where HRM can contribute to overall company performance. This assessment encompasses tangibly measuring a wide range of strategic, operational and administrative functions that both directly and indirectly improve the bottom line. Then, in order to increase the visibility of this value-add, the contribution of the human resource function can be expressed in financial terms similar to most other key performance indicators (KPIs) in the business strategy. The most simple equation for this is (1):

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(1)

Value-Add =

departments to market or sell their services as a way of communicating their value added.� (Wintermantel & Mattimore, 1997) We will explore this issue more in Part 3 of this article where we cover in-depth the different possibilities available to measure the value added of the human resource function. In the course of this article, the intention is not only to show the areas, in which HRM can add value, but also to investigate and analyze different models / KPIs that can be used to make these results visible to key decision makers. While it is clear that companies expect HRM to add more value, studies have shown that one of the best ways in which to do this is by evolving HRM into a real business partner that directly improves performance of the business. This can be accomplished with effective talent management, robust change management, successful alignment of employees to the business strategy,

Impact on Performance - Consumption of Resources

This formula, however only shows a portion of the overall HRM picture, as it is not always possible to express such benefits in monetary terms. Moreover, “it is becoming increasingly more common for human resource

and a host of other HRM value-added activities that impact overall business effectiveness (Lawler, 2005). The article is organized as follows: First, a brief overview of the

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk foundations of HRM is given, and then human resources, minimization of costs, increases in productivity and the different roles of HRM in a company leveraging effectively the creativity are determined. Depending on these of employees. roles, the goals for HRM are outlined. As HRM is working cross-functionally, 2. S o c i a l g o a l s : T h e s e g o a l s the different stakeholders involved or complement economic goals and addressed are then defined. These focus on improving working stakeholders expect a certain added conditions and the overall work value from the activities conducted by environment for the employees (e.g. the HR department. In order to quantify work place layout, industrial safety, the added value, specific methods need compensation, work time organization, conditions of work, to be applied. The following chapter personnel development, etc.) to focuses on measuring the value added improve productivity and increase by HRM to the company. A framework the overall value-ad d t o th e of different measurement business. methodologies and utilities are given. The studied methods highlight different 3. O t h e r G o a l s : L e g a l a n d areas of the measurements (financial, organizational goals are also statistical or systematic) as needed by important in order to ensure that all the different stakeholders. In a further employees are treated fairly and section, the typical critical success within the boundaries of the law. factors (CSF) for HR managers to Overall, the main objective of adequately demonstrate the added value of their department are identified.! HRM is to achieve business goals through the alignment of the human resource strategy with the overall Goals of Human Resource business strategy by monitoring and Management adjusting the aforementioned goals as appropriate. The HRM department, leaders within the company, and the workers Personalization of the Human council are all applying the same goals Resource Function for human HRM. (Olfert, 2006) These are: Within every company the HRM 1. Economic Goals: These goals department needs to define a unique focus on the optimal utilization of HRM strategy that is closely aligned to

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk the targets of the overall company. Within this charter, a clear definition of the roles that the HRM department as a whole should play as well as the role of the individual human resource manager needs to be outlined. Furthermore, it is important to determine in what capacity these human resource managers will serve their stakeholders in order to assist the overall company in goal achievement. Two extreme positions for the HRM role can be identified: (Bechtel, 2007)

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1. Passive Service Provider: In this capacity, HR managers are willing to fulfill only the specified requirements of their customers, but not more. In this way, they are completely reactive to the demands of their customers and cannot react in a proactive manner. A key drawback to this approach is that it often inhibits the HR manager’s ability to execute and live a long-term HR strategy as they are focused completely on operational tasks, and rarely are able to look at the strategic activities of the team. 2. Strategic Business Partner: In this role, the human resource department plays an active part in the operation of the company. The human resource managers create instruments to meet the overarching strategic goals of the company and are expected to fulfill the needs of

both the internal and external customers in a proactive manner. While these examples reflect the extreme points on the continuum, a more realistic view is a combination of both approaches. In practice, companies adopt some hybrid form of each approach based on their respective industry sector, the operative si tu a ti o n o f th e co mp a n y, th e i r competitors, and other market factors. Perhaps a more practical and less extreme view of the role that HR professionals play is that which has been outlined by Dave Ulrich who challenges human resource professionals to define the value they create for customers and employees. This perspective dictates that for HRM, delivering results means focusing on the outcomes and achievements of the human resource department and their contributions made to the business. He describes a framework that shows four key roles that human resources professionals must fulfill to focus on both strategic and operational aspects in both the long and short term in order to add the greatest value to the organization. Such human resource management activities range from managing processes to managing people and are described as follows: (Ulrich, 1997)

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk 1. Strategic Partners: translate these transformation methodologies business strategy into action. They in the organization. They lead systematically assess and align HR reengineering efforts by being a role practices with business strategy, model and executing such changes match organizations to systems, first within the human resource and design, integrate and operate function. They serve as catalysts for these systems to ensure effective change, facilitators of change and organizations. Overall, their focus is designers of systems for change on executing strategy by building with a focus on creating a renewed new organizational capabilities and organization. performance management programs that are linked to desired This model was revised in 2005 outcomes. and a fifth role was added with minor revisions to the descriptions of the 2. Administrative Experts: improve remaining roles, as follows below: processes and reengineer business (Ulrich, 2005) processes to match the associated human resource processes (or vice 1. E m p l o y e e A d v o c a t e : A s a n versa), rethink value creation and employee sponsor or advocate, the how work is performed as well as human resource manager plays an measure human resource results in integral role in organizational terms of efficiency (cost) and success via their knowledge about effectiveness (quality). Overall, their and advocacy of people. This focus is on building an efficient advocacy includes expertise in how infrastructure. to create a work environment in which people are motivated, 3. Employee Champions: listen and contributing, and happy. This is respond to employees and find the accomplished by fostering effective right balance between demands on methods of goal setting, employees and those resources communication, and empowerment available to assist employees while through responsibility, which in the promoting employee contributions. end increases employee ownership Their focus is on increasing in the organization. employee commitment and capability. 2. F u n c t i o n a l E x p e r t : T h i s i s essentially about human resources 4. Change Agents: understand how to not only possessing a body of implement change and can apply expert knowledge but also

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk leveraging it to improve decisions well as to play a developmental role and deliver results. This includes in raising the standard of strategic resolving human resource practices thinking in the management team. issues like recruitment, promotions, transfers, measurements, rewards, 5. Human Resource Leader: In this training and development. The role, the human resource manager human resource expert has to acts as a role model of good contribute their knowledge to issues leadership. To accomplish this, they like work process design, internal need to first lead and value their communications, organization own function before developing structures and leadership other leaders. Therefore hiring, development, all of which may not training, performance management be under the human resource and communication with the human department’s direct influence. resource function must remain a top priority. Ulrich talks about effective 3. Human Capital Developer: People human resource leadership, setting are increasingly being seen as an clear goals, being decisive, organization’s most critical asset, communicating inside and out, thus an important role for human managing change and defining resource management is in results in terms of value-add for enhancing these human assets investors, customers, line managers through development of the and employees. workforce. Examples of activities undertaken by people in this role Each of these roles is important include creating individual training plans for employees to develop a as they all add value and contribute to particular skill or competency and the overall function of human resource and the organization. Depending on the acting in the role as coach. priorities of the company, the human 4. Strategic Partners: The human resource manager has then to adjust resource manager should assist the the focus of activities. For this sake, the line managers to reach their goals human resource manager should by assisting in the development and consult and exchange with other implementation of strategy. This involved parties in the company such involves playing an active role in as the chief executive officer, the crafting strategies, playing the financial officer, the legal counsel and devil’s advocate to help refine and the key line managers in order to test the workability of strategies, as develop a common understanding and

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk deduce the legitimate expectations for the human resource activities. Definition of Stakeholder Requirements The main stakeholders of HRM are existing and prospective employees of the company, the leaders and the shareholders. The personnel task portfolio of the human resource department is: (Olfert, 2007)

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1. Planning: is a part of business planning and involves personnel planning of individual employees, e.g. career planning and collective personnel planning, which operation’s groups, specialized divisions and/or the whole company concern, e.g. personnel status planning, personnel requirement planning, collective personnel operational planning and personnel expenditure planning. 2. Recruitment: Recruitment is responsible to find the right employees at the right time for the right role. It is also sometimes called personnel marketing and includes the tasks of internal and external recruitment.

3. Placement: This task focuses on general personnel employment from the first working day of each employee through the expiration of their contract. 4. M a n a g e m e n t : P e r s o n n e l management is responsible for the controlling and monitoring of daily people related activities within human resource management. They have the goal of reducing overall personnel expenditures, limiting headcount fluctuation, and shrinking absences while increasing productivity. 5. Compensation: These activities are centered on aligning personnel remuneration to corresponding organizational and financial achievements. 6. Development: In this area a focus is put on the personnel development of employees to preserve and improve the general qualifications of people so that they can contribute more completely to the current and future growth of the company. 7. Administration: focuses on the construction of personal information systems, the creation of personnel

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk documents, the set up of basic master data about employees, the completion of legal and general human resource related correspondence as well as the execution of a broad-spectrum of related administrative tasks. 8. Support: is focused on rounding out the overall compensation package of the employee, above and beyond monetary compensation. General services focus on delivering all mechanisms, measures, and achievements for overall social welfare.

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9. Controlling: is a core function of authority on operationally associated activities, including planning, checking and controlling of human resources. At this level, it is clear that the activities of HRM cover the whole lifecycle of an employee within and after the engagement period with the c o m p a n y. A s t h e s e e m p l o y e e s represent the most valuable asset of the company and there is a need to optimize the return of this asset, HRM is predetermined to fulfill this specific role.

Measuring Human Resource Added Value Several approaches can be found in the literature to measure HRM and the majority emphasize the role that HRM plays in creating real value for a company. While there are several different types of value that HRM can provide, few are easily measured. This poses a particular challenge, as Peter Drucker states, “if you can´t measure it, you can´t manage it” (Drucker, 1991). As such, it is imperative for a human resources manager to clearly demonstrate the value-add HRM provides to a company. To do this, many performance outcomes of HRM can be captured and used to outline the tangible contribution that the department makes. In the next section, several different ways to highlight the value-add of HRM will be explored as well as outlining the corresponding tangible contributions made to overall corporate performance. The Link Between Human Resource Strategy And Business Performance !"#$% &$'$(&)#% *+,-+.'% '#/0% 1#(1% 0#$+% 234% -'% )/+'-'1$+1% 0-1#% 1#$% )/56$778$% '1&(1$.9% -1% #('% '-.+-*)(+1% $:$)1'% /+% *+(+)-(;% 6$&</&5(+)$=>% !"#$#%&'&(&)*&)+ ,'+#*-+.//01! Clearly, this is a desired effect of HRM, and when one attempts to

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk connect the dots between business s t r a t e g y, H R M , a n d c o m p a n y performance, it quickly becomes apparent that the key areas where HRM can have a great deal of impact are in the area of employee engagement and increasing competitive advantage. However, in order to add value in these areas, HRM needs to be involved from the start in the overall strategic business planning process of the company to be able to understand and to align its strategy with business needs. Today, most ‘best in class’ companies are integrating HRM as a true value-added partner in their business planning and strategic decision making in order to ensure and sustain competitive advantage. This is critical, as from a competition perspective, many companies differentiate themselves by leveraging their human capital as a valuable resource that provides them considerable advantages over their competitors. Brand value increasingly depends on the worth of intangible assets such as knowledge, core competencies, and organizational capabilities that is captured within the human capital of the company. (Ulrich & Smallwood, 2005) As a result, in recent years, many organizations have tried to capitalize on increasing the value of these intangible assets by investing in the development of their employees.

Within a company, it is possible to evaluate the effectiveness of the human resource department in performing their various roles and their contribution to the company as a whole, as described earlier. Most of the administrative aspects of HRM are necessary to maintain the people in a given organization. However, understanding and evaluating the value of the skills that the company needs to find, attract, hire and lead these personnel while simultaneously developing their abilities to lead, constitutes the challenge of building and maintaining the organization for the future. In looking at this contribution in more detail, there is consensus that the HRM contribution to organizational outcomes is a function of three interrelated processes. The first process is composed of defining the human resource strategy and formulating the policies, programs and practices. The second process consists of shaping the human capital base, and ‘exploiting it’ in terms of worker motivation to maximize the full potential of human capital. The third process emphasizes the enhancement of organizational performance by influencing the degree to which motivated and gifted workers are provided with the opportunity and the means to contribute to operational

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk Figure 1: Interrelated Processes of Human Resource Management

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Source: Adapted from Bamberger Peter, Meshoulam Ilan (2000)

!"&(+';(7+.%?@'-+$''%/?A$)78$'%-+1/% decision-making. These three interrelated processes are shown in 6$&'/+(;%/?A$)78$'%-'%1#$%B$9%1/%'@))$''C>! Figure 1. As long as goals with measurable targets are set, the human resource At this stage, the human resource value-add can easily be proven and it is manager should define the outcomes of easily seen if the end results are each of the above-mentioned activities positive for the business. Therefore, it is and specify the corresponding of the utmost importance to derive the performance indicators. HRM strategy and goals directly from the overall business strategy so that Goal Setting these can then be cascaded to individual employees. In order to As the Senior Vice President of human ensure clear alignment between the resources for PepsiAmerica has stated: business and HRM objectives, it is (Greengard, 2005) equally important to measure bottom-

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk line savings and contributions that HRM delivers to be able to clearly express in financial terms the value-add the function provides. This is due to the fact that while â&#x20AC;&#x2DC;every process has a costâ&#x20AC;&#x2122;, a company must maximize the return on these HRM investments and apply such costs intelligently to get maximum return. (Smith & Marinakis, 1997) Subsequently, the establishment of such financial objectives for HRM has to also be accompanied by a robust performance management process which follows up on the committed

targets and achieved results in order to deliver transparency to the organization. Differentiated Perspectives For Performance Evaluation There are a number of ways to evaluate human resource practices and human resource management as a whole. In order to demonstrate the added value of the human resource program, the human resource manager

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Figure 2: Perspectives of Performance Evaluation

Source: Mabrouk (2010)

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk should consider the three types of Financial Evaluation evaluations as illustrated in Figure 2. As depicted, productivity serves as an important driver of financial performance and HRM involvement plays a central role in ensuring success. Specifically, the human resource manager can emphasize the link between the performance of his department and that of the bottom-line: as in the case of operational performance (voluntary turnover, absenteeism and productivity). Since operational performance is directly linked to the financial performance of the company (safeguarding profitability, liquidity and solvency) by means of productivity, it is possible for the human resource manager to demonstrate in t h i s w a y, t h e v a l u e - a d d o f h i s department. In other words, to determine the extent to which the activities of HRM influence the financial performance of the company, it is important for the human resource manager to pay attention not only to financial outcomes, but also to intermediate operational criteria that indicate how financial results are achieved.

(2)

The first and probably most ambitious method for a human resource manager to demonstrate the value-add of his department consists of measuring the costs and benefits of different human resource strategies and individual human resource practices in financial terms. This demand seems to be vital for the human resource managers in todayâ&#x20AC;&#x2122;s world, as â&#x20AC;&#x153;in a world in which financial results are measured, a failure to measure human resource policy and practice implementation dooms this to secondclass status, oversight, neglect, and potential failureâ&#x20AC;?. (Pfeffer, 1994) In the following, two of the basic approaches for the financial evaluation of HRM are discussed. Return on Investment The basic approach here is to calculate the cost of a human resource intervention (e.g. training), and then to determine the benefit in monetary terms of the achieved results (e.g. improved productivity or a reduction in absenteeism). To calculate the ROI of a human resource intervention program, the human resource manager needs to

ROI = Net Benefits / Intervention Cost

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk calculate the total costs and benefits of data about human resources and the program using Formula (2). (Saks, communicating this information to 2000) interested parties”, (Flamholtz, 1985) which aims to “improve the Using this method, the human management of human resources from resource manager is able to show the b o t t o m - l i n e c o n t r i b u t i o n o f a n y an organizational perspective by intervention to line managers (such as increasing the transparency of human production managers). However, the resource costs, investments and difficulty of this method becomes o u t c o m e s i n t h e m a n a g e m e n t obvious when trying to consider ‘soft’ accounting rituals, such as profit and measures such as communication, loss accounts, balance sheets and learning and interpersonal skills, which investment calculations”. (Cascio, make part of a human resource 1991) intervention. These soft measures are The human resource manager much more difficult to quantify in monetary terms than are ‘hard’ could, for example, think of generating measures such as absenteeism, human resource profit and loss productivity and labor productivity. accounts. This can illuminate the These formulas and measures should financial value-add of human resource be derived from a listing of activities management. Figure 3 is an example and the variables associated with those that a human resource manager could use for this purpose. activities.

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Human Resource Accounting The second approach is based on ‘human resource costing and accounting (HRCA)’ method. Human resources can be considered as (intangible) assets for the company. The main goal of the HRCA method is to try to put these intangible assets (for example in the form of goodwill) into a financial accounting framework and try in this way to influence the company’s management decision-making and learning processes. HRCA is then “the process of identifying and measuring

Here value-add is measured by the share of personnel costs contained in the gross margin. Since the remaining gross margin after deduction of personnel costs must be sufficient to pay for investments, interest, taxes and returns for the owners, the personnel costs are to be kept on a designated level. HRCA seems to be an interesting concept, but it seems not to have gained popular acclaim or adoption, as there has not been a serious effort to develop generic and cross industry measures to date. Moreover, HRCA has failed to develop much in the way

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk of practical applications. Pfeffer (1997) remarks that due to the low standing of HRM in many companies measurement is highly desired, but consequently is quite difficult to achieve due to the political roadblocks that are in place that prohibit this. Figure 3: Human Resource Income Statement

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Statistical Evaluation The statistical evaluation of human resource strategy and practices includes basic descriptive indices such as measures of central tendency. Such statistics allow the human resource manager to make statements about the correlation between human resource practices and outcome variables. The human resource manager should regularly gather human resource metrics, translate these performance metrics into incremental financial value, and adjust the timeframes and scale of the value to fit each stakeholder. If the metrics are especially sensitive, short reporting cycles allow the human resource manager to gain support from key stakeholders and sponsors before formal reports are made. The following table illustrates some examples of the ratios that the human resource manager can use.

Human Resource Ratios External Staffing

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Strategic Planning HR Staffing Cost Per Hire Acquisition of Employees Acceptance Rate

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk Employee Training & Development

Organizational Development & Change

Training Days Per Employee Training Budget Per Employee Supervision

Compensation Performance Management & Rewards System

Organizational Behavior & Theory

Rate of Performance Appraisals Early Resignation Rate

Human Resource Management Audit typical steps that should be conducted within an audit process. !D% #@5(+% &$'/@&)$% (@,-1% -'% (%6&/)$''% /<% $8(;@(7+.%1#$% $:$)78$+$''%/<%1#$% $+7&$% #@5(+% &$'/@&)$% <@+)7/+>,! GH3=@@=I4,!

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DEEFJ

That is to say the evaluation of the conducted activities, policies and systems based on the evidence collected. A human resource manager should conduct such an audit to demonstrate the human resource alignment with the company business strategy. This includes the systematic assessment of how HRM is contributing to the company achievement of business goals. Figure 4 illustrates the

To demonstrate to the rest of the organization that the human resource unit is a partner with a positive influence on the bottom-line of the business, the human resource manager must be prepared to measure the results of human resource activities and then communicate that information to the rest of the organization. The audit could be conducted either by the internal audit department of the company or by external consultants specialized in the human resource management field.

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk Figure 4: Human Resource Audit Process

Source: Mabrouk (2010)

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Human Resource Benchmarking Once the human resource manager has gathered the information on the performance of his department, a comparison can then be made aligning the results to some standard best practice. One approach to assessing HRM effectiveness is benchmarking, which compares specific measures of performance against data on those measures from other organizations believed to be applying best practices. This includes the comparison of cost and other

efficiency-based performance outcomes associated with activities of the human resource function. As illustrated in Figure 5, a human resource manager can conduct benchmarking in a number of different ways, with real pay-backs realized through: â&#x20AC;˘ Getting a sense of the organization's position or performance, relative to previous years, or as compared with similar organizations

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk • Understanding the relative strengths and weaknesses of its current people practices, in relation to perceived ‘good practice’.

stated above could lead to considerable failures in measuring the human resource’s important contributions to company success. Moreover, such a unilateral reliance can also encourage However, reliance only on the a n a p p r o a c h t o h u m a n c a p i t a l types of benchmarking measures management that is counterproductive.

Figure 5: Human Resource Benchmarking

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Source: Mabrouk (2010)

Human Resource Balanced Scorecard The balanced scorecard (BSC) translates a company’s strategy into measurable objectives. The BSC not

only includes financial measures, but also complements these with operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement activities. These

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk operational measures are the drivers of future financial performance. Traditionally, the BSC displays the following four perspectives: (Kaplan & Norton, 2005)

the ability to introduce new products. Only through the ability to launch new products and continually improve operating efficiencies can a company penetrate new markets and increase revenues and margins â&#x20AC;&#x201C; in short, grow and thereby increase shareholder value.

2 Financial Perspective: Financial performance measures indicate whether the company's strategy, 2 Customer Perspective: Customers' implementation, and execution are concerns tend to fall into four contributing to bottom-line c a t e g o r i e s : t i m e , q u a l i t y, improvement. Typical financial goals performance/service, and cost. Lead a r e p r o f i t a b i l i t y, g r o w t h , a n d time measures the time required for shareholder value. the company to meet its customers' needs. Quality measures the defect 2 Internal Process Perspective: The level of incoming products as internal measures for the balanced perceived and measured by the scorecard should stem from the customer. The combination of business processes that have the performance and service measures greatest impact on customer how the company's products create satisfaction â&#x20AC;&#x201C; factors that affect cycle value for its customers. time, quality, employee skills, and productivity, for example. It is From an HR perspective, the important to identify and measure the company's core competencies BSC approach works quite well if the and the critical technologies needed goals are selected in a way that HR is t o e n s u r e c o n t i n u e d m a r k e t able to set measurable targets that leadership. Companies should showcase precisely how HR is creating decide what processes and value. An example of how to competencies they must excel at and accomplish this in the four BSC perspectives is outlined as outlined in specify measures for each of these. Figure 6. Questions that may be asked 2 Learning and Growth Perspective: include: This perspective focuses on the continuous improvement of the - What is our return on our investment in our people? organization with regards to their existing products and processes and

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk - Is our service delivery effective and efficient? - Are our human assets aligned with future needs?

- Are we serving the needs of our customers?

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Figure 6: Balanced Scorecard Perspective

Source: Halikova, Hoyal &Osgood (2003)

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk Critical Success Factors For the human resource manager to be able to demonstrate the valueadd of his department to the company performance, some critical factors need to be met, these are: 2 Know the Business: To provide the foundation for value, the human resource manager and his staff should have a deep understanding of the business they are working for, its key challenges and strategic direction. The human resource manager should know who the key external customers are and have periodic interactions with them in sales, operational, or service situations. Moreover, they should spend time periodically in production units and understand the needs of production managers. In addition, the human resource manager is expected to know how the company o p e r a t e s f i n a n c i a l l y. B y understanding the business, its needs and how it functions financially, the human resource manager will not only be in a better position to develop innovative solutions to critical business issues, but also to demonstrate the valueadd of the department to the company.

company, the human resource manager should understand the forces outside the company that could affect its future success. This includes a wide range of issues including: -Technology shifts -Key industry trends and issues -Globalization issues -Outsourcing and off-shoring trends -Demographic shifts in workforce segments -Legal and regulatory issues Defining The Human Resource Vision And Building Alignment

The human resource manager should have a healthy understanding of the businessâ&#x20AC;&#x2122; operations, the key strategies and challenges of the company and should be aware of the relevant environmental forces. This provides a basis not only for defining a human resource strategy that enhances the value of the company, but also demonstrates the added value of his department to the company. For a company whose future success depends heavily on product innovation, the human resource manager should address its approach to talent acquisition, development and retention. When business strategies and 2 Monitor the Environment: To be a challenges are used to focus on the proactive strategic partner in the vision, the human resource manager

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk then can more closely align the human resource processes and practices with business needs. This alignment is a key step in adding value to the business. Conclusion

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HRM forms one of the most significant areas in determinig the success of the enterprise. A number of studies have noted the importance of HRM activities in the success or failure of a company, (Terpstra & Oison, 1993) where business survival is directly correlated with the HRM function. People are increasingly being seen as the most critical asset of a company. The main mission of the HRM department is therefore to “get the right person at the right place at the right time”. This statement summarizes the responsibility of the department and sets at the same time the framework for measuring its performance in achieving this mission. The strategic role attributed to the HRM department demands that it should be well managed in order to get the best out of the organization. Managing the human resource department demands measuring the performance of that department. HRM measurements transform human resources capabilities into measurable strategic value-add items that are then made transparent to the organization in

order to improve connection with leadership across the company. In order to demonstrate the added value of HRM to the entire company, several possibilities have to be taken into consideration. One approach to measure the value-add of HRM is to determine the financial impact that HRM has on the company. This can be exhibited either through the use of the so-called “human resource accounting” method or by determining the return on investment (ROI) of the intervention of the human resources department to enhance the output (quality/quantity) of certain processes. The HRM manager can also emphasize the link between the performance of the HRM department and the bottom-line; that is operational performance. Since the operational performance is directly linked to financial performance of the company through improved productivity, it is possible for the HRM manager to demonstrate the value-add by reviewing key operational criteria and their impact on overall financial result achievement. One key aspect of the HRM contribution to overall company performance is the ability to assist in the alignment of employees to the company business strategy. In addition,

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk HRM can also perform a self audit in order to identify its own strengths and weaknesses which are then compared with benchmarks from other similar companies in order to truly assess the HRM performance. M o r e o v e r, u s i n g a h u m a n resource balanced scorecard helps the human resource manager to communicate the HRM and corporate strategy throughout the department, to align departmental and personal goals to the strategy, and to link the strategic objectives to long-term targets and annual budgets. In order to fulfill the task described above, human resource managers needs to not only understand the business strategy of the company, they need to have a healthy understanding of the operations of the business, the key strategies and challenges of the

company, as well as be aware of the changes in the overall business environment. This knowledge can then be used to set up the appropriate HRM structures and processes in order to meet the needs of the organization. Having established these structures, the HRM manager then needs to assist the organization in setting the goals and key performance indicators (KPIs) for the employees. For tracking purposes, a performance management process needs to be in place in order to measure and follow up on these KPIs. To sum up, a HRM department that manages to prioritize its investments and link these investments to improved business performance is placing itself at the heart of value creation within the company and can clearly show the contribution that they make to the financial performance of the company as a whole.

References

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1. 2. 3. 4. 5. 6.

Bamberger, Peter and Ilan Meshoulam, “Human Resource Strategy: Formulation, Implementation, and Impact” 2000, Thousand Oaks, CA: Sage Publications. Bechtel, Roman “Strategie als dynamische HR-Aufgabe”, www.personalwirtschaft.de, 02, 2007. Berthel, Jürgen & Becker, Fred G., “Personal-Management: Grundzüge für Konzeption betrieblicher Personalarbeit” 8. Auflage, 2007. Cascio, W.F., “Costing human resources: the financial impact of behavior in organizations”, 3rd ed., 1991 PWS-Kent, Boston. Dessler, G. (2005): “Human Resource Management”, Tenth Edition. Upper Saddle River, NJ: Prentice Hall. Drucker, Peter, “Practice of Management”, New York, Harper Business, 1991.

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The Value Added of the Human Resource Function of the Enterprise by Dr. Ali Mabrouk 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

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Dyer, L. and Reeves, T., “Human resource strategies and firm performance: what do we know, where do we need to go?”, The International Journal of Human Resource Management, 6: 1995. Fitz-Enz, J., “How to Measure Human Resource Management”, (3rd ed.): McGraw Hill. Gatewood, R., & Feild, H. (2001). Mason, Ohio: South-Western. Flamholtz, E., “Human resource accounting”, Jossey-Bass Publishers, Los Angeles, 1985. Greengard, Samuel, “Tuning up human capital systems”, Business Finance, 9, 2005. Gröjer, J.E. & Johanson, U., “Human Resource Costing and Accounting”, Joint Industrial Safety Council, Stockholm , 1996. Lawler, Edward, “From Human Resource Management to Organizational Effectiveness”. Human Resource Management, Summer 2005, Vol. 44, No. 2. Kaplan, Robert & Norton, David, “The Balanced Scorecard: Measures that drive performance”, The Best of Harvard Business Review, July-August 2005. Olfert, Klaus, “Personalwirtschaft” 12. Auflage, 2006. Panayotopoulou L., Bourantas D. Papalexandris N., “Strategic human resource management and its effects on firm performance: an implementation of the competing values framework”, International Journal of Human Resource Management 14:4, June 2003. Pepitone, James, “HR’s new role: creating value”, HR Focus, January 2000. Pfeffer J., “Competitive advantage through people”, Harvard Business School Press: Boston, MA., 1994. Pfeffer, J., “Pitfalls on the road to measurement: The dangerous liaison of human resources with the ideas of accounting and finance”, Human Resource Management, Vol. 36, No. 3, 1997. Phillips, Jack, “Accountability in Human Resource Management”, Gulf Publishing, 1996. Saks, A. M., “Research, measurement, and evaluation of human resources”, Canadian edition Scarborough, Ontario, Nelson Thomson Learning, 2000. Schmeisser W. & Clermont A. “Personalmanagement”. Herne/Berlin 1999. Smith, M., Marinakis S. “Measuring HR value added from the outside in”, Employment Relations Today, Autumn, 1997. Spoginardi M., “Conducting a Human Resources Audit—A Primer”, Employee Relations Law Journal, 23; 1997. Terpstra, D. E. & Oison, P. D “Entrepreneurial start-up and growth: A classification of problems” Entrepreneurship Theory and Practice, 27(3), 1993. Ulrich D., “Human Resource Champions – The next agenda for adding value and delivering results” Harvard Business School Press, 1997. Ulrich D.& Brockbank W., “Role Call”, People Management. 16 June, 2005. Ulrich D.& Smallwood, “From Human Resource Management to Organizational Effectiveness”, Human Resource Management, Summer 2005, Vol. 44, No. 2. Wintermantel R. & Mattimore K., “In the changing world of human resource management: matching measures to mission” Human Resource Management, Fall 1997, Vol. 36, No. 3.

Citation: This article may be cited as: Mabrouk, A. “The Value Added of the Human Reseource Function of the Enterprise”, The Monarch Management Review, UGSM-Monarch Business School, Vol. 1, Num. 1, Oct. 2010, pp. 80-102

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