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The HR Value Chain: A Key to Organisational Success


What value does HR add to an organisation?


In this article we break down the HR Value Chain, explaining the difference between efficient and effective processes and how to measure the value HR is adding to an organisation.




What is the HR Value Chain?


The HR Value Chain was developed by Japp Paauwe and Ray Richardson in 1997. It is a guide that looks at understanding how HR tasks add value to organisational goals.


The HR Value Chain is valuable for both developing and implementing HR strategies as it assists in focusing on tasks most likely to impact organisational performance positively.


It is a 3 stage process that shows how HR activities lead to outcomes, which then influence the objectives - overall goals - of the organisation. Broken down, the process looks as below:


  1. HR activities: recruiting, onboarding, performance, compensation, learning and development, benefits, and safety & compliance.

  2. HR outcomes: employee engagement, improved performance, low employee turnover, and better hires.

  3. Organisation goals: reduced absence, improved productivity, improved profit, improved sales, and improved customer satisfaction.


The process is not linear, there is a two way relationship at all stages. For example, organisational goals can influence the HR tasks undertaken, these in turn influence HR outcomes, which influence organisational goals.


When looking at the value chain it is important to make a distinction between effective and efficient processes. For example, optimising the recruiting process to be shorter may lead to a more efficient process, but this may not lead to hiring the best person, therefore leading to a less effective (hire) outcome.


Therefore, when analysing the value chain, it is important to determine what the best outcome is based on the organisational goals.


Understanding more about the 3 levels


Businesses don’t just end up on level 3, it takes time and effort to get there. Given that a business can be assessed to see what level they are on, let’s discuss how we break down these levels.



Level 1

Level 1 organisations are businesses that focus on having efficient HR processes. This is generally a good starting point for small businesses and start-ups, a good HRIS implemented well can get businesses here quickly.


We can use metrics such as time to hire, L&D budget per head, and cost of HR per employee to measure how efficient HR processes are. For example, a lower cost of HR per employee shows the department is operating more efficiently. Note that this doesn’t measure how effective processes are, this is measured by level 2 organisations.



Level 2

Level 2 organisations focus on having effective processes, they are outcome driven and focus on cost effective ways to reach their desired outcomes.


Once businesses have got efficient processes in place they can then move to creating effective processes, to do this metrics such as engagement, employee turnover, individual performance, and absenteeism rate can be measured, understood, and improved. For example, high engagement shows HR processes are more effective than low engagement, the same goes for absenteeism.


Managers need to be considered with level 2 organisations as, despite HR’s best efforts, employee’s are more likely to be disengaged and have high levels of absenteeism if they have a bad manager. This as managers are largely responsible for executing HR practices, meaning effective training and monitoring of managers is important in achieving effective HR outcomes.

Level 3

A Level 3 HR function is strategic and focuses on the business contribution of their strategies. The outcomes lead to long term business continuity.


They measure not only the effectiveness of their processes, but also the impact on organisational goals such as customer satisfaction, market share, and profit margins For example, poor customer satisfaction may be linked to poor training, therefore investing in training employees can lead to improved customer satisfaction, which in turn impacts profit and market share.


How should start-ups and SMEs consider the HR value chain when building or transforming their HR department?



Start-ups and SMEs should have a long term goal of becoming a level 3 function. For existing businesses one must assess where they are on the value chain and decide how to progress from there.


An HRIS is key to moving along this value chain as it automates processes (making them more efficient) and measures how effective they are through inbuilt reporting and analytics. This will allow businesses to streamline HR operations and provide support to employees in an effective, timely, manner.


For businesses without an HRIS - perhaps you are using paper/excel processes in combination with a payroll system - Fox22 can assist you in getting up and running in weeks, thereafter we can guide you in creating efficient processes and reporting on them so that you can measure your effectiveness.


Businesses with an HRIS - or related HR technology - should also assess the efficiency of their current processes if they haven’t already, your systems’ inbuilt reporting tools should allow for this. Note that changes shouldn’t be made to inefficient processes until their effectiveness has been established. If your technology can’t report on this - or you don’t know how to report on this - contact us and we can assist you in assessing your technology landscape and/or using HR analytics.


Once you have invested in the right technology and your processes are both efficient and effective you can be certain that your HR team will have more time to focus on employee development and creating a positive work environment. It is crucial to develop clear KPI’s so that you can leverage reporting and analytics to track your departments performance on a monthly, quarterly, and annual basis to ensure that you are remaining on track to achieve your strategic HR goals.


Addendum: Typical tasks on the HR Value Chain

Note

Depending on your organisational goals the way the HR tasks are undertaken may differ. For example:

  • A SAAS business looking to improve sales and customer satisfaction may find that they have high staff turnover in their sales department and therefore take a deeper look at their recruitment, onboarding, compensation & benefits, and performance management processes.

  • A manufacturing business looking to improve quality may look at their safety & compliance, training & development, and employee relations processes.

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