In Part One we established that HR’s purpose is not to do HR ‘stuff’ but to build the capability of an organisation to deliver its strategy and to create sustainable value for all its stakeholders. As we talk to HR professionals, we find that an understanding of what we mean by value creation is a real differentiator as it connects you to the nature of any organisation. Organisations are there to create value, whether that is for shareholders, customers, or even society itself. This is true whether you are a quoted, public sector, or charitable organisation. It’s just the definition of value that might differ.
Hence HR needs to develop a clear understanding of how value is created in your organisation and what HR can do to create value. One HRD mistakenly said at this point “Aha I get it; I can use this to justify what I do”. No! You don’t use this understanding of value creation to justify your HR agenda, but to build and prioritise your HR agenda based on whether or not it creates value. This means understanding the numbers.
So, what is the link between HR and value creation?
The value of a business (in this case I define this as market capitalisation -how much investors think the company is worth – but every organisation will have its own value metrics) is driven by operational performance, especially free cash flow. As someone once said, ‘turnover is vanity, profit is sanity, but cash flow is reality’. We need to understand what the challenge is in our organisation in driving free cash flow and how HR can influence this.
I was working with one organisation recently and one of the participants after the programme said “I had three conversations yesterday with some of my business leads and I approached all of them with a value-based mindset. It was a different dynamic and made a real difference”. What she’d done was challenge how the requests being made of her contributed to meeting her organisation’s cash flow challenge. Without this ‘value lens’ she would have focused on simply executing the request, but using the value lens she had helped them see how their request was value destructive and they withdrew it. She said no (which we need to be much more confident in saying) not from an HR perspective, but from a business perspective.
Investors can invest in other, safer investments, so they want to have the confidence that your organisation can deliver this operational performance over a sustained period of time that justifies the risk inherent in investing in your organisation. Again, you need to understand how you can drive this confidence, in your strategy, in your leadership, and in your organisational capability.
This is the key linkage between HR and value. You need to do things that create value, and as we said in Part One, you need to do things that build the capability of your organisation to deliver the strategy that underpins value creation. If your strategy is based on the cloud you need to have the right people but also the right organisation, systems, structures and culture to give you a cloud capability that differentiates you from your competition. As a central part of your business strategy you need a people and organisational plan owned by the whole business that outlines exactly what the requisite capability is and how you’ll build it. HR in turn needs an operational plan of exactly what HR will do. The language here is important. HR should never have its own HR strategy but should focus on what is required to deliver the business strategy.
All of this is of course dependent on HR having the right capability within the function to execute its operational plan. So, investing in yourself and your people isn’t just an investment in HR; if the linkages are clear, it’s an investment in creating value.
Do you want to learn more about how you can impact value creation as an HRD? Join the CRF Learning Effective HRD programme on 3-4 June at Brooklands Hotel, Weybridge. Further details and pricing available here.Back to top