3 keys to internal & external stakeholder management for HR

HR departmental agendas that are required to impact internal stakeholders are essentially different from the agendas that are required to impact external stakeholders

HR departmental agendas that are required to impact internal stakeholders are essentially different from the agendas that are required to impact external stakeholders, writes Wayne Brockbank

Among the other paradoxes that effective HR departments must balance is whether to focus on internal customers or whether to focus on external customers. Of course, the answer is that both must receive attention.

However, four obstacles stand in the way of achieving this stakeholder management balance:

  1. Knowledge: Earlier research at the University of Michigan shows that HR professionals have greater knowledge of HR processes and internal business issues than they do of external realities (i.e. customers, competitors, capital markets, industry trends), but knowledge of external realities differentiate high-performing HR departments to a much greater degree than knowledge of internal factors.
  2. Unit of analysis: Many HR professionals have academic backgrounds in psychology. By definition, psychology focuses on the optimisation of individual talent. This focus may tend to remove the HR professional focus away from the external macro environment, which ultimately determines institutional success or failure.
  3. Expectations: For many years, HR departments have created an internally based self-fulfilling prophecy. Their focus on internal operations has established HR’s internal focus in the minds of senior leaders, who in turn expect HR departments to maintain the internal focus which the HR departments themselves have created.
  4. Skill set: Finally and, perhaps, most important is that the skill set that is required to impact internal customers, including line managers and employees, is substantially different from the skill set that is required to impact external customers and investors.

At the University of Michigan, we have examined four HR department activities and skill sets that might impact internal and external stakeholders. We have assessed how well each is done and how each of them impacts different stakeholders. The four basic categories of HR activities are individual employee performance drivers, HR analytics, integrated HR solutions, and information management.  The first two on this list have relatively low stakeholder impact; the latter two are of greatest statistical importance and will receive attention in this column.

What impacts internal stakeholders?
Integrated HR solutions account for 87 per cent of HR’s impact on line management and 91 per cent of HR’s impact on employees. To create value for line managers and employees, HR departments must provide HR practices that are fully integrated and reinforce each other. Line managers and employees expect HR departments to vertically integrate HR practices with the business strategy. This business integration is then reinforced by HR policies, practices and procedures that work together to provide seamless solutions to the business. They avoid contradictory or inconsistent practices that result in multiple confusing agendas. Furthermore, providing integrated HR solutions is what HR departments do best. Although this is done relatively well, there remains room for HR departments to improve relative to this agenda.

What impacts external stakeholders?
HR’s role in contributing to managing the flow of information accounts for 77 per cent of HR’s impact on external customers and 56 per cent of HR’s total impact on owners and shareholders. If HR departments are to support the organisation in creating value for these external stakeholders, they must help identify, access and import important external information. They must then ensure that the firm has the technical capability and social forums for deriving and applying competitive insights. The problem is that helping to manage the flow of external information through the firm is what HR departments do least well, and yet when it is done well it has more impact on external stakeholders than anything else that they can undertake. When something that is generally not done well, is done well, we call this opportunity. We call it potential competitive advantage.

Implications for HR departments
The above analysis indicates that the HR departmental agendas that are required to impact internal stakeholders (i.e. integrated HR solutions) are fundamentally different from the agendas that are required to impact external stakeholders (i.e. information management). This conclusion suggests three potentially important issues for consideration.

First, who is your department’s focal customer? Is your HR department in the business of making internal stakeholders happy, or is it in the business of making external customers and owners happy? It is clear that a HR department can focus on optimising its popularity with internal stakeholders without having direct impact on external stakeholders. On the other hand, there is a potential danger in a unilateral focus on external stakeholders which might result in alienating internal stakeholders and limiting the department’s internal credibility.

Second, how fixed is your department in its comfort zone? HR’s role in information management is what HR departments do worst but is a key external value creator. This agenda provides substantial opportunity but also may require substantial retooling of the HR department capability set.

Third, what is your department’s professional identity? Organisations do not exist to make management and employees happy. Rather, they exist to make customers and shareholders happy.  Does your HR department exist with a direct line of sight to the mission and purpose of its organisation? Or does its line of sight end with its internal stakeholders?

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