How to structure HR for maximum business benefit

Matching the structure of the HR department with how the business is organised has a significant impact on performance, writes Wayne Brockbank

The relationship between business strategy and HR strategy has received much attention.  Noticeably less attention has been given to the relationship between corporate strategy and HR strategy. Since corporate strategy provides the context within which business strategy is formulated and implemented, this is a potentially serious oversight. This article provides some initial thoughts on this issue.

What is corporate strategy and how does it differ from business strategy? Corporate strategy answers the questions: “What are the businesses in which the company participates?” or “What is the portfolio of businesses that comprise the company?” Once a corporation has determined where it will compete, business strategy then answers the questions: “How will the company compete?” or “What are the sources of competitive advantage that the firm must leverage to be successful?”

Four corporate portfolio configurations may be distinguished. Each has different implications for the respective roles and influence of HR in business units versus headquarters.

1. Holding company. A holding company consists of a confederation of businesses that are held together by legal structures but have virtually no operational relationship with each other. The Tata Group in India is such an organisation. It consists of over a hundred businesses that range from luxury hotels, designer watches and steel production to IT consulting. In a holding company structure, headquarters’ HR is either non-existent or is kept to a bare minimum. The overwhelming preponderance of HR occurs in the businesses. Out of Tata’s approximately 3000 HR professionals, only 20 or so report to headquarters.

2. Unrelated diversification. In unrelated diversification, the differences across the businesses outweigh the similarities. To maintain the focus of HR on the wealth creating properties of the distinct businesses, HR is generally located within each business unit; headquarters’ HR remains proportionately small.

However, driven by self-interest and perhaps ego and the need for control, folks in corporate HR may want the strategically small similarities among the units to be larger than they should be. Under the guise of creating greater corporate unity, headquarters’ HR may tend to overstep its bounds and attempt to impose a one-size-fits-all approach onto the highly differentiated businesses. If headquarters wins the political battle, each business unit HR may lose its ability to drive business results among the differentiated businesses. GE is an example of a company that is skilled at finding the optimal balance between headquarters’ and business unit HR focus and influence.

3. Related diversification. In related diversification, the similarities across the businesses outweigh the differences. Therefore, the influence of headquarters’ HR is large relative to business unit HR. The role of headquarters’ HR is to leverage synergy and provide a relative uniform set of HR strategies and practices.

However, driven by self-interest and perhaps ego and the need for control, business unit HR folks may overemphasise the uniqueness of their respective businesses. If business unit HR folks win the political battle, they might tend to undermine the important synergies of the related businesses and the efficiencies of common HR practices. Some banks with related business portfolios such as HSBC are skilful in seeking the optimal balance by leveraging HR commonalities across their organisations.

4. Single business units. In single business units, the corporate HR and business unit HR are the same. Note that this is not a function of size; rather, it is a function of singularity of the business model. For example, with 1.4 million employees, Indian Railways is one of the world’s largest employers. It has one business model and one dominant HR model.

5 key steps for HR

  1.  Identify your company’s portfolio logic. Ensure that there is agreement within the corporate leadership team concerning the corporate strategy. To what extent is the corporate moving towards related or towards unrelated diversification? Is the company moving towards integration and unity or towards uniqueness and autonomy?
  2. Allocate the HR department resources and influence in accord with the decided portfolio considerations. Try to avoid being clever by myriad consultant-led compensating alternatives.
  3. While this is being done, you might want to minimise the time and effort spent on transactional HR work. The well-known options are to create shared services across all business units, automate HR transactions through technology, or outsource the transactional work though the multiple outsourcing options that are available.
  4. Keep in mind that organising HR is not a HR strategy; it is a diversion from HR strategy. Keep it simple. Organise HR to be consistent with the corporate strategy and then get on with the business of driving business results through customer-focused HR practices.
  5.  Finally, if you are in a company whose corporate strategy is highly diversified and a senior executive gives you the charge (as occasionally occurs) to create a “one family feeling”, get the ink ready on your resume. To attempt to create a unified organisation when the parts are inherently different is mission impossible and a recipe for a career mess.