Peter Reilly is chairing a session on “The changing face of the HR function” at the CIPD’s annual conference and exhibition in Harrogate on 18-20 September. To request a brochure, contact the CIPD.
T 020 8612 6248
• www.cipd.co.uk/ace
When the Berlin Wall came down in 1989, there were fears in parts of Europe that a united Germany would dominate the industrial landscape. Its transformation from a war-torn and beaten country to economic giant would be complete. But, as the decade proceeded, the cost of unification, the effects of monetary union and the stasis that affected many European economies dragged the country down.
Germany’s social market model had once been seen in the UK as worth emulating precisely because it was the main driver of European growth. But, when the German economic miracle lost its sheen, like Japan’s before it, critics had a field day pointing to the disadvantages of consensual decision-making and an inflexible labour market.
Until the turn of the century, HR in large German companies was dominated by personnel administration and discussions on wage rates, regulations and efficient work organisation. It was seen in the UK as legalistic, as it had to deal with a heavily regulated labour market and focus on industrial relations harmony, where decisions required the agreement of all the social partners.
At international conferences and training events, US and UK firms might be presented as offering alternative role models for HR. The work of Dave Ulrich in particular had an interested readership. But, with a few exceptions, such as Lufthansa or BMW, most companies didn’t act on these ideas. Most HR functions resisted global or market-orientated change, at least in their own domain.
The economic crisis in the first half of the current decade made this position untenable. HR transformation began in companies with Anglo-US parents, but quickly spread to German multinationals and companies operating mostly in international markets. This was especially true in medium-sized companies with world market leadership in their field (for example, precious metals and technology group Heraeus) or where an innovative or demanding CEO or an Ulrich-influenced HR director was in charge (for example, Diba, a successful ING subsidiary). These leaders do not present at conferences, but are effective in the daily business meetings of their companies.
By contrast, the public sector and local firms, without such leadership, have been slower to adjust.
Changes were delivered with traditional German thoroughness. Labour costs came down. Wage systems and other terms and conditions were made much more flexible and cost-efficient. Although the demands of free-market liberals have not all been met, German competitiveness has been restored or, in some export-led industries, even extended.
So what impact has all of this had on the HR profession? It has had to become more business-focused and less concerned with employee well-being and dialogue with the social partners. From economic necessity, the previously rather tentative approach to cost management has been replaced with more urgent cutting. Faced with lower budgets and fewer employees, managers have responded in four ways.
First, IT is being used wherever feasible and economically justifiable. The automation of HR processes has often dramatically simplified workflows. Unnecessary bespoke solutions have been axed without any loss of quality. But initial fantasies about integrated systems or employee/manager self-service have given way to more realistic expectations. The market is dominated by SAP, which helps integration but limits choice because providers offering other standard solutions may struggle to compete, and specialised solutions are used only if they offer significant advantages.
Second, many much-loved but inefficient HR products were discontinued because they delivered little demonstrable value. This is particularly true in the area of personnel development – for example, unfocused training or health management. Only processes that deliver definable benefits to company results remain. Social benefits (for example, bonuses for harder working conditions, extra free time for weekend labour, discounts on products) are a thing of the past. This is particularly noticeable in privatised utilities (such as E.ON and RWE) or network services. They have changed virtually beyond recognition over the past 10 years and have set the pace in HR transformation.
Third, international benchmarking of HR costs has had a sobering effect. The reorganisation of the HR function that followed has been, as in the US and UK, heavily influenced by Dave Ulrich’s model. The three-legged stool structure – HR business partners, centres of expertise, and service centres – dominates the field. Banks, especially Deutsche Bank, have shown the way. About one-third of all DAX30 companies have already established this kind of HR service delivery model and the rest are in the process of doing so.
The debate in the UK on what the employee champion role might be has been answered in Germany in the same way as in many reformed HR functions: most employees experience HR only via employee self-service and other IT interfaces. In Germany, like the UK, there tends to be more talk than action about outsourcing, much to the disappointment of suppliers. HR outsourcing has been restricted to transactional processes such as payroll, where significant cost savings are possible. Big, headline-grabbing deals are missing. Deutsche Bank was among the outsourcing pioneers but its experience has not been entirely positive, with change requests pushing up service delivery costs. Many German multinationals now believe that if they do their HR processes, structures and systems right they can realise the benefits of economies of scale by themselves.
Fourth, HR practice is no longer wholly contained within national boundaries. Although the EU has successfully regulated the curvature of bananas, different labour, tax and social regimes across the EU hamper international harmonisation of HR policies and practices. The likes of Germany, with a propensity to develop elaborate regulations, have particular problems in aligning employment practice internationally. Nonetheless, German firms in an international market have adapted to transnational management. This is especially true of the banks, but also of transport and logistics firms, such as Lufthansa and Deutsche Post/DHL. Only a handful of German companies maintain truly global structures in their HR functions, but many are planning regional structures (for example, Europe and Asia-Pacific) or already have them.
The foundations of the German model have not been destroyed, though. There is still much regulation and the labour market does not offer the flexibility of the UK, let alone the US. But, as economic prosperity returns, the preoccupations of the HR function are coming to resemble their Anglo-American counterparts.
As the graph on page 41 shows, Capgemini Consulting’s HR Barometer ranks talent management and management development as the key future issues. What is striking is that the top financial topic (reduction of personnel costs) comes in only at number eight, while HR process optimisation is not in the top 10. This may indicate that HR has met its original goal of cost-cutting and is focused on a tightening labour market or influenced by the need to enhance organisational performance through means other than cost control. Again, this is consistent with US and UK experience – the war for talent appears to have extended its field of operation.
But this oversimplifies the situation. German companies continue to close plants or relocate activities, even overseas, and there is a constant requirement to cut non-wage labour costs. Negotiations with social partners have gone only so far and have led to individual solutions, not a systemic response. In high-wage economies such as Germany, the management of non-wage labour costs demands continuing senior management attention as well as public awareness.
German HR functions are affected by most of the same business issues as the UK, including a renewed interest in succession planning, triggered by the war for talent, and management quality in the context of corporate governance. These changes are set to continue. The question is whether the remaining distinctive features of the German system will survive or whether we will we end up with the globalisation of people management practice and HR organisation.
You can visit any Wal-Mart supermarket around the world and they look the same. Will the hire-and-fire culture dominate people management, with the emphasis on workforce flexibility rather than security? Will there be Ulrich-style HR functions, wherever there are large or complex organisations, irrespective of their location?
Germany, like Japan, was admired, if at times grudgingly, because it pursued a different course. The economic downturn and its continuing effects suggest it may be only a matter of time before we see a vanilla version of people management the world over.
HR’s development in one firm
HR in Henkel – a global company whose products range from Sellotape to solar panels – has been business focused for some time and has had a key account management (KAM) structure in place. Its next step is to achieve greater structure in service delivery. The talent management service is being concentrated in the corporate KAM, while transactional HR work is being consolidated in an internal shared services centre.
A business partner’s experience
Michael Sell is an HR business partner with SAP. In his three years with the company he has always had a global role, but, while it was initially largely operational, it has now become more strategic. He has a strong focus on change management and offers organisational effectiveness consulting and coaching to his client management team. He works with the latter to improve business results by developing the right employee capability, organisational productivity and engagement. He is based at Palo Alto, California, with the challenge of leading a virtual team.
Martin Classen is vice-president at Capgemini Consulting in Germany, responsible for the HR Barometer series and the HR Business Partner study. Peter Reilly is director of HR research and consultancy at the Institute for Employment Studies and is co-author of Strategic HR: building the capability to deliver.