Building a competitive advantage today depends on your ability to build a unique set of organizational capabilities. This requires companies everywhere to rethink human capital and the role of HR, and to take a new, more strategic approach to Performance Improvement.

by Rowan Gibson, author of Rethinking the Future and Klaus Steven, AchieveGlobal Germany.

Performance Improvement

The concept of improving human performance is nothing new. In recent years, the popular Balanced Scorecard approach has helped to bring this issue to the forefront. Originated by Robert S. Kaplan and David P. Norton, it offers a sustainable tool for strategy development and implementation which definitely integrates human capital as a part of the corporate strategy.

This thinking has helped to spark renewed interest in another people-focused approach which has essentially been around since the 1960s: Performance Improvement (PI). The benefit of this approach is that it encourages an understanding of the organization as a system of interdependent functions and people. PI gives organizations a systemic and comprehensive view of their whole institution, guiding them in addressing all the areas that enhance performance.

This, instead of encouraging generic, panaceatype solutions, helps managers open their minds to all kinds of training and work environment initiatives that could potentially be used to enhance performance. What's more, it provides a step-by-step process for implementing strategies and measuring the desired results.

Used properly, Performance Improvement can help HR professionals and managers at all levels of the organization to assess and improve employee's individual capabilities in the context of their organization's strategic performance needs. Therefore, metrics for performance improvement are not whether some generic industry benchmark for quality, timeliness, or productivity is being reached or surpassed, but whether the company's strategic business model is actually being strengthened, creating added value for internal and external customers.

Gary Hamel and C.K. Prahalad make this point clear in their book Competing For the Future: "Each employee must understand the nature of the linkage between his or her own job and the attainment of the goal." They argue that every employee needs "a specific measure of his or her own performance that links individual achievement to the firm's overall strategic intent."

But just how widespread and effective is the use of Performance Improvement in business today? There is very little data on the subject. However,there certainly appears to be a wide gap between the United States and the European Union in terms of the awareness and successful implementation of PI as a strategic initiative. Does this help to explain the similarly widening productivity gap that exists between these two economic regions? A recent study conducted in Germany provides some interesting insight on the subject.

PI Research

The study, which was conducted by Kirsten Rutschke, an independent business consultant, in cooperation with AchieveGlobal Germany and the University of Duisburg, Essen, analyzed 260 firms with more than 500 employees each. It concluded that only one in a hundred of these companies had implemented a comprehensive PI initiative throughout their firms, although 90 percent considered it to be an important or very important issue, particularly for the sales organizations.

Kirsten Rutschke says, "Only one third of German companies have heard of the Performance Improvement approach. But there are two main reasons for them to take this issue seriously: First, the increasingly strategic role of human capital and HR management due to the globalization of our economy. And second, today's tough economic situation, which inevitably leads to the cutting of HR budgets unless HR can show that its initiatives will provide a measurable benefit."

The study revealed that 83 percent of the companies analyzed have a clearly defined corporate strategy, while just 67 percent had taken the trouble to formulate a strategy for marketing and sales. What's more, only 21 percent of the sales organizations regularly use performance models to describe precise actions for the sales people, which could help them to implement this strategy. A detailed analysis of performance gaps was conducted in just 39 percent of the companies. Only 14 percent combined training activities with changes to the work environment in order to address those gaps in performance. So they might, on the one hand, train their people on how to win new customers, however, their compensation system might not reward a salesperson's acquisition activities. The study revealed that 83 percent of the companies analyzed have a clearly defined corporate strategy, while just 67 percent had taken the trouble to formulate a strategy for marketing and sales. What's more, only 21 percent of the sales organizations regularly use performance models to describe precise actions for the sales people, which could help them to implement this strategy.

The research also reveals that only 33 percent of the sales organizations take serious efforts to follow up training initiatives while only 38 percent of the companies measure the training's results and return on investment in a systematic way.

This study indicates that there is huge potential for performance improvement inside many German companies and that HR needs to start playing an important new role in these organizations. What's more, HR was only involved in strategy development in 50 percent of the companies interviewed, while 88 percent of HR managers and 80 percent of general managers say that they recognize the importance of HR's involvement in the process.

This orientation toward strategy, performance measurement, and results would help to make HR's initiatives, in areas like training, for example, much more effective. Kirsten Rutschke says "German companies spend, on average, about 17 billion Euros a year on personnel training and education. There's an increasing awareness, particularly in today's tough competitive times, that these efforts should closely support the corporate strategy and focus on measurable results."

Of course, it is impossible to say whether this German research is indicative of the rest of the world. But the chances are that this is more than likely, which suggests that the potential for Performance Improvement within the European Union could be considerable. It is worth noting that the European Commission's "Competitiveness Report 2002" focuses human capital development as the region's key priority for improving its economic performance compared with the United States. Obviously, though, what is needed is more research on Performance Improvement in Europe, the United States and Asia in order to create a more conclusive picture about the implementation and effectiveness of these initiatives.

A new mandate for management

The new mandate for management is to recognize the strategic and economic value of building a unique set of organizational capabilities. This will focus the company on the development of human capital in a strategy and result-oriented fashion. And it will reposition Human Resources as a crucial factor in achieving and sustaining a competitive advantage for the company in the future. By effectively implementing institution-wide Performance Improvement initiatives, business organizations, and perhaps even entire economic regions, will be able to unleash their full potential for successful wealth creation.