Today’s business environment requires a robust, enterprise-wide plan to deal with unexpected crises. Company reputation and brand, as well as the trust and loyalty of stakeholders, are all critical factors in the background of crisis management. At the helm, HR leaders play a strategic role in organizational sustainability to contribute tangible deliverables through advance preparation, including safety and security initiatives, leadership development, talent management and solid communication plans to support crisis management.

Introduction

"A commitment to planning today will help support employees, customers,
the community, the local economy and even the country. It also protects
your business investment and gives your company a better chance for
survival." (1)
Never before has crisis management been more important. As recent events have shown, the business community, as well as communities at large, is vulnerable to disruptions that can be extremely costly. Examples of recent crises that resulted in lost lives, displaced families and communities, shutdown businesses and damaged economy are hurricanes Rita and Katrina, the London bombings, the South Asia tsunami, the Northeast blackout and the September 11 terrorist attacks. Other serious events, such as financial failure from poor business management, workplace violence, fires, cybercrime, computer viruses, product tampering or union strikes, can also lead to substantial damage and loss.

The SHRM 2005 Disaster Preparedness Survey Report indicates that as a result of the September 11 terrorist attacks 56% of organizations created or revised their disaster preparedness plans but 45% of organizations did not. (2) In view of today’s risk environment, these findings are cause for concern. Companies continue to think "it will not happen here" (see Figure 1).

Defining Crisis Management and HR’s Role

Crisis management is broadly defined as an organization’s preestablished activities and guidelines for preparing and responding to significant catastrophic events or incidents (i.e., fires, earthquakes, severe storms, workplace violence, kidnappings, bomb threats, acts of terrorism, etc.) in a safe and effective manner. A successful crisis management plan incorporates organizational programs such as emergency response, disaster recovery, risk management, communications and business continuity, among others. (3) In addition, crisis management is about developing an organization’s capability to react flexibly and thus be able to make the prompt and necessary decisions when a crisis happens. If an organization prepares for the "worst-case scenario," then it can handle other situations as well. Teamwork and rehearsal are also critical success factors. (4)

Through crisis management planning, organizations can be better prepared to handle unforeseen events that may cause serious or irreparable damage. Traditionally, HR has not been funded or designed to organize or oversee safety and security initiatives. However, regardless of the organization size, HR leaders today have a strategic role and responsibility to ensure their organizations are aware of the human side of a crisis and plan ahead to help minimize its effects. (5) To be most effective, HR leaders work collaboratively with top-down commitment to develop enterprise-wide solutions. As emphasized by HR management gurus Ulrich and Brockbank, "as change agents, HR strategic partners diagnose organization problems … help set an agenda for the future and create plans for making things happen." (6)

Leading the discussion about the future of the organization’s workforce is an obvious way for HR to contribute to both crisis management and long-range strategic planning. Scenario planning, for example, is a strategy that companies are utilizing to help plan for unexpected events. While HR professionals cannot predict the future, they can help their organizations prepare for it through identifying the most critical issues that could influence the workforce in the years to come. (7)

To be included as a strategic partner in crisis management, it is also important that HR professionals understand the "lingo" of crisis management. For example, the term "business continuity" refers to both the short- and long-term sustainability of an organization. Through crisis management, HR has the opportunity to demonstrate intangible values in the organization with real "deliverables" (e.g., crisis management/communication plans, crisis resources, safety and security training, talent management and succession planning). In partnership with other organizational leaders, HR can develop an infrastructure for crisis management of the company’s human capital–based on the organizational culture, capabilities and need–and thus provide supportive leadership before, during and after a crisis. (8)

The Business Case: Cost or Survival

As noted in the SHRM 2004-2005 Workplace Forecast, there is an increased focus on domestic safety and security and concern for global security. (9) With the aftermath of Hurricane Katrina, the business case for crisis management has become all too clear: sustainability of every aspect of the workplace–including people, company reputation and the economy.

Challenges

The business case comes with challenges. Organizations may be reluctant to provide the essentials–that is, total commitment by the CEO and the board (in the short and long term), allocated resources and, ultimately, ownership by every employee. Also, changes in management practices have resulted in organizations having little resilience to cope with emergencies or emerging threats due to flatter organizations, reduced head-counts, smaller financial savings and less ability to absorb the impact of disruptions. (10)

The Human Side of Crisis

One of the errors in crisis management planning is the tendency to focus on systems, operations, infrastructure and public relations, with people last on the list. Organizations need to pay greater attention to the impact of critical events on employees, their families and the community. Business recovery cannot occur without employees. HR plays a strategic role in promoting trustful and prepared leadership throughout the organization to help reassure employees of their safety.

The Ethical and Legal Balance

Organizations have a moral and legal duty to safeguard their employees and the integrity of their business. The Occupational Safety and Health Act (OSHA) requires that employers furnish employees with a place of employment free from recognized hazards likely to cause death or serious physical harm. (11) Further, it makes good business sense to include crisis management as an integral part of corporate governance. The board, for example, has an obligation to ensure the organization is adhering to solid management principles. (12)

Reputation: Key to Sustainability

Corporate reputation is a valuable asset. However, public perception of risk presents a constant threat to an organization’s reputation. In the case of a poorly handled crisis, it may take years to reestablish a company’s reputation. To maintain stakeholder loyalty, reputation is a key component of a crisis management plan. (13) Further, intellectual capital, such as reputation and brand, has value on the organizational balance sheet. For example, research shows that intangible assets account for about 53% of the value of Fortune 500 corporations. (14)

Economy

Business is a stronghold in the U.S. economy. More than 99% of organizations with employees, for example, are small businesses, employing 50% of all private sector workers and providing almost 45% of the nation’s payroll. Thus, the commitment to crisis planning today is key to supporting employees, customers and the community in the local, regional and national economy. (15)

Crisis Leadership: Who Is in Charge?

There is a growing interest in the connection between the importance of leadership and crisis management. According to Harvard Business School professor Daniel Goleman, leaders with emotional intelligence competencies (such as empathy, self-awareness, persuasion, teamwork skills and the ability to manage relationships) are effective leaders. Such skills would be important in crisis management. (16)

According to the SHRM 2005 Disaster Preparedness Survey Report, 65% of HR professionals believe that their organizations are well or very well prepared for a crisis or disaster, in contrast to the perceptions of employees, only 50% of whom think their organizations are well or very well prepared. Eighty-five percent of HR professionals indicate their organizations have some form of a formal disaster preparedness plan, and 15% do not. The findings show that large (500 or more employees) and medium (100-499 employees) organizations are more likely than small organizations (1-99 employees) to offer formal disaster preparedness plans. (23)

The first step of strategic crisis management is the establishment of a crisis management team. Figure 3 lists the recommended players of such a team. HR has an integral role on the crisis management team, such as addressing issues that may affect employees and their families as well as having the required talent and succession plans in place to ensure that the necessary work of the organization can continue.

Information gathering is a key part of strategic crisis management planning. By utilizing a risk reporting process such as SWOT (an analysis that identifies strengths, weaknesses, opportunities and threats), organizations can begin to make better informed decisions, improve communication of risk and build greater management consensus. (24) The following questions are helpful as part of the risk assessment: 1) what is the impact on people; 2) how realistic is the identified potential crisis situation; 3) could corporate action halt or moderate the crisis; 4) does the policy stand up to public scrutiny; 5) are the resources to act available; 6) is the will to act present; and 7) what would be the effect of inaction? (25)

The crisis management team also develops the contingency recovery plan. (26) This is a living document that must be kept current. Within the plan, it is essential there be a clear chain of command established in advance of a crisis. The plan should be written to address the "worst-case scenario," such as total inaccessibility to the normal workplace and the inability to rely upon and use the organization’s resources and infrastructure for an extended period of time. It is recommended the cross-functional crisis management team meet every six months to discuss potential crises and how to respond to them. (27)

Some small- to medium-sized firms, however, may not have the staffing and resources needed for crisis management planning. Thus, they may need to consider various options, such as accessing their chambers of commerce and/or professional associations for assistance. They may also look to their commercial insurance carriers’ safety and loss control professionals for additional support.

Outsourcing is another option. For example, one alternative is to partner with a crisis management consultant that can lead the process. In essence, working with a vendor is a form of outsourcing. In theory, the advantages of outsourcing are saving money on ongoing expenditures and avoiding capital outlay. (28) However, the very nature of crisis management requires an organization to tailor the plan to fit its unique culture and needs. Thus, 100% outsourcing may not be the most practicable avenue, as the vendor would need to obtain a significant amount of information from the organization to develop an effective crisis management plan. Ultimately, the organization’s management is responsible for crisis management.

Finally, research indicates that crisis management budgets are severely underfunded. However, the emergency operations plan (EOP), developed by the crisis management team, can be strengthened at a very low cost. For example, organizations should establish relationships with infrastructure providers (e.g., telecom, local fire and police, utility companies), community organizations and governmental agencies. Often, crisis management information is available for free from such agencies. (29)

HR’s Strategic Leadership Role

As a result of a crisis, corporations may lose workers, along with key talent and organizational knowledge, from low morale, fear, physical relocation or death. As seen in the aftermath of Hurricane Katrina, workforce issues tend to rapidly escalate from a crisis. One of the critical roles of HR is to help the organization develop recovery plans. These strategies should address the safety, health and welfare of employees before, during and after an emergency. Crisis preparedness, response and recovery are essential to help people begin to recover. Helping employees achieve a sense of normalcy is also an important factor in addressing the "human side of a crisis." (30)

Research shows that increasingly HR has a strategic role in crisis management. According to the SHRM 2005 Disaster Preparedness Survey Report, HR professionals frequently have a part in developing their organizations’ disaster preparedness plans. Nearly one-third (31%) state that HR forms disaster preparedness plans and procedures with equal input from other departments, 29% advise other departments that are primarily responsible for these plans and procedures, and 18% are primarily responsible for developing all disaster preparedness plans and procedures. However, 22% of respondents indicate they do not have a role in developing their organizations’ preparedness plans. (31)

For organizations without a plan, the analysis phase can reveal risks that are not managed effectively. Such conclusions may then prompt the organization to develop effective prevention activities, while in turn contributing to an overall safer work environment and/or processes. To forward crisis management planning, HR can make the business case by establishing a link between crisis management/business continuity planning and the organization’s mission, vision and values, and connecting crisis management to the bottom line–such as achievement of the organization’s balanced scorecard, key performance indicators and critical success factors. Some of the benefits of crisis management and business continuity planning are better avoidance of liability actions, protection of assets through risk reduction, protection of markets by helping to ensure supply and reputation protection, and compliance with health and safety legislation. (32) Risk exposures, for example, are considered by investors. Moody’s Investor Service looks at the rigor of the risk management process and asks questions such as whether the company’s senior management is aware of how much it can lose while still achieving its overall long-term financial objectives and if the company knows its top exposures (both measured risks and nonmeasured). (33) For the sake of their stakeholders and financial well-being, as well as retaining valuable human capital, organizations cannot afford to not be prepared.

Finally, HR can help identify key personnel essential to the recovery effort, potential places to work in the event of a crisis and communication options. When a crisis happens, employees want to go home immediately to take care of their families. However, depending on the type of organization, certain key functions may need to be staffed. HR can take the lead by identifying key staff roles well in advance. For example, a hospital or a nursing home will need staff to remain on-site–unlike an association, a manufacturing facility or a school. Also, HR, in conjunction with the crisis management team, should ensure in advance that employees have contact information of their colleagues and their manager.

HR Services: Value-Added for Crisis Management

In developing a crisis management plan, HR directly creates value for the bottom line by being prepared for emergencies and unexpected events with specific strategic plans and activities. Below are recommended strategic and practical steps regarding crisis management planning.

HR Processes and Information

* Review policies and programs related to crisis management.

* House HR records in another geographic location.

* Develop and maintain a list of external resources.

Safety

* Identify and "rent" emergency office space (e.g., a commercial telemarketing center).

* Distribute fanny-pack emergency kits.

Information

* Working with employee assistance program (EAP) professionals, educate management regarding the phases of stress.

* Establish an online page with information about employee benefits and other employee-related policies and programs.

After a crisis, employees need a number of services. From the organization, they need immediate aid and assurance of safety, information, understanding and ongoing support, as well as a rapid return to productivity. (34) According the SHRM 2005 Disaster Preparedness Survey Report, some organizations have formal policies or procedures to assist employees in times of natural disasters or terrorist attacks. Large-sized organizations (59%) are more likely to have formal policies and procedures to cover these situations than small- and medium-sized companies (24% and 16%, respectively). Also, the survey findings indicate that the following policies and procedures are offered in case of emergencies: EAPs (82%), additional unpaid leave (61%), additional paid leave (35%), paycheck advances (33%), leave donation programs (33%), loans (27%) and temporary housing assistance (12%). (35) In addition to these services, HR may provide assistance to employees by highlighting the purpose of the EAP, transferring employees to other company locations as needed and matching employee donations to relief efforts.

Communication: A Key Factor in Times of Crisis

A communication plan is an essential part of crisis management. It is a sign of the times that demands HR to be ready to communicate–often both internally and externally–regarding emergencies on behalf of the organization and employees. Further, unprecedented events such as Hurricane Katrina demonstrate that traditional HR roles go out the window in the interest of being flexible to find new ways to help employees. HR may be called upon to provide answers to the following types of questions: 1) what information and resources are needed to deal with the immediate emergency; 2) what the situation is in the various locations affected; and 3) how employees are reacting. (36)

During a crisis, employees and other internal stakeholders need a convenient and easy-to-find place to access communications from the company. The communication channels listed in Figure 4 are those most organizations could utilize and that would provide the widest access. For managers and supervisors, the company may wish to include password-protected sections on the intranet site, such as a database for information or discussion section strictly for managers. (37)

The Importance of Safety: Preparing in Advance

Employee safety has become a top priority. According to the SHRM 2005 Job Satisfaction Survey Report, feeling safe in the work environment is a high contributor to overall job satisfaction. Specifically, 85% of HR professionals and 82% of employees note that feeling safe is either important or very important. From the employee perspective, 62% of women state that feeling safe is the third most important job satisfaction factor. (38) Further, research indicates that safety executives identify management visibility and leadership, accountability at all levels of the organization and open sharing of knowledge and information as the best strategies for developing a truly effective and sustainable safety culture in their organizations. (39)

In partnering with security professionals or heading up safety and security, HR must play a role that will increasingly involve developing, promoting and training for emergencies. Research shows that some organizations are putting training front and center in case of a crisis. The SHRM 2005 Disaster Preparedness Survey Report notes that 91% of HR professionals whose companies offer crisis response training have specifically tasked employees with the role of crisis leadership. The findings show that 64% of employees in leadership roles have received training in organization-specific disaster response plans (see Figure 5). In addition, HR professionals whose organizations designate employees with leadership roles indicate that 39% are employees with this role in their job description and 25% are employees who have volunteered. (40)

Evacuation plans are also a critical element of a crisis management plan. Organizations should include all people in that plan, with specific attention paid to employees with disabilities, as well as visitors, customers, subcontractors and vendors on site. According to the SHRM 2005 Disaster Preparedness Survey Report, 60% of companies have specific guidelines or equipment in place to assist in the evacuation of people with disabilities in the event of a disaster. (43)

Studies Focus on Crisis Management

The cost of a crisis continues long after it has ended for employees, their families, the community and the organization. Further, there are bottom-line implications in terms of the organization’s reputation and the perceived value of the business. The following studies offer evidence of the critical need for thoughtful crisis management.

* Oxford University and the Sedgewick Group analyzed the impact of catastrophes on shareholder value. This study revealed companies that responded well to a crisis recovered, while those that did not effectively respond experienced a decline in stakeholder confidence. For example, there was a 22% positive difference in stock price for the companies that recovered from the crisis in contrast to those that did not recover. (42)

* The results of a 2003 study of 400 financial executives and risk managers at Fortune 1000 companies revealed that 34% reported their companies were unprepared to recover from a major disruption to their top revenue source and 28% stated that such a disruption would threaten their business continuity. (43)

* An SHRM 2005 survey on the importance of human capital in crisis management shows that 34% of companies indicated that employee and people issues were a significant part of their organizations’ business continuity or disaster plans and 36% indicated that employee and people issues were somewhat a part of these plans. (44)

* In 2004, following the third anniversary of the September 11, 2001, terrorist attacks, the American Management Association surveyed its members and customers to learn if they were prepared to handle a major crisis. The findings revealed that fewer U.S. companies had crisis management plans in 2004 than in 2003: 61% of executives stated their organizations had established crisis management plans, in contrast with 64% in 2003. In 2004, 54% of companies had designated crisis management teams, compared with 62% in 2003. (45)

* In a survey jointly conducted by Strohl Systems and GMP-Global Assurance, responses from all major industry sectors (including those outside the United States and Canada) revealed that one out of every eight organizations had experienced decreased insurance rates due to a comprehensive business continuity plan. The ultimate goal of the program, said 67%, was to "manage an interruption." This survey suggests that insurers are beginning to review business continuity plans, as recommended by the 9/11 Commission. (46)

These studies reveal much variation and degrees of commitment by organizations regarding crisis management. While some of the findings raise the question of exactly how prepared organizations are to effectively handle a crisis, there is also an increasing awareness of the impact of crisis management on the bottom line.

Safety and Security Overseas

As noted in the SHRM Special Expertise Panels 2005 Trends Report, terrorism, safety and security top the agenda for many multinational organizations. Today, companies with a global workforce are paying greater attention to risk assessment, liability and security practices. One of the places where HR can add value is to help ensure the safety of global employees, especially those located in unstable countries. Specifically, this includes being aware of developing situations, knowing where employees are located, keeping communication lines open and having an evacuation plan ready. Further, companies may consider minimizing international travel and overseas assignments. (47)

Multinational organizations face unique risks and challenges, from social unrest and disease outbreaks to military conflicts and kidnappings. To better understand what employers are doing to address these issues, in 2003 Watson Wyatt conducted a survey of companies around the world across a broad range of industries. These 37 companies represented more than 11 million employees. The survey results show that 70% of companies have employees in locations considered to be dangerous. Areas of greatest perceived risk are Asia (81%), the Middle East (50%) and South/Central America (46%). The survey results reveal that in the past two years, 43% of companies had to evacuate employees and/or family members. Interestingly, key findings reveal that 40% of these companies have not adopted a formal policy for evacuation in case of security threats or health-related issues. However, nearly six out of 10 employers (57%) have developed formal evacuation policies. The survey results also show war and terrorism as the top reasons for implementing these policies, as well as political, social or religious unrest. However, 82% of employers appear to be committed to maintain their international presence in these areas and do not plan to reduce the number of employees in these regions in the long term. Some employers are providing additional financial incentives to compensate employees working in high-risk areas. (48)

It would be easy to mistake him for a chief operating officer–after all, his responsibilities reach every corner of the company. But Donovan’s title is "executive vice president of human resources." And his role–an amalgam of company ambassador, personal confidante and self-described "chief change officer"–represents a profound shift taking place in C-suites across the country.

HR is finally garnering respect in companies of all sizes and across many industries. "CEOs and boards of directors are learning that human resources can be one of your biggest game-changers in terms of competitive advantage," says Donovan. His boss is counting on it." The success of the strategy rests in people’s execution," Nardelli says. "That’s why the HR manager has to be an equal partner at the strategic table."

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CEOs have long parroted the cliche: "Our people are our greatest asset." But when the economy sours, those assets often become the first costs to he cut. So why now are CEOs finally walking the walk?

One reason is that competitive advantage is increasingly vulnerable. Patents in technology used to give companies an edge. Then it was the sales and the marketing behind the technology that boosted their batting average. Then the Internet leveled the playing field by offering easy access to intelligence across the globe. "The one thing competitors can’t quickly access is the brains of your work force," explains Susan Meisinger, president and CEO of the Society for Human Resource Management in Alexandria, Va. "The skill sets .your people can bring to the organization are much more likely to be a differentiator than they were in the past." In other words, the right people increasingly do represent an organization’s competitive edge.

At the same time, sophisticated data-collection systems and a variety of statistical methods are enabling companies to measure the return on investment of their specific HR practices. CEOs now have quantifiable measures of what had once been mostly anecdotal evidence, comparison to industry benchmarks and flat-out guesswork.

They also have findings such as the Gallup Organization 2002 analysis of 309,000 employees across 11,000 business units in 51 companies throughout 23 industries directly linking employee engagement to financial results. According to Curt Coffman, global practice leader for Gallup’s Workplace and Customer Consulting, highly engaged business units boast an employee-retention rate 1.44 times higher than the average, productivity levels 1.5 times higher, customer outcomes 1.56 times higher ant profitability spiking 1.33 times the norm.

And in July 2003, Mercer Human Resource Consulting published a survey of 300 U.S.-based organization: showing 88 percent believed their human capital strategy was linked to their company’s business strategy. "This means a whole new era for managing the work force," says Dave Kieffer, leader of the strategy group at Mercer.

Technology has transformed HR in another way. Many of the mundane operations that once relegated the HR director to being a custodian of such administrivia as defined contribution and benefits administration, health ant welfare benefits, and relocation services can now be outsourced, freeing up time to concentrate on strategic functions, such as recruiting and retaining talent, training and development, organization design and execution. "The new line is making sure people strategies are aligned with the business strategies so you can execute and get to where .you want to go," says Meisinger.

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Teaching a company to fish

Wim Roelandts is a believer. The CEO of Xilinx, a San Jose, Calif.-based technology company, Roelandts likes to quote the Chinese proverb that says, "Give a man a fish and he will eat for one day. Teach a man to fish and he will eat for the rest of his life." Roelandts thinks HR can teach an entire company to fish: "The role of HR is not to do the job of management; the role is to improve the quality of management so they can do a better job."

At Home Depot in Atlanta, Donovan and Nardelli couldn’t agree more. "Effective leadership is the common denominator in overall performance," says Donovan. "If I had a buck, I’d spend 99 cents on picking great leaders."

As a result of a 75-question survey that went out to 276,000 Home Depot employees–and sparked an 81 percent response rate–Donovan was able to link the turnover rates of store managers with the financial performance of the store. This was especially important because, Donovan recalls, "When we did the first HR review, we found we were changing store managers like people change underwear."

At the same time, Home Depot was facing a crippling shortage in its work force. With 200 new stores opening every year, 40,000 new employees had to be found, placed, trained, monitored and evaluated. Add in a 30-percent turnover rate of the existing 515,000 employees and that number of new hires nearly tripled.

In response, Donovan created a learning forum for store and district managers and within five months put 1,800 leaders through a full week of learning–for to any of them, their first experience in learning to develop strategy and operating plans. He instituted a formal two-year rotational program for assistant store managers, an executive leadership program for senior staff" and a learning curriculum for the entire company. He oversaw the centralization of Home Depot’s enormous merchandising operations. In 10 weeks, he hired 1,300 HR professionals, upgrading the job from an hourly rating to the equivalent of an assistant store manager, eligible for bonus and stock options. That alone, he says, "was probably worth a penny a share."

The rule of thumb is that it costs a retail company between $2,000 and $8,000 to retain each employee over his or her tenure with the organization. Whenever someone leaves, that’s essentially a lost investment. Between 2001 and 2002, Home Depot’s new initiatives reduced the attrition rate of full-time hourly employees by more than 7 percent. Between the first quarter of 2002 to the first quarter of 2003, voluntary attrition further declined by 47 percent. "The more Dennis succeeds in reducing that turnover, even if it’s by a percent a year, that goes right to the bottom line," says Nardelli.

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A similar goal is shared by Larry Jolmston, CEO of Albertson’s, the Boise, Idaho-based $8.9 billion supermarket chain, and his executive vice president of human resources, Kathy Herbert. "Kathy and her team drive the human capital side of the business," says Johnston, who like Nardelli is a General Electric veteran. "They are at the center of everything we do."

In an industry already infamous for its minuscule profit margins, Herbert’s challenge is to unify what she terms "the mishmash of cultures" of Albertson’s multiple chains to stand up to competitors like Wal-Mart. Herbert has revamped the review process and implemented training and mentoring initiatives, succession plans and other programs aimed at attracting, recognizing and retaining top talent. "The grocery business is not highly sophisticated," says Herbert. "Anybody can sell beans and com and beets. In my mind, it can’t be differentiated except by its people."

Johnston and Herbert make an unlikely pair on their early morning walks in Boise, where the company is headquartered. Johnston ducks at anything under 6′7"; Herbert barely creases 5′2". But they see eye-to-eye on so many issues that Johnston regularly turns to Herbert for advice. "She has the guts and ability to walk into my office, close the door and tell me anything," says Johnston. "She can say, ‘Hey, the way you handled that was great’ of ‘You can’t do that again.’"

Herbert draws on an intimate knowledge of the business, having started as a bagger and checker at age 16, before moving up through store director, buyer and category manager before switching to HR. That hands-on experience helped an outsider like Johnston.

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At Xilinx, Roelandts also looks to his HR director for analysis, not just of his own conduct but of the company’s as a whole. Roelandts schedules the same bi-weekly one-on-one meetings with Peg Wynn, vice president of worldwide human resources, that he conducts with the test of the senior management. "Her specific role is to say, ‘Hey, wait a moment, is this compatible with the culture?’" he says. "Ultimately, I’m the decision-maker. But generally if she says she’s against it, we won’t do it."

Staying true to the company’s culture was even more critical when the recession hit Silicon Valley. Because Xilinx designs and markets silicon chips but does not manufacture them, three-quarters of its 2,600-plus employees ate "knowledge workers." Last year, Xilinx posted revenues of $1.3 billion. "When I was at Intel and we became a billion-dollar company, we had 10,000 employees," recalls Wynn. "There’s a huge value-add per employee [at Xilinx]."

Layoffs, while considered, were a last resort. "Most of our people are working on future business," explains Roelandts, who calculates that losing a trained engineer costs a quarter of a million dollars in lost intellectual property alone. "If I cut them off, I would impact my future."

Roelandts saw the recession as an opportunity to become a stronger company–but success would depend on an HR strategy focused on employee retention. Wynn responded with forced vacations, a year-long sabbatical program that paid employees a small stipend if they went to school or worked for a nonprofit organization and salary reductions. The lowest-paid workers suffered no pay cuts while Roelandts’ salary was slashed by 20 percent and his bonus eliminated.

The cost-cutting program lasted eight months and saved the company more than $56 million. It also achieved Roelandts’ goal. "From a revenue point of view, we became larger than all the other companies in our field combined," he says. Market share also soared: In 2002, Xilinx boasted nearly 50 percent of the programmable logic device market share, up from 50 percent four years earlier.

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Chief of hypergrowth management

While HR helped Xilinx succeed in a market contraction, at Washington Mutual, chairman and CEO Kerry Killinger relies on his HR director, Daryl David, to manage fast growth. The Seattle-based financial services company has made seven acquisitions since 2000 and, says Killinger, "Daryl is at the table every time we talk about a potential acquisition and any other growth initiative." David sees his role in simple terms: "We in HR exist for only one reason: to increase the organization’s capability." In the case of an acquisition, he explains, "HR gets in as early as anyone in the process because so much of what we buy is people. It isn’t factories or vehicles–it’s talent." Because key people can take severance pay or another job, David’s concern is, "Are you paying for talent that won’t be there six months after the deal?"

With a good cultural assessment process, Washington Mutual can identify potential problems during the predeal due diligence. "We’re on the front end to ensure that we don’t buy the wrong company and can begin the integration planning months ahead of the need to implement it," explains David. "We’re trying to get to ‘the ideal deal’–the combination of rewards and processes that create the utmost employee commitment and engagement."

And it’s not just "the ideal deal" of today that HR directors must consider. "We spend a lot of time thinking about today’s organizational structure and how it ought to look tomorrow and five tomorrows from now," says David. "You have to marry up the talent you have with the talent you think is coming and the talent you need to find."

In the final analysis, companies are elevating the HR role because it helps them make money and raise their stock price. It’s no secret that the list of America’s 100 best public companies to work for, as ranked by the Great Places to Work Institute, has consistently outperformed the major stock -ndices. Furthermore, Laurie Bassi, CEO of Human Capital Capability, an Alexandria, Va.-based benchmarking company for human capital measurements, found that from 1997 to 2001, four hypothetical portfolios of between 19 and 41 of the firms that made the largest investments in employee development each year subsequently outperformed the S&P 500 index by a factor of two in the year following the training investment.

That’s why savvy companies like Home Depot have their HR managers meet regularly with analysts. "At the beginning, I think they wondered what the hell was going on," Donovan recalls. But as he described HR’s role in building a high-performance work force, ah attitude adjustment took place. Now, Donovan concludes, "I think they understand the value-add for human resources in our equation." So, too, do more and more CEOs.

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HR’s Impact on the Bottom Line

Organizations that have a documented HR strategy also have:

* 35% HIGHER REVENUE PER EMPLOYEE

* 12% LOWER ABSENTEEISM

* A MORE EFFECTIVE PERFORMANCE MANAGEMENT AND REWARDS SYSTEM THAN THOSE WITHOUT A DOCUMENTED STRATEGY.

Source: Global Human Capital Survey 2002-2003, PricewaterhouseCoopers, 2002.

The Deloitte & Touche Human Capital Return on Investment study measured the impact of human capital practices (e.g., measuring employee performance, enhancing productivity, managing talent, communicating strategically) on various companies’ market-to-book values. The study found that those companies with high human capital index ROI scores:

* ON AVERAGE EARN MORE MONEY FOR THEIR SHAREHOLDERS

* HAVE A 66% HIGHER MARKET-TO-BOOK RATIO

* HAVE A 300% HIGHER FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS

Source: Human Capital ROI Study, Deloitte & Touche, 2002

COPYRIGHT 2003 Chief Executive Publishing
COPYRIGHT 2003 Gale Group

The paternalistic relationship between business and employee health insurance is on its last legs. The new economy, featuring an older and more transient workforce and competition from foreign firms unburdened by high labor costs, is compelling American companies to rethink health benefits. Three additional forces - the likelihood that insurance premiums will outpace inflation again, the prospect of the removal of ERISA protection, and shareholders’ demands for larger returns on investment - add to the pressure, making the current method of job-based health insurance untenable.

First-dollar coverage is virtually extinct. Workers now pay approximately 25 percent of the cost of premiums formerly paid entirely by their employers. Retirees have been especially hard hit, as many firms have eliminated health benefits for retired workers altogether.

But even with employees shouldering a greater share of the burden, business outlays for health insurance still make up a troublesomely large and rapidly growing percentage of payroll. Between 1970 and 1995, health benefits bulked up from 2.4 percent of total compensation to 7.6 percent. Total health benefit costs to employers with 10 or more workers now average close to $4,000 per active employee. The Congressional Budget Office (CBO) forecasts that costs will double over the next 10 years, and even that rate of growth may be understated.

Over the past four years the premiums for the Federal Employees Health Benefits Program have remained constant, for example, yet the FEHBP has estimated an increase of 8.5 percent for 1998. Private employers face similar increases, now that savings from managed care seem to have reached a plateau. The impact of these costs on the bottom line has jolted firms to the realization that they need to reevaluate their role in the selection, provision and monitoring of health insurance. The inevitable result: a change in the provision of health benefits as we know it, from a defined benefit to a defined contribution form of job-based coverage.

Force No. 1: Rising costs

Estimates vary, but even optimists anticipate that health insurance premiums will grow much faster than inflation for the foreseeable future. The CBO predicts inflation will average 2.8 percent over the next decade while premiums for health coverage rise 5.5 percent per year.

Several factors are involved. For one thing, with so many workers already enrolled in managed care plans, there is little room left to hold down costs by moving employees into lower-cost plans. For another, in pursuing market share, many managed care firms allowed prices to be set by marketing rather than actuarial considerations - an error manifested in depressed earnings. Finally, underinvestment in information systems to track utilization trends has compounded errors in pricing at the same time that new government regulations are squeezing profit margins.

To restore investor confidence, managed care plans are under heavy pressure to raise premium prices. Not surprisingly, firms that assumed managed care had tamed health spending find the anticipated return of inflationary premium pricing very disconcerting.

As waste is squeezed out of the health sector, additional savings become progressively more elusive. Key changes in the relationship between the buyers and sellers of health care regarding ability to control prices are evident as well. The advantages now enjoyed by insurance plans and buyers will steadily erode as health care providers become better organized and more capable of negotiating from positions of strength rather than weakness.

Force No. 2: Legislated change

Regulatory pressure is another crucial factor in the inevitable transformation of employment-based health insurance, with more than a thousand state and federal regulations dictating benefits and coverage on the books today. State-mandated benefits considerably hike the cost of health insurance for most companies that haven’t previously met the mandates. Very large firms with operations in several states may have to offer the extra benefits to all employees, even if they are only required in one of the states.

Recently enacted constraints such as those affecting maternity hospital stays, outpatient mastectomies and the right of plans to exclude physicians with high-cost practice styles seriously hamper management’s ability to contain spending. Even the CBO has acknowledged that such mandates could inhibit managed care plans’ ability to hold down costs and thus boost health care spending. Instead of relying on cost-effective criteria, as originally envisioned, managed care decision making is becoming more politicized. Prudent employers will recognize these threats and act accordingly by moving to a defined contribution strategy.

Employers are also concerned about the deterioration of the Employee Retirement Income Security Act’s shield against costly malpractice litigation and cumbersome state government regulations. Under ERISA, in return for self-insuring, employers are granted exemptions from state efforts to expand access to health care, control growth in health spending and protect workers from plan discrimination. At the national level bills have been introduced that, if passed, will enfeeble ERISA and subject self-insured businesses to intrusive new standards, including granting employees the right to sue their employer for injuries linked to medical malpractice or denials of care.

Force No. 3: Shareholder pressure Shareholder discontent over unsatisfactory earnings has led some businesses to pursue savings by targeting payroll expenditures. But low inflation makes any substitution of fringe benefits for wages both more transparent and harder to sell to labor.

The fact that unemployment is at lowest level in decades and many employers are experiencing a labor shortage puts additional constraints on management’s ability to keep labor costs from rising via the wage/fringe benefit tradeoff. And, in the case of low-income workers, such maneuvers have limited application even under the best of circumstances, since wage levels are already below what society considers sufficient. If anything, the political climate demands that management resort to other means of controlling labor costs.

A decline in managerial flexibility does much to explain why employers have begun to shift increases in health expenditures to workers, both in the form of higher copays and limitations on coverage. This shift in financial responsibility, together with more drastic initiatives to reduce the payroll by downsizing, part-time work and outsourcing, for example, reflects employers’ initial response to the new economy.

As employers try to save by cutting back or eliminating the choice of plans available to employees, their exposure to medical malpractice litigation will increase and necessitate more expenditures. Good risk management principles oblige employers to monitor and assess the quality as well as the price of health services provided to their employees, but this merely adds to the problem.

Not when, but how

Given the financial and regulatory pressures on businesses, the central question is not whether but how employer-sponsored health insurance will change - and what the structure of the new system will be. Apart from a continuing, steady cost shifting from employer to employee, we see three alternatives:

* the adoption of a national health insurance scheme

* the sudden and complete discontinuation of employee health benefits

* a shift from defined benefits to a defined contribution strategy.

Numerous attempts to install a national health insurance scheme have already failed, and the political climate is hardly receptive to another try. And, regardless of how inviting employers may find it, a total abdication from the provision of health benefits is untenable, for two main reasons: First, it would generate costly and unproductive labor-management strife. Second, the subsequent swelling of the uninsured population would incur unwelcome governmental intervention, including a revival of interest in mandatory employer coverage and the subjection of benefit determination to political rather than economic criteria.

Thus, future change predictably will center on medical savings accounts, vouchers or a combination of both. More and more large employers are already insisting on report cards from their managed care plans, both to protect themselves from malpractice litigation in case ERISA protection fails and to prepare for the ultimate transfer of responsibility for the selection of health plans to the employees themselves.

As insurance premiums once again outpace inflation, as firms realize their potential involvement in malpractice litigation, as the compliance cost of government regulation spreads and investors intensify the pressures on management to generate higher returns, employers will be forced to extricate themselves from the provision and oversight of health insurance.

The old system of providing health benefits is moribund. The new economy will finish it off.

Dr. Battistella is a professor of health policy and management and Dr. Burchfield is an assistant professor of health care financial management for the Sloan Graduate Program in Health Services Administration at Cornell University in Ithaca, N.Y.

COPYRIGHT 1998 A Thomson Healthcare Company
COPYRIGHT 2004 Gale Group