Organizational Transformation and the Changing Role of the Human Resource Function

JOAN LANCOURT and CHARLES SAVAGE

Seven companies--Oticon, Eastman Johnsonville Foods, The Canadian Imperial Bank of Commerce, W.L. Gore, Semco, and Williams Technologies--have journeyed down the path of organizational transformation, and in each case there has been a significant shift in the role of human resources. The experiences of these companies illustrate the fact that transformation takes as many shapes as there are companies. But if we compare their experiences, a number of themes emerge that will be helpful to those whose organizations are just beginning to change.

WE ARE LIVING in what Peter Drucker calls "the Age of Discontinuity"-a time that subjects all of us to wave after wave of fundamental change and forces us to engage in what Charles Handy calls "upside-down thinking." Virtually everything we know and all our assumptions about managerial practice are being called into question, and for good reason. The old methods are no longer working well enough. The stakes are high: the questions we must answer concern the kind of fundamental redefinition of our companies that will not only liberate and support innovation at all levels of the organization, but also spur the creation of a whole new economy.

Historically, our industrial wealth has been built on the exploitation and depletion of our natural resources. However, recent technological advances and increases in global developments are undercutting the very foundation of that economy. Rather than raw materials or physical assets, knowledge is now hailed as the new source of wealth and the basis for competitive advantage. But to leverage knowledge assets, we must fundamentally transform the way we organize and use this most human of resources.

In an effort to better understand how companies are approaching this challenge and what role the human resource function is playing in the transformation process, we interviewed senior executives and managers at Oticon, Eastman Chemical, Johnsonville Foods, The Canadian Imperial Bank of Commerce, W.L. Gore, Semco, and Williams Technologies-all of whom have been recog- nized by the business community and the press as having approached these issues in interesting, innovative, and experimental ways.

Clearly, these companies are doing something right. Oticon, for example, tripled its return on sales; increased sales growth from 2 or 3 percent to 14 percent in 1992 and to 23 percent in 1993 (in a declining market); reduced time-to-market by 50 percent; opened new markets for products to improve hearing in public spaces; and launched two new product lines and more than a half-dozen product innovations in two-and-a-half years.1 Brazil-based Semco was able to succeed in an extremely difficult market: it achieved sales and profit stability while the Brazilian gross industrial product fell by 14 percent, 11 percent, and 9 percent in 1990, 1991, and 1992, respectively, while capital goods output fell to 1977 levels and while 28 percent of its capital goods manufacturers went bankrupt.2 Johnsonville Foods increased sales from $15 million in 1982 to $130 million in 1990, boosted its market share from 7 percent to 40 percent, and experienced a 200 to 300 percent boost in productivity.3 Eastman Chemical's well documented improvements in the performance of core business processes won it the Malcolm Baldrige award.

What have these companies been doing, and how has the human resource function fared in the transformation process? To answer this question, we have organized our interview data into two sections: first, an identification of those themes which appear to characterize the organizational transformation process as a whole, and second, an exploration of the role human resources has played in the transformation process.

 

THEMES IN ORGANIZATIONAL TRANSFORMATION

Despite differences in size, industry, and nationality, there appear to be four common themes that characterize the process and ultimate shape of the organizational transformations we studied. They are: redefining the business and focusing on the customer; teaming and supporting nonhierarchical structures; leadership and shared values; and a change in language.

 

Redefining the Business and Focusing on the Customer

In one way or another, most of the organizations made significant changes in how they thought about their business and their customers. For example, CIBC changed the focus of its business from working with money to working with the customer. Its "Corporate Vision and Credo," which illustrates the magnitude of this redefinition, states the company's determination to be:

A bank that doesn't think like a bank. A bank that knows that yesterday isn't tomorrow ... A bank that doesn't deal in mortgages, but in the pursuit of owning a home. A bank that doesn't deal in loans ... but in dreams of the future. A bank that isn't changing to fit the future, but to create it ... constantly reinventing itself through its customer ... A bank where clients aren't numbers but individual goals and aspirations. A bank that knows that it's not their money they're dealing with, but their clients' . . .

Johnsonville Foods, a Wisconsin sausage manufacturer, recognized that if it wanted to become a national player, the company had to redefine the concept of "boss." The real "boss" was not Johnsonville's owner, Ralph Stayer, or any of the managers or supervisors. The real boss was the customer, and Johnsonville Foods defined empowerment as "not the right to do as we please, but to be pleased to do what is right for our customers."

Oticon, a Danish hearing-aid manufacturer, also shifted its focus from products to customers. According to Lars Kolind, Oticon's CEO, the company is in the "quality of life [business], not the hearing-aid business." By thinking of customers as people who want and deserve the best quality of life with the hearing they have, rather than as people with defective ears, Oticon has actually redefined its entire business. Essentially, the focus shifted from medical hearing impairments to hearing and quality of life. By tapping into its core competencies in the filtering of background noise (a key issue in the design of a successful hearing aid), Oticon has been able to identify an almost unlimited new market-a hearing-normal public that would appreciate better sound quality in public spaces, such as concert halls, noisy classrooms, and auditoriums where background noise is a problem.

This focus on the importance of identifying core competencies is shared by Eastman Chemical, Semco, and W.L. Gore, and leads to a second theme, that of teaming to combine and recombine competencies as business opportunities arise.

 

Teaming and Supporting Nonhierarchical Structures

Teaming across organizational boundaries appears to be a hallmark of companies in transformation. In fact, a number of the companies in our sample have eliminated many of the traditional organizational boundaries entirely.

Oticon has eliminated not only functional departments but also job tides and the physical barriers imposed by office walls. Work is organized by project teams, and people join teams based on their competencies and interest. There are only three levels in the company: project sponsors (the former management team); project leaders; and project coworkers. All employees (including the CEO) are expected to work on multiple projects, with at least one in their core competency and one in which they feel they can add value based on their other competencies or interests. For example, Lars Kolind, the CEO, has recently finished working on a new training manual, and an administrative coworker with Spanish-language competency is working with a team responsible for marketing and selling a new product in Spanish-speaking countries. This flat, project-focused teaming structure has created a knowledge-based, networked organization that Oticon calls its "spaghetti" organizational structure.

While Oticon's structure may be spaghettilike, Eastman Chemical's team-based organizational structure is actually drawn in the shape of a pizza. The different business organizations are depicted as "pepperonis" scattered throughout the pizza, and the administrative staff is matrixed to the various business units. Although teams have become a way of life at Eastman-so much so that when the Baldrige examiners asked how many teams there were, no one could give a definite answer-the "pizza chart" has helped Eastman to realize that it needs to pay even more attention to the white spaces between the business units.

At Johnsonville Foods, "members" (the company's term for employees) are organized into three basic team categories: product performance teams, customer focus teams, and performance service teams, which are able to reorganize themselves as the nature of their work changes. In addition, it is the team unit itself that decides on the distribution within the team of the "great performance share" bonuses. These decisions provide tangible rewards for being a team player.

W.L. Gore has never had a traditional hierarchy. Its founder's beliefs that there should be no rigid structures and no central, hierarchical control has fostered a flat, "lattice" structure without ranks or titles. "Associates" are organized in self-regulating teams.

Semco is another company where fluid, dynamic project teams easily form and reform as the needs arise. At Semco, the organizational boundary that traditionally separates the organization from its environment is also fluid and permeable, and teaming occurs between Semco "associates" and an ever-changing array of outside subcontractors, many of whom are former Semco employees who have been supported by Semco in setting up their own small businesses. The organizational structure, as in the other companies in our study, has been flattened and only has three levels: a group of "counselors" (formerly called senior executives), partners, and associates.

Given such flat, fluid structures, it is not unfair to ask, "What holds it all together?" If there is so little hierarchy, and no central or top-down control, how does the organization move cohesively in the right direction? This leads us to a third theme, that of alignment through shared values and goals.

 

Leadership and Shared Values

Like a genetic code, shared values become the shaper of organizational and individual behaviors, and when they are truly shared, order is achieved without the need for a host of external control mechanisms. The CIBC vision noted above is one example of the articulation of a shared set of values that guide organizational and individual behaviors. Another example is W.L. Gore's four operating principles to guide behavior:

Furthermore, leadership at Gore is not positional; it is expected of everyone, and a natural leader is defined by his or her followers.

The question of leadership was also a crucial one for Ralph Stayer of Johnsonville Foods. In considering how to make the company a national player, Stayer came to realize that by keeping people dependent on him for leadership and decisions, he, not the employees, was the source of the problem. He likened the situation to that of a buffalo herd in which the herd simply follows the lead buffalo anywhere-even over a cliff. In contrast to the buffalo, in a flock of geese, each goose is responsible for getting itself to the flock's destination. When the lead goose gets tired, another goose moves forward to take its place, assuring a fast and steady pace. To help Johnsonville Foods transform itself from a herd of unquestioning followers to a more empowered community, Stayer stopped merely delegating work and instead transferred ownership of the customer relationships to the organizational members.

At Oticon, a set of core values to guide the work of the company emerged after hundreds of hours of discussion. These values supplanted the previous formal structures and formed the framework for the four operating principles which guide the transformed organization:

    The Choice principle states that employees may choose their projects and are also free to determine what training they need, their vacation schedules, and their working hours.

    The Multijob principle requires everyone to work on a project outside his or her area of prime competence. This is based on the assumption that "a top chip designer who performs a marketing function in one project becomes a much better chip designer. . . . because he sees the world stereophonically."

    The Transparency principle promises that with almost no exceptions, every piece of information is available to everyone. The agility, integration, and alignment that result from this policy far outweigh any risk associated with openness.

    The No Controls principle means that projects emerge based on opportunity, need, and interest. Skunk works are common and, although there is a strategic plan, it is not interpreted rigidly.5

Alignment around these principles enables Oticon to act quickly and flexibly and has already resulted in the development of many new products in the past two years. Leadership has been redefined at Oticon as well. Lars Kolind does not see himself as captain of the ship, but rather as the designer of the ship. He has based this shift on the principle that it is more effective to design an organization that is able to act in innovative ways than to try and control or direct all organizational activities.6

At Semco, the leadership baton rotates every six months among the six "counselors" in an effort to void what other companies .... think they want--responsibility nailed down to a single man or woman. [At Semco] there's no one to blame if the company goes down the drain. When financial performance is one person's problem, then everyone else can relax. You get to pass on the baton, but it comes back again two-and-a-half years later.7

Like Oticon, Semco has found that by openly sharing all information, including financial and salary information, with everyone, the company creates the alignment necessary to maintain order without having to impose controls from the top. This emphasis on shared values and widely available information brings us to a fourth theme: the way in which organizations have altered the language they use.

 

A Change in Language

In one sense, language defines reality. It helps shape mind-sets, and it plays an essential role in transforming organizations. Almost without exception, we see the sample companies consciously changing the language and the rhetoric they use as a way to reinforce the changes they are in the process of effecting.

For example, as noted earlier, titles have changed. At Johnsonville Foods, to underscore and support the shift in responsibility and accountability, and despite initial opposition from the legal department, employees have become 44 members." W.L. Gore, Williams Technology, and Semco have "associates," not employees, and at Oticon, "coworkers" is the term used.

Similarly, the redefinition of roles has been accompanied by a change in language. At Johnsonville Foods, the role of supervisor has been defined as that of "coordinator," and the role of manager has become that of "coach." At Oticon, managers are now "leaders" and "sponsors," and "sponsorship" at W.L. Gore is also an important role. At Semco, the six senior executives have become "counselors," and department heads are "partners."

Given the context of the transformation occurring in these companies, this use of new language is not merely cosmetic. Not only have the roles, responsibilities, and relationships changed significantly, but the structures and infrastructures have been transformed as well; and given that these companies changed the fundamental relationship between leadership and employees, between employees and customers, and between employees and the company, it should come as no surprise that the human resource systems could not and did not remain the same. How human resources was transformed is the focus of the next section.

 

NEW ROLES FOR HUMAN RESOURCES

While the exact shape of the human resources transformation differed from company to company, several themes emerged: many functions traditionally performed by a human resources department were shifted to the line; human resources became a business

while "partner" to the line; there was an increased focus on employee and career development; pay programs focused on "pay for skills;" and many activities were aimed at creating and supporting a more egalitarian culture.

 

Functional Responsibilities Shift to the Line

At Oticon and Johnsonville Foods, many of the traditional human resources functions, such as hiring, reviewing, firing, training, career development, and program development, have been shifted to line managers and employees. In fact, at both companies, human resources as a distinct set of functions has all but disappeared.

To illustrate, the position of director of human resources was eliminated at Johnsonville Foods, and in its place a coordinator of "Membership Services" was created. The role of membership services is to teach the line managers how to do the hiring, reviewing, and firing and to help them understand the various employment laws that regulate these processes. Of the traditional human resources services, membership services has retained only the administration of benefits, the management of the payroll, and some training responsibilities. Membership Services is an active partner to the line, but Johnsonville has decoupled the human resources responsibilities from the human resources department.

Similarly, no human resources department exists at Oticon. With the abolition of departments and set 'Jobs," there is no need for the development and maintenance of job descriptions. An operation based on free access to all information, and on the principles based on shared values identified in the preceding section, obviates the need for extensive and complex policy development and maintenance of policy manuals. Performance reviews, salary actions, and employee relations have become the responsibility of the sponsors, or project leaders, and training and career development have become a shared employee and company responsibility. For example, to develop the necessary skills for use of the new computer system, Oticon supplied everyone with a similar computer at home, and the employees formed a computer club to support one another's learning. Labor law in Denmark is straightforward, and the management team works out two-year contracts with the employees. Although the company is 'unionized, no one person is responsible for union relations. A part-time secretary handles the registration of new employees, and two secretaries manage the payroll.

In cases where human resources remains in place, its duties have been expanded into the line. For instance, at Williams Technologies, the director of human resources is also the director of purchasing.

 

Human Resources As a Business Partner

At some companies, human resources' role has been redefined as that of a business partner. At Eastman Chemical, human resources is matrixed to the business organizations, and as a business partner it is responsible for helping to define the needed competencies as the first step in hiring the right people. In bringing a new plant on line, for example, the ability of human resources to select the right people to run the plant has made a significant contribution to overall plant performance. As a business partner, it is also responsible for supporting the integration of acquired organizations into the Eastman culture and for helping people move into other organizations when Eastman decides to sell one of its businesses-as it did recently with its polypropylene business.

It is also possible to reorganize the human resources department into a number of portfolios of capabilities, as the new vice president of human resources at CIBC has done, so that human resources can actively reach out to the rest of the company as a business partner. Instead of standing between the employees and their managers, human resources at CIBC has been repositioned so that it supports direct communication between managers and employees.

Another close link between the line and human resources exists at Semco. Many of Semco's human resources functions are contracted out to one of the satellite organizations started by former Semco employees, who then partner with line managers to perform a number of human resources tasks.

 

A Focus on Career and Competency Development

Because they have recognized the role and value of their knowledge assets, most of the companies in the sample have focused great attention on identifying and developing their core competencies. This has inevitably led to a greater focus on the need for continuous career and skill development. Although the companies have handled the focus on people development in many different ways, in almost every case, the work encompasses far more than simply putting together a series of training programs.

One solution is the career development system, including job posting, an 800 number for employees, and an emphasis on employees' responsibility for their own careers, introduced at CIBC. The company also maintains a state-of-the-art Leadership Development Center north of Toronto, which focuses on helping individuals and departments to better align them with CIBC values and to focus on the development and leveraging of their intellectual capital.

Other companies are offering similar services. For example, at Eastman Chemical, human resources has developed a program called PASK-- "people applying skills and knowledge"-to facilitate the use of employees' talents individually and within teams. Human resources is also focusing on developing its own competencies, such as those needed to better support organizational mergers and acquisitions. The membership services department at Johnsonville Foods runs personal development workshops aimed at exploring employees' skills, knowledge, and learning styles, as well as developing a personal development plan.

Development at Oticon is, in part, built into the multiproject work system. By becoming a member of multiple project teams, including some outside one's primary area of competence, employees are continually learning new skills and are gaining a broader perspective on the business. According to Oticon's CEO, this wide-angle perspective also contributes to better performance in one's area of prime competence.

Career development at Semco is enhanced by its unusual flexibility in creating and managing a wide variety of projects, and Semco's history is filled with examples of employees who were given the freedom and support to pursue a broad range of creative ideas, almost all of which have paid off. Early in its transformation, a small unit, the Nucleus of Technology Innovation, was formed, which became the prototype for its satellite organizational model. This unit provided its members with the freedom and support to "invent new products, improve old ones, refine marketing strategies, uncover production inefficiencies, and dream up new lines of business.8 Later, the satellite model enabled numerous employees to pursue a variety of product development projects that added to their own and Semco's overall competencies.

 

Pay for Skills

The focus on core competencies has led almost all the companies in our study to make significant revisions in their performance management and compensation programs. We will discuss just a few examples.

Semco's approach to compensation seems, at first blush, impossibly complicated. There are employees on fixed salaries, part-timers, and a number of variable salaries composed of royalties and bonuses. Some employees have a combination of fixed and variable salaries. In Semco's satellite organization, there are "fixed fees, hourly stipends, a percentage of increased sales, a finder's fee, an honorarium, [and] a retainer converting to an advance converting to a royalty."9 For Semco, this arrangement is based on a host of self-set performance objectives such as "cash flow, sales, profits, production units, and any one of a dozen other measures."10 10 In practice, this seems to translate very directly into pay for skills and performance.

The "pay for results" system was redesigned at Johnsonville Foods through the efforts of organizational members. In this system, there are 5 classifications for hourly members, and each classification has three to six results blocks that identify the competencies necessary for that position. When members have mastered the skills, they ask to be reviewed by their coach, a team leader, and two to four colleagues. The reward system is a blend of monetary rewards (a rise in block level, gain sharing, profit sharing, bonuses, and merit increases) and nonmonetary rewards (promotions, desirable job assignments, and greater autonomy). Teaming skills are also directly rewarded by the teams themselves through the distribution of great performance share bonuses (set aside from pretax net income) if specific performance goals are met.

Human resources at Eastman Chemical is also moving toward a "pay for skills" system, phasing out its traditional performance appraisal system, and moving to a 360-degree appraisal system. The bonus system has also been replaced by an employee stock ownership plan in which employees can receive 5 to 15 percent of their earnings in company stock.

 

A More Egalitarian Organization

Without exception, the sample companies have flattened their hierarchies and become far more egalitarian. In one way or another, the human resource programs, whether they are developed and administered by a human resources department or by the line, all support this more egalitarian environment.

Examples of this may be found in Eastman Chemical's and Semco's 360-degree performance review approach, in the way Williams Technologies rotates team leadership every four months, and in Johnsonville Foods' shift from supervisors to coaches, and in its splitting of net profits before tax-allocated on the basis of team performance. Oticon's open office space, in which no one, including the CEO, has an office, its emphasis on a rich network of face-to-face communications, and its decision to make all information available electronically to everyone is another example, as is W.L. Gore's structure of self-managing teams within a "lattice" organization in which ranks and titles are avoided.

 

CONCLUSIONS

As these examples of innovative organizations illustrate, organizational transformation has had a significant impact on the shape and responsibilities of the traditional human resources function. In some cases, the human resources function no longer exists as a distinct function. In others, it has remained intact, but its roles and responsibilities have been transformed in ways congruent with the larger organizational transformation.

Whether there continues to be a wide variety of forms or whether a new, more standard model emerges remains to be seen. What is already evident, however, is that as we shift from industrial-era models to knowledge-era models, and to the discovery that the real assets in our companies are knowledge assets, there will be an increasing need to create more "fluid, temporary structures that facilitate relationships and an open flow of communication"11 and to find ways to "elevate people above technology and processes.12

To do this, organizations will not only need to develop superior teaming skills in order to continually team and reteam the core talents of the organization, but will also have to increase significantly their capability and capacity for continuous change. Prevailing models of change management will have to be refrained: "unfreezing, change, and refreezing" is no longer a useful model. Oticon and Semco, for example, never refreeze. They are swirling, ever--changing, dynamic, and somewhat chaotic virtual businesses--and they are able to operate that way because they, like Johnsonville Foods and W.L. Gore, have been built on a bedrock of trust, shared vision, and a common set of values.

At its best, human resources has a significant contribution to make to this process, but whether it can play a leadership role in helping organizations develop these abilities will depend in large measure on its own ability to reinvent itself: to change its role from one of administrator of compensation and benefit programs and watchdog of corporate policies to one of leader, facilitator, and coach in the creation of organizational environments and cultures that support flexibility, the development of individual and organizational core competencies, and the trust and shared vision necessary to move forward.


1 Lars Kolind, "Thinking the Unthinkable: The Oticon Revolution," Focus on Change Management (April 1994); Polly LaBarre, "The Disorganization of Oticon," 234 Industry Week 14 (1994): 22-28.

2 Ricardo Semler, "Why My Former Employees Still Work for Me," Harvard Business Rev Jan-Feb 1994.

3 L. Brokaw and C. Hartman, "Managing the journey," 12 Inc. 11 (1990): 44-54.

4 Heinrich Flik, "The Ameba Concept," internal document, WL Gore & Assoc., GmbH (1990).

5 Supra note 1.

6 La Barre, supra note 1.

7 Supra note 2.

8 Supra note 2.

9 Supra note 2.

10 Supra note 2

11 Joan Lancourt, "Human Resource Leadership in Reengineering the Organizational Culture and Infrastructure," 10 Compensation & Benefits Management 4 (1994).

12 Vaughan Merlyn, "The Growth Imperative," Ernst & Young, Working Paper CB1102 (June 1994).

Joan Lancourt is a Senior Manager in the Ernst and Young, LLP, Center for Business Innovation" in Boston, Massachusetts, and a member of its Business Change Implementation research team. (Presently a Senior Consultant at ADL, Cambridge, MA).

Charles Savage is President and Mentor of Knowledge Era Enterprises, Inc., of Framingham, Massachusetts. 

1995 Aspen Publishers, Inc. COMPENSATION & BENEFITS MANAGEMENT, Vol 11, Nr. 4, Autumn 1995

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