HR’s New Operating Model
By Sandra Durth, Neel Gandhi, Asmus Komm, and Florian Pollner, McKinsey & Company
Interviews with more than 100 chief human resources officers and people leaders reveal how the HR operating model is changing to drive value in a volatile business environment.
The way in which organizations manage people used to be relatively straightforward. For more than two decades, multinational companies generally adopted a combination of HR business partners, centers of excellence, and shared service centers, adjusting these three elements to fit each organization’s unique nature and needs.
Today, this approach — introduced by Dave Ulrich in 19961 — is rapidly evolving. In interviews with more than 100 chief human resources officers (CHROs) and senior people leaders from global multinational businesses, we identified five HR operating-model archetypes that are emerging in response to dramatic changes in business and in the world — including heightened geopolitical risks, hybrid working models, and the rise of majority-millennial workforces.
These emerging operating models have been facilitated by eight innovation shifts, with each archetype typically based on one major innovation shift and supported by a few minor ones. The key for leaders is to consciously select the most relevant of these innovation shifts to help them transition gradually toward their desired operating model.
Eight innovation shifts driving HR’s new operating models
Today’s increasingly volatile, uncertain, complex, and often ambiguous business environment is forcing companies to transform at an unprecedented pace. The global COVID-19 pandemic and rapid evolution of workplace technology have accelerated the adoption of various alternative, hybrid working models — as well as new challenges in monitoring employee conduct and performance. The emergence of majority-millennial workforces has led to a profound shift in employee preferences. And the “Great Attrition” of workers,2 exacerbated by demographic developments in many parts of the world, has intensified existing talent shortages.
HR plays a central role in navigating this upheaval, creating a need for the function to rise to a new level of adaptability and responsibility.3 While every organization has its own trajectory and HR operating model, our interviews with senior leaders revealed that organizations are innovating in ways that are collectively changing the HR function from the “classic Ulrich model”:
- Adopt agile principles to ensure both strict prioritization of HR’s existing capacity and swift reallocation of resources when needed, enabling a fundamentally faster rate of change in the business and with people and how they work.
- Excel along the employee experience (EX) journey to win the race for talent in the time of the Great Attrition,4 enabling both employee health and resilience.
- Re-empower frontline leaders in the business to create human-centric interactions, reduce complexity, and put decision rights (back) where they belong.
- Offer individualized HR services to address increasingly varied expectations of personalization.
- ‘Productize’ HR services to build fit-for-purpose offerings with the needs of the business in mind, and to enable end-to-end responsibility for those services through cross-functional product owner teams in HR.
- Integrate design and delivery with end-to-end accountability to effectively address strategic HR priorities, reduce back-and-forth, and clarify ownership.
- Move from process excellence to data excellence to tap into novel sources of decision making using artificial intelligence and machine learning.
- Automate HR solutions to drive efficiency and capitalize on the power of digitalization in HR.
These innovation shifts are driving the emergence of new HR operating models, albeit with different degrees of influence depending on the nature of individual organizations (Exhibit 1). In analyzing the drivers, we identified five HR operating archetypes.
Five emerging HR operating models
These eight innovation shifts have enabled companies to rethink how they manage their people and the best way to do so. Exhibit 2 shows the five emerging HR operating models we identified, which are all enabled by two core elements: a strong, consistent data backbone and a user-friendly, highly reliable service backbone. When asked which two archetypes best fit their HR operating model, 48 percent of people leaders attending a recent webinar selected Ulrich+, 47 percent EX-driven, 36 percent leader-led, 31 percent agile, and 6 percent machine-powered.
This model is an adaptation of the classic Ulrich model, with HR business partners developing functional spikes and taking over execution responsibilities from centers of excellence (CoEs). In turn, CoEs are scaled down to become teams of experts and selected HR business partners. They are supported by global business services and have a digital operations backbone. Many CHROs believe the classic Ulrich model is not up to solving today’s HR challenges, with HR business partners lacking the skills and time to keep up with the latest HR developments. Inflexible CoEs limit agile reactions, while other organizational boundaries have steadily become more permeable. Multinational businesses with mature and stable business models are often the ones that experience these pain points.
This model calls for a smaller number of HR business partners, with an emphasis on counseling top management, while CoE professionals focus on topics such as data and analytics, strategic workforce planning, and diversity and inclusion. The freed-up resources are pooled to implement cross-functional projects. CHROs who favor this operating model believe that HR needs to accelerate to keep up with the increased focus on execution exhibited on the business side and to prevent HR from hindering rapid transformation. Companies are applying this and other agile methodologies when experiencing rapid growth or discontinuity. (For an example of this model, see sidebar “An agile transformation.”)
This model is meant to help CHROs gain a competitive advantage by creating a world-class EX journey. Putting EX first means allocating disproportionate resources toward “moments that matter.” For example, HR, IT, and operations experts could be granted full responsibility to jointly plan, develop, and roll out a critical onboarding process. By creating a world-class EX, HR becomes the driving force in bridging cross-functional silos and in overcoming the patchwork of fragmented data and processes that many organizations suffer from today. The companies employing this model are highly dependent on their top talent, with a small set of clearly defined competencies. (For more on this model, see sidebar “Optimizing the employee experience.”)
In this model, CHROs transition HR accountability to the business side, including for hiring, onboarding, and development budgets, thereby enabling line managers with HR tools and back-office support. This archetype also requires difficult choices about rigorously discontinuing HR policies that are not legally required. Too much oversight, slow response times, and a lack of business acumen in HR have led some companies to give line managers more autonomy in people decisions. Companies exploring this choice typically have a high share of white-collar workers, with a strong focus on research and development.
With this model, algorithms are used to select talent, assess individual development needs, and analyze the root causes of absenteeism and attrition — leaving HR professionals free to provide employees with counsel and advice. As digitalization redefines every facet of business, including HR, CHROs are looking for ways to harness the power of deep analytics, AI, and machine learning for better decision outcomes. Organizations that are experimenting with this are primarily those employing a large population of digital natives, but HR functions at all companies are challenged to build analytics expertise and reskill their workforce.
Innovation shifts shaping HR model archetypes
While innovation shifts have shaped the traditional HR operating model and led to the emergence of new archetypes, not all innovation shifts are equal. Each archetype is typically based on one major innovation shift and supported by a few minor ones (Exhibit 3).
For example, a leader-led archetype is mainly shaped by the shift of empowering the leaders and the front line. At the same time, it gives more flexibility to the needs of the individual (the “cafeteria approach”) because leaders have more freedom; it also builds on digital support so leaders are optimally equipped to play their HR role. Alternatively, an agile archetype is strongly focused on adapting agile principles in HR, but it typically also aims to move toward a productized HR service offering and strives for end-to-end accountability.
The critical decision for senior people leaders is to consciously select the most relevant of these innovation shifts to transition gradually toward their desired operating-model archetype. For example, the leader-led model puts business leaders, rather than HR, in the driver’s seat, allowing line managers to choose the right HR offerings for their individual teams. And for companies that decide to deploy machine-powered HR, the key is building and relying on deep analytics skills. This model uses integrated people data to make targeted, automated HR decisions.
In large, diversified organizations, CHROs may find that different archetypes fit the differentiated needs of specific businesses better and may adopt a combination of HR operating models.
Transitioning to a target operating model
Transitioning to a future-oriented archetype is typically a three-step journey. First, CHROs and their leadership teams align on the right operating-model archetype for their organization based on the most pressing business needs, expectations of the workforce, the wider organizational context, and the company’s dominant core operating model. In large, diversified organizations, CHROs may find that different archetypes fit the differentiated needs of specific businesses better and may adopt a combination of HR operating models.
Second, HR leadership teams prioritize the three or four most relevant innovation shifts that will move their function toward their chosen operating-model archetype. When doing this, people leaders need to reflect on strategic HR priorities and, even more important, the shifts required to establish the operating model given its feasibility, the potential limits to the speed of implementation, and the magnitude of change. (Today, we find that the capacity to change the HR information system is often the most limiting factor.) For example, if a company is operating in a traditional hierarchical “command and control” way, the sole shift of HR into an agile archetype requires profound and demanding changes to ways of working, likely beyond only HR. Similarly, a business accustomed to a “high touch, concierge service” HR approach will find that a shift to a leader-led archetype is challenging and requires significant effort to implement.
Finally, teams think comprehensively about the transition journey, working toward core milestones for each of the prioritized innovation shifts individually and ensuring a systemic, integrated transformation perspective at the same time. This requires mobilizing for selected shifts, building new capabilities, and acting on an integrated change agenda in concert across business and HR.
This article was originally published by McKinsey & Company, www.mckinsey.com. Copyright © 2023 All rights reserved. Reprinted by permission. Original article can be found here.
ABOUT THE AUTHOR(S)
Sandra Durth is a senior expert and associate partner in McKinsey’s Cologne office, Neel Gandhi is a partner in the New York office, Asmus Komm is a partner in the Hamburg office, and Florian Pollner is a partner in the Zurich office.
The authors wish to thank Fabian Schmid-Grosse and Christian Winnewisser for their contributions to this article.