By Jonathan Zhu

While the human resources (HR) function is almost universally acknowledged as a critical source of business value, the situation on the ground in many privately owned enterprises (POEs) in China suggests many companies haven’t gotten the message.

At a Chinese life-sciences company with global ambitions, the head of HR is a close relative of the founder. The appointment reflects the importance that the owner attaches to HR, and it is consistent with the traditional practice of putting someone you trust in charge of highly critical functions. Unfortunately, the owner’s relative has no experience managing the HR function.

Similarly, a Chinese medical device company hired a head of HR whom the owner met through his personal network. Although the owner trusts him, the HR head is not a specialist in the healthcare industry and is relatively inexperienced. As the company expands globally through acquisitions in overseas markets, the organization is realizing it does not have enough of the right people or the HR infrastructure required to integrate and manage the newly acquired entities.

POEs structure vastly different from MNCs

At a large POE conglomerate, the base compensation for the top management team is about half that at comparable multinational companies (MNCs) operating in the country. Despite earning several billion dollars in revenue, it is difficult for the POE to attract talent from MNCs — and retain the ones it has recruited— because of shortcomings in its HR infrastructure, performance-management system, and processes for identifying high-potential executives.

Even at companies where executives are aware of the importance of attracting, developing, and retaining talent, disconnects can occur with HR. At most POEs, the HR department has limited  resources and authority. At one POE, an HR leader who had been hired from an MNC competitor was astonished to find how little HR infrastructure and resources the company was willing to allocate—contrary to what had been promised.

Not surprisingly, many top HR leaders and other executives who come from MNCs struggle when confronted with a POE’s organization. The kind of infrastructure they are accustomed to is absent; and although the owner expects them to build it, the executive must justify every expenditure.

In short, many POEs do not take the HR function seriously. Why not? These companies are young and have grown so quickly they may not have had time (or capacity) to implement organizational structures and strategies. Moreover, in many firms HR is regarded as an administrative function responsible for processing and distributing paychecks, enrolling employees in benefit plans, and taking care of routine transactional matters. But the biggest obstacle to unlocking the potential of the HR function lies in the deeply ingrained attitudes and beliefs of top leaders’—mindsets that prevent a full appreciation of HR’s value and, worse, can justify inaction.

Value of HR

Undervaluing HR can have unfortunate, but predictable, results. Executives who are unaware of gaps in their organization’s capabilities, may fail to establish a culture and reputation conducive to attracting the best talent. This can ultimately affect expansion and success.

The undervaluing of HR continues at a time when POEs have become an important source of economic growth and employment in China, as well as major contributors to the country’s role in global trade. Indeed, POEs are beginning to gain significant advantages in their decade-long battle with multinational companies for talent — primarily because the compensation gap is narrowing. According to CEB, in 2007 only 9 percent of highly skilled Chinese professionals preferred to work for a domestic company, while 41 percent preferred to work for a MNC. By 2010, the gap narrowed considerably, with 28 percent preferring domestic companies and 44 percent preferring MNCs, according to Harvard Business Review. Increasingly, in-demand professionals are seeing fewer reasons to work for an MNC with distant headquarters, when they could be working at the center of a domestic company in the second-largest economy in the world. Clearly, MNCs have their work cut out for them..

Unless POEs dramatically overhaul their HR structures, they will be unable to use, motivate, and retain talented individuals; they will have difficulty converting their newfound attractiveness as employers into significant business advantage; and they will unnecessarily hobble efforts to compete on the global stage.

Learning from leaders

POEs can look for inspiration in the country’s high-tech industry, where a handful of pioneering companies paved the way a decade or more ago. Heidrick & Struggles, in conjunction with the Stanford Project on Regions of Innovation and Entrepreneurship (SPRIE), conducted an in-depth study in 2006 of what leaders of high-tech companies in China were actually doing to address talent challenges. Because many world-class practices are first developed at Chinese tech companies, Heidrick & Struggles found numerous examples of POEs that recognized the value of HR:

  • Neusoft, from its inception, pursued students and invested intensively in their capabilities. Today, it is the largest China-based company providing IT solutions and services. In addition, the company conducted in-depth leadership assessments of its top 500 employees and established development plans to guide their professional growth.
  • At Lenovo, to counteract the tradition of a strong hierarchy in Chinese organizations that often produces followers instead of leaders, the company’s mid-level managers were given carefully set performance targets, but how they met them was left entirely up to their own judgment.
  • At travel-services website Ctrip, senior executives were the instructors for crucial courses such as sales, quality, and marketing (which the CEO taught). For employees in new roles, completing required courses was necessary for career advancement.

These are just a few concrete, practical steps these companies took on the journey to becoming household names. The first step? Acknowledge the attitudes that are holding back your HR function—and your company—and work consciously to overcome them.

Changing HR means changing your mindset

The chief obstacle on the path to HR excellence in many POEs is the mindset of the leaders. Unexamined attitudes prevent leaders from seeing the importance of HR, and, as a result, they do little to capture its full value. Once these attitudes are recognized, simple steps can reverse the course. Here are five steps to overcome the most frequently encountered attitudes and beliefs preventing POEs from realizing the full value of HR.

 

  1. Acknowledge the ‘founder trap’ and avoid it  In many cases, company founders — flush with confidence from their initial success — believe they can do it all. They resist sweeping organizational changes or new faces at the leadership table, even as their company rapidly grows. Experience has clearly shown that as a company grows to a mature enterprise, it needs distinct kinds of leadership at each stage. Founders can either invest the time and effort to become skilled in each type of leadership, or surround themselves with people who compensate for their shortcomings. Transformational HR leaders can provide the high-level HR competence founders lack, as well as help founders develop leadership skills as needed.
  2. Get the fundamentals right  Although HR is seen as largely administrative in many POEs, a general complacency about the function often leaves even these essential aspects underdeveloped. Many companies lack a basic HR infrastructure — people processes, enabling technology, and an effective means of communication with employees. Companies that fail to quickly address these shortcomings will continue to fall behind the competition. Most important, they will be unable to move beyond the purely transactional to the transformational — the practices that turn talent into a potent competitive weapon.
    Getting the fundamentals right requires work, including organizational assessment and development. But HR best practices are widely known and understood, and POEs can benchmark themselves against exemplary companies and put those practices in place.
  3. Adopt a strategic, transformational view of HR  The one thing that characterizes top-performing companies worldwide is that they use HR to support strategy and catapult their companies past local and global competitors. Once the foundation is established, leaders can turn to the value-adding, transformational aspects of HR: systematic talent and leadership development, identification of high potentials, retention of top performers, carefully designed incentives to drive performance, an engaging culture, and thoughtful succession planning.
    These activities must be governed by a talent strategy that supports the company overall. That means projecting talent needs based on the company’s strategy and managing existing talent toward that future. For example, many companies see innovation as a key part of their business strategy. Whether through the development of innovative products and services, a new business model, or creative internal processes, the objective is to gain more than incremental advantages over the competition. Such major advances occur only through talent — the people who individually and collectively generate superior ideas, fresh perspectives, and new ways of doing things.
    Many companies simply hire smart people and hope for the best. They fail to see that the connection between talent and innovation can be systematically addressed as an organizational issue. But forward-looking HR leaders understand their key role is to enable a strategy of innovation. Among other things, they can understand the leadership implications of an innovation-focused strategy, transform the executive team, and identify the elements of the corporate culture that need to change to support innovative thinking, appropriate risk taking, and new behaviors.
  4. Treat HR as an investment, not a cost center  The phenomenal growth rate of China’s economy over the past 35 years, along with the growth of companies and personal wealth, has led to a short-term, bottom-line mindset. That mindset values the tangible — the immediate returns and the trappings of success, which have come so effortlessly for so long. As a result, the intangibles, such as leadership and talent development, get less attention and little investment. HR is seen as a cost center rather than as the means for taking the company to the top and keeping it there over the long term. This is particularly important against a backdrop of economic contraction, when companies’ HR processes will be face greater scrutiny and greater strain. While the urge to cut might be strong, the ultimate winners will be companies that invested in transformational HR.
  5. Use organizational structure to drive performance  All the familiar organizational structures — functional, divisional, and matrixed — offer advantages and disadvantages for a business. And they answer the question, “Who decides what and when?” Unfortunately, in many POEs, the reporting relationships and management of various activities tend to concentrate decision making at the very top and are designed to ensure that managers and employees perform exactly as instructed. Part of this is cultural — stemming from an unwillingness to question authority and a penchant on the part of leaders for designing organizations along family or clan lines. And part of it is inexperience with organizational design and development intended to prepare executives for broader roles. A well-deployed, actively managed organizational structure paired with a transformational HR leader with integrity, empathy, and strong HR skills can empower employees and produce a deep bench of highly competent leaders.
    This, in turn, leads to more engaged, innovative employees and, ultimately, stronger business performance.

These steps — escaping the founder trap, creating sound fundamentals, taking a transformational view of HR, investing for the long term, and using organizational structure to improve performance — can propel even the most neglected HR operation toward the excellence that separates the leaders from the laggards. As POEs adopt these steps and begin to achieve excellence in HR, MNCs will have a tougher time competing against them. And POEs will find that success begets success: earning reputations that attract exceptional talent will, in turn, attract even more talent, enabling these companies to outdistance their more shortsighted competitors.

About the author: Jonathan Zhu ([email protected]) is a partner in Heidrick & Struggles’ Shanghai office and a member of the Healthcare and Life Sciences Practice.

Posted by By Jonathan Zhu