The best of both worlds - includes related articles on recruiting and decentralizations - dual-reporting human resources department becoming a trend

HR Magazine, Sept, 1999 by Carla Joinson

Should HR be highly centralized or should it report to other divisions? Some companies blend both approaches.

Become a strategic business partner - it's both goal and guide, mantra and message for HR departments operating in a lean, no-nonsense era. The best way to become that partner, however, can be elusive. Should HR opt for efficiencies of service and cost that are best gained through centralization? Or should it give up a certain amount of corporate control to support each division's business goals?

Some companies believe they can exploit the best aspects of both approaches by creating an organizational structure where HR reports to both the corporation and an individual division. Businesses with such HR structures can capture the economies of scale and long-term expertise that centralization allows, while simultaneously setting themselves up as strategic partners on the business side.

How common is this dual-reporting approach? A recent survey of 61 large employers in Philadelphia by William M. Mercer Inc. revealed that slightly more than half the respondent companies have their HR staffs reporting to business units.

Mercer principal Karen Piercy says that having such an organizational structure is valuable "when it's especially important to be attuned to the business, and your HR goal is to be a partner."

However, she admits that the lack of centralization also has certain drawbacks. After setting up such a reporting relationship "you may then find that you don't look like a company any more, because everyone has different policies," she says. "HR programs can become so different that you can't even move HR people around anymore."

Taking the Pros, Leaving the Cons

Some companies have found a way to maximize the benefits and minimize the drawbacks of having HR report to business units.

One company that has successfully managed this reporting relationship is PPG Industries, a diversified manufacturer based in Pittsburgh, which first embraced divisional reporting in 1992. "Our core organization concept centers on strategic business units (SBUs), which report to the office of the chief executive, made up of the CEO and two executive vice presidents," says Bud Wise, PPG's director of organization development. "Seasoned HR directors report to each of these SBUs since we believe that what you emphasize from an HR standpoint needs to align with the SBU's need. Functional reporting is to the senior VP of HR in corporate."

The main advantage to this organizational structure is that the HR strategy for each SBU can be tailored to its specific needs. "For example, in one SBU, the management of labor costs is absolutely critical to that business' success," says Wise. "And in this case, the themes that are emphasized are those that optimize labor costs. On the other hand," he continues, "labor costs may not be a real issue in one of our tech businesses - the HR issue there is to staff it with the skilled technical people we need."

For Paul McKinnon, vice president of HR at Dell Computer Corp. in Round Rock, Texas, the key to having HR report to business units lies in balancing effectiveness and efficiency. Dell's segmentation strategy has the company regularly spinning off new divisions, or segments, whenever growth or financial parameters call for more autonomy within a certain line of business. As business leaders are assigned to that new segment, HR leadership moves with them.

"Having HR report to the business units works so well for us because our strategic targets are in growth, and that organizational structure supports those goals," says McKinnon. "If you focus strictly on cost," he says, "you wouldn't be led in this direction."

While he admits that centralization offers efficiencies, McKinnon also believes that stressing efficiency can make it more difficult for companies to enact change, which can cost the business in other ways. "To have HR in each line of business may not be the most efficient way to operate," he says, "but we believe it's the most effective way to operate for Dell - given our business strategy to build around growth and segmentation."

His observations tie in with findings reported by Theresa Welbourne in a study conducted at Cornell University's Center for Advanced Human Resource Studies. The study suggests that having senior HR report up the business side to a CEO has a positive effect on financials, such as stock price and earnings growth, in small and fast-growing companies. The study may relate to other types of firms as well because it's likely that firms whose individual lines of business enjoy great autonomy and independence mimic the characteristics of fast-growing companies, says Welbourne, a professor at the University of Michigan Business School.

Striking a Balance

Dallas-based Texas Instruments (TI) has managed to strike a healthy balance, gleaning the benefits of centralization while enjoying the advantages of having HR report to business units. That balance was born of a process that started more than a decade ago, says Jeff Elson, director of HR for digital imaging, silicon technology development, worldwide facilities, and worldwide procurement and logistics.