An MNC that did not have operations in the world’s largest democracy—India—felt that it should have at least a minimal presence. It set up the company’s manufacturing operations in India in the mid-1990s. Being an American company, it recruited American nationals who never stayed beyond a couple of years. Finally, to save costs, the company decided to appoint an Indian CEO. As the managing director of the company, the CEO established great HR systems. He had a workforce that was young in age and was paid a salary that was at least 20 per cent to 30 per cent above the prevailing market standard.
Five years after it was set up and two years after the Indian CEO took over; the company touched a turnover of 100 crore. It was at this juncture that the CEO thought of conducting an HRD audit of his company to assess what more could be done. He and his HRD chief felt that they had done their best in terms of introducing a good performance appraisal system, communication system, training programmes and a number of other initiatives. When an HRD audit was conducted, it was revealed that while employee satisfaction was of a high order, the younger employees were concerned about their career paths and the company’s future. The HRD audit pointed out the need for the company to ‘think long-term’ and offer its younger employees (who were generally loyal to the company and excited to be working there) career progression based on its long-term plans. To this, the CEO remarked that all policies were being dictated by the head office in the USA, and he could do very little to prepare a strategy plan. He also suggested that a turnover of 100 crore meant nothing for the American company and they were simply not concerned about their Indian operations. They merely wanted to be present in the country and were reluctant to even allocate more than a few minutes to discuss India in their annual business planning. Under these circumstances, he could do little to offer a rewarding career to the employees. He admitted that he understood their frustration—he often faced deeply frustrating situations himself.
Finally, after the HRD audit report was discussed, the need for a long-term plan become very important as without it there could be no conceptualization of future growth and how it affected employee morale.
At the end of the exercise, it was decided to summarize the HRD audit report and circulate it among the agenda items for the company’s next annual planning meeting. While presenting the audit report (in the short time allocated), the CEO remarked that on the basis of the report he needed to offer promising careers to employees and, for that to happen, there was no alternative but to expand the company. Given the necessary freedom and support, he felt he could quadruple the annual turnover in the next three years. This caught the attention of the top management, who then suggested that he should present a plan for this. On returning to India, the CEO called all his senior executives together and said that he had made a promise to make the company earn four times more in the current year. They needed to build a strategy plan so that they could grow and offer their staff opportunities to grow too. They brainstormed and came up with a number of alternatives. These were examined and implemented. Today, the company is doing business worth 700 crore.
In this case, the HRD audit led the company to discover its strategy and plan its future. The total amount of money the company spent on the HRD audit was less than 5 lakh. In the following five years they benefited by achieving seven times their prevailing turnover. A 5 lakh investment with 500 crore returns! Such is the potential of an HRD audit. Organizations spend enormous amounts of money on people and people managers. If only they were willing to spend a relatively small amount to get their business functions and HRD investments audited, they would go a long way towards multiplying their business.
In the last two decades, a large number of corporations have established HRD departments, introduced new HRD systems and made structural changes in terms of differentiating HRD function and integrating it with HR function. A good number of CEOs have seen some hope in HRD interventions for most of their problems and challenges. HR systems are people-intensive and require a lot of managerial time. There are examples of corporations where HRD has put itself in the driver’s seat and produced a number of benefits. In today’s competitive world, ‘people’ or employees can give a company much competitive advantage. To get the best out of HR, the latter must be well aligned with the business’s structure, strategies, systems, styles and goals. HR ought to be aligned with both short-term goals and long-term strategies. Without such alignment, HR could become a major liability to corporations. Also, the skills and styles of HR staff, line managers and the top management should synergize with the overall HR goals and strategies. The HRD audit tries to bring about these alignments and synergies.
Having a separate or a dedicated HRD department does not necessarily guarantee good HRD. Good HRD requires the following:
It is to achieve the last objective that the HRD audit has come into being. An HRD audit is a comprehensive evaluation of the prevailing human resource development structure, strategies, systems, styles and skills in the context of the short- and long-term business plans of a company. The HRD audit attempts to determine the future HRD needs of the company after assessing its current HRD activities and inputs.
Over the last two decades I have pioneered a methodology for auditing the HRD function and implementing it in a number of Indian companies (see Rao, 1999 for the original work on HRD audit). The HRD audit begins with a brief from the CEO and chief of HR, who may set an agenda and determine the focal areas of evaluation. The interview with the top management starts with finding out details of the organization’s future plans, and uses them as a base for outlining its competency requirements. The current competencies, structures, HRD systems, and so on are assessed in terms of their capability to prepare the organization for the future. Suggestions are made regarding the improvements that can be made in order to meet future business goals and plans. The HRD audit is contextual; it uses the available knowledge of the potential of HRD systems to help the corporation achieve its goals.
Some important characteristics of HRD audits are as follows:
HRD audit is comprehensive The HRD audit begins by building an understanding of future business plans and corporate strategies. While the HRD audit can be performed even in organizations that lack well-formulated future plans and strategies, it is most effective as a tool when the organization already has such long-term plans in place. The HRD audit attempts to answer the following questions:
This question needs to be answered by the top-level management. If the company has long-term plan documents, they need to be reviewed. On the basis of the answer to the question, consultants finalize the subsequent audit strategies and methodology. The consultants make an attempt to identify the nature of core competencies the organization needs to develop in order to achieve its long-term five- to ten-year plans. The consultants also attempt to identify skills that the company needs to develop at various levels (workforce level, supervisor level, junior management level, middle management level, top management level, and so on) and with respect to various functions (finance, production, marketing, and so on). Listing all these core competencies and skills for the future is the starting point of the HRD audit. The HRD audit normally attempts to assess the existing skills and competency gaps in order to achieve the company’s long-term business goals and short-term results. The competencies may deal with technical aspects or managerial aspects, and may be people-related or conceptual.
This is assessed through an examination of the qualifications of HRD staff, their job descriptions, training programmes they have attended, and so on. Besides, an attempt is normally made to identify the skill gap in the organization through personal interviews. Training needs and performance appraisal forms provide further insights. Departmental heads and other employees also give inputs about competency and other skill requirements.
The auditors attempt to identify various HRD subsystems that are available to ensure the presence, utilization and development of skills and other competencies in the company. These HRD subsystems have been presented and evaluated in Chapter 2. All the HRD tools in the organization are listed and studied in detail.
The effectiveness of each system needs to be assessed. For example, the effectiveness of the performance appraisal system is assessed by discussing systemic efficiency with employees individually and in groups. The auditors look at the appraisal forms and the linkages between appraisal and training, conduct questionnaire surveys to assess the extent to which coaching and other components of other appraisals are being utilized, and conduct the necessary workshops to assess the effectiveness of these systems. Similarly, with regard to induction training, consultants make it a point to meet those who have been through the induction training recently or those who are in the process of being inducted into the company. Their views are noted in order to improve the induction training methodology.
In the next stage, an attempt is made by the auditors or consultants to examine whether the company’s existing HRD structure can handle its immediate and future HRD needs. This examination will assess the existing skill base of the company’s HRD staff, and its professional preparation, attitudes, values and developmental needs, and the line manager’s perceptions of these issues. In addition to examining the full-time staff, the HRD structure is also assessed in terms of the use of task forces and other mechanisms.
Here an attempt is made to examine the leadership styles, human relations skills, and so on of senior managers. The extent to which their styles facilitate the creation of a learning environment is examined.
HRD audit examines linkages with other systems The HRD audit examines linkages between HRD and other systems like total quality management, personnel policies, strategic planning, and so on. Suggestions are made, by evaluating the answers to the aforementioned questions, about the future HRD strategies required by the company, the structure needed to develop new competencies, the systems that need to be strengthened, and the styles and culture that are compatible with the company’s HRD processes, particularly the style of the top management.
HRD audit is business-driven The HRD audit always keeps business goals in focus. At the same time, it attempts to introduce professionalism into HRD. In keeping the business focus at the centre, the HRD audit attempts to evaluate HRD strategies, structures, systems, staff, skills and styles, and their appropriateness.
The HRD audit is not a problem-solving exercise. It may not be able to provide any solutions to specific problems the organization is facing, for example, those relating to industrial relations, discipline, poor performance, and so on. However, it may be able to illuminate the sources of the problems. It will not give feedback about specific individuals. It will however give feedback about the HRD department, its structure, competency levels, leadership, processes and the influence of HRD on other systems.
In order to arrive at answers to the aforementioned questions, auditors use a number of methods. These are described in some detail here.
The HRD audit, if conducted through participatory methods, may itself initiate the change process. Even if it does not, it is a potential diagnostic tool and can provide a lot of information to the top management on human processes and help to plan further interventions.
The organization has to prepare itself for the audit. Normally, the HR function, systems, competencies, culture and the commitment of the top management come under scrutiny. Diagnoses are particularly painful if things need to improve. In such cases, there is much corrective work to be done and more severe criticism of past actions. Hence, an audit, because it must be self-critical and open to examination, may not always be comforting. An audit actually requires a lot of courage and boldness on the part of the HR department. For these reasons, it has taken much time for HRD audits to gain acceptance and become popular. But once done, an audit can realign the firm’s goals with HRD, help people to drive business better and boost HRD function.
In preparation for the audit, the auditors have to familiarize themselves with the current HRD status. They do this by examining various documents relating to the existing systems and processes.
Rao (1999) introduced the concept of the HRD score card. The score card is a series of four-letter grades assigned by the auditors on the basis of the HRD audit. At the end of the audit, the auditors assign letter grades for the following dimensions:
The letter grades range from ‘A+’ to ‘F’, where ‘A+’ indicates an extremely high level of maturity, and ‘F’ indicates an extremely low level or total lack of maturity. The HRD score card helps identify at a glance the areas in which the firm needs to focus. Consider the score card of a hypothetical company, Firm X, in Table 11.1.
Table 11.1 indicates that Firm X has high HR competency levels, both of HR and line staff and reasonably good HRD systems. The HRD culture has not yet fully developed (or the HRD systems have not yet had an impact), and the business linkages of all the systems are weak. The organization should therefore try to ensure the business linkages of the HR systems. The ROI on HR is weak.
TABLE 11.1 HRD score card of Firm X
A great deal of work has been done in India on the use of the HRD audit as an organizational development (OD) intervention. This is a unique feature of Indian organizations. Experience in initiating OD, with the aid of the HRD audit, has shown the following results (see Ramnarayan and Rao 2011):
These results indicate that an HRD audit is cost-effective and affords many useful insights into how a company’s performance can be improved. While various methods like individual and group interviews, workshops, questionnaires and observation can be used as tools, the success of the audit depends on the efficiency of implementation in the post-audit phase.
There are at least two cases of HRD audits that have not yielded any results. In a certain company, the HRD manager was very enthusiastic about getting the HRD audited. The audit report indicated that the state of the company’s HRD was very poor indeed. The staff competencies were rated as poor, the practices were questioned and improvements were suggested. The benchmarking data also indicated that this company was one of the poorest performers in terms of HRD, although in terms of profits it was a leader. Though the audit began with an interview with the CEO, no opportunity was provided to the auditors to make a presentation to the CEO. As a result, the audit report did not receive any attention and the auditors considered the effort a waste.
In another company, the top management commissioned the audit, but got busy with the reorganization of one of the company’s critical marketing functions. In the process, and due to market competition, all the energies of the top management and the HR staff were diverted to the new organizational structure and they did not have an opportunity to learn of the audit’s findings. The auditors felt that some of the audit findings were directly related to business improvements, in terms of the very reorganization the company was planning. But the auditors were unable to engage the attention of the top management. The effort did not result in anything concrete.
These two instances make it clear that the following processes in the HRD audit have the power to initiate and manage change:
M. G. Jomon conducted a study to identify factors influencing the use of audits as tools for change. He studied four organizations that had been audited. They were studied about three to four years after the first audit in 1993–94 (Jomon 1998). He tried to assess how the following variables had influenced HRD audits:
Jomon’s study indicated the following in each of the four companies:
Soon after the audit in 1993, in Organization 1, the management held a number of meetings and a final action plan was formulated. Though the action plan covered HRD at the policy-making, operational and departmental levels, and contained a joint action plan for the HRD training department, both the reports and the plan were kept confidential. The following changes were effected as a result of the audit exercise:
The audit in Organization 2 was conducted in 1994. The situation in 1997 was as follows:
The first audit in Organization 3 was conducted in 1993. A management council meeting was organized to discuss the strengths, weaknesses and recommendations of the audit. Strategic issues related to HRD were also considered at this juncture. The status in 1997 was as follows:
In Organization 4, some of the weaknesses highlighted by the audit in 1994 were as follows:
Once the HRD audit report was submitted, the HR chief called all the managerial staff for dinner and presented the findings. Based on the discussions, an action plan was drawn up that, after implementation, brought about the following changes:
The key findings of the study were as follows:
However, the following organizational characteristics did not seem to have any relation to the utilization of audit inputs or the effectiveness of the HR function:
In fact, in one company, though the HRD department was small and inadequately staffed, the utilization of the HRD audit and its positive effect on HRD practices was high chiefly because of the high competency level of the HRD staff.
The following are some of the organizations in India that have done an HRD audit: Aditya Birla Group, Rajashree Cement, Vikram Cement, Hindalco, Indo-Gulf Fertilisers, Gwalior Grasim, Harihar Fibres, L&T, Crompton Greaves, Gujarat Guardian, Gujarat Gas, Apollo Tyres, Alexandria Carbon Black, Godrej Soaps, GVFL, BPL, Tyco International, Gati Cargo Management Services, Wockhardt Hospitals (Bangalore), Fluent Technologies and Neterwala Group of Companies.
TVRLS offers a certificate education programme in HRD audit. The certificate is intended to prepare candidates to be internal or external auditors. The HRD audit course is meant for those HR executives who already have the qualifications necessary to be HR managers and want to strengthen their competencies.
An HRD audit does not start out intending to be an OD tool. But by virtue of its diagnostic and participative methodology, it seems to work as a change management tool. The interview methodology with its comprehensiveness and the audit methodology that insists on beginning and ending with the top management’s involvement—both have a high potential for initiating processes of change. The audit could be further refined as an OD tool. The audit process involves all the HRD staff and a large number of managers, and makes them conscious of areas where improvements are needed. An HRD audit is needed for realigning and rejuvenating the HR function in any company. It is increasingly likely to become a tool of self-renewal for the HR function.
A manufacturing organization with a 1,500 crore turnover is manned by 3,000 employees. Of them, 500 are managerial staff. The total people cost of this company is 155 crore. Table 11.2 shows the break-up of the people cost.
TABLE 11.2 People cost in a manufacturing organization
If the HR audit costs 10 lakh, including the auditor’s fee and cost of travel and stay, what kind of long-term and short-term benefits are expected with an investment of 10 lakh? Justify financially that your investment in the HR audit is likely to give many times the return.
If three of the junior managers (with an annual CTC each of 8 lakh) do not have the competencies required to perform any productive HR job (as they are not sufficiently qualified) and the HR audit points out this weakness, how much should the company be willing to invest in their training to start receiving returns within one year?
If the audit has indicated that 30 per cent of the senior managers resist change and are proving to be bottlenecks in introducing innovations that could make the company go global, how much do you think the organization should invest in giving them a global exposure and with what benefits?
If a strategy consulting firm has suggested to the company that with the right strategies the company can double its turnover in the next three years, how much do you think the company should invest in building the strategic competencies of the top management?
Jomon, M. G., 1998, The Effectiveness of HRD Audit as an OD Intervention, Thesis submitted to AHRD-XLRI Fellow Programme in HRD, Jamshedpur: XLRI.
Ramnarayan, S. and Rao, T. V., 2011, Organizational Development: Accelerating Learning and Transformation, New Delhi: Respone Books (forthcoming).
Rao, T. V., 1999, HRD Audit, New Delhi: Response Books.