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Management 5984Strategic Human Resource Management

Spring, 2006

Verizon Communications, Inc.: Implementing a Human Resources Balanced Scorecard



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Overview

This study discusses the four “Perspectives” specified in Kaplan’s and Norton’s

Balanced Scorecard framework, focusing on their implementation at GTE

4)

.

Subsequently the efficiency of Garret Walker’s and Randall MacDonald’s internal

communication strategy is evaluated and in the final chapter a summarizing conclusion is

provided.

Introduction

In 1996, J. Randall MacDonald, Executive Vice President of Human Resources at the

GTE Corporation was facing the challenge to create an HR strategy supporting GTE's

workforce through a major business transformation. Moreover Charles R. Lee, GTE’s

CEO wanted to know what the company was actually getting back for the money spent

on various HR related activities.

The main problems for GTE and other American based telecommunication

companies were high employee and customer turnover rates and the declining quality of

customer service. A tight labor market made it difficult to find qualified people. There

was no system in place at GTE to measure employee’s performance and MacDonald

realized that a quantitative model was needed, showing whether the HR department’s

activities contributed to the company’s financial goals. Balanced Scorecard, a conceptual

framework to measure a company’s performance, utilizing financial and non-financial

measures was selected as a method to quantify “intangible realities” at GTE.



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The Balanced Scorecard Perspectives

One of the main challenges for GTE’s Planning, Measurement and Analysis (PMA)

group, the project team responsible for the implementation of Balanced Scorecard, was

defining the right measures to evaluate the performance of GTE’s human capital. Using

feedback from the business presidents, the PMA group and the HR measurement core

team defined 118 measures, organized into four “Perspectives”, (i) a strategic

perspective, (ii) a customer perspective, (iii) an operations perspective and (iv) a financial

perspective.

The Learning and Growth Perspective

The “Four Perspectives” implemented at GTE deviated from those defined by Kaplan

and Norton4)

. Instead of using the “Learning and Growth Perspective”, intended to create

a climate that would support organizational change, innovation and growth, a “Strategic

Perspective” was selected. GTE thought that “Learning and Growth” would be embedded

in all of the four perspectives. Interestingly, GTE’s HR Balanced Scorecard and

associated measures did not provide any indication that continuous learning and the

creation of an environment that fosters growth and organizational change were actually

embedded in any of the four perspectives. Moreover, the case provided no evidence that

organizational or cultural change accompanied the implementation of Balanced

Scorecard at GTE.

The “Four Perspectives” defined by GTE HR should have encouraged “Learning and

Growth” and the creation of a climate of action, introducing the cultural shifts needed to



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motivate, empower and align the workforce behind GTE’s attempt to adapt to the

changed business environment. The degree of readiness for a culture of “Learning and

Growth” is reflected in the willingness of a company’s employees to improve and change

the processes, followed to perform daily work routines. Measures to evaluate the

workforce’s readiness should have been the number of proposals, submitted by GTE

employees suggesting work flow improvements, and also the number of proposals

actually implemented.

The Customer Perspective

Kaplan and Norton defined the “Customer Perspective” as a strategy for creating

value and differentiation from the perspective of the customer. For example Fannie

Mae’s Operations and Corporate Service division (OCS), implementing Balanced

Scorecard, had intense discussions about the “Customer Perspective”, primarily focusing

on identifying who its customer actually was4). As an internal support organization OCS

had internal customers. Nevertheless OCS decided to explicitly recognize how it

provided value to external customers. The “Customer Perspective” selected at Fannie

Mae consequently included internal and external customers4). In contrast, the “Customer

Perspective” defined at GTE did not consider external customers but only focused on

internal customers, that is, GTE employees. As a consequence the measures associated

with GTE’s “Customer Perspective” did not include any data reflecting the perspective of

the company’s external customer base, indicating that GTE HR was not interested in

measuring the impact of HR activities towards the company’s main, if not only revenue

contributor.



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To better understand the value that implemented HR activities, focusing on call center

staff provided to external customers, HR should have considered external customers in

their “Customer Perspective”. Measures like illustrated in table-1 should have been

introduced to evaluate the satisfaction of GTE customers with the support and help

provided by call center employees.

Measures to quantify the quality of GTE customer support

Percent of support calls escalated to support representative’s supervisor (all calls are recordedand can be used as evidence).

Percent of support calls where customers provide praise to support representative (all calls arerecorded and can be used as evidence).

Percent of support calls that are rated “excellent” (without the knowledge of the supportrepresentative, support calls are conducted by a 3’d party, hired to evaluate the quality of GTE’scustomer support).

Table 1 Measures to quantify the quality of GTE’s customer support

For example understanding the relationship between the costs to improve call center

employee workplaces and the percentage of GTE customers that escalated support calls

to a supervisor would have helped HR to find out, whether the workplace improvement

initiative provided value to GTE customers. In case there would have been a strong and

negative correlation between these two measures, HR could have used this insight as a

leverage to broaden the workplace improvement activity and could have proved to the

CEO, what he was actually getting back for the money spent for this HR initiative.

The Financial Perspective

Regardless of conflicting views at GTE HR about whether a direct relationship

between the performance of non-financial measures and financial outcomes could be



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established, Garret Walker and Randall Mac Donald thought that Balanced Scorecard

would ultimately provide a reasonably close link to GTE’s profitability.

Reducing employee turnover

In 1998, HR started an initiative to reduce the high employee turnover rate in the

company’s call centers. A subsequent calculation provided by HR demonstrated that the

reduction of employee turnover by one percent saved the company $23.60 million. The

costs for hiring and training were used as a base for this calculation. Mainly through exit

interviews, a lagging indicator, HR found out that the number one factor for employees to

leave the company was work environment related. As a response, the size of the cubicles

that people worked in was increased and some of the computers were upgraded.

Surprisingly, the cost savings calculated by HR did not consider the expenses for

improving the work environment. A simple calculation approximates what these costs

might have been. The base assumptions for our cost estimates are that the upgrade of one

computer costs $2,000 and the enlargement of one cubicle costs $1,000. The cubicle

enlargement costs include labor and material and the costs to purchase additional work

space. Computers are upgraded for half of the workplaces that are enlarged.

1,000 Workplaces 5,000 Workplaces 10,000 Workplaces

Computer upgrade $1,000,000 $5,000,000 $10,000,000

Cubicle enlargement $1,000,000 $5,000,000 $10,000,000

Total $2,000,000 $10,000,000 $20,000,000

Table 2 Sample calculation: Costs for improving employee workspace

As table-2 shows, the costs for improving workplaces are considerable and should not

have been neglected. In case workplaces for 10,000 employees - roughly 10% of GTE’s



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workforce - would have been upgraded, the expenses would have almost matched the

cost savings calculated by GTE HR. The fact that these expenses were not included in the

cost saving estimates demonstrated that GTE HR either tried to make the outcome of

their activity look better than it actually was, or that HR was not familiar with finance

related business aspects, or both.

Increasing shareholder value

The PMA group conducted an effort to establish linkage effects between HR related

efforts and financial outcomes. This activity should demonstrate how improving an

employee engagement index would lead to improvement in internal quality, which in turn

would lead to improvements in customer service indices and ultimately to increases in

market share and shareholder value. The associated GTE HR Linkage Model, meant to

explain how HR initiatives contributed to shareholder value, and related measures like

“Total Shareholder Return” could not describe the actual relationship between HR

activities and shareholder value. Table-3 shows two measures that could have been

linked to help understanding the relationship between HR activities focused on customer

service employees and shareholder value.

Linkage between HR activities and share holder value

Training costs per call center employees

GTE customer turnover rate

Table 3 Linkage proposal

Once data for the measures illustrated in table-3 would have been collected over a

period of one year, regression analysis could have been used as a tool to evaluate the

correlation between these two measures. In case of a strong and negative correlation, a



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subsequently conducted analysis would have shown, whether the extra profits gained by

lowering the customer turnover rate were actually higher than the additional training

costs for call center employees. If yes, GTE HR should have continued this activity and

should have evaluated how the training quality could have been further improved.

Otherwise this HR activity should have been reassessed and potentially stopped because

it did not provide any measurable shareholder value.

Communicating Balanced Scorecard results

The data for all the customer perspective measures came from employee opinion

surveys, questioning one-twelfth of the employee population each month. The company

was experiencing a 15% to 20% response rate for these monthly surveys. Considering

that on average only 15 to 20 out of 100 employees responded it is questionable, whether

the data used to model the “Customer Perspective” actually represented underlying

realities. The low survey response rate also questions the success of the PMA group’s

communication strategy, considered as key to success. By sharing PbViews with more

employees and not just with HR staff and the business presidents, the employee survey

response rates could have been increased, because GTE employees would have better

understood the reasons for HR to conduct these surveys.

The PbViews software was considered as appealing because it got one hundred hits a

week. Taking into account that PbViews was provided to all 2000 HR employees this

means that per work day 20 HR employees or 1 % of all HR employees, not counting the

business presidents, used the PbViews software. A daily usage rate of 1% can not be

considered as “appealing”. Instead it shows that even within the HR department the



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support for the Balanced Scorecard implementation was low. This is another indication

that the business rationale for implementing Balanced Scorecards what poorly

communicated inside GTE.

Cardinal Health implemented a highly successful and very effective communication

program. Introducing “Learning Maps”, the company helped its employees to better

understand the concepts of its workforce strategy3)

. The maps were simple and easy to

understand, providing visual representations of concepts and ideas focusing on topics like

(i) the rapidly changing market place, (ii) the company’s response to the changed

environment and (iii) how Cardinal Health created value for its shareholders3). GTE HR

should have adopted the concept of “Learning Maps” to communicate the reasons for the

implementation of Balance Scorecards to all employees. As a consequence, more workers

would have understood the reasoning behind this HR initiative and broader support

would have been ensured.

Conclusion

The implementation of Balanced Scorecards at GTE was capable to quantify the

activities conducted by the HR department and was useable to measure the quality of HR

services provided to GTE employees. However implemented measures and associated

linkages were not sufficient to quantify the contribution of HR initiatives to share

holder’s value. To foster broader adoption, the underlying rationale for the

implementation of Balanced Scorecards should have been better communicated to all

GTE employees, as suggested. The Telecommunications Act transformed the regulated

world of protected markets and established profit margins into a turbulent and highly



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competitive business environment for the telecommunications giant. Organizational and

foremost cultural change would have been required to successfully adapt to the new

business climate. To create an environment that would have promoted change, innovation

and continuous improvement, more aspects of the “Learning and Growth Perspective”

should have been injected into GTE’s linkage model.

Every journey begins with a first step. The implementation of Balanced Scorecards at

GTE is considered a move in the right direction. Nevertheless, GTE HR had still a long

way to go.



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References:

1. Verizon Communications, Inc.: Implementing a Human Resources balancedScorecard, Jeremy Scott, 2001, [HBS 9-101-102]

2. Ulrich & Brockbank (2005). The HR Value Proposition

3. The Workforce Scorecard, Mark A. Huselid, Brian E. Becker, HBS Press, 2005,ISBN 1-59130-245-4

4. The Strategy Focused Organization – How Balanced Scorecard companies thrive inthe new business environment, Robert S. Kaplan, David P. Norton, 2001, HBS Press,ISBN: 1-57851-250-6

5. Designing and Implementing an HR Scorecard, Garrett Walker and J. RandallMacDonald, Human Resource Management, Winter 2001, 2001 John Wiley & Sons,

Inc.

6. Fundamentals of Corporate Finance, Ross-Wester-Jordan, McGraw Hill, ISBN 0-390-5799-7

7. Data Analysis and Decision Making, Albright, Winston, Zappe, ThomsonBrooks/Cole 2003, ISBN 0-534-38367-X

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