Human Resources
Thought Leadership

Ask Our Expert: Transforming HR in China

We've asked several Hewitt associates to answer questions about positioning Chinese companies for global success through HR. If you'd like to ask a question about this topic, or about any other pressing human resources challenge you might be facing, e-mail us. We'll share responses to select questions on a regular basis.

Fueled by a 10-year period of explosive growth, China has successfully flexed its economic muscle and transformed its role in the global economy. Today, China has expanded beyond manufacturing and emerged as a formidable player in the information age, adding software, hardware and service solutions to its well-honed manufacturing capabilities. No country has successfully undergone such a radical transformation in such a short period of time.

The fast pace of growth and change brings with it unique challenges — particularly for the Human Resources (HR) function. To keep up with rising business demands, the HR function in China has begun undergoing a transformation of its own.

Hewitt has been working with Chinese companies for almost 20 years and is recognized as the leading HR Consultancy in China*. We provide a wide range of consulting services to State Owned Enterprises (SOE), Privately Owned Enterprises (POE) and multinational companies doing business in China.

Hewitt recently helped a large global technology company (POE) begin the HR transformation process in what is the largest HR transformation project ever undertaken by a Chinese company. The company has experienced explosive growth, tripling in size over the last five years, causing a number of organizational growing pains and opportunities, particularly within HR.

To share our perspectives, we've assembled a group of experienced Hewitt consultants with extensive expertise in helping companies transform HR in China:

Jenny Li - China Market Leader
Piotr Bednarczuk - China HR Effectiveness and Corporate Transactions Leader
Sharon Li - Senior Consultant
Matt Badger - Principal and Senior Consultant
Pete Sanborn - Global HR Effectiveness Leader

The following Q&A is a collection of their thoughts on the evolving role of HR and how it can deliver greater value to the business.

Question: How has HR's role changed over the past 10 years?

Answer:
Jenny Li: The first wave of HR transformation really began in 2000, as Chinese companies began to realize the importance of people management systems, talent attraction and retention. A number of Chinese companies went public in 2001, and companies began focusing on HR program design.

The second wave of HR transformation occurred between 2006 and 2008, and was focused on program implementation. More Chinese companies expanded, and the movement of talent across various industries grew common. This period also saw the rise of a more performance-driven culture in China. Today, Chinese university graduates have a wide array of opportunities at SOEs, POEs and multinationals.

We're currently in the midst of the third wave, which is focused on business performance improvement, product and employer branding, and attracting a more diversified, mobile, global workforce. In the future, we expect to see the HR function move into driving the business planning and strategy process. Weathering through the downturn, business leaders from Chinese companies fully accept the fact that the ability to attract, motivate and retain top performers has moved beyond a mere catch phrase to being the key to competitive survival and a critical differentiator in future business success. They now focus more on alignment between their customer and investor value propositions and the capabilities that exist in the organization. And they pay careful attention to how the organization harnesses the knowledge and creativity of the diversified workforce.

Pete Sanborn: The role of HR is definitely evolving. Historically, HR in China has been viewed primarily as an administrative role, and it wasn't even considered a true profession. Today, HR is beginning to be seen as a critical role as China migrates from a manufacturing to an information economy. Company leaders now recognize that they need to think more strategically about talent. More companies are focusing on attracting and retaining the right high-quality talent in the organization — providing HR with a real opportunity to drive value.

Question: What is the primary role now of HR in China?

Answer:
Piotr Bednarczuk: In general, Chinese business is more mature than the HR function in China. HR has a great opportunity to not only provide incremental value, but to play an important role in transforming and globalizing the business. For example, while Chinese companies have been very successful to date, there are currently few global Chinese brands. Most Chinese companies have global aspirations, and we are seeing many Chinese companies setting up their operations on a global level. This creates new challenges and opportunities for HR. Executives are beginning to realize the cost of not strengthening the HR function. They realize that a weak HR function could impede future growth.

Sharon Li: Human capital in China is growing increasingly important, giving HR a larger role in the business. In the past, leading companies were profitable due to a good opportunity, the right strategy, or a special relationship. As the market matures, companies will compete based on the quality of their human capital.

Question: How does Chinese senior management typically view HR?

Answer:
Sharon Li: That depends on the company, but one way to get a sense of how senior management views HR is to look at the percentage of senior HR leaders that have a seat at the management table. Currently, about 30 percent of HR departments are part of the senior management team; the remaining 70 percent define their role primarily through service and administration, making it more challenging for them to be viewed as strategic.

Piotr Bednarczuk: What sets those 30 percent of strategic HR departments apart is that senior management is taking a broad look at the business and seeing their organization's limitations, possibly for the first time. As soon as corporate leaders recognize the potential impact that their HR function can have on future growth, they immediately want to help HR evolve and actively drive that change.

Question: What can HR do to become more of a business partner?

Answer:
Piotr Bednarczuk: First, HR has to get out from under the mountain of administration they perform and provide greater value to the organization. That's easier said than done, but HR transformation is an increasingly popular topic at Chinese companies, and we've helped many of them do just that. It's extremely difficult to be proactive when the administrative demands placed on HR continue to escalate, but HR needs to dig deep and transform their role in the organization, implementing a clearer division of tasks between Centers of Expertise, Business Partner and Shared Service Center functions, supported by investing in technology platforms and outsourcing solutions that can free their team to be more strategic. Without the room to do strategic work, HR will never be included at the management table.

Jenny Li: HR cannot transform itself — it needs the support of senior management. HR transformation is much more successful when the executive suite is a champion and sponsor. In addition, HR professionals need to have stronger business acumen.

One of the other keys to success comes down to shifting the organization's mindset. Once business leaders understand how HR can contribute to improved business performance, they invest in transforming HR into a value-generating center. It's about providing greater value — not more programs.

Question: How do the HR trends differ between SOEs and POEs?

Answer:
Jenny Li: It's difficult to generalize since there are marked differences across industries. We have seen some SOEs with very advanced management teams and some POEs that are not as globally focused as you might expect. China has a history of preparing their industries for success and then opening them up once they can compete effectively on a global stage.

Sharon Li: Although both sectors have much in common, in my experience, SOEs tend to be more focused on system-related HR issues, such as transforming HR systems to be more performance and market driven. At POE's, HR tends to be more focused on workforce-related issues, such as talent acquisition and leadership development.

Question: What are the HR implications of the increasing globalization of Chinese companies?

Answer:
Pete Sanborn: As in many other areas in the world, Chinese companies are rapidly globalizing; and as they globalize, they need to hire, retain and engage people on a global level. That fact is leading them to think much more strategically about employment, policies, and their overall employer value proposition. They are recognizing that their reputation as a great place to work is a key business advantage. They need to make talented people feel like they are a part of the company, regardless of their location.

Sharon Li: This means that HR programs, policies and infrastructure need to support globalization. In early stages of globalization, expatriate programs need to be carefully designed to motivate Chinese employees working abroad. Also, having a global leadership program is critical to improving the global view and cross-cultural management skills of the leadership team. Later on, before localization becomes the top priority, HR policies, programs and the employer brand need to work together to attract, retain and motivate local talent. Finally, the HR infrastructure (including the HR governance model, roles, structure, processes and systems, etc.) should meet local needs, while simultaneously ensuring global consistency so that HR can enable the company to be truly global.

Piotr Bednarczuk: To compete globally, Chinese companies will need to build stronger brands internationally, and that will require hiring a global workforce, creating a company culture that embraces different points of view and translating Chinese values into an international setting. HR can play a significant role in creating that culture and establishing the policies and procedures that support a truly global enterprise.

Question: How will the increase in M&A activity in China affect HR?

Answer:
Piotr Bednarczuk: Until recently, most growth was organic. But now, we're beginning to see more deals. One example that comes to mind is the acquisition of Volvo by the Zhejiang Geely Holding Group. In that deal, they saw an opportunity to acquire a global brand, technology and know how. The Chinese clearly have their sights set on establishing their own global brands, and we expect to see them acquire more global companies in the future, which will create new challenges and opportunities for HR.

Pete Sanborn: Chinese companies that are "flush with cash" are now acquiring large global firms. HR will play an important role in conducting the due diligence, setting up the organizational structure, and managing the organizational integration.

Question: How will the war for talent and growing skill shortages affect HR's priorities?

Answer:
Matt Badger: Talent — or the lack of available skilled talent — will inhibit the growth of Chinese companies. The global pool of skilled talent is limited and Chinese companies will compete globally for this critical talent. This is leading to a rise in turnover, which negatively affects the bottom line. As a result, talent attraction and retention has become a corporate priority and organizations are realizing that investing in HR transformation can help them gain a competitive advantage.

Jenny Li: We see skill shortages across China in key skill areas, such as leadership and managerial talent. Developing and attracting the best leaders and deploying them for the right situations will be a huge challenge. Chinese companies need more and more leaders who can run a global business, understand the differences in leadership rhythms through different market conditions, inspire a diversified workforce with a clear vision and defined expectations, and who can always see opportunities and can challenge assumptions.

Weathering through the downturn, leaders in Chinese companies had a stronger bias for developing talent and organizational capability. The war for talent will intensify during the recovery. Business leaders realize that future profitable growth relies on a seamless human capital supply chain to ensure the organization has a ready supply of key capabilities. Recently, a large number of our projects have been talent and capability related, ranging from helping organizations conduct strategic workforce planning by redesigning the sourcing, assessment, selection, and on-boarding processes to key talent retention and engagement. Developing critical management capabilities to fulfill domestic and global growth aspirations is another hot need in the market.

Piotr Bednarczuk: Increasing labor costs are beginning to cause pain for Chinese companies. The era of cheap labor that once gave China a competitive advantage is coming to an end, and workers are going on strike as they seek higher pay. China is moving away from being the low-cost provider, and now focusing on automation and value creation. Chinese companies are beginning to recognize the need to be more efficient and effective with the current talent in place.

Question: How does HR maximize its value within China today?

Answer:
Pete Sanborn: First and foremost, HR needs to get the fundamentals down and build a strong foundation, including efficient HR processes, a solid technology platform and HR shared services. Traditionally Chinese companies have added people to fix inefficiencies, rather than identify the needed outcomes and develop the needed HR processes and capabilities. Once the fundamentals are mastered, HR can provide on-going value by supplying the right talent and engaging and developing the talent needed to make their organizations successful.

Sharon Li: Until recently, most Chinese companies have typically hired new graduates from universities, and then promoted them from within. These graduates tend to be younger and less experienced than their counterparts in other countries, and HR therefore needs to be able to provide strong training and development to help them evolve.

Now, many of these companies are also recognizing the need to hire more experienced professionals, and that need places different demands on HR and the employer brand. HR can increase their value by addressing these demands.

Question: What do you see as the greatest challenges that HR has to overcome to make a bigger business contribution in China?

Answer:
Jenny Li: One of the biggest challenges is the lack of skilled HR talent. Organizational Development professionals are currently in very high demand, and it will take some time for the supply of skilled HR professionals to catch up.

Pete Sanborn: In addition, HR needs to build greater depth in business acumen, and HR functional knowledge particularly employee engagement and total rewards. HR also needs the consultative skills and the ability to translate business issues into HR issues.

Matt Badger: Another challenge is the sheer speed with which all of these changes are taking place. That speed can be distracting, and many companies still need to focus on mastering the basics.

Question: Are there any other learnings you'd like to share?

Answer:
Jenny Li: Addressing the HR component early on is a key driver of success. The right time to address HR transformation is when companies are putting their business globalization plans in place, not after the plans are completed. Companies need to remember to think about the HR implications.

Pete Sanborn: China is a very complex and multi-layered culture, and it takes time to understand how business operates. While it is a long process to win senior management's trust, once you build that trust, my experience is that it is a longer-term trust than is typical in many Western companies.

Piotr Bednarczuk: Listening and taking the time to truly understand the business and HR context is essential. The thinking is much more logical and sequential, and managers are looking for proof every step of the way. At the same time, Chinese companies are very nimble. They are thirsty for knowledge and implement very fast once they've made a decision.

* Hewitt named as Consulting Firm of the Year for Talent Management (ChinaSTAFF, 2007, 2008 and 2009)