HR takes center stage: in the age of intellectual property battles, this long-overlooked corporate function is becoming a critical weapon in the arsenal.

'He's not a backroom, second-chair member of the staff," says Robert Nardelli, referring to Dennis Donovan. The first executive Nardelli hired "after becoming the president and CEO of The Home Depot in December 9000, Donovan makes presentations at every board meeting, gives quarterly progress reports to financial analysts and regularly sits down with suppliers to describe the company's latest processes and planning.

It would be easy to mistake him for a chief operating officer--after all, his responsibilities reach every corner of the company. But Donovan's title is "executive vice president of human resources." And his role--an amalgam of company ambassador, personal confidante and self-described "chief change officer"--represents a profound shift taking place in C-suites across the country.

HR is finally garnering respect in companies of all sizes and across many industries. "CEOs and boards of directors are learning that human resources can be one of your biggest game-changers in terms of competitive advantage," says Donovan. His boss is counting on it." The success of the strategy rests in people's execution," Nardelli says. "That's why the HR manager has to be an equal partner at the strategic table."

CEOs have long parroted the cliche: "Our people are our greatest asset." But when the economy sours, those assets often become the first costs to he cut. So why now are CEOs finally walking the walk?

One reason is that competitive advantage is increasingly vulnerable. Patents in technology used to give companies an edge. Then it was the sales and the marketing behind the technology that boosted their batting average. Then the Internet leveled the playing field by offering easy access to intelligence across the globe. "The one thing competitors can't quickly access is the brains of your work force," explains Susan Meisinger, president and CEO of the Society for Human Resource Management in Alexandria, Va. "The skill sets .your people can bring to the organization are much more likely to be a differentiator than they were in the past." In other words, the right people increasingly do represent an organization's competitive edge.

At the same time, sophisticated data-collection systems and a variety of statistical methods are enabling companies to measure the return on investment of their specific HR practices. CEOs now have quantifiable measures of what had once been mostly anecdotal evidence, comparison to industry benchmarks and flat-out guesswork.

They also have findings such as the Gallup Organization 2002 analysis of 309,000 employees across 11,000 business units in 51 companies throughout 23 industries directly linking employee engagement to financial results. According to Curt Coffman, global practice leader for Gallup's Workplace and Customer Consulting, highly engaged business units boast an employee-retention rate 1.44 times higher than the average, productivity levels 1.5 times higher, customer outcomes 1.56 times higher ant profitability spiking 1.33 times the norm.

And in July 2003, Mercer Human Resource Consulting published a survey of 300 U.S.-based organization: showing 88 percent believed their human capital strategy was linked to their company's business strategy. "This means a whole new era for managing the work force," says Dave Kieffer, leader of the strategy group at Mercer.

Technology has transformed HR in another way. Many of the mundane operations that once relegated the HR director to being a custodian of such administrivia as defined contribution and benefits administration, health ant welfare benefits, and relocation services can now be outsourced, freeing up time to concentrate on strategic functions, such as recruiting and retaining talent, training and development, organization design and execution. "The new line is making sure people strategies are aligned with the business strategies so you can execute and get to where .you want to go," says Meisinger.

Teaching a company to fish

Wim Roelandts is a believer. The CEO of Xilinx, a San Jose, Calif.-based technology company, Roelandts likes to quote the Chinese proverb that says, "Give a man a fish and he will eat for one day. Teach a man to fish and he will eat for the rest of his life." Roelandts thinks HR can teach an entire company to fish: "The role of HR is not to do the job of management; the role is to improve the quality of management so they can do a better job."

At Home Depot in Atlanta, Donovan and Nardelli couldn't agree more. "Effective leadership is the common denominator in overall performance," says Donovan. "If I had a buck, I'd spend 99 cents on picking great leaders."

As a result of a 75-question survey that went out to 276,000 Home Depot employees--and sparked an 81 percent response rate--Donovan was able to link the turnover rates of store managers with the financial performance of the store. This was especially important because, Donovan recalls, "When we did the first HR review, we found we were changing store managers like people change underwear."

At the same time, Home Depot was facing a crippling shortage in its work force. With 200 new stores opening every year, 40,000 new employees had to be found, placed, trained, monitored and evaluated. Add in a 30-percent turnover rate of the existing 515,000 employees and that number of new hires nearly tripled.

In response, Donovan created a learning forum for store and district managers and within five months put 1,800 leaders through a full week of learning--for to any of them, their first experience in learning to develop strategy and operating plans. He instituted a formal two-year rotational program for assistant store managers, an executive leadership program for senior staff" and a learning curriculum for the entire company. He oversaw the centralization of Home Depot's enormous merchandising operations. In 10 weeks, he hired 1,300 HR professionals, upgrading the job from an hourly rating to the equivalent of an assistant store manager, eligible for bonus and stock options. That alone, he says, "was probably worth a penny a share."

The rule of thumb is that it costs a retail company between $2,000 and $8,000 to retain each employee over his or her tenure with the organization. Whenever someone leaves, that's essentially a lost investment. Between 2001 and 2002, Home Depot's new initiatives reduced the attrition rate of full-time hourly employees by more than 7 percent. Between the first quarter of 2002 to the first quarter of 2003, voluntary attrition further declined by 47 percent. "The more Dennis succeeds in reducing that turnover, even if it's by a percent a year, that goes right to the bottom line," says Nardelli.

A similar goal is shared by Larry Jolmston, CEO of Albertson's, the Boise, Idaho-based $8.9 billion supermarket chain, and his executive vice president of human resources, Kathy Herbert. "Kathy and her team drive the human capital side of the business," says Johnston, who like Nardelli is a General Electric veteran. "They are at the center of everything we do."

In an industry already infamous for its minuscule profit margins, Herbert's challenge is to unify what she terms "the mishmash of cultures" of Albertson's multiple chains to stand up to competitors like Wal-Mart. Herbert has revamped the review process and implemented training and mentoring initiatives, succession plans and other programs aimed at attracting, recognizing and retaining top talent. "The grocery business is not highly sophisticated," says Herbert. "Anybody can sell beans and com and beets. In my mind, it can't be differentiated except by its people."

Johnston and Herbert make an unlikely pair on their early morning walks in Boise, where the company is headquartered. Johnston ducks at anything under 6'7"; Herbert barely creases 5'2". But they see eye-to-eye on so many issues that Johnston regularly turns to Herbert for advice. "She has the guts and ability to walk into my office, close the door and tell me anything," says Johnston. "She can say, 'Hey, the way you handled that was great' of 'You can't do that again.'"

Herbert draws on an intimate knowledge of the business, having started as a bagger and checker at age 16, before moving up through store director, buyer and category manager before switching to HR. That hands-on experience helped an outsider like Johnston.

At Xilinx, Roelandts also looks to his HR director for analysis, not just of his own conduct but of the company's as a whole. Roelandts schedules the same bi-weekly one-on-one meetings with Peg Wynn, vice president of worldwide human resources, that he conducts with the test of the senior management. "Her specific role is to say, 'Hey, wait a moment, is this compatible with the culture?'" he says. "Ultimately, I'm the decision-maker. But generally if she says she's against it, we won't do it."

Staying true to the company's culture was even more critical when the recession hit Silicon Valley. Because Xilinx designs and markets silicon chips but does not manufacture them, three-quarters of its 2,600-plus employees ate "knowledge workers." Last year, Xilinx posted revenues of $1.3 billion. "When I was at Intel and we became a billion-dollar company, we had 10,000 employees," recalls Wynn. "There's a huge value-add per employee [at Xilinx]."

Layoffs, while considered, were a last resort. "Most of our people are working on future business," explains Roelandts, who calculates that losing a trained engineer costs a quarter of a million dollars in lost intellectual property alone. "If I cut them off, I would impact my future."

Roelandts saw the recession as an opportunity to become a stronger company--but success would depend on an HR strategy focused on employee retention. Wynn responded with forced vacations, a year-long sabbatical program that paid employees a small stipend if they went to school or worked for a nonprofit organization and salary reductions. The lowest-paid workers suffered no pay cuts while Roelandts' salary was slashed by 20 percent and his bonus eliminated.

The cost-cutting program lasted eight months and saved the company more than $56 million. It also achieved Roelandts' goal. "From a revenue point of view, we became larger than all the other companies in our field combined," he says. Market share also soared: In 2002, Xilinx boasted nearly 50 percent of the programmable logic device market share, up from 50 percent four years earlier.

Chief of hypergrowth management

While HR helped Xilinx succeed in a market contraction, at Washington Mutual, chairman and CEO Kerry Killinger relies on his HR director, Daryl David, to manage fast growth. The Seattle-based financial services company has made seven acquisitions since 2000 and, says Killinger, "Daryl is at the table every time we talk about a potential acquisition and any other growth initiative." David sees his role in simple terms: "We in HR exist for only one reason: to increase the organization's capability." In the case of an acquisition, he explains, "HR gets in as early as anyone in the process because so much of what we buy is people. It isn't factories or vehicles--it's talent." Because key people can take severance pay or another job, David's concern is, "Are you paying for talent that won't be there six months after the deal?"

With a good cultural assessment process, Washington Mutual can identify potential problems during the predeal due diligence. "We're on the front end to ensure that we don't buy the wrong company and can begin the integration planning months ahead of the need to implement it," explains David. "We're trying to get to 'the ideal deal'--the combination of rewards and processes that create the utmost employee commitment and engagement."

And it's not just "the ideal deal" of today that HR directors must consider. "We spend a lot of time thinking about today's organizational structure and how it ought to look tomorrow and five tomorrows from now," says David. "You have to marry up the talent you have with the talent you think is coming and the talent you need to find."

In the final analysis, companies are elevating the HR role because it helps them make money and raise their stock price. It's no secret that the list of America's 100 best public companies to work for, as ranked by the Great Places to Work Institute, has consistently outperformed the major stock -ndices. Furthermore, Laurie Bassi, CEO of Human Capital Capability, an Alexandria, Va.-based benchmarking company for human capital measurements, found that from 1997 to 2001, four hypothetical portfolios of between 19 and 41 of the firms that made the largest investments in employee development each year subsequently outperformed the S&P 500 index by a factor of two in the year following the training investment.

That's why savvy companies like Home Depot have their HR managers meet regularly with analysts. "At the beginning, I think they wondered what the hell was going on," Donovan recalls. But as he described HR's role in building a high-performance work force, ah attitude adjustment took place. Now, Donovan concludes, "I think they understand the value-add for human resources in our equation." So, too, do more and more CEOs.

HR's Impact on the Bottom Line

Organizations that have a documented HR strategy also have:

* 35% HIGHER REVENUE PER EMPLOYEE

* 12% LOWER ABSENTEEISM

* A MORE EFFECTIVE PERFORMANCE MANAGEMENT AND REWARDS SYSTEM THAN THOSE WITHOUT A DOCUMENTED STRATEGY.

Source: Global Human Capital Survey 2002-2003, PricewaterhouseCoopers, 2002.

The Deloitte & Touche Human Capital Return on Investment study measured the impact of human capital practices (e.g., measuring employee performance, enhancing productivity, managing talent, communicating strategically) on various companies' market-to-book values. The study found that those companies with high human capital index ROI scores:

* ON AVERAGE EARN MORE MONEY FOR THEIR SHAREHOLDERS

* HAVE A 66% HIGHER MARKET-TO-BOOK RATIO

* HAVE A 300% HIGHER FIVE-YEAR TOTAL RETURN TO SHAREHOLDERS

Source: Human Capital ROI Study, Deloitte & Touche, 2002