HR Value Chain: How To Link HR Activities to Business Impact
Too often, HR is still perceived as a cost center rather than a function that actively contributes to the organization’s business goals. So, how can HR leaders and managers demonstrate the value that HR adds to the business?

AIHR for Business
There are plenty of HR stereotypes. That it’s just the department for paperwork and admin. That HR teams don’t understand the business or data. That they’re the fun police, focused only on protecting the company. It’s time to leave those myths behind and show the real value HR brings. The HR value chain can help do just that. It shifts the focus from day-to-day tasks to the bigger picture: how HR drives outcomes that matter to the business.
This article discusses the HR value chain, what it looks like in practice, and how you can implement this HR model in your organization. Let’s dive in.
Contents
What is the HR value chain?
Why does HR struggle to show its value to the business?
The HR value chain model explained
The HR value chain in practice
HR value chain advanced model
How to put the HR value chain to work at your company
What is the HR value chain?
The HR value chain is one of the best-known HR models for demonstrating how HR contributes to business results. It helps make the connection between HR activities and organizational outcomes more visible and measurable.
The HR value chain model is based on the work of J. Paauwe and R. Richardson (1997). It’s a three-step process that starts with HRM activities, followed by HRM outcomes, and organizational objectives. It clearly depicts how HR activities lead to organizational goals.

According to the HR value chain model, everything HR does and measures can be divided into two categories: HRM activities and HRM outcomes. These then result in an impact on organizational objectives. In short:
- HRM activities refer to the day-to-day activities of an HR department, such as compensation, recruitment, succession planning, and training and development.
- HRM outcomes are the goals HR aims to achieve with their activities. HR teams recruit, compensate, and train people to achieve certain outcomes, including, for example, employee retention, satisfaction, and presence.
Why does HR struggle to show its value to the business?
Despite its growing role in business success, HR still struggles to clearly show its value. Below are some of the reasons behind that:
- Outdated perceptions of HR: HR is still widely viewed as an administrative, support, or compliance function rather than a strategic driver.
- Lack of clear, business-aligned metrics: HR teams often report on activities (like number of hires or trainings) rather than how those activities support performance, retention, or profitability.
- HR outcomes are often indirect: Many HR efforts, like employee engagement, culture, or leadership development, affect business results over time, not overnight.
- Difficulty proving cause and effect: It’s not always easy to isolate HR’s contribution to a business outcome when so many variables are involved.
- Disconnection from business language and priorities: HR metrics and reporting can feel disconnected from the KPIs executives care about.
- Fragmented tools and data: Without integrated systems, HR data remains siloed, making it harder to track long-term impact or spot trends across the employee life cycle. On top of that, many HR teams lack the data literacy needed to analyze and interpret the information they do have.
Empirical evidence shows that there is a positive relationship between HRM practices, HRM outcomes, and organizational outcomes. In other words, what HR does – when done well – can measurably influence how people perform and, ultimately, how the business performs.
The challenge is making that connection visible and understandable to others in the organization. That’s where the HR value chain comes in. It helps HR teams map their activities to outcomes in a structured way, showing how everyday HR work contributes to results that matter: productivity, innovation, profitability, and more.
Below, you can read what the research says about these relationships.
The HR value chain model explained
Let’s take a closer look at the HR value chain model and its three components.
HRM activities and processes: Efficiency metrics
On the left side of the chain, we find the HRM activities. These are measured using the so-called efficiency metrics. Examples include:
- Cost per hire
- Time to hire / time to fill
- Learning and development budget spend
- Training time in days
- Time since last promotion
All of these metrics measure various HR processes and give information about the HR function’s efficiency. They do not say anything about how well HR is hitting its marks (e.g., its effectiveness).
We will refer to organizations that solely focus on HRM processes as level 1 HR organizations. These organizations’ primary focus is on cost savings, which are achieved by optimizing these efficiency metrics.
For example, if they can lower the cost of hire while keeping the time to hire metric stable, they are more efficient. This immediately shows a significant weakness of these level 1 HR organizations: they focus on reducing HR costs and thus approach HR as a cost center rather than focusing on the value that HR adds.
In other words, HR efficiency says nothing about how HR contributes to the business.
The HR value chain connects what HR does to what the business needs. But to truly add value, your team must have the skills to align their work with outcomes that matter.
With AIHR for Business, your team will learn to:
✅ Link HR activities to measurable business impact
✅ Apply skills in people analytics, AI, stakeholder management, and more to increase HR’s impact
✅ Deliver value consistently across functions, locations, and business units
🎯 Make every HR activity count with a team trained to deliver value at every level.
HRM outcomes: Effectiveness metrics
In the second category, we observe the HRM outcomes. These are the outcomes that are traditionally seen as important HR KPIs. Examples include:
- Engagement
- Retention/employee turnover
- Absenteeism rate
- Individual performance
- Team performance
- Quality of hire
All of these metrics provide information about the workforce’s performance, which involves both HR and line management.
For example, HR management is more effective when employee engagement is high than when it’s low. The same holds true for retention and (inversely) for employee absence.
Part of HR effectiveness is how well managers execute the intended HR practices. HR can do a stellar job, but with bad managers, employees will be more absent and much more likely to leave.
Generally, HR activities are aimed at achieving positive HR outcomes. For example:
- We don’t want to spend too much time recruiting new people; otherwise, we will lose the best candidates, reducing our quality of hire metric
- We are training our people to make them perform better and retain them
- We engage in the promotion of total wellbeing to lower absenteeism
- And so on.
Level 2 HR organizations focus on HRM outcomes. They don’t focus on cost savings but on how they can achieve their HR outcomes in a cost-efficient way.
Organizational objectives and business outcomes
The final element of the HR value chain model is organizational objectives. These are the strategic goals that the organization is trying to reach. Examples of metrics include:
- Market share
- Profit margins
- Market capitalization
- Customer satisfaction
- Customer loyalty
These are the kinds of outcomes that add value to the business and make the organization more viable in the long run.
Level 3 HR organizations focus on the business contribution they make with all of their people policies. These are truly strategic HR functions.
The HR value chain in practice
Let’s look at an example of how the different levels of HR organizations we mentioned earlier think and act. Suppose the organization wants to become more innovative and profitable, and one way it intends to do so is by increasing its L&D spending.
- A level 1 HR organization will simply allocate more L&D budget to employees, believing that better-trained employees will benefit the organization.
- A level 2 organization will also allocate more L&D budget to employees, but they will follow up by checking if these investments pay off. They assess knowledge retention and check if the investments improve individual performance. If not, they will test and change training programs and/or training providers to optimize return.
- A level 3 organization does things the other way around. They know that L&D spending increased because the organization wanted to become more innovative and profitable. This organization will thus do all of the above and test how this impacts these two organization-level key performance indicators (KPIs). They will only be satisfied when there’s a positive relationship between the L&D spending and the business KPIs.
HR level | Focus | How | Level |
Level 1 HR organization | Focus on cost-saving… | …through optimizing HR efficiency. | Operational |
Level 2 HR organization | Focus on HR results… | …through maximizing HR outcomes. Cost efficiency is secondary. | Tactical |
Level 3 HR organization | Focus on business results… | …through efficient and effective HR policies. | Strategic |
This difference in how HR approaches the same business goal – boosting innovation and profitability through L&D – often reflects HR maturity. As the HR functions mature, their decisions become more data-driven, aligned with business outcomes, and strategically integrated across the company.
HR value chain advanced model
The advanced HR value chain model is very similar to the original HR value chain model. There are, however, two key differences between the two:
- HR enablers: As you can see in the image below, the model starts with a number of so-called HR enablers. These include capable professionals, HR budget, HR systems, HR tech, and more. They are indispensable for HR’s work in the business, as without these enablers, the value chain cannot function effectively.
- Balanced scorecard: In the advanced HR value chain model, organizational performance is defined in the balanced scorecard. The scorecard holds the KPIs from a financial, customer, and process perspective, and these key performance indicators are integrated into the value chain. As such, the balanced scorecard helps align and demonstrate HR’s added value to the business.
Here’s what the advanced HR value chain diagram looks like:

How to put the HR value chain to work at your company
Here are a few elements and steps to consider if you want to use the HR value chain model in practice:
- Align your HR strategy with business goals: Ensure you understand the organization’s business goals (innovation, growth, employee development, etc.) and define HR’s role in supporting these goals (e.g., training people to further contribute to the business’s growth).
- Map all existing HR activities: Create an overview of all of your organization’s current HR activities in areas such as, for example:
- Identify gaps or redundancies: Find out where there is a gap between the organization’s business goals and what the HR function is currently supporting through its activities. An HR gap analysis template will help you structure your evaluation.
- Prioritize strategic, value-driving activities: Define what your core HR activities are (or should be). These should be focusing on supporting the company’s business priorities and can fall in one of the abovementioned categories, among others.
- Update HR KPIs to reflect business impact: Update your key HR performance indicators to ensure that they reflect the change in core HR activities and accurately capture how the HR function contributes to the organization’s business goals and success.
- Measure HR outcomes: Use those updated key performance indicators to track the outcomes of your HR activities. Examples include:
- Quality of hire
- Retention rates
- Training effectiveness
- Employee engagement and satisfaction levels.
- Link HR outcomes to business outcomes: Use analytics to demonstrate the relationship between your HRM outcomes and organizational outcomes. Examples can be:
- Increased quality of hire -> Higher innovation rate
- Better training -> Improved customer service
- Higher engagement levels -> Increased retention and higher productivity.
- Use the value chain in stakeholder conversations: As mentioned at the beginning of this article, the HR value chain is an excellent tool to show how HR contributes to the organization’s business goals. Make sure you mention it in your stakeholder conversations and when demonstrating results.
- Review and update regularly: Use surveys, exit interviews, performance data, and more to review regularly what is working and what isn’t in your HR value chain. Whenever the organization’s business priorities change, update your value chain accordingly.
If the HR framework you opt for is the advanced HR value chain, then you need to include an extra step right after you’ve aligned the HR strategy with your organization’s business goals, and that is the following:
- Identify key HR enablers: Determine what elements are indispensable for your value chain in HR to function effectively. As mentioned above, examples include:
- Competent HR team
- HR budget
- HR systems
- HR processes
- Etc.
Over to you
Many organizations today often still don’t see the value HR adds to the business, and HR departments often still struggle to demonstrate their added value in a clear and impactful way.
Using a value chain for HR, like the ones discussed in this article, is an excellent, proven, and well-researched way for HR leaders to show how their activities and outcomes contribute to the company’s business goals and, eventually, to its success.
Learn more
Related articles
Are you ready for the future of HR?
Learn modern and relevant HR skills, online