The employment relationship, at its core, is a simple exchange of time and skills for reward. However, in reality it can be incredibly complex and whether organisations have a unitary or pluralistic perspective, they have a number of choices to make in terms of how they approach the employment relationship.
In order to support strategic goals, employers must make a number of decisions about the employment relationship. Discuss what choices they need to consider and how this can affect the employment relationship and organizational performance.
|SHRM and performance|
By the end of this chapter you should be able to:
- Critically evaluate the claim that SHRM can impact on firm performance.
- Explain the significance of the ‘black box’ between HRM and performance outcomes.
- Be aware of the difference between possible HR outcomes at the individual, group, and organizational levels.
- Understand some of the theories that seek to explain why and how HRM impacts on organizational performance.
- Appreciate how organizations may go about measuring the outcomes of HRM and appreciate the complexities and difficulties involved.
High-performance work practices
The ‘black box’
HR Balanced Scorecard
Since the field of SHRM first emerged, a central focus of concern has been to try to establish whether there is a link between SHRM and organizational performance. Indeed, examining this link was a key concern in the first influential publications in the area (Fombrun et al, 1984; Beer et al, 1985). Many studies have now been conducted around the world using increasingly sophisticated statistical techniques that have lent weight to the argument that, when carried out effectively, SHRM interventions can improve firm financial performance, raise levels of individual productivity, and even lead to positive societal-level outcomes (Arthur, 1994; MacDuffie, 1995; Patterson et al, 1997; Becker and Huselid, 1998; Collins and Smith, 2006). Some commentators have gone so far as to quantify the precise impact that adopting SHR practices can have:
The magnitude of the returns for investments in high performance work practices is substantial. A 1% standard deviation increase in such practices is associated with a 7.05% decrease in labour turnover and, on a per employee basis 27, 044 US$ more in sales and 18,641 US$ and 3,814 US$ more in market value and profits respectively. (Huselid, 1995: 667)
Studies have taken place not just in the UK and the US but around the world; research in Greece, France, Taiwan, and India has examined the link between high-performance work practices and organizational performance and found a positive relationship (Guerrero and Barraud-Didier, 2004; Katou and Budhwar, 2006; Shih et al, 2006; Som, 2008). Evidence has accumulated to the point where the Chartered Institute of Personnel and Development concluded some years ago that there is ‘no room for doubt’ that a clear link between people management and performance exists’ (CIPD, 2001: 4). Other researchers, though, have been more cautious (Guest et al, 2003; Patterson et al, 2007; Gooderham et al, 2008). Guest (2011: 3) goes so far as to remark that ‘after over two decades of extensive research, we are still unable to answer core questions about the relationship between human resource management and performance’.
High-performance work practices refers to a bundle of HR practices that is expected to yield positive performance outcomes at the individual and organizational levels. In Chapter 5, we examined some of the ways in which these bundles have been conceptualized. However, although the concept is intuitively appealing, there is little consensus as to the precise practices that should be in the bundle, and the evidence as to their impact is mixed.
In this chapter, we build on the arguments presented in the preceding chapters to examine in more detail some of the research that has been conducted on the HRM–performance linkage. In particular, we outline the strengths and contributions made by some of the seminal studies that have taken place, but we also examine the drawbacks and limitations of research in the field.
In Chapters 5 and 6, we examined some of the main theoretical approaches that have been developed by researchers keen to find a rationale explaining why SHRM might be linked with performance outcomes at the level of the firm. For instance, the resource-based view, which we discussed in Chapter 6, has been used to argue that an organization’s employees constitute a resource that enables the firm to secure sustained competitive advantage. Our intention here is to dig deeper into the SHRM–performance linkage in three areas. First, we examine some of the key findings arising out of research on the topic, differentiating between outcomes at the individual, unit, organizational, and financial performance levels. Second, we evaluate a range of theoretical frameworks that have been used to explain the mechanisms underpinning the HRM–performance linkage and explain the process by which interventions in the HRM arena should give rise to outcomes at the organizational level. Third, from a practical perspective, we explore some of the methodologies used by practitioners in an effort to evaluate and measure the contribution of the HR department to organizational performance.
Case study 8.1 Pace
Back in 2006, set-top box manufacturer Pace was under threat of bankruptcy; the company was losing £15 million on sales of £175 million. With debts of £30 million, the company was also experiencing a crisis of leadership. However, by 2009, the company was able to announce revenues of £1.1 billion and won the CIPD People Management Award. Employee numbers had risen from 600 to over 1,000. The change was spearheaded by new CEO Neil Gaydon and new HR Director Jill Ezard. When Jill was appointed, she found several underlying factors. Leadership was poor and so staff were demoralized. The hierarchical structure meant that communication was poor and decision making slow and unwieldy. The staff were not close enough to the customer to understand what they wanted. A complete overhaul was needed. First, Jill decided to restructure the workforce and create a stronger customer focus. Four of the existing eight management layers were removed and the previously separate sales and engineering staff were brought together in teams focused around the customer. Roadshows were held to explain to staff how the organization was going to work, and to start to embed cultural change with behaviours focused around customer focus, leadership, communication, teamwork, driving for results, and personal responsibility underpinned by the values of passion, integrity, accountability, innovation, and appreciation. These were all linked to the company’s performance management scheme. Performance metrics were changed to focus on speed, margin, and quality, and rolled out across the entire workforce, from senior managers down. Staff surveys showed that employees felt positively about the changes, and levels of employee satisfaction also rose alongside improved financial performance.
Churchard, C. (2010) In the top set. People Management, 8 April, pp. 18–21.
- What do you think it was about the HR changes and the way they were implemented that contributed to improved performance?
- Drawing on the example of Pace, what role can HR play in turning around a failing organization?
8.2 Findings of research on the impact of SHRM on performance
A very large number of studies have suggested that SHRM can impact on organizational performance. However, reviewing these reveals a broad array of performance outcomes that have been explored at the individual, unit, and organizational levels (see Table 8.1).
It is therefore important to bear in mind, when reading analyses of the impact of HRM on performance, that performance may be conceptualized in different ways. Many studies have focused not just on one set of outcomes, but on several. For example, Guthrie et al (2009) examined the impact of a set of high-performance work practices on individual-level behavioural outcomes such as absenteeism and turnover, and on productivity and labour costs, finding that high-performance work practices reduced turnover and absenteeism and raised levels of productivity. Gould-Williams (2007) found in a study of over 3,000 staff in 47 local authorities in England that approaches to HRM that fostered a positive attitude towards the organization also led to raised levels of discretionary effort and motivation, reduced intent to quit, and lower stress levels.
Table 8.1 Indicators of SHRM outcomes
One question that needs to be asked is, at what level can a causal relationship between SHRM and outcomes reasonably be measured, particularly since the application of HRM can vary significantly within organizations (Truss, 2001; Wright et al, 2003; Gerhart, 2005), and secondly whether notions of relevant outcomes will also vary between sectors (Harris et al, 2007).
In order to better understand the scope of the research, seven especially interesting or influential studies are described in more detail below.
8.2.1 Huselid (1995)
Mark Huselid was the first researcher who claimed to have established a causal link between high-performance work practices and performance. Through a survey of senior HR managers in almost 1,000 US firms, Huselid found that a one standard deviation increase in high-performance work practices yielded a 7.05% decrease in employee turnover, $27,044 increase in sales, $18,641 increase in market value, and $3,814 increase in profits per employee. He did not find evidence to support the argument that high levels of fit between HR policies, or fit between HR strategy and corporate strategy, impacted on performance (see Chapter 5). Huselid’s study has been extremely influential. However, his methodology meant that there was only one survey respondent in each organization, and so it is difficult to be sure that their views are representative. The two factors that emerged through his analysis of data, ‘employee skills and organizational structures’, and ‘employee motivation’ lack internal consistency, and the data he obtained were cross-sectional, in other words, the outcomes were measured at the same time as the HR interventions.
8.2.2 West et al (2002)
Michael West and his team explored the HRM–performance link in the context of hospitals in the UK. The methodology used in the study was cross-sectional and involved a survey completed by the HR Directors (or their representatives) of 61 NHS Hospital Trusts. Statistical analysis showed a significant association between teamworking, appraisals, and training and levels of patient mortality. This study has been very widely cited due to the far-reaching implications of the argument in the paper that the way people are managed may influence mortality levels. However, the authors point out that their sample is small. Also, the time periods covered by the elements comprising the overall measure of mortality were not identical, which may have given rise to measurement error. Finally, and crucially, as the data collection was cross-sectional, in other words, it took place at one point in time, the authors point out that ‘no causal inferences can be drawn from the analysis’ (p. 1308).
8.2.3 Purcell et al (2003)
Purcell and colleagues examined approaches to HRM in 12 organizations longitudinally over 30 months through interviews and questionnaires with a range of respondents, as well as objective measures of performance, such as wastage or shrinkage in the case of a supermarket and the ratio between number of presentations to clients and products sold in the case of a bank. A particular focus of the study was to test out a theoretical framework that explained why HRM interventions would affect performance. The team used the ‘AMO’ model and argued that employees perform well when they are ‘able’ to do so, i.e. have the necessary knowledge and skills, have the ‘motivation’ to perform well, and are given the ‘opportunity’ to perform well in their jobs. Eleven HR policies and practices were identified as enablers of AMO, and the team argued that these HR processes give rise to positive attitudes such as job satisfaction and commitment, which, in turn, give rise to higher levels of performance.
The team found that higher performing organizations had a ‘Big Idea’, such as a clear set of values or mission, which was embedded, connected, enduring, collective, and measured throughout the organization. The research also highlighted the importance of the role of line managers in implementing and enacting HR policies; in particular, the findings showed that HR interventions in the areas of career opportunities, training, job design, communication, performance appraisal, and work–life balance impacted positively on outcomes such as commitment, satisfaction, and motivation. Purcell and colleagues concluded that there were positive associations between some HR policies and practices and performance, and that negative outcomes arose from poorly managed HR policies. They also noted that ‘it was difficult to isolate the impact of policies and practices from other factors, such as technology or market fluctuations’ (p. xi). This study has made an important contribution to our understanding of the HRM–performance link, most particularly through the application of the AMO model which provides a theoretical underpinning.
The AMO model suggests that employees perform well when they have the necessary skills or ability to do so, the motivation to perform, and are given the opportunity to perform by their line managers. HR policies and practices can impact on AMO and thus give rise to higher levels of performance.
8.2.4 Gooderham et al (2008)
Gooderham and colleagues examined data from the 1999 Cranet HRM survey which took place in 16 European countries. A questionnaire was issued to the HR managers of firms with over 100 employees, resulting in a dataset comprising 3,281 firms. Performance was measured by asking respondents whether gross revenue for the past 3 years has been well in excess of costs. The study differentiated between two approaches to HRM: ‘calculative’, which focuses on assessing and rewarding performance, and ‘collaborative’, which involves strategies of communication or cooperation. They found that the calculative approaches to HRM, and not the collaborative approaches, were most closely associated with performance, but that even in these cases the associations were relatively modest. This runs contrary to the findings of other studies. Interestingly, they also found considerable variation by country, which suggests that studies need to take account of national setting (see Chapter 5). Overall, they conclude that ‘while certain HR bundles do have an impact on performance, this should not be exaggerated’ (p. 2053). There are several limitations to the study, including the relatively weak performance measure, lack of explanatory theoretical framework, and the fact that it is cross-sectional and relies on single respondents in each organization. Nevertheless, this study has made an important contribution to the debate by providing evidence that suggests that the HRM–performance link may be weak.
8.2.5 Nishii et al (2008)
In their study, Nishii and colleagues were concerned to gain a better understanding of the process by which HRM impacts on performance. They draw on attribution theory, which suggests that people have a deep-seated need to understand their environment, and so are driven to seek out the patterns that underpin their employer’s approach to managing people. Five possible attributions are outlined: a focus on service quality; a focus on employee wellbeing; the wish to reduce costs; the desire to exploit employees; and, finally, the need to comply with trade unions. The authors argue that these attributions will affect employee commitment, satisfaction, citizenship behaviours, and customer satisfaction. Data were collected from multiple sources within a supermarket chain in the US, resulting in a dataset of 5,600 questionnaires, and objective performance data. The study found that employees’ perceptions of the underlying purpose of HR policies and strategies varied, and that there was a disconnect between employee perceptions and management intentions. They suggest that congruence between intentions and experiences of HR practices may be associated with a stronger link between HR and performance. This study contributes to our understanding of the HRM–performance link by moving away from a reliance on the resource-based view and, instead, drawing on theories based on organizational psychology. However, questions are raised due to the fact that the researchers could not find empirical support for all of their five proposed attributions, and due to the uncertainties surrounding the drivers of the attributions.
8.2.6 Collins and Smith (2006)
Collins and Smith (2006) examined how a commitment-based approach to SHRM influences organizational social climate and knowledge sharing as well as firm performance in 143 high-tech companies in the US. Overall, they found that increasing commitment-based HR practices by one standard deviation resulted in a 16.9% increase in sales from new products and services and an 18.8% growth in sales. These impacts were found to be mediated by organizational social climate and knowledge exchange. This study adds to our knowledge of the HRM–performance linkage by focusing on one industry and one approach to SHRM. It moves away from the RBV in terms of explaining how the link works and, instead, suggests that HRM impacts on social climate and knowledge sharing which, in turn, affect performance. One drawback with this study is that data were collected on HR practices from senior HR managers and, as the study by Nishii et al (2008) suggests, there may be a gap between intended and experienced HRM. It is also not clear whether the proposed model would work in other contexts.
8.2.7 Boselie et al (2003)
Boselie and colleagues set out to examine the impact of government institutions on the HRM–performance link in organizations in the Netherlands, drawing on their new institutionalist framework (see Chapter 6). Data were collected from three sectors, health care, local government, and tourism by questionnaires completed by 132 HR managers. They found evidence that there are two distinct approaches to SHRM, a commitment-based approach and a control-based approach, and that a focus on the control-based approach was associated with reduced levels of absenteeism. They also found that in highly institutionalized contexts such as hospitals and local authorities, the impact of control HR systems on absence levels was weaker than in the less institutionalized context of tourism organizations. The authors argue that it is important to take account of the degree of institutionalization, which may differ between countries as well as industries, when examining the link between HRM and performance. However, the authors also note that their research was cross-sectional and they would have preferred to have carried out some in-depth case studies to explore the process of causality more deeply.
Choose two of the articles referred to above and obtain copies of the entire text. Read both articles carefully and, for each, answer the following questions:
- What theory is proposed to explain how HRM impacts on performance?
- What measures of both HRM and performance outcomes are used?
- What data were obtained and what methods were used?
- What are the strengths and weaknesses of the study?
- How could HR managers use the study in developing their own approach to SHRM?
Taken together, these seven studies represent a good cross-section of the extensive research that has taken place on the HRM–performance link. It is evident that the studies have adopted different methodologies and theoretical foundations, measure both HRM and performance in different ways, and the findings all tend to point towards a variety of different conclusions. The authors are all at pains to point out that their research has limitations. Overall, the conclusion would appear to be that there is some evidence of a link between HRM and performance, but that, at this stage, there is no conclusive proof.
8.3 Evaluation of HRM–performance research
In reading these and other studies examining the link between HRM and performance, it is important to bear in mind that the SHRM–performance literature is one that is beset with problems and controversies. Commentators have noted difficulties in at least six interrelated areas:
- Defining SHRM. What aspects or features should be included and why? In Chapter 5 we outlined some of the many ways in which SHRM has been conceptualized and argued that no clear agreement has been reached as to what constitutes ‘best practice’. Studies have used widely different measures of high-performance work practices and reported significant variations in results (Marchington and Grugulis, 2000; Wright et al, 2001; Guest et al, 2004; Chang and Huang, 2005; Hesketh and Fleetwood, 2006). Although on paper the ‘high commitment’ approach is favoured, there is some research evidence that ‘low road’ or high control, cost minimization strategies may be more closely associated with performance (Wood and de Menezes, 1998; Orlitzky and Frenkel, 2005). We know little about which HR practices, specifically, might be more important than others, or under which circumstances (Patterson et al, 2007).
- Rhetoric/reality gap. Is it sufficient to measure intended HR strategies and policies when exploring the HRM–performance linkage? Research suggests that there is a significant gap between rhetoric and reality, with employees’ HR experiences normally falling some way short of what is intended. Studies that rely on stated HR strategies may therefore be failing to measure what is actually happening in organizations (Truss, 2001; Gerhart, 2005; Kinnie et al, 2005a; Patterson et al, 2007; Nishii et al, 2008; Conway and Monks, 2009). The most recent trend is towards focusing on employees’ experiences or perceptions of HR.
- Specifying outcomes. At what level should the outcomes of SHRM be measured? Should the focus be on firm financial performance, individual performance, or divisional/unit performance, for example? Are these outcomes relevant in all contexts? For example, a focus on firm financial performance will not be relevant for public or third sector organizations. Firm performance may be too far removed from the HRM/employee relationship and dependent on other factors (Purcell and Kinnie, 2007). Should the focus be on the individual level and, if so, should we be concerned with behavioural or attitudinal outcomes (Wright et al, 2001; 2003; Boxall and Purcell, 2008)? It is also the case that a focus on short-term financial outcomes may be at the expense of longer-term outcomes such as generating organizational sustainability and resilience over time. Practical issues have meant that important topics such as these have not yet been subject to empirical research.
- Theoretical linkage. Commentators have referred to the ‘black box’ between SHRM, on the one hand, and outcomes, on the other. Many feel that there is a lack of an appropriate theoretical framework for explaining why SHRM should be linked to performance at any level. Is the gap too great between high-level SHRM policy making, on the one hand, and the financial performance of the firm, on the other, for any meaningful conclusions to be drawn? And, significantly, on what theoretical grounds can we assert that there is a causal linkage? It is insufficient merely to observe that firms with particular approaches to SHRM perform better than others; without an explanatory framework, such an observation may be either a coincidence or masking other, underlying factors, and in fact causality may even be reversed, i.e. firms that perform better can afford to invest more in their SHRM processes (Guest, 2001; Hesketh and Fleetwood, 2006; Boxall and Purcell, 2008). A surprising number of studies have failed to provide any theoretical underpinning for their empirical research. Table 8.2 summarizes some of the main theories used to ‘explain’ the HRM–performance linkage and their limitations. In summary, no single theoretical framework has so far been able to provide an adequate explanation of the process by which HRM impacts on performance, but those that focus on the link between HRM interventions as experienced by employees and performance outcomes at the individual level are the most persuasive.
- Methodology. The majority of studies in the area have, for pragmatic reasons, used cross-sectional research designs that also rely on the views of one respondent in each organization. This creates a series of problems. For example, can one person’s views on a firm’s HR strategy and its financial performance be relied upon? How can collecting data at one point in time on both input factors, such as HR strategy, and output factors, such as performance, be valid? We would normally expect some kind of lag between an intervention and an outcome (Gerhart et al, 2000; Guest, 2001; Boselie et al, 2003; Wall and Wood, 2005). More worryingly, in a review of the literature, Wright et al (2005) found that a significant number of studies relied on performance data from an earlier period than was covered by the HR practices that were measured. Guest (2011) argues that the absence of longitudinal methodologies in the field casts doubt on many of the findings. He states that past performance is a far stronger predictor of current performance than is HRM.
- Perspective. Critical scholars have noted that studies on the SHRM–performance linkage are unitary in perspective and overemphasize financial performance at the expense of employee, ethical, or societal level outcomes (Paauwe, 2004). Some have argued that SHRM has been associated with efforts towards work intensification, decreasing job security, and other outcomes that are undesirable at the individual level (Marchington and Grugulis, 2000; Wright et al, 2003; Guerrero and Barraud-Didier, 2004; Harley and Hardy, 2004; Chang and Huang, 2005; Legge, 2005; Long, 2007; Boxall and Purcell, 2008). There is lack of agreement over whether data relating to HR practices should be collected from individual employees or from HR managers, and whose perspective is of most value and relevance (Guest, 2001; Hesketh and Fleetwood, 2006). Delbridge and Keenoy (2011: 800) refer to the ‘moribund and limited nature of mainstream HRM’ and the absence of theoretical critique or reference to alternative voices within studies of the HRM–performance linkage.
Table 8.2 Summary of key theories on the HRM–performance link
The black box refers to the unknown processes that occur between HR interventions, on the one hand, and performance outcomes, on the other. One focus of research has been to find an appropriate theory to explain how this ‘black box’ works in order to better explain why and how HRM might impact on performance.
Case study 8.2 Nick’s Pizza and Pub
It is often the case that staff turnover is high in the catering industry (around 200%) due to uncomfortable working conditions, stress, and the fact that many employees are young people working part-time. This means that achieving high levels of motivation and performance can be hard. Nick’s Pizza and Pub, based in Crystal Lake, Illinois, in the USA, has managed to buck this trend, achieving a manageable turnover rate of 20% and expanding its number of outlets. The company attributes its success to three key management practices. First, it has moved away from a ‘command and control’ style towards what it calls ‘trust and track’, where employees are told the reasons behind all the decisions that are made. Staff are encouraged to offer their own solutions for improving operations. Second, the company offers several levels of training that are voluntary, but those who choose to do more training receive an automatic pay rise, and those attaining the highest level train new employees. As employees move up the training levels, they wear different coloured hats so they are instantly recognizable. This system ensures that those who put in the most effort receive most rewards. Finally, Nick’s has designated a ‘safe area’ in each outlet where employees can talk to managers and give them feedback. Employees are able to call managers at all levels into this safe area at any time and know that they will be listened to. Nick’s feels that its approach to managing people places an emphasis on creating a great place to work and enhances customer service.
Adapted from Improving Employee Performance in 3 Simple Steps: A Restaurant Case Study, posted by Greg McGuire, Halogen Software Talent Management and Employee Performance blog, 16 March 2011. http://www.halogensoftware.com/blog/improving-employee-performance-in-3-simple-steps-a-restaurant-case-study/.
What do the theories of SHRM outlined above tell us about why Nick’s approach has been successful?
Researchers have highlighted the difficulties of seeking conclusive evidence that HRM is linked to performance. For instance, if an organization is performing well, then any number of other factors, aside from the way in which people are managed, could be influential. Equally, causality could be reversed, in other words, it may be the case that high levels of organizational performance could enable a company to put in place sophisticated approaches to managing people. How do you think that researchers could go about addressing these complex issues?
8.4 The practicalities of measuring SHRM outcomes
Although academics debate the processes by which HRM may be linked with organizational outcomes, HR professionals are being regularly called upon by senior colleagues to provide management information relating to the contribution made by HR activities (Mooney, 2001). As Ulrich and Brockbank (2005b) note, being able to provide these kind of data is a core requirement for HR managers keen to to establish their credibility. However, the demands on HR managers today in terms of information are becoming ever more complex. Large organizations may require data such as return on investment (ROI), Balanced Scorecard evaluations of the HR department and HR activities, or benchmarking of HR policies and practices against other organizations (Marchington and Wilkinson, 2008). As Holbeche (2001: 51) notes: ‘for many Human Resource practitioners, it’s an act of faith that people management is a key factor in determining profitability. Whether that view is shared by management team colleagues is a different matter.’
8.4.1 HR data
One of the first issues is to determine what should be measured. Standard HR areas that are often measured by organizations tend to fall into the categories shown in Table 8.3.
A study in the US (Gates, 2004) found that the single most common HR metric used was turnover, used by 96% of organizations participating in his survey, followed by average compensation, 82%, average workforce age, 77%, diversity, 76%, compensation, 76%, seniority, 75%, and accident rate, 74%. However, there are a vast number of possible HR metrics, for example, Ulrich (1997b) identifies 52, and it is therefore difficult to know which might be the most important. A survey carried out in 2007 on behalf of the CIPD involving 787 organizations examined which outcome measures were most commonly used. Out of a range of 40 possible measures, none was used by more than 60% of respondents, reflecting the lack of consensus over what to evaluate.
Table 8.3 Domains of HR measurement
|Employee attitudes||For instance, measuring levels of engagement through a staff survey, as well as satisfaction
with the HR department and activities
|Employee performance||These would include measures such as individual productivity and performance, for example,
through annual appraisals and team performance
|Employee behaviours||For instance, turnover and absenteeism|
|Health and safety measures||Including accident rates|
|Workforce profile and costs||E.g. competencies, talent, proportion of employees at particular grades, total workforce,
salary costs, diversity statistics, talent pool
|ROI in HR department||E.g. ratio of HR staff to employees, operational cost of the HR department|
|Cost and efficacy of HR activities||Such as number of applications per vacancy, training costs per employee, training
satisfaction, speed of response to applicants
|Customer outcomes||Such as customer satisfaction|
Sources: Ulrich, 1997b; Holbeche, 2001; Mooney, 2001; Ulrich and Brockbank, 2005b; Boudreau and Ramstad, 2007; CIPD, 2007; Crail, 2007; Marchington and Wilkinson, 2008.
Mooney (2001) suggests that factors for measurement can be evaluated on the basis of how easy or difficult the data are to obtain and their degree of relevance to business performance (see Fig. 8.1).
Although it would appear that data that are relatively easy to obtain and highly relevant (upper right-hand quadrant) will be the most helpful for the HR department, some caution must be exercised. A CIPD report (2009b) concluded that there is no one definitive way of measuring HR outcomes that will be relevant in all contexts, but rather that it is the process of measuring that is itself of greatest value as this will generate discussion about HR’s contribution. However, for the HR professional it is important to be able to gather data that are ‘relevant’. Mooney (2001) suggests that ‘relevant’ data are those that are most closely linked with overall business performance, such as labour turnover, performance reviews, training and development, adherence to budgets, health and safety, compliance with legislation and HR policy, and line manager satisfaction with HR performance.
Figure 8.1 Mooney’s HR data collection matrix.
Marchington and Wilkinson (2008) show how service-level agreements (SLAs) are becoming an increasingly common approach to evaluating HR’s contribution. SLAs comprise a series of statements about the level of service that the HR function is expected to provide for the organization, for example, preparing job offer letters within 1 day or providing advice on disciplinary matters within 2 days. Shell is one firm that uses this approach (Sparrow et al, 2004: 165). Whilst SLAs can be useful in providing a clear statement of what is expected of the HR function, unless they are closely aligned with organizational goals, they may fail to serve a useful function.
Whilst many organizations collect internal measures of various kinds, benchmarking against comparator organizations is increasingly common. A study carried out by the CIPD in 2006 found that there are over 1,000 indices that have been used in benchmarking exercises. However, Marchington and Wilkinson (2008) point out that contextual variations can have a considerable impact on results; what is relevant in one sector may not be in another, and aggregate-level data can mask substantial differences. Employers therefore need to be sure that the benchmark organizations are relevant.
Two possible approaches that can be used by organizations to evaluate their HR contributions are reviewed below.
Boudreau and Ramstad (2007) show that, despite the advances in HR measurement, often these measures do not yield substantive, strategic change. The reason for this, they argue, is that ‘many HR measures originate from a desire to justify the investments in HR processes or programs. Typically, HR seeks measurement not to improve decisions, but to increase the respect for (and potentially the investment in) the HR function and its services and activities’ (p. 190). They compare this with the measures used by accounting departments, which focus on outcomes rather than on justifying the department’s activities. Instead, they argue, HR’s role should be on providing measures that senior managers can use to guide future decisions about the management and deployment of staff. They propose a four-component measurement system with the acronym LAMP: logic, analytics, measures, and process:
- Logic: the chosen measurement system should focus on the factors that are logically most relevant to performance. Starbucks measured the performance of its baristas in such a way as to capture issues of trust and discretion as these would impact most on customer service.
- Analytics: effective data analysis is important in order to interpret the data correctly. A simple correlation between two factors, such as staff satisfaction and customer satisfaction, does not necessarily signify a causal relationship. Customers could be more satisfied due to location, or more highly satisfied customers could lead to more satisfied staff. The more data that HR managers have at their disposal, the more important analysis becomes.
- Measures: should be of high quality and focus on what matters. Traditional HR measurements can be supplemented by linking to metrics collected in other areas of the organization, such as information systems and R&D. Over time, they recommend that organizations should shift their focus from measures focused on efficiency towards effectiveness and, finally, towards impact. For instance, employee turnover can vary in its significance depending on who is leaving and the context. In firms competing on the basis of quality, if turnover is high among well-qualified, highly trained and experienced employees, this will leave important talent gaps where the recruitment of suitably qualified replacements will take time. In firms competing on the basis of speed but not quality, then rapid recruitment of lower-skilled workers is important. The issues will need to be tackled differently, and so nuanced, context-specific measures are required.
Process: measuring HR outcomes should be part of an overarching strategic change management process, and a key element of this is educating line managers to accept that HR measures are an important component of the change process.
(Boudreau and Ramstad, 2007: 187–206)
Global retailer Limited Brands adopted the LAMP approach to strengthen the link between business performance and HR processes. This involved an analysis of the critical success factors required for improving the overall performance of its shops, within which HR issues, such as staff deployment and core competencies, were integrated. Next, appropriate measures were developed, including the tracking of in-store customer and employee movements. One learning point that emerged was that customers were more likely to purchase an item if they entered the changing rooms; this was used to develop employee training and deployment programmes (Boudreau and Ramstad, 2007: 206-213).
8.4.3 The HR Balanced Scorecard
The Balanced Scorecard was developed in the 1990s by Bob Kaplan and David Norton as a methodology for linking strategic objectives with a range of performance outcomes from four perspectives (Kaplan and Norton, 1998):
- Organizational learning and growth
- Internal business processes
- Financial performance
The concern was to move away from simplistic performance evaluations based purely on financial outcomes, and instead to consider performance from a more holistic perspective in terms of their contribution to the overarching aims of the organization. The Balanced Scorecard has been widely adopted internationally by organizations as diverse as Tesco, Kenya Red Cross, Veolia, AT&T, and BMW (http://www.balancedscorecard.org).
The Balanced Scorecard was developed by Kaplan and Norton (1998) as a tool to help managers find holistic ways of measuring organizational performance.
The approach was extended into the HR domain by Becker et al (2001), who show the importance of the management of intangible assets to organizational performance outcomes. Their HR Scorecard rests on two core questions:
- How should strategy be implemented in the firm? How does the firm generate value?
- What performance measures capture this?
The answers to these two questions generate the insights needed to start to develop an HR measurement process that accounts for both leading indicators, i.e. those with a future-focus such as R&D cycle time, and lagging indicators, such as financial metrics, that focus on the past, for each of the four areas of the Balanced Scorecard. Becker et al (2001) identify four domains where decisions should be made:
- HR deliverables or outcomes, in order to identify how the HR system generates value in the firm.
- The high-performance work system elements that generate the deliverables, providing examples of what the deliverables should be for each system element.
- The elements of the HR system that need to align with one another to achieve the deliverables, which focus on the alignment of the HR system with strategy implementation.
- HR efficiency measures, differentiating between core (i.e. significant HR expenditure that makes no direct contribution to strategy implementation) and strategic metrics (i.e. those designed to produce the HR deliverables).
Becker and colleagues (2001: 75–76) argue that the benefits of the HR Scorecard include:
- It reinforces the distinction between HR doables and HR deliverables
- It enables you to control costs and create value
- It measures leading indicators (as opposed to lagging indicators)
- It assesses HR’s contribution to strategy implementation and the bottom line
- It lets HR processionals effectively manage their strategic responsibilities
- It encourages flexibility and change.
One organization that has adopted the HR Balanced Scorecard is US-based car accessories manufacturer ABPS. ABPS has used commercially available HR Balanced Scorecard software to help it track progress in such areas as training, recruitment, culture, performance management, and HR expenditure in the wake of a complex merger. (See http://www.strategy2act.com/case_studies/proved_ways_to_measure_and_improve_performance_in_hr.html.)
Whilst approaches to measuring HR’s contribution have become ever more sophisticated, it is important to bear in mind the constraints and complexities that this entails:
- Seeking to quantify HR’s contribution places the emphasis on areas that can easily be measured, rather than what is necessarily most important.
- Service-level agreements can lead to an overemphasis on meeting the needs of other departments, and downplay longer-term HR strategic objectives.
- Relevant data may not be easy to obtain. Boudreau and Ramstad (2007) cite the example of turnover measures the greatest value is knowing why people are leaving and where they are going, which are rarely measured.
- The link between HR interventions and organizational performance is complex and multilayered; the collection of HR metrics risks oversimplifying the process and creating a misleading impression.
- Simply measuring outcomes does not lead to change or improvement.
- The relevance of different measures varies between industries and organizations. What is relevant in one context may be less so in another. Benchmarking may therefore not be as useful as managers believe.
- To be useful, HR measures need to focus on people outputs rather than HR processes.
In this chapter we have examined the issue of whether or not SHRM impacts on performance. Opinion on this subject is divided. Some commentators have argued that there is now ample evidence to suggest that effective HR practices will yield significant performance outcomes at both the individual and organizational levels. However, most have urged a degree of caution in asserting that there is a clear and causal link between the two, citing problems in terms of the way in which HRM and performance are specified and measured, the methodologies used in research studies, variations between sectors, and uncertainties surrounding the relevant theoretical framework. Yet, intuitively it makes sense that if people are managed effectively, their contribution will be greater, although there is as yet not enough evidence on exactly what ‘effective’ means in this context. Both HR managers and line managers have a role to play, and more research is needed on how line management and HR interact with one another to create a positive organizational performance climate.
Despite the reservations, it is clearly important for HR managers to be able to show how their strategies and policies yield beneficial outcomes for their organizations, or it will be difficult to argue for investment in the department. Several measures have been suggested and two more holistic methodologies for examining HR’s contribution have been discussed.
- A great deal of research has been conducted to find out how HRM impacts on organizational performance.
- A large number of studies have concluded that there is a link between the two.
- Commentators have also argued that we need to be cautious in asserting that this link exists.
- There is lack of agreement over the best way to measure HR and over the theory that explains how the link might work.
- Various performance outcomes have been considered at the individual, unit, and organizational levels, but evidence is mixed.
- More research is needed that examines the HR–performance link using more sophisticated methodologies and in different settings.
- HR practitioners are, however, under pressure to measure the activities of the department and the outcomes of their policies and practices.
- There are a number of methodologies that practitioners can use, including the HR Balanced Scorecard.
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