In recognising HRM systems as ‘strategic assets’ and in identifying the strategic value of a skilled, motivated and adaptable workforce, the relationship between strategic human resource management and organisational performance moves to centre stage. The traditional HR function, when viewed as a cost centre, focuses on transactions, practices and compliance; when this is replaced by a strategic HRM system it is viewed as an investment and focuses on developing and maintaining a firm’s strategic infrastructure (Becker et al., 1997).
This systems approach and concentration on ‘bundles’ of integrated HR practices is at the centre of thinking on high-performance work practices. The work of Huselid (1995) and Huselid and Becker (1996) identified integrated systems of high-performance work High-performance work practices as significant economic assets for organisations, concluding that ‘the magnitude of the return on investment in High Performance Work Practices is substantial’ (Huselid, 1995: 667) and that plausible changes in the quality of a firm’s high-performance work practices are associated with changes in market value of between $15 000 and $60 000 per employee.
This differs from the universal approach, in that highperformance work practices are recognised as being highly idiosyncratic and in need of being tailored to meet an individual organisation’s specific context in order to provide maximum performance. These high-performance work practices will only have a strategic impact, therefore, if they are aligned and integrated with each other, and if the total HRM system supports key business priorities.
This requires a ‘systems’ thinking approach on the part of HR managers, which enables them to avoid ‘deadly combinations’ of HR practices which work against each other, for example team-based culture and individual performance-related pay, and to seek out ‘powerful connections’ or synergies between practices, for example building up new employees’ expectations through sophisticated selection and meeting them through appropriate induction, personal evelopment plans and reward strategies.
The impact of human resource management practices on organisational performance has been recognised as a key element of differentiation between HRM and strategic human resource management. Much research interest has been generated in exploring the influence of ‘high-performance work practices’ on shareholder value (Huselid, 1995) and in human capital management (Ulrich, 1997; Ulrich et al., 1995). A survey by Patterson et al. (1997), published for the CIPD, cited evidence for human resource management as a key contributor to improved performance.
Patterson argued that 17 per cent of the variation in company profitability could be explained by HRM practices and job design, as opposed to just 8 per cent from research and development, 2 per cent from strategy and 1 per cent from both quality and technology! Other studies have reviewed the links between high-commitment HRM and performance, and two recent studies by Guest et al. (2000a, b) have argued the economic and business case for recognizing people as a key source of competitive advantage in organisations and therefore a key contributor to enhanced organisational performance.
In terms of HR managers, research has highlighted the need for the development of business-related capabilities (an understanding of the business context and the implementation of competitive trategies) alongside professional HRM capabilities. Huselid et al. (1997) concluded that while professional HRM capabilities are necessary, but not sufficient alone for better firm performance, business-related capabilities are not only underdeveloped within most firms but represent the area of greatest economic opportunity.
The important message for HR managers is not only to understand and implement a systems perspective, but to understand how HR can add value to their particular business, so that they can become key ‘strategic assets’.
Criticisms aimed at advocates of the high-commitment/performance link are mainly centred on the validity of the research methods employed and problems associated with inconsistencies in the best-practice models used (Marchington and Wilkinson, 2002). In terms of evidence it is difficult to pinpoint whether it is the HR practices that in turn lead to enhanced organisational performance or whether financial success has enabled the implementation of appropriate HR practices.
It is difficult to see how organizations operating in highly competitive markets, with tight financial control and margins, would be able to invest in some of the HR practices advocated in the best-practice models. This is not to say that HR could not make a contribution in this type of business environment, but rather that the contribution would not be that espoused by the best-practice models. Here, the enhanced performance could be delivered through the efficiency and tight cost control more associated with ‘hard’ HR practices (Storey, 1995) and the contingency school.
A further difficulty is the underlying theme of ‘unitarism’ pervading many of the best-practice approaches. As Boxall and Purcell (2003) note, many advocates of best-practice, high-commitment models tend to ‘fudge’ the question of pluralist goals and interests. If the introduction of best-practice HR could meet the goals of all stakeholders within the business equally, the implementation of such practices would not be problematic. However, it is unlikely that this would be the case, particularly within a short-termist-driven economy, where the majority of organisations are looking primarily to increase return on shareholder value.
Thus if this return can best be met through cost reduction strategies or increasing leverage in a way that does not fit employees’ goals or interests, how can these practices engender high commitment and therefore be labelled ‘best practice’? It is not surprising, therefore, that ethical differences between the rhetoric of human resource best practice and the reality of human resource real practices are highlighted (Legge, 1998).
High-commitment models, therefore, which at first appear to satisfy ethical principles of deontology in treating employees with respect and as ends in their own right, rather than as means to other ends (Legge, 1998), in reality can assume a utilitarian perspective, where it is deemed ethical to use employees as a means to an end, if it is for the greater good of the organisation. This might justify downsizing and rightsizing strategies, but it is difficult to see how this might justify recent tensions between shareholder interests and senior management goals.
A common theme of the best-practice models is contingent pay; thus, when an organisation is performing well, employees will be rewarded accordingly. There have been many recent cases, however, where senior managers of poor performing organizations have been rewarded with large pay-offs. Becker and Gerhart (1996) discuss and debate the impact of HRM on organizational performance further.
They compare the views of those writers that advocate synergistic systems, holistic approaches, internal–external fit and contingency factors (Amit and Shoemaker, 1993; Delery and Doty, 1996; Dyer and Reeves, 1995; Huselid, 1995; Milgrom and Roberts, 1995) with those that suggest that there is an identifiable set of best practices for managing employees which have universal, additive, positive effects on organisation performance (Applebaum and Batt, 1994; Kochan and Osterman, 1994; Pfeffer, 1994). They provide a useful critique of the Best-Practice School as they identify difficulties of generalisability in best-practice research and the inconsistencies in the best-practice models, such as Arthur’s (1994) low emphasis on variable pay, whereas Huselid (1995) and MacDuffie (1995) have a high emphasis on variable pay.
We have so far considered the complexity of the strategic human resource management debate, and recognised that our understanding and application of strategic HRM principles is contingent upon the particular body of literature in which we site our analysis. What then are the implications for the HR practitioner, and particularly the HR strategist? We started to consider the role of the HR practitioner at the end of our consideration of the best-fit school. It is now appropriate to consider in more detail how strategic management processes in firms can be improved to deal more effectively with key HR issues and take advantage of HR opportunities.
A study by Ernst & Young in 1997, cited in Armstrong and Baron (2002), found that more than a third of the data used to justify business analysts’ decisions were non-financial, and that when non-financial factors, notably ‘human resources’, were taken into account better investment decisions were made. The non-financial metrics most valued by investors are identified in Table.
Non-financial metrics most valued by investors
This presents an opportunity for HR managers to develop business capability and demonstrate the contribution of SHRM to organisational performance. One method that is worthy of further consideration is the balanced scorecard (Kaplan and Norton, 1996, 2001). This is also concerned with relating critical non-financial factors to financial outcomes, by assisting firms to map the key cause–effect linkages in their desired strategies.
Interestingly, Kaplan and Norton challenge the short-termism found in many Western traditional budgeting processes and, as with the Ernst & Young study, they imply a central role for HRM in the strategic management of the firm and, importantly, suggest practical ways for bringing it about (Boxall and Purcell, 2003). Kaplan and Norton identify the significance of executed strategy and the implementation stage of the strategic management process as key drivers in enhancing organisational performance.
They recognise, along with Mintzberg (1987), that ‘business failure is seen to stem mostly from failing to implement and not from failing to have wonderful visions’ (Kaplan and Norton, 2001: 1). Therefore, as with the resourcebased view, implementation is identified as a key process which is often poorly executed. Kaplan and Norton adopt a stakeholder perspective, based on the premise that for an organisation to be considered successful, it must satisfy the requirements of key stakeholders; namely investors, customers and employees. They suggest identifying objectives, measures, targets and initiatives on four key perspectives of business performance:
They recognise that investors require financial performance, measured through profitability, market value and cash flow or EVA (economic value added); customers require quality products and services, which can be measured by market share, customer service, customer retention and loyalty or CVA (customer value added); and employees require a healthy place to work, which recognises opportunities for personal development and growth, and these can be measured by attitude surveys, skill audits and performance appraisal criteria, which recognise not only what they do, but what they know and how they feel or PVA (people value added).
These can be delivered through appropriate and integrated systems, including HR systems. The balanced scorecard approach therefore provides an integrated framework for balancing shareholder and strategic goals, and extending those balanced performance measures down through the organisation, from corporate to divisional to functional departments and then on to individuals (Grant, 2002). By balancing a set of strategic and financial goals, the scorecard can be used to reward current practice, but also offer incentives to invest in long-term effectiveness, by integrating financial measures of current performance with measures of ‘future performance’.
Thus it provides a template that can be adapted to provide the information that organisations require now and in the future, for the creation of shareholder value. The balanced scorecard at Sears, for example (Yeung and Berman, 1997: 324), focused on the creation of a vision that the company was ‘a compelling place to invest’, ‘a compelling place to shop’, and ‘a compelling place to work’, whereas the balanced scorecard at Mobil North American Marketing and Refining (Kaplan and Norton, 2001) focused on cascading down financial performance goals into specific operating goals, through which performance-related pay bonuses were determined. An abridged version of this, including some of the strategic objectives and measures in Mobil’s Balanced Scorecard, is included in Table.
Kaplan and Norton (2001) recognise the impact that key human resource activities can have on business performance in the learning and growth element of the balanced scorecard, where employee skills, knowledge and satisfaction are identified as improving internal processes, and therefore contributing to customer added value and economic added value. Thus, the scorecard provides a mechanism for integrating key HR performance drivers into the strategic management process.
Boxall and Purcell (2003) highlight the similarities between Kaplan and Norton’s (2001: 93) Learning and Growth categories of strategic competencies, skills and knowledge required by employees to support the strategy, strategic technologies, information support systems required to support the strategy and climate for action, the cultural shifts needed to motivate, empower and align the workforce behind the strategy, and the AMO theory of performance, where performance is seen as a function of employee ability, motivation and opportunity.
Thus the balanced scorecard contributes to the development of SHRM, not only in establishing goals and measures to demonstrate cause–effect linkages, but also in encouraging a process that stimulates debate and shared understanding between the different areas of the business. However, the balanced scorecard approach does not escape criticism, particularly in relation to the measurement of some HR activities which are not directly linked to productivity, thus requiring an acknowledgement of the multidimensional nature of organisational performance and a recognition of multiple ‘bottom lines’ in SHRM. Boxall and Purcell (2003) suggest the use of two others besides labour productivity, these being organisational flexibility and social legitimacy.
So, although the balanced scorecard has taken account of the impact and influence of an organisation’s human resources in achieving competitive advantage, there is still room for the process to become more HR driven.
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