Strategic HR aspects of performance

In our opening chapters we described the shift in emphasis away from the contract of employment towards the contract for performance. Even before the development of Taylor’s scientific management methods a century ago, getting the most out of the workforce has always been a predominant management preoccupation, and the manage­ment literature is full of studies on the topic. Psychologists have studied motivation and leadership, ergonomists have dismantled and reconstructed every aspect of the physical environment in which people work, industrial relations specialists have pondered power relationships and reward, while sociologists discussed the design of organisations and their social structure, and operations experts have looked for ways to engineer process improvements. In 2001, Caulkin asserts:

more than 30 studies in the US and UK leave no room for doubt; how organizations manage and develop people has a powerful – perhaps the most powerful – effect on overall performance, including the bottom line. (Caulkin 2001, p. 32)

1. A CHANGE IN PERSPECTIVE: FROM EMPLOYMENT TO PERFORMANCE

The traditional HRM approach to enhancing individual performance has centred on the assessment of past performance and the allocation of reward – rewards were provided in exchange for performance. This has been powerfully influenced by the industrial rela­tions history, as trade unions have developed the process of collective bargaining and negotiation.

The prime purpose of trade unions has always been to improve the terms and working conditions of their members; the union has only one thing to offer in exchange for improvements in terms and conditions, that is, some opportunity for improvement in productivity or performance. With the steadily increasing influence of unions in most industrial countries through most of the twentieth century, it was inevitable that performance improvement was something of direct interest only to management. Performance therefore became stereotyped as something of no intrinsic interest to the person doing the work.

The influence of trade unions has altered and collective bargaining does not dominate the management agenda as much as it used to. This is the most significant feature in the general change in attitudes about what we go to work for. Managements have been gradually waking up to this fact and realising the scope for integration in a way that was previously unrealistic. Not only is it possible to say, ‘Performance is rewarded’, one can now begin to say, ‘Performance is a reward’. The long-standing motivational ideas of job enlargement, job enrichment, and so forth, become more cogent when those at work are able to look for the satisfaction of their needs not only in the job, but also in their performance at the job.

Although it may seem like playing with words, this subtle shift of emphasis is funda­mental to understanding the strategic approach to performance.

2. INFLUENCES ON OUR UNDERSTANDING OF PERFORMANCE

2.1. The Japanese influence

In the 1980s the success of Japanese companies and the decline of western organisations encouraged an exploration and adoption of Japanese management ideas and practices in order to improve performance. Thurley (1982) described the objectives of personnel policies in Japan as performance, motivation, flexibility and mobility. Delbridge and Turnbull (1992) described type ‘J’ organisations (based on Japanese thinking) as charac­terised by commitment, effort and company loyalty. A key theme in Japanese thinking appears to be people development and continuous improvement, or ‘kaizen’.

Much of this thinking and the specific management techniques used in Japan, such as JIT (just in time), have been adopted into UK organisations, often in an uncritical way and without due regard for the cultural differences between the two nations. It is only where the initiatives are developed and modified for their location that they appear to succeed.

2.2. The American literature

Key writers from the American ‘excellence’ school, Peters and Waterman (1982), identified eight characteristics that they found to be associated with excellent companies – all American. These companies were chosen as excellent on the basis of their innova­tiveness and on a set of financial indicators, compared on an industry-wide basis. The characteristics they identified included such factors as a bias for action (rather than an emphasis on bureaucracy or analysis) and using a simple form with lean staff (meaning a simple organisation structure and small HQ staffing).

Peters and Waterman identified a shift from the importance of strategy and structural factors to style, systems, staff and skills (from the hard ‘s’s to the soft ‘s’s). In a follow- on book Peters and Austin (1985) identify four key factors related to excellence as concern for customers, innovation, attention to people and leadership.

However, there are problems with the research methodology used; for example, no comparison was made with companies not considered to be excellent. We do not, therefore, know whether these principles were applied to a greater extent in excellent organisations. In addition, a number of the companies quoted have experienced severe problems since the research was carried out, and there remains the problem of the extent to which we can apply the results to UK organisations.

Whatever the reservations, the influence of this work on strategic thinking about performance remains profound. Even the use of the term ‘excellence’ means that there is a change of emphasis away from deadpan, objective terms such as profitability, effective­ness, value added and competitive advantage towards an idea that may trigger a feeling of enthusiasm and achievement. ‘Try your best’ becomes ‘Go for it’.

More recently there has been considerable quantitative research in the USA that aims to identify HR practices which lead to high organisational performance, for example Huselid (1995) and Pfeffer (1998). The HR practices identified are termed ‘high perform­ance work practices’ and have encouraged similar investigations in the UK to determine ‘high commitment work practices’.

2.3. HRM and the strategy literature

The HRM strategy literature provides different ways to understand the contribution of HR policies and practices to organisational performance. We noted in Chapter 2 that three distinct approaches to HR strategy can be identified. The universalist or best practice approach presupposes that certain HR policies and practices will always result in high performance, and the question is to identify exactly what these are. The contingency or fit approach suggests that different HR policies and practices will be needed to produce high performance in different firms depending on their business strategy and environment. Finally the resource-based view of the firm suggests that neither of these approaches is sufficient, but that every organisation and its employees should be considered as unique and that the set of HR policies and practices that will result in high performance will also be unique to that firm. From this perspective no formula can be applied, and the way that people processes contribute to organisational performance can only be under­stood within the context of the particular firm. These three perspectives have resulted in different investigational approaches to understanding the impact of people management on organisational performance, as will become clear in the following section.

2. DO PEOPLE-MANAGEMENT PROCESSES CONTRIBUTE TO HIGH PERFORMANCE?

The investigations to date have had a dual purpose, the first being to seek to establish a link between people-management practices and organisational performance. In other words, does the way that people are managed affect the bottom line? The second one follows logically from this, and is: If the answer to the first question is yes, then which particular policies and practices result in high performance? Both these questions are usually invest­igated in parallel. A variety of different definitions of performance have been used in these studies. These range from bottom line financial performance (profitability), through productivity measures, to measurement of outcomes such as wastage, quality and labour turnover (which are sometimes referred to as internal performance outcomes). Some­times the respondent’s perception of performance is used, on the basis that bottom line figures can be influenced by management accounting procedures. The studies have gen­erally used large datasets and complex statistical analysis to determine relationships.

Some researchers argue that the performance effects of HR policies and practices are multiplicative rather than additive, and this is often termed the ‘bundles’ approach (see, for example, MacDuffie 1995), and this highlights an emphasis on internal rather than external fit. In other words, a particular set of mutually reinforcing practices is likely to have more impact on performance than applying one or just some of these in isolation. This is sometimes referred to as complementarity. Pfeffer (1998), for example, identifies seven critical people-management policies: emphasising employment security; recruiting the ‘right’ people; extensive use of self-managed teams and decentralisation; high wages solidly linked to organisational performance; high spending on training; reducing status differentials; and sharing information; and he suggests that these policies will benefit every organisation. In the UK the Sheffield Enterprise Programme (Patterson et al. 1997) has studied 100 manufacturing organisations over 10 years (1991-2001) and used statis­tical techniques to identify which factors affect profitability and productivity. It has been reported that aspects of culture, supervisory support, concern for employee welfare, employee responsibility, and training were all important variables in relation to organ­isational performance. Also in the UK, Wood and de Menezes (1998) identify a bundle of HR practices which they term high-commitment management, and these comprise recruitment and selection processes geared to selecting flexible and highly committed individuals; processes which reward commitment and training by promotion and job security; and the use of direct communication and teamwork.

This avenue of work has a very optimistic flavour, suggesting not only that people- management practices are related to high organisational performance, but that we can identify the innovative and sophisticated practices that will work best in combination. On a practical level there are problems because different researchers identify different practices or ‘bundles’ associated with high performance (see, for example, Becker and Gerhard 1996), and the results overall have been patchy and inconclusive. Guest et al. (2003) address these issues by suggesting that it is the internal fit of practices that is important, rather than the exact practices that are in the bundle.

There have been many criticisms of this approach, partly based on the methods used – which involve, for example, the view of a single respondent as to which practices are in place, with no account taken of how the practices are implemented. A further confusion is that some studies are at establishment level, some at corporate level, some are sector based and some are cross-sector. Each of these approaches has inbuilt problems and creates extreme difficulties for any meta-analysis of the studies so far. A further problem is causality. It could be that profitable firms use best practice people-management methods, because they can afford to do so since they are profitable, rather than that such methods lead to profitability. A further issue concerns the conflict between different aspects of the bundle. Such contradictions are, for example, between individualism and teamwork and between a strong culture and adaptability. Lastly, this approach ignores the business strategy of the organisation.

The work we have described so far comes from a universalist/best practice perspective; an alternative way forward is to use the contingency or fit point of view (see, for example, the work of Wright and Snell 1998), asking the question, ‘Which people-management policies create high performance in which different organisational circumstances?’ This approach does bring the integration with business strategy to the fore, and draws attention to sectoral differences; for example Guest (2001) has suggested that ‘high performance work practices’ may be effective in producing high performance in manu­facturing rather than services. However, it fails to provide a more useful way forward.

Attempting to model all the different factors that influence the appropriate set of HR policies and practices that lead to high performance is an extremely complex, if not impossible, task. In addition to this Purcell et al. (2000) argue that the speed of change poses a real problem for the fit approach.

In summary, the extent to which all the statistical work that has been done proves the relationship between people-management practices and organisational performance continues to be hotly contested. Reviewing the academic literature Richardson and Thompson (1999) come to the conclusion that the evidence indicates a positive rela­tionship between innovative and sophisticated people-management practices and better business performance. Guest et al. (2003), however, recognise that although the statistical work so far provides some associations between people management and organisational performance there is a lack of convincing evidence. Guest (2000), Hall (2002) and par­ticularly Purcell (1999) all provide detailed expositions of the problems with the above approaches. The situation is further confused by the fact that organisations often apply differing HR practices to different groups of employees. For example Melian-Gonzalez and Veranco-Tacoronte (2006) found that the value and the uniqueness of jobs were two factors that influenced the application of differing practices.

Purcell (1999) suggests that a more useful approach is to focus on the resource-based view of the firm, which is the third perspective on HR strategy that we considered in Chapter 2. From this perspective each organisation is a unique and complex whole, so we need to look beyond lists of HR policies and practices to explain organisational performance. We also need to consider long-term performance capability and not just short-term performance improvements. From this perspective Paauwe and Richardson (2001) argue that the move to longitudinal studies and case study work is useful, and suggest that organisational context and institutional arrangements need greater atten­tion; Becker and Gerhard (1996) suggest that it is more likely to be the architecture of the system, not just a group of HR practices, that results in high performance, and Purcell suggests that it is how practices are implemented and change is managed that makes the difference. Hutchinson et al. (2000) term this ‘idiosyncratic fit’. The work of Purcell and his colleagues from Bath University, which forms part of the CIPD’s research in this area, attempts to address some of the deficits in large-sample statistical work. They have investigated 12 case study organisations on a longitudinal basis, collecting the employees’ view and concentrating on the line manager’s role in implementation.

They collected data on 11 HR policy/practice areas identified from previous research as being linked to high organisational performance. In testing the link between people manage­ment and performance this study differs from others in that the measures taken were ones that were the most meaningful to each organisation. (The issue of performance measurement and its varying nature is addressed in Case 11.1 on the companion website, www. pearsoned.co.uk/torrington). Also each of the organisations was visited twice over a two- and-a-half-year period so comparisons could be made over time. Their results are not clear- cut, but a major conclusion is that it is the way policies are implemented and the role of line managers which are critical. They also acknowledge that it is difficult to disentangle the performance impact of HR policies from the performance impact of changing environ­mental circumstances and other changes such as technology. They do argue, however, that those organisations with a ‘big idea’, which expresses what the organisation stands for and what it is trying to achieve, were more able to sustain their performance over the longer term. For example the big idea in Jaguar is quality and in Nationwide it is mutuality. They also found that such big ideas have five characteristics in high-performing organisations:

• Embedded – in policies and practices
• Connected – connects relationships with customers, values, culture and the way people are managed
• Enduring – stable, long-lasting values which survive even in difficult times
• Collective – acts as corporate glue
• Measured and managed – often through the use of balanced scorecard type approaches

For further information on the balanced scorecard see Chapter 33.

Source: Torrington Derek, Hall Laura, Taylor Stephen (2008), Human Resource Management, Ft Pr; 7th edition.