QUESTION
Essay Question:
Drawing upon relevant theories, models and empirical evidence from the research literature you will write an essay in which you critically analyse the following statement:
‘Strategic Human Resource Management enhances organisational performance in
both good and bad economic times’.
SOLUTION
Strategic Human Resource Management enhances organisational performance in both good and bad economic times
Human Resource Management (HRM) is a relatively new concept in management having taken over from the old concept of Personnel Management in the 1980s. While most firms in that era were keen to dismiss it as nothing but a rebranding exercise meant to give the personnel management departments more prominence, over time they have come to appreciate that the scope of Human Resource Management is significantly wider than just looking at hiring and training people to do a job.
In 1984 the first model of Human Resource Management was coined at the Michigan school which highlighted four processes which define the role of HR managers – selection, appraisal, rewards and development. The same year Harvard coined its own framework which defined that HR isn’t just the work of a singular department, but line managers also perform an HR role (Armstrong 2011). They were the first to link HR policies with overall business strategy of the organization and can in a way be seen as the pioneers of Strategic HRM.
However, several years earlier before the concept of Human Resource Management had been born; Karen Legge had perpetuated the thought of the Contingency Theory which had articulated that people policies are not a standard plug and play concept which can be applied independent of the situation an organization finds itself in. Late advocates of the concept of ‘Best Fit’ would build on the ideals of Contingency when articulating theories of Strategic HRM (Armstrong 2011).
While the theory of strategic management had existed since the 1960s, the ideals of mission statements and objectives took a while longer to sink into the psyche of firms. The early adopters benefited as the focus afforded by a well articulated mission and vision helped organizations grow at a quicker pace, as the objectives of the top management permeated down to the lowest levels.
One of the most dominant early theories of Strategic Management was of a resource based view of a firm which focussed on optimizing the value of existing resources and developing new ones. Over a period of time the definition of the inputs that go into making a business work expanded from capital and raw material to include people. This became the foundation stone for Strategic Human Resource Management as the people that existed in the organization and those that were needed to make it grow became seen as a vital resource to business excellence.
Strategic Human Resource Management
There are many different definitions that exist for Strategic HRM, but all of them largely have the same underlying theme which is to utilize people in the best possible way to help achieve organizational goals. This utilization can happen through well defined HR policies or practices, or by integrating HR into the organization’s objectives not just as an independent function, but perhaps more importantly as a relevant skill that line managers must have.
To this effect, two concepts were defined which help organizations apply Strategic HRM well:
a) Resource based view – Defining a strategy to help an organization achieve a competitive advantage requires using its current and future resources productively. One of those resources which needs to be exploited to the maximum is human resources (Armstrong 2011).
b) Strategic fit – involved ensuring that HRM is not just seen as a stand alone function in organizations fulfilling the old role of personnel management, but is instead applied both vertically and horizontally in an organization. Vertically HR links with other management processes that are vital to the organization’s well being, while Horizontally it ensures that the activities pursued by the HR department act in congruence with each other (Armstrong 2011).
While logically the above makes complete sense, applying it in the real world required HR thinkers to dig deeper. Three approaches were defined as guidelines which organizations could choose to apply depending on which better defined the situation that they found themselves in.
1. Best Practice Approach – which simply stated that certain practices employed in some organizations are just so much better than what others do, and hence should become an industry norm (Armstrong 2011).
2. Best Fit Approach – which stated that one couldn’t really cut-and-paste a best practice without taking into the context within which it was applied. Every organization was not just different – it was also at a different stage of existence, had a different status vis-a-vis its competitors, and may have very different kinds of business objectives. Hence, it was important to define HR strategies which would be most relevant to an organization keeping each of the above three factors in mind – context, competition and objectives (Armstrong 2011).
3. Bundling Approach – which works on the concept of using many complementary HR practices both vertically and horizontally to build greater coherence between HR and business strategy (Armstrong 2011).
Enhancing Organizational Performance
Organizational Performances has multiple measures, depending on the objectives of the company, but common to most organizations are the goals of increasing profits and achieving market share and /or revenue growth.
In 2004, Mercer HR Consulting developed an organizational performance model which among other things was based on people, structure, processes and rewards. It was based on the necessary alignment of each of the above to optimize the human capital of the organization. It aimed at identifying gaps in the workforce which needed to be filled for a company to enhance its organizational performance (Armstrong 2011).
Measuring Organizational Performance in HR Terms
While aligning the HR objectives with that of the organization were critical, over time it also became necessary to evaluate the impact that Strategic HRM was making to the overall organization in measurable terms. It was crucial to determine HR parameters based on which organizational performance could be measured. Some common parameters which exist across organizations include:
1. Attrition rate
2. Absenteeism
3. Revenue per employee
4. HR Costs as a ratio of total cost
5. Employee Satisfaction Surveys
(Armstrong 2011)
Strategic HRM and the Economy
Traditionally, during tough economic times the role played by HR departments the world over gets magnified. However, it is interesting to note how often during good economic times that same role is so often overlooked. The link between Strategic HRM and Organizational Performance is undeniable, and it is the state of the economy which often helps bring it to the fore. The honest truth is that while the priorities and activities undertaken by the HR department tend to change depending on the economic context, the impact they make on Organizational Performance either way is positive.
The King of Good Times
The funny thing about good times is that you’ll never know how long they’ll last. Most organizations when do their annual forecasts, make their plans with an optimistic view of the economy, their business and perhaps based on more than a little bit of wishful thinking when it comes to their competition and their attempts to grab market share and revenue share. Despite this often narrow-minded approach, there are organizations that ‘beat the market’ regularly in good times, and are better prepared for the tide turns against them. Such preparedness often exists because of a number of things an organization has done right in the past. More often than not, HR is behind most of these initiatives.
Some of the key Strategic HR practices which work wonders in good economic times include
a) Attracting Talent – One of the most important tasks assigned to HR managers to attract talent. A high quality workforce is a competitive advantage in the global marketplace, and HR teams work usually in cohesion with line managers to build an organization during good times. Talent Acquisition tends to take various forms
i) Raw Talent – picked up from leading universities and moulded to the requirements of the organization. Some organizations have a distinct liking for raw talent as people with limited experience often hold less prejudice about structures and what does or does not work in a particular business setting.
ii) Industry Hiring – scavenging one’s competitors for people who have an understanding of how the industry works and what are the skills needed to help drive an organization forward is no easy task. A good economic environment often makes such people a tad expensive, but the knowledge they bring in to the organization and the relatively low time they take to begin delivering on the job often compensates for the cost.
iii) Cross skill hiring – A good economic environment is an excellent time to bring in new skills into the organization to help it grow. Identifying skill gaps necessary to promote growth and then looking across domains at people who can plug the holes is an exciting strategic initiative which delivers long term results (Armstrong 2011).
b) Developing Skills – Skill development is key to increasing organizational performance, and is best done during good economic times due to the budgetary requirements of such an exercise. Three Strategic Initiatives help in Skill building:
i) Training – can be carried out both within the organization or outside of it with the help of professionals. Skills training could range from productivity enhancement to learning a new language which would help key top management people be more effective in a high growth marketplace. Chuck Williams, Dean of Butler University College of Business, had an interesting approach to training, where he suggested that “training in small, bite-sized pieces” in contrast to 2-week long training programs not only increases productivity, but also gives employees an opportunity to apply what they learn (Williams n.d.).
ii) Building a Learning Organization – Often in organizations, knowledge of the best practices of handling certain processes lies with a few individuals, and does not permeate across geographies. Building knowledge repositories, process manuals and knowledge sharing mechanisms helps an organization take a massive leap forward towards organizational performance.
iii) Intellectual Capital Building – workshops by business leaders and talks by achievers from different walks of life are terrific tools for building the intellectual capital in an organization.
c) Job Design – allows individuals to have greater flexibility and variety in the work they do. More often than not this results in a considerably happier workforce which tends to work harder to deliver organizational goals. Participating in cross-functional teams in key projects is a vital part of job design that increases job satisfaction (Armstrong 2011).
d) Knowledge Management – everything from acquisition of knowledge to documenting it and making it universally accessible across an organization comes under the domain of knowledge management. This tool helps unlock tremendous value in geographically spread organizations and can help businesses grow in new markets by using learnings from past experiences.
e) Workforce Engagement – Employees need to have a sense of belonging to an organization, and feel motivated about coming to work each day. One of the best ways to increase this is by having a positive vibe around the workspace by building engagement into the organization’s culture, into its very fabric.
f) Performance Management – is perhaps the most crucial of all Strategic HR practices as it focuses on everything from increasing employee productivity to product and process quality to improved levels of customer service. Such changes in the dynamics of an organization have the most visible and most easily measurable impact on the organizational performance. There is often a strong link between performance management and all the other elements discussed in this essay, and it is this integration which helps it link best to performance.
g) Rewards & Recognition – Money is an amazing motivator for a large number of employees. It is their reward for spending time away from their families and helping an organization which they do not own a stake in grow. Financial incentives go a long way in helping improve organizational performance. However, it is interesting to note that a survey of Multinational Enterprises in Australia shows that companies deliberately opt to pay their managers at the median point when compared with the market (McDonell et al 2011)
While all rewards are not necessarily financial, they do not almost always come at a ‘cost’ to the organization, and budgeting such measures can usually only be done in good economic times. Rewards are most often linked to achieving individual goals, but the value of recognition independent from a financial incentive should not be underestimated.
h) Succession Planning – for key roles defines personnel within the organization who are being trained to take over a particular assignment. This involves identifying the right people for taking over key leadership roles, and providing them with the relevant skills necessary to grow into a role. Succession planning is an interesting activity since the HR practice is almost always carried out during good economic times, but the benefits are more often than not accrued during tough times when lay-offs necessitate job divisions and role reassignment (Armstrong 2011).
i) HR Forecasting – People like, any other resource in the organization, will always have a demand-and-supply gap. While a business does forecasting of its targets and deliverables over the next 1-5 years, HR works in partnership with the strategic teams to gauge the demand for people and identify the skills necessary to fulfil a role. More often than not growth plans for the future assume economic solidity, and most HR Forecasting is done keeping in mind that the organization will need more people, not less. However, an often neglected element of HR forecasting is where these people will be sourced from, and internal hiring is a crucial element which needs to be considered while doing forecasting.
The Saviour in Bad Times
When the tide turns against organizations, there are those that cripple and die. Organizations requiring bail outs and workers dreading the next day of job cuts have become commonplace over the last half-decade, and despite all the hope of a turnaround, many firms are yet to turn the corner. As John Sherman stated in his award winning paper at Cornell, “When economic conditions are deteriorating it is imperative for firms to cut expenses in order to remain viable.” (Sherman 2010). That being said, letting people go is not the only way to cut costs. Franco Gandolfi in a wonderful piece for the Ivey Business Journal shared short-term, medium-term and long-term cost adjustment solutions including innovative practices like reducing the work week to voluntary sabbaticals (Gandolfi 2008).
However, while cost cutting is natural during a recession, there are plenty of other equally critical strategic tasks that HR undertakes to deliver value to the organization.
Some of the key Strategic HR practices which are necessary in tough economic times include
a) Retaining Talent – There are some individuals in every organization who are vital for its long term future. Retaining talent must be distinguished from irreplaceable people. People who tend to make themselves irreplaceable traditionally tend to do more harm than good in the long run. In fact, HR Professionals believe that finding skilled labour is even more difficult in a recession as not only are jobs becoming more specific, there are now jobs that exist for an activity that never really existed before, making it near impossible to find a perfect fit despite high levels of unemployment (Schramm 2011). Hence, it is important that retaining talent is a Strategic HR process and not an individual driven prerogative. Retaining high quality talent helps make an organization a “great place to work”.
b) Performance driven Compensation – At a time when staying in the black is so heavily dependent on how a firm performs in comparison with its competitors, having a strong performance-based compensation structure serves as an excellent motivator for employees. Additionally, linking individual’s remuneration to organization performance creates a win-win situation for both the person and the firm.
c) Employment Security – High performing organizations do not let quality resources leave the organization in an economic downturn. Instead, they provide them with job security because they are aware that cutting costs is not the solution to a tough environment, generating greater business, and deriving more productivity out of existing resources is.
d) Employee Motivation – High performing firms are those where the employees are motivated, not by fear, but by the nature of their jobs. One of the biggest causes of disillusionment in the workplace is worrying whether tomorrow you will have your job or not. In such a situation the first thing that happens is that office productivity tumbles, and the employees who stay on in an organization tend to work at well below their potential.
e) Employee Commitment – is the willingness of employees to go that extra mile when you need them to the most. Employees with high levels of commitment to the organization’s cause are often worth two in times of high pressure. Such people tend to identify well with the organization’s goals and objectives because they either appeal to them on a personal level or fit in well with their professional ambitions.
f) Communication – Arguably the most useful Strategic HR practice during tough times is Internal Communication. Communication one must remember is a two way process, and ideally involves not just the organization being honest and truthful to the employees about the state of affairs, but also being receptive to the feedback and response they receive from the employees about their own plight. Formal channels of communication are absolutely vital to ensure that gossip and hearsay, both very dangerous modes of misinformation spreading in an organization. Harris Diamond, CEO of Weber Shandwick Worldwide shared his perspective, “…colleagues and coworkers talk about the economic issues, which feeds the rumor mill. Some of the rumors might be accurate, but most are false. The result? A demotivated workforce. People freeze up waiting for bad news.”
John Sherman had a valuable solution to this conundrum, “A good way to get around the institutional barrier that tends to separate management from workers’ concerns is to actively solicit employees’ opinions on the work they are doing. Worker involvement committees are an effective strategy for accomplishing this goal.” (Sherman 2010)
Conclusion
A BCG/WFPMA Survey conducted in 2010 defined the four areas which needed maximum attention during volatile economic times as managing talent, improving leadership development, enhancing employee engagement and strategic workforce planning (BCG & WFPMA 2010). It is no coincidence that each of these come under the ambit of Strategic Human Resource Management. Organizations which have managed to keep their heads above the water during these turbulent times have ensured that HR vertically and horizontally permeates across the organization and is no longer seen as a “support function” but as a key business enabler. This is sadly though not true for all organizations with a March 2009 the Economist Intelligence Unit survey indicating that “There are diverging perspectives between those working in the HR function and those elsewhere in the organisation regarding the strategies and goals of human resources” (Bennett 2009). Hence, it is easy to understand why only some organizations continue to do well in difficult times, while the bulk of firms struggle.
Jon Williams, a partner at PricewaterhouseCoopers, sums it up perfectly when he states that the key role of HR over the next decade is to help organisations position themselves to prosper when the economy strengthens (Reynolds 2009).
References:
Schramm J, 2011, Feels Like Recession, But …,
http://www.shrm.org/Publications/hrmagazine/EditorialContent/2011/1211/Pages/1211trendbook.aspx, viewed 22nd April 2012.
BCG & WFPMA, 2010, Creating People Advantage 2010: How Companies Can Adapt Their HR Practices for Volatile Times,
http://www.ahri.com.au/MMSDocuments/profdevelopment/research/research_papers/creating_people_advantage_2010.pdf, viewed 22nd April 2012.
McDonnell, Russell, Sablok, Burgess, Stanton, Bartram, & Manning, 2011, A Profile of Human Resource Management in Multinational Enterprises Operating in Australia, http://www.education.ahri.com.au/docs/HRM_MNE_report.pdf, viewed 22nd April 2012.
Williams C, n.d.,Inside Indiana Business: Strategic HR Moves in Difficult Economic Times,
http://www.insideindianabusiness.com/contributors.asp?id=1541, viewed 22nd April 2012.
Bennett E, 2009, The Economist Intelligence Unit: The role of HR in uncertain times,
http://graphics.eiu.com/marketing/pdf/Oracle_HR.pdf, viewed 22nd April 2012.
Armstrong M, 2011, Armstrong’s handbook of strategic human resource management – Michael Armstrong, Chapters 1 and 2 11th edition, pp. 3 – 43, viewed 22nd April.
Gandolfi F, 2008, Ivey Business Journal: HR STRATEGIES THAT CAN TAKE THE STING OUT OF DOWNSIZING-RELATED LAYOFFS,
http://www.iveybusinessjournal.com/topics/strategy/hr-strategies-that-can-take-the-sting-out-of-downsizing-related-layoffs, viewed 22nd April 2012
Littlecott L & Dunham P, 2008, The Impact of the Economic Crisis on our Organization’s Human Resources, http://www.strategichrinc.com/articles/Dec2008.htm, viewed 22nd April 2012.
Reynolds D, 2009, HC Online: What HR can offer in tough times, http://www.hcamag.com/resources/hr-strategy/what-hr-can-offer-in-tough-times/115171/, viewed 22nd April 2012.
Sherman J, 2010, Three Strategies for Managing through Economic Change, Cornell HR Review, http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1008&context=chrr, viewed 22nd April 2012.
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