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The Connections between HR Strategy and Organisational Performance What research evidence is there that people management policies can actually influence corporate performance?

A number of projects have attempted to identify a link between progressive human resource management policies and practices and organisational performance. The CIPD in particular, has sponsored much research into the subject and, in the early part of 2001 it published the results of its summary of the research carried out on its behalf, entitled: The case for good people management. It concluded that a positive relationship had been identified between employee attitudes, organisational culture, human resource management practices and company performance. It emphasised that, if managers wish to influence the performance of their companies, the most important area they should focus on is the management of people.

It also concluded that employee commitment and a satisfied workforce are fundamental to improving performance.

J. B. Arthur conducted a number of investigations, chiefly into the US steel industry, in the first half of the 1990s. In particular, Arthur examined the effect of high-commitment strategies (where the focus is on shaping employee behaviours by creating psychological links between organisational and employee goals, moderate employee participation, general training and high wages) compared with low commitment strategies (or, as he called them, control strategies, where compliance is through rules and procedures, with little employee participation, little training and low wages). He concluded that mills employing high commitment strategies had significantly higher levels of productivity and quality. The average employee turnover rate in high commitment mills was less than half of that in firms with a low commitment strategy.

Arthur also examined the performance effects associated with a fit between business and human resource strategy and concluded that, where fit could be demonstrated, productivity was generally 25% higher than without fit. We will look at how "fit" can be achieved in a later chapter.

In 1995, M. A. Huselid conducted research into the impact of human resource management practices on company performance and found that, if firms increased their high performance work practices, the result was significant reductions in employee turnover and significant increases in productivity and profits.

In a further study in 1997, he focused on the strategic impact on shareholder value of high performance work systems and found that firms that adopted high performance work

systems had significantly higher levels of performance than those which did not, although the research did not identify precisely how such a system creates that value.

Later in manual we'll look at ways of evaluating the effectiveness of human resource strategies and some of the pitfalls of doing so. But at this point, think about your own organisation and the strategies employed. How might the strategies help or hinder organisational performance? What evidence do you have of your findings?

Case Study

In 2003 the UK Chartered Institute of Personnel and Development (CIPD) published a study into the HR practices, staff views and performance in 11 large UK organisations including Jaguar Cars, the Nationwide Building Society, Selfridges (a large and successful London store) and Tesco (the UK's largest supermarket chain).

The University of Bath in the UK had carried out the research. One of the key conclusions was that the most carefully thought through HR strategy was useless unless it was embraced by line managers who have the skills and understanding necessary to engage and motivate employees.

Research had already demonstrated the powerful statistical impact of people management practices on overall business performance. But in this study they wanted to understand more about why and how such practices influenced organisational performance – to unlock what has been termed the "black box".

The study "Understanding the People and Performance Link: Unlocking the black box" confirmed the powerful relationships between HR practices, employee commitment and operating performance. It tracked

organisational performance over a three-year period. Where effective HR practices were not in place, levels of employee commitment were found to be up to 90% lower.

Other key conclusions included:

(a) An organisation needs a clear direction and purpose, beyond the bland mission statement or generic goal of financial returns, which engages, enthuses and unites people. At The Nationwide Building Society this is a commitment to mutuality. At Royal United Hospital (RUH) Bath it is saving lives. This "big idea" appears essential in motivating and directing people behind the strategy of the

organisation.

(b) High performing organisations invariably employ some form of balanced performance scorecard or methodology. Be it the stakeholder value model employed at Selfridges, the six-sigma methodology at Jaguar or a quality framework at the Court Service, this demonstrates the importance of different stakeholder groups to the organisation's success, and links individual and corporate goals.

(c) The research confirmed that there was no universal "best HR practice". It is all about having a broad and integrated "bundle", tailored to the needs of the organisation. For example, the practices employed at technology company AIT would be unlikely to go down well on the production line at Jaguar. Yet every worker there could tell you Jaguar's latest position in the international quality league table.

Strong attention to team working, extensive employee communications and involvement, and positive perceptions of training and careers emerged as common ingredients in the performance-driving HR mix.

Leadership – not at the top of the organisation, but at the front line – appeared to be holding back many UK organisations. Middle managers and supervisors set the context in which the HR/business performance relationships happened, or did not happen.

For example at the UK supermarket retailer Tesco, where 88% of staff feel loyal and share the company's values, a typical section manager described their role as, "mobilising the team with a goal, motivating people". And building management capability is a core component of the UK government tax office's HR strategy.

Another example in the research is nursing staff at a hospital describing the change after a new ward manager worked with her HR colleagues on a range of new policies, such as flexible shift working and 360 degree appraisal. Comments included:

"I'm much more motivated now, there's training, the atmosphere's totally different";

"Communication is excellent now…our manager is very approachable"

"When I came here it was unsettled. Now we have a strong team…you want to do the job to the best of your ability".

The high level of staff turnover in the ward had since fallen to almost zero.

Organisations can make progress very quickly. They need to survey employee attitudes and commitment; assess, train, coach and support their first line managers and integrate HR policies with goals and values. Once these processes are underway there is a very high likelihood of

transformation.

Linking Human Resource Strategy to Performance

Evidence suggests that to achieve superior organisational performance, there must be a distinct link between human resource strategies and the organisation's business strategies.

We will look at this subject in more detail later in the manual, but the CIPD research into people management and business performance identified three main approaches to the development of human resource strategies:

The best practice approach, which is based on the belief that there is a set of superior human resource practice which, if adopted, will lead to better organisational

performance

The best fit approach, which is based on the belief that there can be no universal prescription for human resource management policies and practices. It is all contingent on the context and culture of the organisation

The configurational approach, which focuses on the need to achieve horizontal or internal fit, i.e. human resource practices which are interrelated and internally consistent.

Finally, the Future of Work Survey carried out on behalf of the CIPD and analysed by, amongst others, David Guest, analysed the effectiveness of a number of "progressive"

human resource practices by surveying 835 private sector organisations. The survey found that the application of these practices is associated with higher levels of employee

commitment and quality and greater flexibility. These in turn are associated with higher levels of productivity and quality of goods and services and hence financial performance.

Their model of the link between human resource management and performance is shown below.

Source: CIPD, The case for good people management, 2001