The impact of HR
Much research has been carried out showing that good HRM practice and firm performance are correlated
How HRM makes an impact
Storey et al (2009: 4) observed that: ‘The premise is that, in some shape or form, HR policies have an effect on HR practices and these in turn influence staff attitudes and behaviours which will, in turn again, impact on service offerings and customer perceptions of value.’ The assumption is that good HRM practices will enhance performance. This is supported by the notion of ‘best practice HRM’, which describe as a ‘strong’ HR system is in place. Core characteristics of their ‘strong’ system are high levels of distinctiveness, consistency and consensus. Where these are present there will be an organizational climate that supports HR implementation. But they also made the obvious suggestion that it is not enough to have good practices if they are not properly implemented.
An extensive research project conducted by Guest and Conway (2011) led to the finding that consensus on HR effectiveness did not support Bowen and Ostroff’s (2004) proposition that a strong HR system would have a significant association with outcomes. Guest and Conway commented that their study revealed very low levels of agreement about HR effectiveness. They concluded that: ‘There are three elements in a logical model of HR effectiveness. HR practices must be present, they must be effective and they must be effectively implemented’
Uncertainties about the link between HRM and performance
As noted earlier, much research has demonstrated an association between HRM and performance. But Guest et al(2000b) observed that it left uncertainties about cause and effect. Ulrich (1997: 304) pointed out that: ‘HR practices seem to matter; logic says it is so; survey findings confirm it. Direct relationships between performance and attention to HR practices are often fuzzy, however, and vary according to the population sampled and the measures used.’ Guest (2011: 11) summed up his article on HRM and performance with the comment that: ‘After hundreds of research studies we are still in no position to assert with any confidence that good HRM has an impact on organization performance.’
There are two issues that affect the determination of a link between HRM and firm performance: ‘causal ambiguity’ and ‘contingency factors’. These contribute to what is known as the ‘black box’ phenomenon.
The term causal ambiguity refers to the numerous, subtle and often hidden interconnections between the factors influencing cause and effect. Boselie et al (2005: 75) referred to the causal distance between an HRM input and an output such as financial performance: ‘Put simply, so many variables and events, both internal and external, affect organizations that this direct linkage strains credibility.’
A basic reason for ambiguity is multiple causation, which exists when there is more than one possible cause for an effect. HRM may have caused an improvement in performance but there may be many other economic or business factors that did so, and it could be difficult to unravel them. Another factor is the possibility of reversed causality (a situation where A might have caused B but B might well have caused A). As Purcell et al (2003: 2) expressed it: ‘Although it is nice to believe that more HR practices leads to higher economic return, it is just as possible that it is successful firms that can afford more extensive (and expensive) HRM practices.’
Causation will additionally be affected by the organization’s context, ie the internal and external environmental factors that influence what happens within the organization.
The black box phenomenon
Causal ambiguity also stems from the black box phenomenon, as illustrated in Figure 4.1. This is the situation in which, while it may be possible to observe HRM inputs in the form of HR practices and to measure firm performance outputs, it may be difficult to ascertain, through research, what happened in between – what the HRM outcomes were that converted the input of HR practices into firm performance outputs. Alvesson (2009: 56) suggested that: ‘Research does not proceed beyond attempts to find an empirical association between HR practices and organizational performance. The phenomena are in a black box, only input and output are registered and what is happening remains clouded in the dark.’
Explanations of how HRM makes an impact
Guest (1997: 268) stated that: ‘The assumption is that “appropriate” HRM practices tap the motivation and commitment of employees.’ He explained how expectancy theory might help to explain the HR/performance link as follows:
The expectancy theory of motivation provides one possible basis for developing a more coherent rationale about the link between HRM practices and performance. Although expectancy theory is concerned primarily with motivation, it is also a theory about the link between motivation and performance. Specifically, it proposes that high performance, at the individual level, depends on high motivation plus possession of the necessary skills and abilities and an appropriate role and understanding of that role. It is a short step to specify the HRM practices that encourage high skills and abilities, for example careful selection and high investment in training; high motivation, for example employee involvement and possibly performance-related pay; and an appropriate role structure and role perception, for example job design and extensive communication and feedback.
Following this contribution from Guest, any explanation of the impact of HRM on organizational performance is likely to be based on three propositions: 1) that HR practices can make a direct impact on employee characteristics such as engagement, commitment, motivation and skill; 2) if employees have these characteristics it is probable that organizational performance in terms of productivity, quality and the delivery of high levels of customer service will improve; and 3) if such aspects of organizational performance improve, the financial results achieved by the organization will improve. This can be described as the HR value chain.
The propositions highlight the existence of an intermediate factor between HRM and financial performance. This factor consists of the HRM outcomes in the shape of employee characteristics affected by HR practices. Therefore, HRM does not make a direct impact. A model of the impact of HRM taking into account the considerations of reverse causation and contingency effects mentioned earlier is shown in Figure 4.2
.But high performance is not just about HR practices. The case-based research by Purcell et al (2003) showed that the key to activating what they called the ‘people-performance’ link lies not only in well-crafted ‘bundles’ of HR practices, but in their conjunction with a powerful and cohering organizational vision (or ‘big idea’) and corporate leadership, together with front-line leadership’s action and use of its discretionary power