HRM Effectiveness In Improving Performance

HRM Effectiveness In Improving Performance This article examines the strategic role of HR and its main practices, describes the outcomes of the respective category of HR practices, explains the critical reasons for measuring HRs efforts, and proposes a framework for assessing HR. Ultimately, organizations would be able to utilize the information to determine how particular HR practices correlate with better business results; determine potential areas for investments, expansions, and reductions; justify budget allocations; and be more accountable for each dollar spent within the organization. The framework proposed does not merely explain the cost for each of the major HR activity, but demonstrates the value of the activity and hence, the opportunity to determine if it is a worthwhile investment and strategy for creating a competitive advantage. What value does the human resources (HR) function contribute to the bottom line of the organization? Over the years, there has been tremendous emphasis placed on HR practitioners becoming strategic business partners and being a value-added source within organizations. Traditionally, HR professionals could talk generally and conceptually about employee morale, turnover, and employee commitment being outcomes of HR efforts. Furthermore, the HR function is often viewed as an expense-generator and an administrative function and not as a value-added partner. Ulrich (1997b) reiterated that to fulfill the business partner role of HR, concepts need to be replaced with evidence, ideas with results, and perceptions with assessments. This article examines the strategic role of HR and its main practices, describes the outcomes of the respective category of HR practices, explains the critical reasons for measuring HRs efforts, and proposes a framework for assessing HR. Ultimately, organizations would be able to utilize the information to determine how particular HR practices correlate with better business results; determine potential areas for investments, expansions, and reductions; justify budget allocations; and be more accountable for each dollar spent within the organization. The framework proposed does not merely explain the cost for each of the major HR activity, but demonstrates the value of the activity and hence, the opportunity to determine if it is a worthwhile investment and strategy for creating a competitive advantage. The framework has proven its effectiveness at many companies showing how HR creates value, utilized the information collected to increase investments in specific HR strategies and eliminating ineffective investments, and used as a critical resource in the strategic business planning and budget allocation. The companies include Fortune 500 and smaller companies from retail, transportation, and financial industries. Understanding the Strategic Role of HR In todays business environment, organizations need to be constantly evaluating their internal and external environment for challenges and opportunities to remain competitive and to sustain growth. Political, economic, social, and even psychological changes within our societies create significant impact on organizations. Given any significant change or event, how ready are we as an organization to react in order to remain competitive? Many factors are driving changes in organizations today including the use of technology, globalization, changes in workforce demographics, eliminating the bureaucracies in organizational structures, and balancing work-family issues. Understanding the potential of an organizations resources and optimizing the output of such resources given the changes, provides the impetus for HR being the key source of creating the competitive advantage for the organization. Insert figure 1 about here To create value and deliver results, HR professionals must begin not by focusing on the work activities or work of HR but by defining the deliverables of that work. HRs roles in building a competitive organization include management of strategic human resources, management of transformation and change, management of firm infrastructure and management of employee contribution (Ulrich, 1997a). Although these roles are valid and have proven to be value-added in recent years, there is now the critical need to move beyond the strategic business partner role to players in the business (Ulrich Beatty, 2001). Players, according to Ulrich Beatty, contribute to the profitability of the organization, they deliver results and they do things to make a difference. The roles of players are to a) coach b) design, c) construct, d) change the organization, e) creating followers, and f) playing by the rules. Another perspective on the role of HRM suggests that in leading-edge companies, HR profession als play four key roles: a) strategic business partners, b) innovators, c) collaborators, and d) facilitators (Schueler Jackson, 2000). As a strategic business partner, HR professionals should understand the nature of the business from a strategic, operational, financial, and other aspects necessary to be part of an effective team managing an organization. Functioning as an innovator, HR professionals are challenged to continuously search for strategies that will create value for the organization and not merely function in a reactionary mode. Furthermore, HR professionals will also serve as collaborators with senior leaders and all employees to implement business strategies forming the strategic link throughout the organization. As facilitators, HR professionals function as the change agent providing rationale, support, and readiness for planned changes designed to support the business strategies. The fundamental role of HRM is essentially to maximize profitability, quality of work life and profits through effective management of people (Cascio, 2003). Given this premise, it can be easily inferred that HRs role is to help create value to the organization. Figure 1 illustrates some of the external challenges and changes facing organizations, their impact on the organization, and how HR is impacted. The Importance of Measuring HRs Activities Even though HR professionals are convinced that their efforts add value to the organizations bottom-line, there is frequently little evidence to demonstrate such belief. A recent survey of 54 companies in the Midwest, USA conducted by the author revealed that 51 of the 54 companies conducted little or no assessment of their HR departments efforts and therefore could not have provided any quantitative measures of HRs value to the organization. In addition, a study conducted by Becker, Huselid, and Ulrich (2001) indicated that less than 10% of the 968 firms that participated in their study had a formal estimation procedure to measure HRM. Measurement in most HR departments is usually restricted to processes measuring costs and not showing value added (HRPS, 1993). There is now the imperative need to justify each dollar invested, compare strategies to determine maximum worth, and to decide on where to invest especially as companies scramble to survive after the September 11 tragedy. Pepitone (1997) reiterated that HR leaders should know how to prove the value-added of their services because management is increasingly requiring departments to give evidence of their worth. In addition, Sorensen (1995) stated that the best way for HR to gain credibility so that it can make meaningful changes is for practitioners to measure the cost and effectiveness of what they do. And they must put that into language that senior executives understand: financial results. HR managers need to measure the cost and effectiveness of their activities far more closely than they have in the past. Many organizations have been forced and are conti nuing to determine ways of being more cost-effective. Many of the other functions including finance, accounting, and marketing are able to show a return on investment for their respective efforts, so given the increased emphasis on HR practices, it is imperative for HR to be able to show its effectiveness in creating value for the organization. The new HR is a transformed role comparing itself to any other function, not only through espoused value creation strategies, but through outcomes, qualitative and quantitative measurements, and direct relationships to profitability. The simple option of showing HRs value or becoming extinct as a department presents itself to HR professionals and given the strong belief of HR as a source of added value in organizations, there is no choice than for HR professionals to be able to quantitatively and qualitatively explain its strategic role in the organization. There has been substantial evidence over the years to show the relationship between HR and organizational performance as summarized by (Yeung Berman, 1997). Some of the studies include MacDuffie and Krafcic (1992), US Department of Labor (1993), Pfeffer (1994), Arthur (1994), Huselid (1995), and Ostroff (1995). Even though these studies exist, there still lacks a framework that is grounded in theory, yet practical enough for practitioners to use that shows the major HR activities, outcomes of the respective activities, and how they can be measured. The framework describes clusters within the HR function and encompasses: a) strategic planning, b) selection, c) training and development, d) organization development and change, e) performance management, f) rewards system, and g) organizational behavior theory. HRs Activities Outcomes Even though there are several classifications or groupings of HR activities, the author uses seven groups of activities seen as being most strategic and influential in realizing the strategic business objectives of the organization. Todays economy dictates that organizations continually assess the external and internal environment and make relevant changes in order to remain competitive. The author examines each of the clusters and provides a description of each, its importance in achieving the business strategy, and how it can be measured to determine its effectiveness. Insert figure 2.0 about here Strategic Planning The role of the HR function has changed tremendously over the past 10 years where HR functions have previously been viewed as not being an integral core of the business and merely viewed as an administrative function to todays economy where HR practitioners are more frequently considered business partners. Being a business partner, the ideal situation would be the inclusion of the HR leader in the strategic business planning (SBP). In the most fundamental sense, SBP involves choosing how an organization will compete (Rothwell, 1994). The questions of what product to produce, where should the product be sold, how many to make available, how the products and services differ from the competition are included as part of the business planning process. Business strategy can also be defined as the process by which the basic mission and objectives of the organization are set and the process by which the organization uses its resources to achieve the objectives(Tichy, Fombrum, Devanna, 1982) . Why is it important for HR to be involved in the strategic planning process? In developing strategies in todays complex and dynamic business environment, there is the critical need for business leaders to continually assess their talent pool to determine if the appropriate expertise needed to accomplish the business strategies are available within the organization. If not, where and how can the organization acquire the necessary skills? Another critical area is to identify what skills are needed to be developed internally for current employees to perform at the level necessary for the organization to be competitive. Does the organization need to change any of its current policies and practices in order to derive the intended behaviors of employees? How should performance be measured and what types of rewards should be given for the intended behaviors? These are all fundamental areas of effectively managing an organization and imperative to be addressed at the strategic planning stage . Typically, the HR function has the most experience and knowledge in addressing these critical issues. Strategic planning seeks to identify those organizational decisions and actions, which yield the greatest advantage under various assumptions about the organization and its environment. The integration of human resource function into the organizational strategy provides the basis to enable the human resource function to support and implement the strategic plan to achieve a competitive advantage (Wofford, 2002). This strategy provides for the maximization of human capital, reduction of wasted and inefficient labor and other financial investment, and eventually maximizing profitability. By addressing these issues at the strategic planning stage with HR included, there is the higher likelihood of more efficiently reaching the business outcomes and avoiding chaos, massive layoffs, crises resulting from not having skilled employees to carry out particular tasks and not having the right fit among employees, corporate strategies, and business environments. C.K Prahalad (Prahalad, 1990) in describing the roots of competitive advantage, stated that the real sources of competitive advantage are to be found in managements ability to consolidate corporate wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities. Moreover, Tichy et al., (Tichy et al., 1982) reiterated that there are three core elements for organizations to function effectively and include mission and strategy, organization structure, and human resource management. Clearly, the HR function plays a pivotal role in determining the busi ness strategy through the assessment of the organizations capabilities to successfully compete through a particular strategy, determining the appropriate rewards system, determining appropriate organization structures, and developing strategies to increase employees performance. Given the definition of strategic planning as how an organization will compete, the question arises as to how would an organization be able to assess the effectiveness of its strategic plan. Indicators of a successfully crafted strategic plan include creating advantages that are sustainable over a long period of time. Has the planning resulted in a) the attainment of the organizations goals and objectives, b) financial profitability, b) positioning to create advantages for the short-term and long-term, and d) created a sense of social responsibility? In essence, this process determines the decisions and actions an organization will undertake to create and sustain competitive advantages. Acquisition of Employees In the era of increasing globalization and the struggle to create sustainable competitive advantages, organizations are continuously evaluating their strategies to ensure that they have the expertise needed to help achieve the mission of the organization. The economic challenges due to the consequences of the 9/11 terrorists attacks on the United States also continue to affect organizations financial position and subsequently on recruitment and selection strategies. Gatewood Feild (2001) define selection as a process of collecting and evaluating information about an individual in order to extend an offer of employment. Fitz-enz (2002) described ways of measuring the cost per hire, source cost per hire, and interviewing cost. Indeed, these are critical metrics in deciding the cost in acquiring employees. Nevertheless, to fully understand the value and effectiveness of the selection process, one has to analyze the impact of the employees contribution to the organization not only from a cost factor, but the performance in the short-term and long-term. Has the employee been able to contribute to the successful implementation of the business strategy? In examining the efforts that are part of the acquisition, one has to examine the effectiveness of the planning process, advertising and recruitment sources, effectiveness of the interviewers in selecting the right candidate, change in the pool of qualified candidates, and performance of the incumbent on the job. HR Planning involves the process that specifies the activities that a firm must use in order to develop its human resources to improve its overall practices (Gatewood Feild, 2001). The process entails determining how many employees the organizations needs to be performing at its optimum and where the employees should be working in the organization given the external and internal challenges and opportunities. With the economy still struggling to improve after 9/11 terrorists attacks, organizations have been forced to layoff even thousands of employees in some cases in order to survive. The real challenge for HR in the upcoming months and even years would be to predict the demand for their products and services and then to determine the need for labor. Nevertheless, one still has to be able to reasonably predict labor demands and determine if employees have to be laid off or how many employees have to be recruited within a specific period. In addition, HR Planning should involve the s kills and competencies currently available within the organization and what other intellectual capital would be needed in the future to adequately meet the needs of the stakeholders. Another aspect of the acquisition process involves the advertising and recruitment sources. Given the high costs of advertising in newspapers, internet websites, journals, employment agencies, and direct and indirect costs associated with advertising, there is a definite need for HR professionals and other senior leaders to be aware of the effectiveness of the respective sources being used to advertise and recruit their candidates. In assessing the effectiveness of recruitment and advertisement sources an organization uses to recruit its employees, it is imperative to relate the actual performance of the incumbent to the advertising and recruitment. Some of the factors that should be included in this evaluation are historical employee turnover data, absenteeism, actual performance on the job, and ability to advance in ones career. There may also be a high level of correlation with specific school, number of years of work experience, education major, GPA, and other such factors with o nes performance. Given the collection and analysis of this data, HR is much more likely to invest their advertising and recruitment budget to where real value is created for the organization. Fitz-enz (2002) described the need to ensure that the recruitment function to be efficient and further stated that it is better to measure recruiters as a team than as individuals whenever applicable. In determining their efficiency as a team, Fitz-enz stated that the measurements should focus on the productivity of their interviewing techniques, the average length of interviews for the respective job groups, number of interviews needed to make a quality hire. Another means of determining the effectiveness of the recruitment function is a measure to show the change in the number of qualified candidates that is available for selection. This could be a significant cost reduction strategy given that advertising costs can re reduced if there are qualified candidates available for future openings and other jobs currently available. Training and Development The American Society for Training Development estimates that US organizations are spending more than $60 billion annually on employee training and development. Given this significant investment, it is reasonable for one to ask about the benefits of such investments, especially since more companies are seeing a need for lifelong learning and are integrating technology in their strategies. Swanson (1995) defined employee training and development as the process of systematically developing expertise in individuals for the purpose of improving performance. The argument as to whether T D helps to create a competitive advantage has shown that conceptually, it can be a source of competitive advantage. Nevertheless, there still is a critical need to develop frameworks and strengthen the argument for being aware of the actual benefits provided by this intervention. Developing a framework for assessing the financial benefits of T D, Swanson (2001) listed three questions that provide the vari ations on the assessment of HRD, of which T D is a major category. What is the forecasted financial benefit resulting from the HRD intervention? What is the actual financial benefit resulting from the HRD intervention? What is the approximate financial benefit resulting from the HRD intervention? (Approximate financial benefit is used whenever there is some level of uncertainty of the exact value created by the intervention). The framework describes three perspectives to assess the benefits including positive benefits, relative benefits, and return on investment. The positive benefits are those indicators that show the benefits exceeding the costs. The key issue in this perspective is to determine that the benefits at least equal the costs. It may also mean the inability of the measurement to show a financial benefit, but demonstrates the benefit of for example, strengthening the culture and maintaining the tradition of the organization. Return on investment (ROI) is a ratio that expresses the relationship of every dollar of performance value to every dollar expended to achieve that value. In understanding the impact of the training, it is imperative to determine what difference, if any, the investment made in supporting the business strategy of the organization. The assessment of the training should focus on the difference of the performance of the employee, the department, the process, and the overall performance of the organization. Furthermore, were there adequate opportunities for the employee to practice what they learned in the classroom, were they rewarded for improvements made as a result of attending the training, and can a relationship be demonstrated with the training and the organizations performance? Fitz-enz (2002) suggested that in addressing the results of the training process, the following questions be answered: How well did the employee learn? How effectively did the employee apply the learning from a business standpoint? What difference did it make to the business perspectives? In sum, measuring the impact of a training initiative regardless of the scope, size of investment, and number of employees involved, there is the imperative need to determine the purpose of doing the training and if the goals have been met at various intervals after the intervention had been completed. To determine the benefit, ROI, or whatever terminologies we choose to describe the outcome, one has to consider the direct costs of developing and implementing the intervention, in addition to the indirect and opportunity costs. This total cost would then have to be compared with the intended benefits and actual benefits immediately after the training and at different intervals after the intervention based on its nature. It is therefore imperative to address the following questions given the critical need to understand the impact of the intervention: Has the employees attitude changed since the training? Did the employee acquire knowledge and expertise in an area that would enable him/her to perform more effectively on the job? Has the employees performance changed after the training? How has the change in the employees performance affected the business strategy and performance of the organization? These are all areas to be integrated in assessing the impact of training and development in todays economy. With answers to these questions, it is relatively simple to determine if the training investment was worthwhile and to articulate how training and development supports the business strategy and contributes to the bottom-line of the organization. Organization Change and Development Given the continuing changes in the global economy, demands of customers, preferences and values of employees, it is a necessary component of the HR strategy to ensure that the organization is adapting to the external and internal variables it current faces and would likely face in the future in order to meet its stakeholders expectations. The pace of global, economic, and technological development makes change an inevitable feature of organizational life (Cummings Worley, 2002). A growing importance and competency expected from the HR professional, therefore, is his or her ability to plan and implement the necessary changes for the purpose of improving performance. Swanson (1995) defined organization development (OD) as the process of developing and implementing planned changes in organizations for the purpose of improving performance. The opportunity for HR through its organization development interventions is to create organizational effectiveness at the individual, department, f unction, process, and organizational levels. Many OD practitioners may argue that OD is not a measurable effort, at least quantitatively. The challenge arises again as to what value do the change efforts really have on the bottom-line of the organization. Should OD be excluded from quantitative measurement? Given a downturn in the economy and the need to reduce labor cost, are OD practitioners able to justify their worth to the organization? In answering these questions, it is necessary to examine the outputs of OD. In many instances, the outputs should be an improvement in performance at the individual, process, and organizational levels. Fitz-enz (2002) suggested that OD can be measured through productivity, quality, service, responsiveness, development, and survival. How efficiently are products and services delivered to the customer? These factors are indeed critical in assessing the effectiveness of ODs efforts and therefore, should be part of the process of making changes in organizations. Some of the key measurements can be derived from the following questions: What is the quality of the output and does it meet the customers expectations? Does the service offered by the organization provide a competitive advantage as compared to its competitors? How effectively does the system respond to changes in the external environment? Does the organization allow for maximum sharing of information, leveraging each employee and work unit, and resolving any internal or external challenges? Are the values and ethics of each employee and work unit representative of the overall culture of the organization and supportive of the business strategy? The responses to these questions based on the respective organization provide the basic measurements in assessing the readiness and effectiveness of the organization to function effectively in its current and anticipated internal and external environments. Should the responses indicate less than optimal performance at the individual, process, and organization levels, the opportunity exists for HR to conduct an analysis and develop, and implement planned changes to improve performance at all levels. As pointed out by (Becker et al., 2001), HR professionals too often want to measure their success by their activity rather than the actual business results. By having concrete answers to these questions, there will be appropriate responses in answering the role of OD in achieving the business strategy of the organization. Performance Management Performance management systems make clear to employees what is expected of them and assure line managers and strategic planners that employee behaviors will be in line with the companys goals (Noe, Hollenbeck, Gerhart, Wright, 2003). Many organizations still rely on the performance appraisal viewed as an annual ritual and primarily the responsibility of the HR function. In todays economy and the utmost of managing performance to create a competitive advantage Noe, et al (2003) grouped performance management into three categories of defining performance, measuring performance, and the feedback aspect of performance. Performance management systems are geared to ensure that each employee within the organization, based on previously conducted job analyses, is performing the tasks intended at the expected level to support the strategic business objectives of the organization. The thinking of HR practitioners and other business leaders that an annual performance appraisal is performance management must become obsolete. Effective performance management entails a process where each employee is fully aware of his or her role in the organization, what type of output is expected, and how the output will be measured. How would one determine the effectiveness of the performance management system in creating competitive advantages for the organization? In answering this key question, the following areas should be addressed: Ensuring that job descriptions are developed through timely and effective job analyses. Job descriptions are updated on a regular basis to reflect to changing business environment. Feedback is shared continuously among all stakeholders. Every employee is fully aware of his or her role in the organization, which can easily be accomplished in the performance planning phase of the process. There are measurable outcomes assigned to every task reflecting the role of the position and incumbent in achieving the goals and objectives of the organization. There must be congruency and consistency in performance measures across the entire organization and performance standards should always be measured consistently. The process and the system must be viewed as credible, fair, valid, and reliable. A survey with numerical ratings can be used by employees and supervisors to assess if ones role and responsibilities are fully aligned with the goals of the organization, satisfaction with the actual process and satisfaction with the supervisors management of the performance management process. An aggregate of the responses produces an assessment of the performance management system and its effectiveness in improving individual and organizational performance. One of the critical strategies in performance management is to understand the fundamental role of each employee in achieving the mission of the organization. By mapping a process through the identification of the purpose and role of each incumbent, one is easily able to identify where the deficiencies may exist and to develop corrective actions, identify the strengths of each individual and to maximize each employees potential and hence their contribution to the financial contribution to the bottom-line of the organization. Rewards System The starting point for any reward system design process needs to be the strategic agenda of the organization (Lawler, 1990). By understanding where the organization is positioning itself for various intervals in the future, an organization could design the reward system to provide incentives specifically designed to foster behaviors, attitudes, and outcomes among the workforce that directly correlate with the strategic agenda of the organization. As indicated by Lawler (1990), numerous studies including (Vroom, 1964, Lawler, 1971, and Kerr, 1975) have shown that effective rewards systems can significantly increase the motivation of individuals to increase their performance. As inferred from these studies, the fundamental intent of rewards in organizations is to provide incenti