The Romance of HRM and Business Performance: The Case for Big Science
It is often assumed that research over the last decade has established an effect of human resource management (HRM) practices on organizational performance. Our critical assessment of existing studies finds that, while collectively they have opened up a promising line of inquiry, their methodological limitations make such a conclusion premature. We argue that future progress depends on using stronger research methods and design, that in turn will require large-scale long-term research at a level of magnitude that probably can only be achieved through partnerships between research, practitioner and government communities.
We conclude that progress so far justifies investment in such big science. Key words: Human resource management (HRM), high performance work systems, high performance work organization, company performance, organizational performance. Picture the scene. A leading scholar, specializing in human resource management, is called to court as an expert witness by an international company that has brought a case against a firm of consultants.
The company has paid several hundred thousand pounds in consultancy fees, and invested many times that amount in its personnel function, to introduce the ‘performance-enhancing’ human resource management (HRM) practices recommended by the consultants. Three years on there is no evident return on their investment. The company is suing the
The expert witness is asked to prepare a report addressing two questions: (a) whether it was reasonable of the consultants to assume an ffect of HRM practices on performance on the basis of both researchers’ accounts of their own findings and how practitioners have been encouraged to view them; and (b) the extent to which the evidence in fact can be interpreted as establishing such a causal link. In this paper we present the report that we would have submitted were we the expert witness. Having adopted this format, we will conclude by considering the implications of our assessment for future research. First, however, we introduce the core concepts.
Conceptual Background Human resource management (HRM) is a term used to represent that part of an organization’s activities concerned with the recruitment, development and management of its employees (Wood & Wall, 2002). Within that domain, current interest is focused on HRM systems emphasizing all or most of the following practices: sophisticated selection methods, appraisal, training, teamwork, communications, empowerment, performance-related pay and employment security. Collectively these are deemed to contribute to the skill and knowledge base within the organization, and to employees’ willingness to deploy their learning to the benefit of the organization.
For this reason authors have used labels such as “human capital-enhancing” (Youndt, Snell, Dean & Lepak, 1996), “high commitment” (Wood & de Menezes, 1998), or “high involvement” (Guthrie, 2001; Vandenberg, Richardson & Eastman, 1999) to characterize the approach. They often contrast this with traditional, Tayloristic or control approaches to management, which emphasize low skill, limited employee discretion and a tight division of labour (e. g. , Arthur, 1994; Lawler, 1986; Walton, 1985). The rationale for focusing on such high commitment approaches to HRM lies in the assumption that the practices will enhance organizational performance.
Related to this is the view that the practices will be a source of unique and sustainable advantage because, unlike other initiatives such as the introduction of new technology, they result in skills and knowledge that are largely organization-specific and are therefore difficult to imitate (e. g. , Barney, 1991, 1995). Companies can copy one another’s technologies much more easily than they can their human resource capabilities. The link between HRM and performance has been conceived in a variety of ways. The simplest view is that practices are additive (the more the better, e. g. Guest & Hoque, 1994), and that they enhance performance regardless of circumstance (a universal effect, e. g. , Pfeffer, 1994).
Alternative perspectives emphasize various kinds of ‘fit’, of which three main types have been identified (Wood, 1999). ‘Internal fit’ posits synergy among the practices, meaning that their collective effect will be greater than the sum of their individual parts. For example it might be argued that selecting able people without training them, or training employees but not empowering them to use that training, will have little effect; whereas implementing the three practices together will.
Indeed, Barney (1995) goes so far as to argue that individual practices “have limited ability to generate competitive advantage in isolation” (p. 56). The second type is ‘organizational fit’, which concerns the role of HRM in enhancing the effectiveness of other organizational practices or technologies, and vice versa. Lawler, Mohrman and Ledford (1995), for example, link HRM to total quality management (TQM), arguing that the two sets of practices are “complementary in their impact on organizational performance” (p. 144).
Similarly, McDuffie (1995) sees high commitment HRM practices being integral to the effectiveness of lean production (Womack, Jones & Roos, 1990) initiatives and vice versa. The third and final type is ‘strategic fit’. This assumes that HRM practices need to be aligned with the organization’s strategy (e. g. , in the case of private businesses to their competitive strategy) to have their full effect on performance (e. g. , Miles & Snow, 1984; Schuler & Jackson, 1987; Youndt et al. , 1996). Empirical investigation of fit typically involves testing for interaction effects (e. . , among different practices, or between HRM system measures and strategy). Since fit is central to many accounts of effects of HRM on performance, it is relevant to determine the extent to which such interactions have been examined. In practice, as we shall see, much empirical work ignores or pays only limited attention to issues of fit, by default taking the universal thesis propounded by Pfeffer (1994) and others. Is an HRM Effect on Performance Presumed by Researchers and Practitioners?
We can now return to the first question we have been asked to consider as expert witnesses, whether authors portray research findings as confirming a causal effect of HRM on organizational performance, in support of the guiding theory. There can be little doubt that such an interpretation is widespread. Early reviews of the field fuelled this perception as they concluded that the studies supported the universal thesis (e. g. , Guest, 1997; Becker & Huselid, 1998). Becker and Gerhart (1996, p. 779), for example, argue that “conceptual and empirical work … has progressed enough to suggest that the role of human resources can be crucial”.
Such views have permeated subsequent studies. Way (2002), for instance, states that “Theoretical and empirical HRM research has led to a general consensus that the method used by a firm to manage its workforce can have a positive impact on firm performance” (p. 765). A more subtle way in which authors imply an established performance effect lies in the labels many use to denote salient HRM systems.
For example, in his seminal study, Huselid (1995) uses the expression “high performance work practices” (p. 635); mirroring Lawler et al. s (1995, 1998) choice of “high performance organizations” for their book titles. Subsequently, Delaney and Huselid (1996) refer to “performance-enhancing” (p. 949) HRM practices, Kalleberg and Moody (1996) to “high performance work organizations” (p. 114), and Appelbaum, Bailey, Berg and Kalleberg (2000) and Way (2002, p. 765) to “high performance work systems”. Titles of many papers carry the same message. For example an early paper by Arthur (1994), is entitled “Effects of human resource systems on manufacturing performance and turnover”.
Following Huselid’s (1995) lead in his paper on “The impact of human resource management practices on turnover, productivity and corporate financial performance” (our italics), many other authors, also describing cross-sectional results, use equivalent causal terminology (e. g. , Ahmad & Schroeder, 2003; Bae & Lawler, 2000; Delaney & Huselid, 1996; Jayaram, Droge & Vickery, 1999; Vanderberg, Richardson & Eastman, 1999; Wright, Gardner & Moynihan, 2003). The idea of causality is thus embedded within the choice of label for HRM systems and the way in the wording of titles.
Such terminology is in danger of appearing to prejudge the very relationship under investigation, as if the researcher’s role were to find evidence for a widely expected (and one might say, even hoped for) relationship. A further way in which the discourse of research implies an established effect of HRM on performance, is through the argument that it is now time to move on to other issues. In this vein Delery (1998) suggests that “Establishing that HRM practices are linked with firm effectiveness is an important first step…however, there is little understanding of the mechanisms through which HRM practices influence effectiveness” (p. 89).
Similarly there have been calls to broaden the outcomes studied to cover those of more immediate interest to employees. Osterman’s study (2000) of “High Performance Work Organization” practices follows this lead, as he set his objective to determine “whether their productivity and quality gains redounded to employees’ benefit” (p. 179). He examines the not unimportant question of whether these practices are associated with layoff rates and compensation gains; but in so doing he simply assumes, without proof, that there are gains to redound (i. e. , share among employees).
A final indication of the way in which a causal effect is assumed relates to practice. In their review of research, Becker and Gerhart (1996) set their goal as being to “demonstrate to senior human resources (HR) and line managers that their HR systems represent a largely untapped opportunity to improve firm performance” (p. 780). That message has clearly got though, as evident from Cooper’s (2000) article in a leading UK HRM practitioner journal, which concludes: “Academic studies have established a link between HR and profitability. The race is now on to find out how and why people policies make a difference to shareholders” (p. 28).
Again, Philpott’s (2002) summary that “What is missing, says the CIPD [the UK’s Chartered Institute of Personnel Development], is a genuine appreciation both that people management holds the key to increased productivity and that meeting the objective requires the appropriate application of a range of people management practices. In general terms these practices encompass, recruitment, training, job appraisal and reward, job design, job quality and communication with staff” (p. 5). One should record that some have been more circumspect in their assessments (e. g. , Delaney & Godard, 2001; Marchington & Grugulis, 2000; Wood, 1999).
Wright and Gardner (2003), for example, only go so far as to suggest that evidence mounts that HR practices are at least weakly related to firm performance” (p. 312). Godard (2004) is even more sceptical. Though not doubting that HRM “can be highly effective in some work places” (p. 355), he concludes that, especially in liberal market economies, the generalizability is likely to be low. Nevertheless, the message conveyed by a large part of the literature is that HRM practices do promote performance. Expert witness testimony part 1 Our evidence on the first question is clearly in favour of the defence.
It shows that it was reasonable of the consultants to assume a positive effect of HRM practices on performance on the basis both of researchers’ portrayal of their own findings and how these have been presented in non-academic circles. Does the Evidence Support an HRM-Performance Effect? To address the second question, concerning the extent to which the evidence can be interpreted as establishing a causal effect of HRM on performance, we evaluate key empirical studies. What follows is an account of the method we adopted, and our findings. Sampling the studies We used five criteria to select the studies to be evaluated.
First, we restricted our choice to those appearing in reputable refereed journals, to ensure that we were assessing high quality studies. This meant that other influential work, published for example in books or reports, was excluded (e. g. , Appelbaum et al. , 2000; Ichniowski, 1990; Lawler, Mohrman & Ledford, 1995, 1998). Second, we restricted our selection to studies published from 1994 onwards, when research on HRM and performance first came to prominence. Third we only included those studies covering multiple HRM practices, because the focus is on whether the HRM system as a whole promotes overall organizational performance.
This excluded any studies of single practices such as training, sophisticated selection, or job design. Fourth we included only studies including measures of economic performance such as productivity, profit or return on assets. Thus we excluded studies limited to other performance indicators such as labour turnover, absence, or employee well-being. Finally, because of the detailed assessment involved, we restricted the sample to highly cited milestone studies of the mid- to late-1990s, and a selection of more recent ones (whose citation rate is yet to be determined). The studies we used are shown in Table 1. [Table 1 about here]
Assessing the studies In order to assess the evidence we identified key criteria relevant to generalization and causal interpretation against which to judge studies individually and collectively. Those criteria are: the sample and response rate; the reliability and validity of the HRM measure and source of data for it; the adequacy of the research design; the extent to which other factors have been controlled; the strength of the findings on the HRM-performance link; whether there has been a test for fit; and finally if the effects of individual HRM practices have been considered alongside those of the composite HRM measure.
We expand on these criteria and the rationale for their choice in the course of presenting findings. Sample and response rate The size of samples used affects the power to detect main effects, and even more so theoretically predicted synergies (interactions). Coupled with the response rate, size also affects the extent to which one can generalize. It can be seen (column 1) that the studies have diverse but often rather small