Mindstretches® // Can HR ever add value – and how do you prove it?

Notes from an fe3 mindstretch®
The search for a measure of Human Capital


23 January 2007

The views expressed here are the personal views of the participants and are not necessarily the views of their organisations. The following people were present at this mindstretch®:

After introductions and the welcome, Karen gave a very rough agenda    and then introduced the topic as “the Holy Grail” for many academic researchers.    David Guest has called the search for a link between HR and performance “THE dominant research issue”. She went on to say that academics seem keen to make the links and some of the studies even pre-judge the expectations through their use of language – “high performance work practices” for example, where there is causality embedded in the choice of label. Commentators, especially Guest, while trying to prove that there is a link, are increasingly pressing for clearer statistical and causal evidence. They are able to enumerate considerable issues with the studies which have already been completed – as we will see.

She then turned to one seminal study conducted by Mark Huselid, published in 1995.    Huselid’s view is that HR policies, properly configured, provide a significant and direct economic contribution to firm performance and that systems of HR policies exploit the synergies among the practices and help to implement the organisation’s competitive strategy. Whereas prior work had looked at individual practices, Huselid’s study looked at a number of them, looking at how they impacted turnover, productivity and corporate financial performance.

The results looked positive, but participants thought that it was odd that “fit” (i.e. that high performance work practices should “fit” the strategy of the organisation) should have so little effect; it might have been expected it to be more significant.

Chris mentioned the multiplicative effect of technology and questioned how Huselid controls for this effect – Karen said she didn’t think this had been mentioned in the study at all.

There are numerous commentators who query that the impact of HR on financial performance either exists at all, or can be measured. Karen described a meta study by Wall and Wood which listed some of the issues in this area.    She made a particular point around linking HR performance with the financial measures, as the finances are usually a measure of past performance which may be influenced by external events, rather than HR. She also pointed out that six of the 25 studies failed to show ANY statistically significant positive relationships between HRM and performance.

  In a general discussion, mindstretch® participants agreed that researcher find the evidence to support the position they have chosen – whether pro or anti. This didn’t diminish the desire to prove a link, or the complexity of such research.

Chris asked what people what they considered to be a definition of performance and gave an example. Stephen Bevan, in a masterclass for the HR Society asked people to put 8 companies in order of performance; his was almost an exact reverse of the group view, with the Passport Agency at the top of this list. This was because he had used ability to change as the key criterion, which was the right performance measure at the time. This supported the earlier point that the definition of performance depends on which stakeholder you ask.

Mike raised issue of what performance means in the public sector – tends to be hard to judge as many of the objectives are subjective – as well as very, very long term. For example, the QCA’s objective is developing and delivering the curriculum for England and Wales. Mahen’s made the point that public sector prefers vague objectives!

Paul thought the one key indicator for plcs is shareholder value and felt that perhaps the public sector equivalent is accountability.

Bevan’s view, said Chris, is that it is situational – and dependant on who is the key stakeholder. He gave another example of Kodak – very successful, giving fantastic shareholder value - but they failed to see the digital camera coming. He added that it may be that organisations deliberately set faulty indicators – is it better to win a gold medal (which you keep forever) or set a world record (which only lasts until someone does better)?

He went on to say that it wasn’t only performance that needed definition. We also need to define HRM.

Carole agreed, pointing out that there is no real work force planning process in the NHS. At this point, Paul expressed concern that we seem to be focussed on inputs when performance is more normally about outputs or outcomes.

After some brief introductions     and a brief overview of what Fissing did     Chris gave the meeting a definition of benchmarking as carried out by Fissing.     He stressed that the way in which Fissing collected measurements was not just about competition, but about learning from others. He commented that he didn’t know always whether members implemented changes in the way they suggested; but that he had told three members that they were going bust a year before they did so. So benchmarking isn’t a guarantee of success.

  Fissing introduced more informal benchmarking in 1990, but the other types of benchmarking here are more analytical. Turning to performance benchmarking, Chris said he thought that some elements of benchmarking were about HR performance – but that it ought to be focused on measuring the organisation, not itself.

  Chris said that people constantly expect people like me will provide data to tell them what’s happening and went on to tell a true story of a naval ship, kitted out with the most sophisticated equipment to detect incoming missiles. All the crew were below the deck, monitoring the equipment. Unfortunately, all the high technology didn’t help them when an exocet missile came underneath the radar, and did significant damage to the ship. Had they had a distinctly non-technical “lookout”, they might have had warning and escaped. Chris’ advice was that you should use your own senses and those of other people to help you understand the environment, and the threats.

  Chris pointed out that Human Capital is a term which implies more forward looking performance than just capital. In the economic sense, “capital” has the potential to add value as an asset. But it wasn’t just a financial value, but all other organisational assets including the people, but more importantly, the activities that they do. He gave the example of Wayne Rooney – that on Manchester United’s balance sheet, Rooney will have a value, but that he will only be worth this, if the manager gives him the right kind of activity.

The term Human Capital goes back to the 1690s, but the first people to demonstrate the value of people to nations were Schultz and Becker in the 1960s.

  Human capital (HC), according to Chris is to do with value and activity to which it is directed; CIPD definition seems limited and still implies an act of faith that we ought to be investing in our people to produce a result. Chris thinks HCM involves thinking about people strategically.

Mahen commented that an example of a deliberate attempt to grow HC was in when the UK computer industry developed a supply of systems analysts and programmers – creating new capital based on new industrial needs.

Chris said we need to think about which activities really add value and how to secure knowledge gained by people into the organisation. Value is derived from current delivery plus value added for future performance. A dilemma is that current value tends to be more highly prized, but can be misleading – Sue gave an example of highly effective sale person who was arrogant and disruptive. There was no thought about the longer-term damage that he could be doing.

Chris pointed out that banks tend to think that 80%+ of their people have no capital value because they work in non-profitable areas of the business.

  Chris showed that currently, as rated by the marketplace, only 25% of value is tangible. Can this concept work in the public sector? Mike thought so, but that measurement might be more difficult. In both sectors it is about the contribution made.

  Chris drew the distinction between HRM – using a resource – and HCM – managing added value and gave the example of Capita, whose chairman was quoted as saying that the firm adds value to public sector employees by better managing and motivating them, unlocking the potential from their labour (rule-following). Paul thought they also had a technology value add.

Mahen wondered what happened to human capital if you outsourced it…?

  Looking at the framework for human capital, Chris pointed out that organisations can design in some aspects which support the development and support of human capital, regardless of whether people stay or go.

  Chris put up a slide of a model developed by Chinese academics. Carol commented that China increasingly sending young managers to Africa – no rules and no preconceptions. This model helps thinking about the separation of the elements of HC – has a more individualistic feel than the Mayo/Nutt version. Mahen asked about the time perspective – Chinese model is not a typical Western one, which focuses on current quarter vs longer term. He also questioned the effect of a competitive mindset (Western) vs a complementary one (China). However, true shareholder value, as perceived by pension fund managers, may also drive in a longer-term perspective.

Paul asked if the model might be externalised through the brand. Chris thought it would need to be consistent with the brand, but the model, as presented, is essentially internally focussed. Sue wondered if the external view might fit into the top “egg”, somewhere between relationships and culture. Chris thought that the model would connect with the outside world because all these elements link in with the business purpose – so if you were in the private sector, this would also include profit, money etc.

  Where HC fits is about how you use the other elements so that they are complementary – called intelligence by Chris: internal and external scanning to make sense of it. He sees the development of this kind of intelligence as one of the key challenges for HR. Karen thought that this sounded very close to one of the definitions of strategic HRM which is that the role of HR is to help the company develop its ability to operate strategically.

  HR people are generally ok at the Human emphasis but need to sharpen up on the Technical side – have to be able to deal with both to deliver intelligence. Elements on the Human side are also harder to measure e.g. how to measure employer brand, promise versus delivery, engagement and perceptions (e.g. Q12 survey). Chris did think, however, that FDs are interested in the “softer” issues, primarly because they’re finding they can’t manage people.

  Chris commented that the development and application of measures shouldn’t be an add-on but integral to running the business and that gathering and interpreting the results would be where organisations used “intelligence”.

There’s a need for clusters of information but we also need information on what these actually mean. There was a discussion on the balance between what HR does and what line managers do – Paul queried whether there was a need for the HR department at all – HRM should be passed to managers to deliver. Chris thought that this was unlikely, saying that employment law had a impact on what can be delegated. Tim also wondered if there would be an impact on culture if HRM (for example, recruitment) was passed down the line, creating silo thinking and even potentially recruiting clones of the people already there. Sue particularly thought that the frequency and quality of internal appointments was very important to get right – and managers may not.

  Chris thought that the real measures of Human Capital wasn’t anything that was on this slide.

  Oleh said that it was a continual frustration that there wasn’t ONE measure of Human Capital, although Karen wondered whether one would actually be very useful.

Chris commented that we don’t know what is the silver bullet measure that the rest of the board could understand, but it would be based on KPIs, so likely to be bundles of related measures. He thought that the score card was the wrong way of doing this – because then HR is just focused on the people measures, rather than looking at all of them and how they relate to one another.

There was some discussion that perhaps the measures could boil down to a single factor for presentation, separating the impact of HC, linked to its external effect.

      The discussion focused on the need of HR to influence the opinion leaders/formers and to develop the ability of line managers to manage people so that developed capital is captured by the organisation.

  Chris thought that it would be critical to segment the organisation and showed the group one example of doing this. He defined the top box as labout, with little opportunity to add value. The three boxes below this, and especially the Creatives and Leaders as creating the future of the organisation.

  Chris commented that previously, most organisations would have put the majority of people in the top box. He described the bottom right-hand box as HR and CEO activity.

        His thought was that HR needed to find out who has the potential to add value and focus on – and measure - this group – which led to a heated debate!

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