Are Human Resources a Cost or a Productive Asset?

In a research CEOs ranked six organization capabilities as important to success

• Speed to market,
• Talent acquisition,
• Capacity to learn,
• Innovation,
• Shared mind-set, and
• Accountability.

And each firm that was ranked higher on these capabilities demonstrated superior
performance. Each of these capabilities is usually not managed directly but is an outcome
of how the workforce of an organization is managed.

Ask any CEO and they all ‘believe’ that Human Resource Management practices and
organizational performance are ‘linked,’ and that HRM contributes in enabling an
organization become more ‘effective’ and gives it a ‘competitive advantage’ over
competition; a firm’s human resources provide a source of competitive advantage that is
difficult to replicate, is rare, inimitable, and non-substitutable. The question then is what
companies do to ‘implement’ this belief. A lot of my experience is contradictory to this
belief - HR is treated as a ‘cost’ and not a ‘productive’ resource that is ‘managed’ to
deliver ‘results.’ Similarly while recruiting HR professionals I usually find that nearly all
candidates measure their contribution to organizations based on ‘activities,’ like
compensation, performance appraisal, establishing HR systems, etc. rather than actual
business results.

Why has HRM got relegated to such a low priority as a managerial tool in the region? Is
it because we cannot ‘appreciate’ how HR practices ‘influence’ business outcomes? Or
we ‘discount’ the role human resources play in delivering results? Or the larger socio-
economic context has influenced the development of HRM as a strategic capability of an
organization? It is a little bit of all three.

HR challenges in the region are very different from the rest of the world. Three
contextual factors have strongly influenced the practice of HRM - regional labour laws,
predominance of entrepreneur-owned and managed businesses, as different from
professional organizations, where ownership and management is separate and easy access
to a highly educated work force from high-population low-GDP neighboring countries.
The regional economies, dependent upon foreign labour, allow easy inward migration of
foreigners as employees on a contractual basis. But once in, foreign employees find it a
little difficult to switch employers. The short-term residence visas, based upon three year
employment contracts albeit renewable, create a sense of uncertainty in the minds of the
employees about the longevity of their employment. This uncertainty and poor labour
mobility skews the bargaining power of employer-employee relationship in favor of the
employer, and makes the employee overly dependent upon the whims of employers. This
is further compounded by the fact that the employees often ‘fear’ returning to their home
countries for a multitude of reasons – economic, social and filial etc. Entrepreneur-owned
and managed businesses, most of which are quasi-monopolies based upon exclusive
distribution rights over geographies, discount employees as ‘value-adding’ resources;
employees are ‘replaceable,’ and a cost to be minimized. The easy access to quality
manpower at low wages from the region (India, Pakistan, Lebanon, Syria, Jordon, UK,
EU, South Africa, etc.) enables relatively easy substitution and reinforces this perception.
The situational influences - short-term nature of employment contracts, nature of
businesses, and easy access to a quality labour pool, contributes to making the employer-
employee relationship very ‘transactional’ - employees are wage-oriented and
organizations ‘exchange’ wages for work. Is such a transactional relationship not
effective? It is not good enough and discounts the role that HRM can play in an
organization.

How HRM works

I believe that HRM, managed strategically, contributes to enabling an organization

superior performance versus competition. In the era of globalization and rapid
dissemination of technologies, it is usually not ‘what’ resources a company has but ‘how’
the resources are managed that is a critical success factor. And ‘how’ the resources are
managed (organizational capabilities) is primarily a function of human resources. The
difference between ‘average’ organization and an ‘outstanding’ organization is that in the
later human resources are driven from within and make the difference through creativity,
innovation, and determined effort. The challenge of HRM is to go beyond the discrete
activities like staffing, training, performance appraisal and rewards etc. that contribute to
skill and knowledge enhancement, and focus upon how HRM practices acting in concert
create an organizational climate where the staff engage in ‘discretionary’ effort, focused
upon strategic goals of the organization, beyond what is just required to do a job. HRM
need to be based upon a ‘belief’ that individuals come to work to both ‘make a living’
and ‘realize’ a sense of self-worth and ‘achievement’ at the social setting called work.
The outcome of HRM interventions based upon the needs and motives of employees
coming to work will ‘engage’ their heart and ‘enable’ them to realize their dreams in the
organizational context, converting the tedious employee-employer relationship into an
energizing ‘transformational’ relationship.

Employees’ perception of organizational climate is essentially a psychological

phenomenon. It is based upon a majority of employees forming an experience based
shared perception of what the organization is in terms of practices, policies, procedures,
routines, and rewards. An organization has a ‘strong’ climate when a majority of
employees ‘see’ the situation similarly - share a common interpretation of what is
important, what are the collective goals, what needs to be done to achieve the goals, and
what will be the outcomes (rewards and incentives), both for the organization and the
individual, for achieving the goals. Research suggests HRM practices strongly influence
organizational climate by sending ‘signals’ that helps employees make sense of the work
situation, and positive organizational climate in turn is related to improved organization
performance indicators like customer satisfaction, customer service quality, and financial
performance, etc. HRM induces compliance and conformity through social influence by
motivating employees to deliver results, often by going beyond their organization role
requirements.

Linking HRM activities with business results

Traditionally HR professionals talk generally and conceptually about employee morale,

turnover, and employee commitment as outcomes of HRM efforts. Even though HRM
professionals are convinced that their efforts add value to the organization's bottom-line,
it is difficult to demonstrate this. For HRM to gain credibility it is imperative to show its
effectiveness in creating value for the organization measured through qualitative and
profitability measures. From another point of view an ability to measure HRM
contributions to business results will strengthen the HRM function in organizations by
justifying budget allocations, creating accountability for expenditure on diverse HRM
activities, and determining potential areas for investment.

Diagram 1 encapsulates the HRM function with the diverse activities an HR manager can
leverage to deliver outcomes. Organizational climate is not the only intervening variable
that is indicative of the strength of the relationship between HRM interventions and
organizational performance indicators. The outcomes of HRM management are also
influenced by the organizational leadership behavior and the workforce competencies.
Leadership behavior, through word and deed, needs to consistently communicate the
same values, beliefs, and messages. At a very basic level HRM is about ‘communication’
about what the organization is all about. The understanding of any communication is a
function of many factors – importance of the message, paying attention to the message,
credibility of the source, quality of the message, comprehension of the message, and
agreeing with the message. And for individuals in an organization, bombarded as they are
by verbal and non-verbal messages from a diversity of sources, reaching unambiguous
conclusions about what is required as a member of the organization, requires the
messages to be from credible persons (HR practices require top management support), be
distinctive enough to attract attention (demonstrated through visible actions), important
enough to force spending cognitive energy for understanding the content and meaning of
the message, be easy to understand, consistent across different situations and over time,
appear to be based upon consensus amongst principal decision makers, and generate
consensus among recipients. Workforce competencies are a driver of success but are
often misunderstood as a general level of competency but are required to be highly
differentiated, and based upon specific competencies linked to maximizing success.

Table 1 correlates HRM practices to performance measures. At a macro-level it is

necessary to ensure ‘alignment’ of HRM practices with business strategy. It is not just for
the management to believe that the link exists but he staff need to perceive and believe
that HRM practices of the organization are linked to strategy, are internally consistent
and linked together in a meaningful way. The best measures to assess alignment or fit of
HRM practices with strategy are employee perception measures of e.g. the direct link
between performance monitoring systems and organizational goals, etc., and management
satisfaction with HRM practices, etc. (table 1). Alignments of HRM practices are
important because of unintended secondary effects. For example if ‘minimizing’ cost per
hire is a metric or a guideline then the recruiting manager will strive for efficiency and
cost-effectiveness in the new hire process and hire skills required at the market rate.
Often the secondary effect will be that the new hires may not have competencies required
to become promotable to more than two levels above current positions, and the training
budgets will be skewed towards making employees promotable rather than enhancing
skills of high-performers, who will have a high probability to leave. It is therefore
necessary to develop and use metrics that assess short-term and long-term contribution

Diagram 1 HRM activities and outcomes

Staffing Leadership Financial &

behavior performance
Training & Development
HRM metrics
Practices & Performance mgt. Organizational
Systems Rewards climate &
Culture
Organization dev. Competitive
Workforce advantage
capabilities

of new hires, in addition to the acquisition cost metrics e.g. cost per hire, source cost per
hire, and interviewing cost, etc. (table 1).

It is similarly necessary to demonstrate the commitment of an organization to developing

staff, not on the size of training budgets, but by ensuring that acquired skill-sets during
training are reflected in improved organizational outcomes. A simple metric of ‘Return
on Investment of Training’ imposed upon the line managers ensures that the line
managers’ judiciously identify training needs for their staff, create opportunities to assess
and use staff skills acquired during training, and measure the actual change in
performance of the staff; training as genuine investment.

An organization’s performance management systems are the building blocks of how

HRM practices are used to create competitive advantage vis-à-vis competition. It is
through the three dimensions of the performance management systems - defining of the
performance measures, measuring the performance through credible measurement
systems, and giving constructive feedback to the employees, that employees understand
what is expected of them and ensure that employee behaviors will be in sync with
company goals. To ensure that performance measurement systems work it is necessary
that job descriptions are developed and updated regularly to reflect changing business
conditions, employees are fully aware of their roles, measurable outcomes are assigned to
all tasks, employees see a link between what they are required to do and organizational
goals, consistency in measuring performance measures, and the process is credible, fair,
valid, and reliable. The reward system of the organization needs to be aligned with the
performance measurement systems to foster attitudes and behaviors that correlate with
the organizational goals. And to ensure that the reward system is effective it is necessary
to assess that whether or not the reward system rewards behaviors to support the business
strategy, the overall satisfaction level of the workforce with the rewards, the flexibility of
the reward system to external challenges and opportunities that may create a need for
changing the system, and the overall cost-effectiveness of the reward system.

Organization Development (OD) is amongst the major HRM activities in an organization.

It is through OD interventions linked to business strategy that HRM has the opportunity
to create organizational effectiveness at the individual, department, function, process, and
organizational levels. I believe that OD needs to be a measurable activity even though it
is challenging to link change efforts to measurable outcomes. OD can be measured
through productivity improvements, delivering quality and service, and organizational
responsiveness to changes in the environment.
 Table 1 Correlating HR actions with performance measures
HR role Outcomes for the organization
Alignment with • Internal alignment reflects the
business extent to which HRM practices
strategy ‘fit’ together as a cohesive
whole and are mutually
reinforcing
• External alignment reflects the
extent to which HRM practices
are effective in implementing
strategy
Staffing • Effective contribution of new
employees to the organization
Training & • Positive change in attitudes of
Development staff
• Increased expertise
• Opportunities to implement
newly acquired skills
• Support from peers and
supervisors in trying out new
knowledge
Performance • Each position and task supports
management organizational objectives
• Effective processes for
maximizing performance
Reward systems • Reward systems motivates
increased performance
• Incentives provided to achieve
individual and organizational
behaviors aligned with
organizational goals
Organizational • Flexible organization structure
development in response to strategic
opportunities and challenges
• Flexibility and adaptiveness to
Measures
• Extent to which employees see a link
between performance appraisal and
compensation
• Extent to which employees perceive a
link between organizational objectives
and the performance monitoring
system
• Management satisfaction with HR
contributions to organizational goals
• Adequate number of incumbents
• Time required to hire
• Reduced cost per hire
• Reduced employee turnover
• Performance outcomes of new hires
• Improvement in output of staff
• Extent to which job descriptions are
developed through effective job
evaluation
• Extent to which every employee is
aware about his/her role in the
organization
• Extent to which measurable outcomes
are used to assess performance
• Extent to which the process and system
is viewed as fair and credible
• Extent to which in the process there is
continuous sharing of feedback
• Extent to which reward system reflects
employee’s personal values and
organizational culture
• Extent to which staff are satisfied with
the reward systems – level of reward is
appropriately matched with
achievement
• Cost-effective outcomes of reward
systems – does it lead to strong
sustained performance orientation?
• Ability of the organization to compete
in the external environment
• Extent of quality or service orientation
delivers to customer expectations
 deliver value to consumers
• High productivity orientation
• High quality orientation
• High level of customer
orientation
• Effective responses to changes in
external environment
• Efficiency of delivering products or
services to customers
• Extent to which organization focuses
upon sharing innovation
• Extent to which an organization seeks
to leverage capabilities of each
employee

Challenges of HRM in the Regional Retail Industry

Retailers in the region, particularly Dubai, have grown at phenomenal rates, often
upwards of 25-30 % per annum, over the past 3-4 years. The challenge of an HR manager
during periods of rapid growth is to find an adequate number of people, since majority of
staff are imported into the country, and quickly ramp up basic skills to deliver. HR
practitioners, who need 100 frontline sales staff, need to interview over 700-1000
candidates, get them over into the country, provide accommodation, train them and get
them on the floor. And then take care of employee attrition. It is very difficult to discuss
HRM practices that lead to productivity improvement when on a treadmill. Rapid growth
has also incapacitated the HR professional. It is irrelevant to focus upon metrics like
productivity of staff, or cost-management or inventory turns, etc. when sales and
profitability are buoyant, and most owner-manager believe that business success is a
function of franchise brand. This has considerably weakened the expected links between
business strategy and the management of human resources in the retail sector. Table 2
correlates business goals with ideal HRM initiatives, and identifies what actually happens
in the regional retail industry.

Conclusion

Will retailers ever turn to strategies that depend upon the commitment, loyalty, and skills
of the work force? I believe not. The contextual conditions (legal, nature of business
structures, and easy access to literally millions of low cost labour) will ensure that the
process of adoption of sophisticated HRM practices will be slow.
 Table 2 Fragmented implementation of HRM in retail

Nature of strategic Expected HR practices to enable What actually happens?

decision organization achieve strategic
goals
Innovate and identify Develop idea identification Entrepreneur likes an idea on an overseas
new market niches for capabilities in-house and reinforce trip, acquires the brand as a bouquet of
new retail concepts behaviors that move the franchisees
organization forward
Create a high Create a work environment that Create a new bonus or commission
performance work encourages productivity and result structure
environment orientation
Gain market share Create a work environment where Locate a new store in a new mall
managers are always hungry for
growth – increasing new
customers, sales per customer,
innovative loyalty programs,
searching for new segments, etc.
Improve organizational Focus upon training, develop in- Hire the required staff
capabilities in the light house resources to take new
of emerging trends responsibilities, develop career
plans, lateral organization moves
to different functions, etc.
Increase the fit between Evaluate the entire set of HR Ad hoc implementation of HR practices
organization’s goals and practices (hiring, training, where often the staffing needs are not in
HR practices compensation, systems for staff sync with compensation benchmarks or
participation in management, fairness of promotions is not transparent
performance appraisal and reward etc. and HR practices become a jumble of
mechanism, etc.) from a strategic inconsistent actions - reducing
outcome perspective focused upon organizational trust and leaving the staff
sending a coherent and consistent focused upon salaries
message

© Manoj Nakra 2006