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Quality Management and OrganisationalBehaviour.

"It is fashionable to speak of thehuman assets of organisations. It is also useful, for it reminds us thatalthough people only appear as costs in the formal accounts, they are assets inthe sense that they are, or should be, a productive resource; a resource thatneeds maintenance and proper utilisation and one whose output is greater thanits cost." Charles Handy.

Employees are frequently referred to asthe human resource or as indeed an asset, and frequently the greatest asset. Ifthis is to be the case and output is to be maintained so as to gain a returnover and above the cost of the salary or wage, what are the duties of a managerto ensure that the workforce are productive and well maintained? To what extentis motivation the maintenance that this resource requires and how might thisresource be motivated.

Offthe Balance Sheet: HR as an Intangible, Value-Adding Resource

Allbusinesses are made up of various bits and pieces that are classified on thebalance sheet as either assets or liabilities. Assets are those itemswhich 'owe the organization, represent some form of payment or are valuable oradd value in some other way. Typical items are buildings, vehicles, patents,cash or accounts receivables and others. Conversely, liabilities are thosethings which represent either sums owed or items that taken away from the valueof the firm. Items such as insurance, accounts payable, unsold inventory andwork-in-progress as well as workers wages represent typical liabilities.

Whenassessing the value of a firm whether for sale as a whole as would be the casewith a merger or acquisition or in small portions as would be the case bybuying stock shares, the final purchase price represents the current marketvalue of the firm. Though there are a few good ways to valuate a firm, bookvalue consists of a firm's assets less the liabilities, possibly inconjunction with an estimation of cash flow for some period of time. Inpublicly traded companies, one can compare the firm's balance sheet to thenumber and value of shares outstanding to determine if the market value exceedssuch a book value. In the case that it does, the basis for this is generallyto be found in such intangible assets as the unique competitive positionresulting from the human resources of the firm. This intellectual capitalcan be the basis for the market's belief that the firm is worth more than theoffices, factories and cash that it owns and thus begins to form the rationalefor the mantra, our employees are our greatest asset.

This oft heard phrase is one that we . One, in fact, that we liketo hear as it is 'warm and fuzzy' and makes us feel good and we can rest easyknowing that people are valued. These feelings could likely just be written offor some version of an internalized golden rule which we maintain in aneffort to provide psychological comfort. Such thinking helps justify that weare to be considered important and necessary and, as such, we are inclinedto think of others in a similar fashion.

Despite this phraseology, from an accounting standpoint, humanresources show up on the liability side, if at all. With this fact, it is anatural consequence to consider the nature of the human resource and if it isindeed capable of contributing a greater value than that which it extracts inwages and other expenses. Clearly some companies outperform others in the sameindustries with virtually the same geographic factors and access to capital andequipment. In short, is the holy grail of sustainable competitive advantage tobe found in the resource that shows up on the liability side of the balancesheet? If a firm is to acquire and sustain a source by which it can distanceitself from the competition, this source must have four distinctcharacteristics:

• Valuable - Human resources, both individually as employees and as a 'administrative' department, contribute to the value of the firm as evidenced by numerous marginal utility analysis.
• Rare - Clearly, not all positions are created equally as there are some skill sets that are in high demand. In a classical economic model, this demand drives supply down and prices up thereby creating a situation in which rationing and scarcity occurs.
• Inimitable - This refers to the ability of a potential source of competitive advantage to be difficult to duplicate by the competition. While this factor could certainly apply to a certain location (i.e., champagne comes only from France, etc.), this factor also applies to human resources.
• Non-substitutable - Certainly, some jobs and functions have been automated and people have been replaced by machines yet, it is obvious that the human brain is infinitely more capable than the cleverest computer at certain tasks. Tasks that are highly technical in nature or those such as management or entrepreneurship are simply non-substitutable by other than a living soul (Dreher and Dougherty 2002, pp. 168-170).

Byusing the above criteria, human resources qualifies as a potentialsource of sustainable competitive advantage but we have yet to actuallydemonstrate that this can be the case.

In thecompelling read, The Human Equation, Pfeffer summarizes data from numerousfirms that indicate that by paying attention to the 'people' function, a firmcan reap substantially greater profits that the competition. His data reflectsthat a firm's success is not necessarily determined by the attractiveness ofthe industry that it is in as Porter suggests nor is it in the strength ordegree to which it leverages technology. Rather, his research revealed thatthose firms whose returns far outpace the market average have done so throughthe deployment of what can be termed high performance or high commitment worksystems (Pfeffer 1998, p. 29). Such a system is not comprised on any singlepractice but is rather a cohesive frame of seven reinforcing practices, all ofwhich must work together in order to achieve a supra-normal result. Thesepractices are:

• Employment security
• Selective hiring
• Decentralized decision-making
• Comparatively high compensation
• Extensive training
• Egalitarian work place
• Extensive information sharing (Pfeffer 1998, pp. 64-65).

When each of thesepractices are present, the following are examples of actual results that can beproduced by having a coherent and cohesive system of practices that worktogether to produce synergistic outcomes:

• A paper mill that implemented these practices realized a 3x increase in profitability.
• A study of approximately 200 banks indicates that HR practices alone can account for a 30% variance in financial performance.
• A General Motors plant implementing high performance work systems realized employee litigation savings of 50-70x lower than that of similar plant with 'traditional' practices.
• Overall, firms that utilize high performance system enjoy an average return 40% greater than their peers, virtually regardless of the industry (Pfeffer 1998, p. 32; pp. 59-60).
• Firms that rank in the top 10% of HR management practices compared to those who rank in the bottom 10% experience the following:

a.       Over 4x the number of qualified applicants per position.

b.      2x as many HR professionals per employee.

c.       Almost the turnover.

d.      A market-to-book value of almost 3x that of the bottom 10% firms(Huselid, Becker and Ulrich 2001, pp. 16-17).

Thathuman resources may erroneously be considered liability should be apparent.This potential transition from cost center to revenue generator is aptlyillustrated by utilizing a Balanced Scorecard methodology. Theperspective of a balanced scorecard is one that recognizes that traditionalaccounting systems are flawed. Conventional systems both fail to adequatelycategorize items but also fail to recognize the presence and true value ofintangible assets. Though the balanced scorecard does not place a financialvalue on these items it nevertheless recognizes not only their existence buttheir importance. It does this by using two overarching 'organizing' themes:

• There are both leading and lagging indicators ofprofitability or success as opposed to simply viewing the lagging data of afinancial statement.
• There are four 'perspectives' or 'levels' bywhich a firms strategy is implemented which more adequately capture not onlythe strategy but how it articulates throughout the firm.

Beginning at themost fundamental level, each successive level represents an evolution of theprior level's goal so that, in the end, the mission of the firm is achieved bythe translation of each levels measured objectives.

The first of these levels, Learning and Growth, roughly representsthe human resource function of the firm. This is the people-infrastructure andthe achievement of any further levels is contingent upon the success of thisone. The sources of this level's efforts are focused upon people, systems andorganizational policies & procedures (Kaplan and Norton 1996, p. 28).Though the measures in this area represent a typical balance of leading andlagging indicators, the perspective is overall a key driver (aka, leadingindicator) of the subsequent three levels of 1.) internal business practices,2.) customer, and 3.) financial. Though the learning & growth perspectiveis truly fundamental to any business results, as Kaplan and Norton pointout that, as many managers are evaluated on short-term and lagging financialindicators, it is often difficult to sustain investments to enhance thecapability of people, systems and organizational processes (Kaplan and Norton1996, p. 126).

At this point, the argument is very persuading that human resourcesshould be treated as an asset. As in many cases, the difficulty lies in theimplementation or alternatively, the maintenance of the asset. Just as onemust care for and maintain a physical plant, the same holds true for intangiblehuman resources and is this is the function of management. Though thevery subject potentially conjures up notions of command and controlsupervisors, these methods are quite different from the findingshigh-performance or high-commitment work systems.

With the same academic rigor that produced the very concept of highperforming systems and the balanced scorecard, researchers at the noted Galluporganization meticulously analyzed the results of surveys sent to 24 companiesincluding 2,500 business units in twelve industries. This produced results totwelve questions scored by Likert Scale (1-to-5) from 105,000 employeesyielding well over one million data points. The goal of these surveys was toproduct data that would separate the 4's from the 5's in terms of whatqualities do great managers have (Buckingham & Coffman 1999, p.30). Conducted not just for the purpose of determining some 'best manager'award, the surveys revealed the predictable linkage of the ability of goodmanagement practices to realize superior financial outcomes. For example, in aparticular line of retail stores, good management produced:

• 5% better-than-budget sales revenue, a $104million dollar impact,
• 25% increases in profitability, and
• Greater retention of 12 employees/year that,chain wide had a potential impact of $27 million (Buckingham and Coffman 1999,pp. 30 - 31; p. 40).

Perhaps unsurprisingly, each of the survey question werelinked to the business outcomes of productivity, profitability, retention andcustomer satisfaction. Each question pointed directly to the ability of themanage to care and maintain the employees under his or her stewardship. At theend of the day, two key finding resulted: one, good management of the humanresources makes a tremendous difference in business outcomes and, two, mostemployees do not leave bad companies, they leave bad managers (Buckinghamand Coffman 1999, pp. 34 - 36). The ability of a manage to select, setexpectations, motivate and create a relationship with each employee is theabsolute crux of a manager's job. In performing this function, a few speficto do's are for the manager to provide the materials and equipment theemployee needs to do their job, to provide them the opportunity to do what theydo best (rather than trying to fix what is wrong), to listen and encouragetheir development while remaining committed to quality work (Buckingham andCoffman 1999, p. 37). Simply put, their ability to do this is roughlyequivalent to the firm's ability to produce results.

With this evidence, it seems incontrovertible that human resourcesare a likely source for competitive advantage and further, there is a veritablechecklist of practices for both the firm and the managers to use in order toachieve superior results. Were this the end of the story, surely all companieswould be both very profitable and enviable places of employment yet this is notthe case there are barriers to implementation. Perhaps the first barrier isthat many firms simply do not accept these data. According to Pfeffer, ofthe people that are presented with this evidence fail to see the connection.Of the who do see it, they do not embrace it as a system but rather asingle practice or two. Finally, of the 25% of the original 'group' thatremains who both see the connection and implement it as a system, only about of these stick with it long enough for change and results to actually accrue,thus we are left with approximately 1/8 who truly get it and do it (Pfeffer1998, p. 29).

Inaddition, similar to those who do not believe, research has revealed thatmany HR professionals fail to make connections between research and practice.Correspondingly, the firms of human resource professionals who reported readingacademic literature were more profitable than those who did not (Rynes, Colbertand Brown 2002, p. 149). Finding such as this only serve to reinforce thethemes that have already been noted: there is a right way and by doing itright, it is more profitable for everyone.

Though it would be nice to have a true financial accountingsystem that recognized not only the value of items such as intangibles aspatents, employee experience and skills and the collective value of a firm'shuman resource systems, there is tremendous difficulty in assessing the valueof these items. The short version is simply that to adequately measure thecontribution of people, especially collectively, one must simply utilizeparadigms outside the scope of financial accounting principles. Methods suchas the balanced scorecard utilize concepts that express fully the idea thatpeople are our greatest asset and further, these methods point to some of thesystems, techniques and guidelines that managers can use to properly maintainthese assets.

Works Consulted

Becker, B., M. Huselid, and D. Ulrich. (2001). The HRScorecard: Linking People, Strategy, and Performance. Harvard BusinessSchool Press: Boston, Massachusetts, USA.

Buckingham, M. and C. Coffman. (1999). First, Break All the Rules:What the World's Greatest Managers Do Differently. Simon & Schuster: NewYork, New York, USA.

Dreher, G. and T. Dougherty. (2002). Human Resource Strategy: ABehavioral Perspective for the General Manager. McGraw-Hill Irwin: NewYork, New York, USA.

Kaplan, R. and D. Norton. (1996). The Balanced Scorecard:Translating Strategy into Action. Harvard Business School Press: Boston,Massachusetts, USA.

Pfeffer, J. (1998). The Human Equation: Building Profits byPutting People First. Harvard Business School Press: Boston,Massachusetts, USA.

Giannantonio, C. and A. Hurley. (2002). Executive Insights intoHR Practices and Education. Human Resource Management Review (12), pp.491 - 511.

Chan, L., M. Shaffer, and E. Snape. (2004). In Search of SustainedCompetitive Advantage: The Impact of Organizational Culture, CompetitiveStrategy and Human Resource Management Practices on Firm Performance. InternationalJournal of Human Resource Management (15), 1, pp. 17 - 35.

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