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Quality Management and Organisational Behaviour.

Question 1

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

Question 1 Guidance

The employees are frequently referred to as the human resource or as indeed an asset, and frequently the greatest asset. If this is to be the case and output is to be maintained so as to gain a return over and above the cost of the salary or wage, what are the duties of a manager to ensure that the workforce are productive and well maintained? To what extent is motivation the maintenance that this resource requires and how might this resource be motivated.

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

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

When assessing the value of a firm whether for sale as a whole as would be the case with a merger or acquisition or in small portions as would be the case by buying stock shares, the final purchase price represents the current market value of the firm. Though there are a few good ways to valuate a firm, book value consists of a firm's assets less the liabilities, possibly in conjunction with an estimation of cash flow for some period of time. In publicly traded companies, one can compare the firm's balance sheet to the number and value of shares outstanding to determine if the market value exceeds such a book value. In the case that it does, the basis for this is generally to be found in such intangible assets as the unique competitive position resulting from the human resources of the firm. This intellectual capital can be the basis for the market's belief that the firm is worth more than the offices, factories and cash that it owns and thus begins to form the rationale for the mantra, our employees are our greatest asset.

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

Despite this phraseology, from an accounting standpoint, human resources show up on the liability side, if at all. With this fact, it is a natural consequence to consider the nature of the human resource and if it is indeed capable of contributing a greater value than that which it extracts in wages and other expenses. Clearly some companies outperform others in the same industries with virtually the same geographic factors and access to capital and equipment. In short, is the holy grail of sustainable competitive advantage to be found in the resource that shows up on the liability side of the balance sheet? If a firm is to acquire and sustain a source by which it can distance itself from the competition, this source must have four distinct characteristics:

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).

By using the above criteria, human resources qualifies as a potential source of sustainable competitive advantage but we have yet to actually demonstrate that this can be the case.

In the compelling read, The Human Equation, Pfeffer summarizes data from numerous firms that indicate that by paying attention to the 'people' function, a firm can reap substantially greater profits that the competition. His data reflects that a firm's success is not necessarily determined by the attractiveness of the industry that it is in as Porter suggests nor is it in the strength or degree to which it leverages technology. Rather, his research revealed that those firms whose returns far outpace the market average have done so through the deployment of what can be termed high performance or high commitment work systems (Pfeffer 1998, p. 29). Such a system is not comprised on any single practice but is rather a cohesive frame of seven reinforcing practices, all of which must work together in order to achieve a supra-normal result. These practices 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 these practices are present, the following are examples of actual results that can be produced by having a coherent and cohesive system of practices that work together 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).

That human resources may erroneously be considered liability should be apparent. This potential transition from cost center to revenue generator is aptly illustrated by utilizing a Balanced Scorecard methodology. The perspective of a balanced scorecard is one that recognizes that traditional accounting systems are flawed. Conventional systems both fail to adequately categorize items but also fail to recognize the presence and true value of intangible assets. Though the balanced scorecard does not place a financial value on these items it nevertheless recognizes not only their existence but their importance. It does this by using two overarching 'organizing' themes:

  • There are both leading and lagging indicators of profitability or success as opposed to simply viewing the lagging data of a financial statement.
  • There are four 'perspectives' or 'levels' by which a firms strategy is implemented which more adequately capture not only the strategy but how it articulates throughout the firm.
  • Beginning at the most fundamental level, each successive level represents an evolution of the prior level's goal so that, in the end, the mission of the firm is achieved by the translation of each levels measured objectives.

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

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

With the same academic rigor that produced the very concept of high performing systems and the balanced scorecard, researchers at the noted Gallup organization meticulously analyzed the results of surveys sent to 24 companies including 2,500 business units in twelve industries. This produced results to twelve questions scored by Likert Scale (1-to-5) from 105,000 employees yielding well over one million data points. The goal of these surveys was to product data that would separate the 4's from the 5's in terms of what qualities 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 good management practices to realize superior financial outcomes. For example, in a particular line of retail stores, good management produced:

  • 5% better-than-budget sales revenue, a $104 million 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 were linked to the business outcomes of productivity, profitability, retention and customer satisfaction. Each question pointed directly to the ability of the manage to care and maintain the employees under his or her stewardship. At the end of the day, two key finding resulted: one, good management of the human resources makes a tremendous difference in business outcomes and, two, most employees do not leave bad companies, they leave bad managers (Buckingham and Coffman 1999, pp. 34 - 36). The ability of a manage to select, set expectations, motivate and create a relationship with each employee is the absolute crux of a manager's job. In performing this function, a few spefic to do's are for the manager to provide the materials and equipment the employee needs to do their job, to provide them the opportunity to do what they do best (rather than trying to fix what is wrong), to listen and encourage their development while remaining committed to quality work (Buckingham and Coffman 1999, p. 37). Simply put, their ability to do this is roughly equivalent to the firm's ability to produce results.

With this evidence, it seems incontrovertible that human resources are a likely source for competitive advantage and further, there is a veritable checklist of practices for both the firm and the managers to use in order to achieve superior results. Were this the end of the story, surely all companies would be both very profitable and enviable places of employment yet this is not the case there are barriers to implementation. Perhaps the first barrier is that many firms simply do not accept these data. According to Pfeffer, of the 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 a single practice or two. Finally, of the 25% of the original 'group' that remains 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 (Pfeffer 1998, p. 29).

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

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

Works Consulted

  • Becker, B., M. Huselid, and D. Ulrich. (2001). The HR Scorecard: Linking People, Strategy, and Performance. Harvard Business School 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: New York, New York, USA.
  • Dreher, G. and T. Dougherty. (2002). Human Resource Strategy: A Behavioral Perspective for the General Manager. McGraw-Hill Irwin: New York, 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 by Putting People First. Harvard Business School Press: Boston, Massachusetts, USA.
  • Giannantonio, C. and A. Hurley. (2002). Executive Insights into HR Practices and Education. Human Resource Management Review (12), pp. 491 - 511.
  • Chan, L., M. Shaffer, and E. Snape. (2004). In Search of Sustained Competitive Advantage: The Impact of Organizational Culture, Competitive Strategy and Human Resource Management Practices on Firm Performance. International Journal of Human Resource Management (15), 1, pp. 17 - 35.

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