The HR department's role in organisational performance

The HR department’s role in organisational performance Veronica Hope Hailey, School of Management, University of Bath Elaine Farndale, Erasmus University Rotterdam Catherine Truss, Kingston Business School, Kingston University Human Resource Management Journal, Vol 15, no 3, 2005, pages 49-66 Research into how HR contributes to organisational performance is plentiful yet plagued by challenges. Alongside the ‘black box’ issue between HRM and performance, the time-lag effect and the range of performance indicators applied, the role of the HR department in this relationship is critical although often ignored. A longitudinal case study is presented here that focuses particularly on this issue, and shows a complex picture of improving HR department importance alongside high-level financial performance, but declining employee commitment and morale. The article suggests that the tensions between the rhetoric of HRM strategy, the grim reality of the employee experience and a lack of focus on human capital meant the outstanding financial performance was not sustainable in the longer term. The inherent conflict in serving both management and employees in process-and peopleorientated roles is highlighted. Contact: Veronica Hope Hailey, School of Management, University of Bath, Bath BA2 7AY. Email: [email protected] T he bottom-line imperative of high organisational performance dominates many discussions about how HRM contributes to firms. The literature abounds with models purporting to explain how HRM practices have an impact on employee behaviour and hence affect bottom-line firm performance (Guest, 1997; Paauwe, 2004). The focus in these studies has been on the policies and strategies rather than on the role played by individual actors and departments in putting these policies into practice. However, case study-based research has repeatedly shown that how policies are experienced by employees is as critical as the policies themselves in understanding an organisation’s HRM system (Guest, 1999; Truss, 2001). One particular area of neglect in unpicking the link between HRM and performance is the role played by the HR department. Clearly, the activities of this department are a critical aspect of HRM policy enactment, yet no direct link has to date been established between the literature on HRM and performance and on the role of the HR department. This gap is addressed here by exploring, through qualitative and quantitative data collected over a seven-year period from a large retail bank, how the role of the HR department has an impact on organisational outcomes. The article begins by examining the literature on HRM and performance. It goes on to critique the emphasis within the prescriptive literature on the importance of a strategic partnering role for the HR department while devolving responsibility for people management to the line (Ulrich, 1997). The two sets of literature are linked through a set of research areas around the role that the HR department plays in mediating between HR strategy and firm-level outcomes. The story of the company is then presented, charting its changing nature within the financial services sector. The article concludes with some HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 49 The HR department’s role in organisational performance critical observations on the need to reconceptualise the relationship between HRM and firm performance. HRM AND FIRM PERFORMANCE The linkage between HRM and firm performance has dominated much of the debate within the HRM literature since the mid-1990s. Despite research conducted within the ‘best practices’ paradigm to uncover a generic set of high-performance or highcommitment work practices (Huselid, 1995; Arthur, 1994) and ‘best fit’ studies that focus on aligning HRM strategies to organisational strategies and contextual conditions to create superior firm performance (Wright, 1998; Gratton and Truss, 2003), there is no agreed conceptualisation of how this relationship between HRM and firm performance actually works (Marchington and Grugulis, 2000). A primary issue in the development of appropriate conceptual models for research in this area is which variables should be included in making the step from HRM to firm performance (Paauwe and Farndale, 2005). This is largely described as a ‘black box’ issue: if HRM activities are to have an impact on HRM outcomes and firm performance, it will take place only if worker attitudes and, in particular, worker behaviour are affected (Guest, 1997; Purcell et al, 2003). It is therefore essential to explore not only what practices are being implemented, but also how they are enacted by line management and the HR department, and how they are received by employees (Truss, 2001). The issue of how firm performance should be measured is also crucial to this discussion. Much research in this field adopts a shareholder perspective, focusing on productivity or financial performance indicators such as return on investment, assets or equity (see eg Arthur 1994; Huselid, 1995). These studies do not consider the impact of HRM on other stakeholders such as employees, trade unions and society (Paauwe, 2004). A balanced scorecard approach has been proposed to counter this trend to gather financial, customer and employee indicators of firm performance (Becker et al, 2001). Broadly speaking, adopting only financial measures of success is recognised as limiting and more subject to time-lag factors, while the balance scorecard approach is more immediate and useful (Truss, 2001). A further methodological challenge is the predominance of cross-sectional studies in the field (Paauwe and Farndale, 2005). As yet, there is little empirical evidence regarding the possible time-lag between an HRM intervention and its effect on firm performance. The few studies that take a longitudinal perspective (d’Arcimoles, 1997; Guest et al, 2003) suggest that the majority of HRM interventions have a time-lagged effect, sometimes up to two or three years, before generating effects on firm performance. A remaining factor not yet explored in existing studies is the potentially mediating effect that the HR department may play in this linkage between HRM and firm performance. We therefore also need to consider the literature on HR departmental roles. Role of the HR department The widely cited Ulrich (1997) typology is a useful starting point. The typology defines people and process aspects of HR roles, and operational and strategic activities. The largest part of the corporate HR department role is the ‘administrative expert’, which is processorientated with a day-to-day, operational focus, based on the management of the firm infrastructure. The role contrasts with the other process-orientated role, ‘strategic partner’, which is future-focused, based on the strategic management of people and aligning HRM strategy with business strategy. The operationally focused, people-orientated role of ‘employee champion’, in which HR is responsible for listening and responding to 50 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss employees, contrasts with the people-orientated strategic role of ‘change agent’, which focuses on managing organisational transformation and change. Linking HR roles with organisational performance, Ulrich’s (1997) model suggests that all four roles should be carried out simultaneously to improve firm performance. However, this is a prescriptive model and there is currently a scarcity of empirical evidence of how these roles are carried out (Truss et al, 2002). In his framework, Ulrich (1997) sets out a vision of an unproblematic, collaborative partnership between line managers, senior executives and the HR department. A pluralist perspective of competing stakeholder groups, not all of whom are united behind the corporate aim of increased competitive advantage, is not considered. The most recent surveys of HR professionals within the UK have all reported an increased emphasis on the strategic partner role (Hall and Torrington, 1998; Sisson, 2001). However, the ideal of HR professionals redirecting their energy and effort towards aligning HRM strategy with business strategy, and consequently away from employees to resolve role conflict, should be questioned. Ulrich (1997) highlighted that HR professionals must be both strategic and operational, yet the potential role conflict this could engender was not addressed. Caldwell (2003) reported ‘role ambiguity’ and ‘role conflict’ within the HR profession because of the competing demands made upon it by senior managers and employees. There is thus a certain amount of conflict inherent in developing a strong link to organisational strategy, taking a long-term perspective, while trying to maintain an internal consultant role for line managers focusing on the short-term, reactive issues (Caldwell, 2003: 997). As a consequence of the adoption of increasingly strategic roles for HR, much responsibility for people-focused HRM – such as the employee champion and change agent roles – is being devolved to line management. Existing empirical research suggests, however, that there are also significant barriers preventing these managers from doing this work effectively (Brewster and Holt Larsen, 2000), including the need to deliver shortterm business results, a lack of time and training, and a lack of incentives given to them for fulfilment of this additional work (McGovern, 1999). The HR department and line management together thus have a crucial role to play in stimulating appropriate employee behaviour on behalf of the firm (Purcell et al, 2003). In the context of the resource-based view of the firm, high firm performance is related to achieving sustained competitive advantage through internal resources (Barney, 1991; Pfeffer, 1995). This can only be achieved when the resources available are valuable, rare, imperfectly imitable and imperfectly substitutable – such as an organisation’s human capital (Paauwe, 2004). Human capital refers to employees in terms of their skill, experience and knowledge which have economic value to firms (Snell and Dean, 1992). A firm chooses to invest in the recruitment or development of employees to achieve the desired level of skill and knowledge. These attributes are necessary for employee behaviour to be in line with the firm’s goals, hence enhancing productivity (Wright and Snell, 1998). This human capital is, however, transferable: employees are free to move between firms, and their contribution depends on their willingness to perform (Snell and Dean, 1992). Sustained competitive advantage thus lies in employees themselves, not in HRM practices, as these do not meet the criteria of value, rarity, inimitability and nonsubstitutability (Wright et al, 1994). Therefore, the HR department needs to go beyond designing effective HRM policies and practices to ensure that these practices are implemented appropriately and are accepted by employees in order to achieve the intended results. The review presented here suggests that there are various tensions and ambiguities HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 51 The HR department’s role in organisational performance surrounding the role of the HR department in the organisation. Furthermore, as we have seen, we know little about how HR roles are played out, over time, in organisations. How might choices made by actors within the HR department influence the enactment of HR policy and strategy and, in turn, organisational outcomes? This question is considered through our empirical research. METHODOLOGY The case study presented here was conducted in a UK high street retail bank, described here under the pseudonym Successbank. Successbank was one of seven companies researched over a nine-year period as part of a research consortium. The study focused on one region within the bank’s branch network. Once Successbank had acquired Costbank (in 1995), its staff were also included within the sample. The data were collected at three different times: 1994, 1997 and 1999. A mix of quantitative and qualitative methods of data collection was used. In 1994, a total of 1,200 questionnaires were distributed to randomly selected employees across all grades; 610 were completed and returned. In 1997, 1,000 questionnaires were distributed and 672 returned; in 1999, 1,000 questionnaires were distributed and 375 responses received. This gives an overall sample size of 1,657 and a response rate of 52 per cent. (At the time of the first data collection, Successbank had never used attitude surveys, but by 1999 staff surveys had been conducted frequently – this may help explain the reduced response rate.) For the purpose of statistical analysis, the 1994 data were weighted based on the 1999 data to counter the large percentage of management respondents from the 1994 round of the survey (34 per cent compared with 8 per cent and 9 per cent in 1997 and 1999). In all other respects, the samples from the three years are comparable. Table 1 outlines the unweighted profile of respondents for each stage of data collection. The data analysis explored the descriptive statistics comparing responses to the questionnaire over the three time periods, observing significant differences through the use of cross-tabulations and Chi-square tests on the non-parametric data. The questionnaire consisted of 137 questions, including items on HRM practices TABLE 1 Respondent profile ( % of respondents per year) 1994 1997 1999 34 22 13 31 1 8 20 21 48 3 9 23 20 46 2 Contract Full-time Part-time 86 14 73 27 70 30 Gender Male Female 58 42 35 65 34 66 Job title Manager Supervisor Technical/professional Administrative/clerical Manual worker 52 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss (effectiveness, fairness, impact), employee commitment (loyalty, future prospects, shared values), organisation strategy (clarity, ability to change), management (competence, trust, awareness), work climate (morale, risk-taking, feedback) and the HR department (competence, role, strategy). The questionnaire was piloted with a pharmaceutical company before being used with the other companies in the research consortium. In addition, interviews were held with employees from all levels of the bank (executive board to branch clerical staff): 37 in 1994, 33 in 1997 and 36 in 1999. Each interview lasted 60-90 minutes and was taped and transcribed. A focus group lasting 90 minutes was held with the HR department at the start of each stage of data collection. The data from both the interviews and focus group were analysed and coded at each time period using a number of categories such as business strategy, organisational culture and the role of the HR function. The data were also analysed and coded using HRM policy and practice areas as categories. At all times the codes also noted the job grade of the interviewee. In addition, after the merger in 1995 the two banks were labelled separately in terms of interview data. Finally, emergent categories were also noted, such as ‘new technology’ or ‘merger activities’, providing there was a sufficient density of response across all interviews. A longitudinal multi-method/multi-respondent case-study approach was adopted. This was partly to address some of the methodological challenges outlined earlier in HRM and firm performance research, and partly to avoid the potential pitfalls and biases of single-rater studies. The quantitative survey work provides a sound basis for statistical comparison of HRM activities and employee perceptions across fixed points in time, while the qualitative research reveals a much more detailed contextual illustration of the organisation. Previous HRM survey research has often drawn only on narrow measures of HRM policies without exploring their implementation within the workplace (Bacon, 1999) – hence, the adoption of a more employee-focused approach to the study presented here. The following sections describe the banking industry context and detail the changes that took place at Successbank at the three points in time of data collection. Details of the business strategy, HRM activities and the role of the HR department are highlighted. THE UK BANKING INDUSTRY In the last quarter of the 20th century, the commercial banking sector in the UK was undergoing radical change due to three clear forces: deregulation, new technology and increasing competition. Commercial clearing banks entered the traditional retail market of savings banks, while new competitors, such as high-street retailers, stepped into the market. Equally, there was increasing pressure on traditional branch network structures due to new forms of banking, such as those via the internet and telephone. All these changes led to high levels of work intensification (Gardener et al, 1999). Since the 1970s there has also been a shift towards a marketing-orientated sales culture in response to the highly developed and deregulated market. The market power shifted from the providers of banking services to consumers, and a shareholder perspective in terms of bank performance was gradually adopted. This meant a new focus within the industry on cost-cutting and profit rather than the traditional reliance on quality of service provision (Gardener et al, 1999). As technology developed, the branch networks served less of a function both in terms of backroom and customer-facing activities. Technology facilitated the provision of a better-quality and quicker service to customers but with fewer employees. The trend was therefore for branch networks to shrink, leaving some key branches providing full HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 53 The HR department’s role in organisational performance services, supported by other smaller branches for more selective activities (Storey, 1995). The physical space created by the change in activities within branches was developed as retail space for selling financial services, supporting the new sales culture. Alongside these structural changes, the employment relationship within banks was also changing. Traditionally, the major high-street banks had a strong bureaucratic culture. Staff joined a bank at an early age because it offered job security and career progression and a certain status associated with banking as a profession. However, the life-long employment culture has now been eroded, and a new psychological contract is being developed with employees (Atkinson, 2002). The tradition of structured careers and welfare-orientated HRM policies has largely been replaced with performance-related pay, a lack of job security and career planning, and other sales-orientated HRM policies (Cressey and Scott, 1992; Sparrow, 1996). Hence, in the 1990s in the UK there was evidence of an increase in bank employee discontent, with the first compulsory redundancies in the sector being implemented in 1993 (Storey, 1995). Thus, there is evidence of the trust and commitment historically associated with employment in this sector being eroded by restructuring and individualisation of employment relationships (Cressey and Scott, 1992; Herriot et al, 1996). However, the motivation and commitment of employees was crucial to maintaining service quality levels in the newly restructured and reformed banks (McCabe et al, 1998). Therefore, many banks adopted increased direct communication with employees through videos and newsletters as well as measuring employee attitudes with regular surveys. ORGANISATIONAL CHANGE AT SUCCESSBANK 1994: The response of Successbank to the industry-level challenges of deregulation, new technology and increased competition was to adopt a selective market leadership strategy and to place shareholder value as the governing objective of the business. The measures of market value and share price were adopted as indicators of success – from 1984 onwards, Successbank doubled the stock market value of the business every three years. Previously, marketing and retailing processes were tightly bundled together with the branch as the main economic unit and profit centre. Now, Successbank was centralising many processes, while branches were viewed not as profit centres but as part of the delivery system. In reducing costs and streamlining activities, Successbank was a market leader among the four main retail banks in the early 1990s. The existing Successbank culture at the start of the 1990s was seen by senior management as insufficiently focused on the rapidly changing nature of customer demand. The stated aim within strategic documentation was to move away from the authoritarian culture towards one that emphasised personal responsibility and the effective performance management of people. However, the strength of the old banking culture made it extremely difficult for employees to adapt: People’s expectations were that they had a job for life and that they would be promoted on a regular basis...We have betrayed them and they have no trust in us, because we are fundamentally telling them a story that was not what they expected when they joined Successbank at all. Senior manager The old culture was being dismantled without any clear replacement: ...every change that is implemented seems like another blow to the old accepted way of doing things, rather than something new and better being introduced. Senior manager 54 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss Long lines of communication and a lack of directional clarity exacerbated the situation. This was exemplified by the relationship that the head office had with the branch network: They are part of the problem... The way that [an intervention] was communicated to staff was the crazy way of a circular from head office with no input from the area director or branch manager. This is a crazy way of sending down bad news. Senior manager The problems of low morale and lack of trust were directed at the bank as a whole or, more specifically, at senior management. Eighty-seven per cent of staff disagreed that morale was high at this time, with only 16 per cent believing management cared about employee needs. The esprit de corps within teams at branch level, by contrast, was said to be ‘fairly good’: Branch managers are well loved although it may be they have jumped into the trenches with the staff. Senior manager Role of the HR department in 1994 The HR department comprised three sections: Corporate Personnel developed policies and helped support the change process, Central Personnel Services dealt with the central delivery of volume HRM activities and Line Personnel reported directly to the business unit management. There was no HR director on the board because it was thought that the main executives were ‘all very involved in personnel’ (chief executive). The head of Central Personnel Services sat with the General Management Committee of UK Retail Banking, and the Line Personnel sat with their respective management teams. However, HRM issues were not seen as ‘wound into the business planning process – in order of priorities it is strategy, structure, systems and people’ (HR practitioner). Members of Line Personnel viewed their role as having moved beyond purely administrative support to providing practical, business-based solutions. However, the view from the business was mixed. Some managers saw the department as primarily focused on headcount reduction – ‘the only contact with personnel is reduction in staff numbers – all we see of them is negative things’. This was one outcome of the attempt to empower line managers to take responsibility for the management of people: in practice, bankers stuck to banking and gave lowest priorities to HRM issues. Due to the top-down imposition of change, managers tended not to feel ownership of the new HRM interventions. Furthermore, branch managers continued to be measured in terms of business results, giving little incentive to consideration of people issues. In 1993, appraisal was decoupled from rewards and there was an end to across-theboard pay increases. Instead, a pay pot gave managers limited discretion to determine employees’ salaries. Pay was, however, a major source of dissatisfaction, with 34 per cent of staff disagreeing that their pay was fair compared with others within the organisation, and only 29 per cent believing that their pay was fair compared with other organisations. 1997: In 1994, Successbank had bought the Solid Building Society and, in 1995, merged with Costbank banking group. These acquisitions made Successbank a market leader, with a network of 2,700 branches. While the head offices of the two banks merged immediately, the company needed union approval and an Act of Parliament before the two branch networks could be merged – this had not been achieved at the time of the second data collection. HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 55 The HR department’s role in organisational performance FIGURE 1 Comparative share prices within the UK retail banking sector 1994-2004 Successbank Average Source: historical share price data from http://uk.finance. yahoo.com. The data show the monthly share price and have been rebased to 100 in 1994. The merger resulted in many change initiatives but with little integration between them. Staff felt a barrage of change raining down upon them but with no sense of prioritisation: There is no sense of priority... I would find it difficult if you asked me what are the three or four things I need to concentrate on next year which are the crux of taking the business forward. Manager A member of the HR staff said that the annual plan would typically list some 100 HRM projects that needed to be delivered within 12 months. For Successbank employees, the main impact of the merger was even stricter management of headcount and the handling of lending decisions via technology. The uncertainty created by the merger, the shock of job insecurity and the experience of continual change contributed to the results observed from the 1997 questionnaire. Seventy-eight per cent of respondents believed there was less job security, 86 per cent believed there was more pressure at work, and 48 per cent believed that working conditions had worsened: If you are off sick you are bombarded with calls all day. You feel that you can’t be off really. I do feel that you are not appreciated at times because you do all this work and no one seems to realise it – or it seems that way. Operating core Nevertheless, 78 per cent of respondents believed the organisation would achieve its aims (an increase on 68 per cent in 1994), but those believing that senior management was well informed about what people at lower levels thought and did remained around 15 per cent: There is a lot of fear. People are a little scared of going off on their own and using their own initiative. It is all very well higher up and for me to speak like this because I have nothing to lose. But lower down, people have a lot to lose. Branch manager 56 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss Part of this may be due to the failure to describe what the future held for staff: What we are not very good at at the moment is actually trying to paint a picture of the future in terms of business strategy, in terms of how we are going to behave, in terms of what the key issues are. Senior group HR adviser However, the bank remained extremely successful in business terms, as shown by the share price indices in Figure 1. Results still dominated the criteria for promotion: If I was not delivering the sales targets, the fact that I was a good staff manager would be irrelevant. Given the bank’s extraordinary success, and the short-term pressure to maintain this, senior management was not inspired to tackle organisational climate problems. Role of the HR department in 1997 In 1997, the HR department was restructured into a business partner model. The HR business partners in the line contracted with newly created central HR shared services centres to supply administrative services to the business units. This was to reduce headcount and costs and free up time for business partners to concentrate on an internal consultancy role. A strategy and policy group remained at head office, together with a small unit concerned with top-level succession planning. A new HR Director was appointed and immediately made part of the Executive Committee. Two main strands of HRM strategy were developed: at group level, the longterm HRM strategy was determined, and at the business unit level of the branch network a short-term HRM strategy was developed to meet the immediate needs of the business. Yet, there was little communication of the priorities emerging from each strategy area: What we have at HR is a silo-based approach with very little lateral communication between the directors… There is no sense of priority. Senior group HR adviser Few below group personnel or director level had an understanding of what the HRM strategy was. The perception of it being solely concerned with headcount reduction persisted throughout the branch network. In 1997, only 21 per cent of respondents agreed that the HR department had a strong overall strategy guiding its activities (although this was an increase on the 1994 figure of 15 per cent). One area in particular, training, was well regarded in terms of content and provision, particularly due to the flexible learning centres that were opened within branches. However, because of the reduction in headcount, staff complained that they could not access the learning centres as there was no cover for their absence. A third of all respondents in the survey had not received any training at all during 1997 (the same percentage as in 1994). Forty-nine per cent agreed they did not have the opportunities they wanted to be promoted despite the bank introducing an internal jobs bulletin board where staff could apply for jobs across the branch network. Interviews with employees at that time revealed that line managers were ignoring this initiative. The strong internal labour market and the consequent lack of alternative employment experience brought problems in the area of rewards. Forty-eight per cent of staff surveyed had company shares, which were performing well at that time, yet only a quarter believed that their pay was fair compared with external comparisons (similar to 1994). The aims of HRM practices were explained in communication initiatives, including videos, live TV broadcasts and newsletters to try to communicate the changes to the staff. HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 57 The HR department’s role in organisational performance TABLE 2 Management and organisational strategy (% of respondents agreeing or strongly agreeing with these statements per year) I believe the organisation will achieve its aims I am aware of what management is trying to achieve This organisation has a clear corporate strategy Management cares about the needs and morale of employees Senior management are well informed about what people at lower levels think and do 1994 Agree Strongly agree 60 8 1997 1999 Agree Strongly Agree Strongly agree agree 60 18 59 11 Sig.1) p .000 53 4 53 7 55 7 .001 41 7 43 11 53 13 .000 15 1 20 3 18 2 .003 9 0 13 2 11 1 .003 1) The significance levels reported are of Chi-square tests applied across all three rounds of data for all options for each question. Yet, branch managers continued to identify more with their staff than with head office and were not reliable in selling the company line. The imposition of HRM policies from head office continued to be seen by some Successbank branch managers as just another example of centralisation and a decrease in their autonomy. The pressure to deliver business results remained paramount, with people issues continuing to take a secondary position. From both the interviews and survey data it was apparent that non-managerial staff had virtually no contact with the HR department: I don’t think I am in a position to rate them as I have no involvement with them. Operating core 1999: By 1999 the majority of branch staff had their performance measured not by attention to due process but by the number of financial service products they sold. Information systems calculated financial risk. The branches had in effect become retail outlets. The branch networks were merged and a separate life office was also acquired in this period. While the prime strategy remained doubling shareholder value every three years, ‘Taking our people with us’ emerged as one of three key business imperatives. This was an initiative by one of the group executive directors to show that senior management understood that the change... ...was going to put people under a great deal of pressure and we needed to ensure that they were motivated and morale was maintained. HR practitioner The branch network was reduced from 3,000 to 2,300 branches, with a strategic intention to reduce the number to 1,700 over time. One manager summed the change up as: I used to have 43 staff. I now have 14 and the targets haven’t changed. Change was described as ‘constant pain’. As a consequence, there were a number of 58 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss TABLE 3 Employee commitment and loyalty (% of respondents agreeing or strongly agreeing with these statements per year) 1994 Strongly agree 15 6 Agree I recommend this organisation to my friends as a great place to work For me this is the best of all possible organisations for which to work I am proud to tell others that I am part of this organisation Morale is high 1997 1999 Agree Strongly Agree Strongly agree agree 23 7 8 3 Sig.1 p .000 10 1 15 3 9 2 .000 27 6 35 8 25 5 .000 3 0 8 1 5 0 .000 1. The significance levels reported are of Chi-square tests applied across all three rounds of data for all options for each question. dimensions on which questionnaire responses differed significantly over the three points in time (see Tables 2 and 3). Staff awareness of corporate strategy increased over the period from 48 per cent in 1994 and 54 per cent in 1997 to 66 per cent in 1999. Likewise, staff agreeing that they were aware of what management was trying to achieve increased from 57 per cent in 1994 to 63 per cent in 1999. At the same time, 70 per cent agreed the organisation would achieve its aims (a slight decline compared with 78 per cent in 1997, but an increase on 68 per cent in 1994). Despite this, only 30 per cent of staff were proud to tell others that they were part of the organisation (a decline compared with 43 per cent in 1997 and 33 per cent in 1994), and only 11 per cent would recommend the organisation to others as a great place to work (which again showed a decline, compared with 30 per cent in 1997 and 21 per cent in 1994). Other data regarding employee commitment showed a similar negative trend. The mechanics of change started to attract senior management’s attention. A special change management consultancy team was set up, comprising HR high-flyers, aimed at ‘changing employee mindsets through changing employment contracts’ (senior group HR adviser). The HR department was fully involved in the change initiatives, ranging from new leadership competencies and the use of professional sports people for expert coaching to area directors. Investor in People accreditation was also sought. From 1998 onwards, staff were able to study for a nationally accredited qualification in customer services; and by 1999 6,000 staff had either completed or were in the process of obtaining these qualifications. A corporate university was established using the latest techniques in distance and e-learning. Mindful of the business imperative of ‘taking our people with us’, the retail-banking network invested heavily in communications. At the beginning of 1999 under a banner of ‘Staying ahead’, a whole raft of initiatives was unleashed on the workforce: written communication, videos, senior manager visits and motivational events. Nevertheless, the survey showed that only 20 per cent of staff agreed that management cared about the needs of employees (similar to both 1997 and 1994). Only 5 per cent of those surveyed agreed that morale was high (compared with 9 per cent in 1997 and 3 per cent in 1994). Morale was lower in the branches than in head office: Top management are seen as tough bastards who do a good job and who couldn’t care less about people. Local management are seen as lovely people HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 59 The HR department’s role in organisational performance who are not really good at their jobs but ‘who really care about me’. We have this schizophrenia thing. HR manager During the third and final phase of data collection in 1999, the bank’s financial performance started to falter. At the beginning of 2000 press reports showed that Successbank’s share price had fallen by almost 40 per cent since the previous spring. Likewise, Successbank’s market value, once £60 billion – the most highly valued bank in the world – had dropped to £34 billion. The bank’s proposed acquisition of a further financial services group was rejected by the Monopolies Commission. This brought to an end its strategy of creating shareholder value through the acquisition of ‘fat’ businesses and then stripping out costs. As Figure 1 shows, by 2004 its dominance of the retail banking sector in the UK was over. Role of the HR department in 1999 In 1998, the HR Operations function won a national award for its innovative approach to administrative service provision. In 1997 it had opened a call centre, restructuring HRM provision into a central administrative pool in order to deliver consistent advice, reduce costs and help over-stretched managers. The bank won the award primarily due to the high satisfaction rate of call-centre users (HR staff and managers), and the success of the centre in addressing the needs of a newly merged organisation in terms of consistency of HRM activities. Despite this national award, at branch level staff saw the HR department only as responsible for recruitment and selection, and criticised it for being slow, bureaucratic and driven by headcount reduction. Training and development received high-profile coverage with the establishment of a corporate university, but the problem remained one of access, not provision. Forty-five per cent of staff said they had spent no time in formal training in the past year (actually higher than in previous years). Only 34 per cent were satisfied with appraisal (similar to previous rounds of the survey). Fifty-eight per cent of respondents agreed that nobody cared for average employees as far as career management was concerned. The publication of total rewards packages was intended to communicate to staff the total value of the Successbank compensation package. However, only 17 per cent agreed that their pay was fair compared with comparable external employment (a decrease compared with 25 per cent in 1997 and 29 per cent in 1994). Only 24 per cent agreed that they were fairly rewarded given the stresses and strains of the job, and 53 per cent of staff were dissatisfied with rewards overall (an increase compared with 36 per cent in 1997 and 45 per cent in 1994). At director level, there was more appreciation of the business partner role. There was: a positive and equal partnership between the HR function and the board – no longer there as the favourite auntie! Senior manager However, repackaging HRM issues for strategic attention was seen as critical: Whereas once upon a time we would have said: ‘staff attitudes are poor – we’ll have to do something about them’, that wouldn’t have got you buy-in at top management. Now we have to prove that staff attitudes have an effect on customer service, or sales, or costs, or whatever. HR staff Despite the employee communication initiatives, most of the day-to-day employee champion activity involving responsibility for listening and responding to employees was left to line managers. This resulted in a paradox for the HR department: they had what was perceived externally as an excellent HR structure, but got little thanks for it from employees. HR recognised that the developments in the shared service centres and the 60 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss TABLE 4 Credibility of the HR department (% of respondents agreeing or strongly agreeing with these statements per year) 1994 Strongly agree 19 0 Agree The HR department is competent at its job The HR department plays an important role in the success of the organisation The HR department has a clear overall strategy guiding its activities The HR department is a waste of the organisation’s resources 1997 1999 Agree Strongly Agree Strongly agree agree 23 2 27 1 Sig.1 p .054 13 1 15 5 21 3 .000 14 1 16 5 18 1 .000 12 3 8 3 14 3 .003 1. The significance levels reported are of Chi-square tests applied across all three rounds of data for all options for each question. business partner model had removed their presence from the bank’s grassroots level. Some HR managers regretted it: It is more a question of support to managers and the management of change stuff now. So we are not really seen by staff so much now. My guess is that their opinion of us will not be particularly high. I...regret that because I do think we should be doing more to champion staff concerns. The survey data supported this view. The largest percentage (between 50 and 60 per cent) of responses to questions about HR department strategy, competence and importance fell within the ‘neither agree nor disagree’ category. Table 4 displays how the strategy and importance of the HR department improved over the period from 1994 to 1999. Comparing Successbank across all the data with other companies surveyed within the research consortium shows some distinct trends (see Table 5). Successbank was compared with a pharmaceutical company (Pharma), a technology company (Hi-tech) and an FMCG company (Food and drink). The data show that although improvements in the communication of corporate strategy and the functioning of the HR department were seen during the period in Successbank, they were still falling well behind some of the other top performing companies on these indicators. They were also well below these other companies in terms of employee commitment, yet they scored equally highly in believing their organisation was going to be successful. There is therefore a clear conflict of evidence between how employees feel about Successbank in terms of their commitment and the organisational climate and how well they think the company is performing. These data are more consistent in the comparator companies presented. DISCUSSION This longitudinal case study raises some important questions about 1) HRM and firm performance outcomes and 2) the role of the HR department in this relationship. We examine each of these in turn. HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 61 The HR department’s role in organisational performance TABLE 5 Comparison of key indicators among participating companies (1999) (% of respondents agreeing or strongly agreeing with these statements per company) Successbank Pharma Hi-tech Food and drink Agree Strongly Agree Strongly Agree Strongly Agree Strongly agree agree agree agree Management and organisational strategy I believe the 59 11 organisation will achieve its aims I am aware of what 55 7 management is trying to achieve This organisation has a 53 13 clear corporate strategy Management cares 18 2 about the needs and morale of employees Senior management are 11 1 well informed about what people at lower levels think and do Employee commitment and loyalty I recommend this organisation to my friends as a great place to work For me this is the best of all possible organisations for which to work I am proud to tell others that I am part of this organisation Morale is high HR department credibility The HR department is competent at its job The HR department plays an important role in the success of the organisation The HR department has a clear overall strategy guiding its activities The HR department is a waste of the organisation’s resources 62 56 7 64 9 69 27 55 4 55 4 70 5 62 12 62 4 60 31 40 2 46 4 50 2 19 1 13 1 31 3 8 3 43 13 51 18 53 21 9 2 21 5 28 8 30 4 25 5 53 25 56 23 62 24 5 0 11 0 20 1 29 2 27 1 36 4 53 2 48 8 21 3 35 6 41 11 49 19 18 1 19 2 18 2 42 7 14 3 8 3 8 2 3 1 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss HRM and firm performance The findings discussed suggest we need to reconceptualise the way we model the relationship between HRM and firm performance. We highlighted earlier that there are several issues to consider (cf Paauwe and Farndale, 2005). First, what should be measured in trying to understand the ‘black box’ issue in research between HRM and firm performance? By simply assessing the bundles of HRM policies and practices in place, Successbank could have been perceived as a good employer just at a time when employee commitment was declining. Our study has shown that we need to extend the design of the conceptual model of the HRM-performance linkage by bringing employee voice into the equation, observing the processes implemented for creating opportunities for two-way communication and employee support (Truss, 2001). Secondly, the case also reveals that the best of HRM policies may be designed but that does not mean that they are implemented within the workplace. A stark example of this was the excellent provision of open learning centres within the branches. Yet, the reality was that reduction in headcount made access to these centres impossible. There needs to be a clear distinction in research between intended and implemented HRM practices. Thirdly, the case has shown that we need more than financial indicators to measure firm performance. By tracking share price alongside employee commitment and organisational climate levels, the contradictory results showed low staff commitment and sizeable dissatisfaction alongside outstanding financial business success. In the short term, Successbank could afford to live with low staff commitment, but high firm performance was not sustainable in the long term. This attention to creating discretionary human behaviour beyond the design of innovative HRM policies through appropriate implementation of these practices is central to the discussion surrounding the development of a firm’s human capital to achieve sustained competitive advantage (cf Wright et al, 1994). Finally, we should be measuring HRM and firm performance over time in order to assess the impact of time-lag on the outcomes of HRM practices. Successbank’s HRM strategy supported a cost-reduction strategy, but once this business strategy was no longer a viable option the organisation seems to have been unable to pull on other capabilities to find a new source of competitive advantage. The bank had not focused on the essential characteristics of its human capital to achieve sustainable competitive advantage (cf Barney, 1991). Role of the HR department Lessons for the HR department’s role in affecting firm performance also emerged. In line with other recent studies (cf Guest and King, 2004), the case questions the wisdom of focusing on the strategic partnering role. We have shown how the HR department may become more important strategically, but the human factor of people’s everyday work experience may deteriorate. Thus, the strategic role does not necessarily enhance the value of the firm’s human capital, and in the long term this has a negative effect on the sustainability of high firm performance. Employees felt increasingly estranged from the HR department, and HR professionals recognised this role conflict (cf Caldwell, 2003). We also need to recognise the business strategy and the primacy of shareholder concerns. Certain business strategies, such as cost-reduction, may neglect the peopleorientated HR roles of change agent and employee champion, while cloaking this neglect with an emphasis on process: establishing an efficient administrative expert structure and playing an active strategic partner role. This supports Caldwell’s (2003) analysis of the potential conflict and ambiguity between the different roles prescribed in the Ulrich (1997) typology. HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 63 The HR department’s role in organisational performance The HR department did not react to the early warning signs of decreasing employee commitment and loyalty. Instead, it concentrated on implementing ‘best practice’ HRM. While jobs were redesigned, there was little evidence of change interventions to help staff make the behavioural transition necessary to carry out the new jobs. The Change Management Unit was established only in the late 1990s, by which time much of the pool of goodwill and loyalty had been eroded. The function instead chose to concentrate on a cost-cutting HRM strategy in order to fit the demands of the business. To secure a place at the strategic table, it implemented costreduction strategies on the function itself by centralising and standardising HR department services, for which its activities also received external recognition. However, there was little incentive, financial or otherwise, for either HR professionals or managers to consider a high-commitment HRM strategy. The need to deliver year-on-year increases in shareholder value dominated all business debates. The decision to devolve people management responsibility to line management, in order to address an area of ambiguity in the HR department’s roles, was also problematic. Line managers were neither capable nor motivated to take on these issues. It appeared a dangerous HR strategy to devolve responsibility for both change agent and employee champion roles without first building up capability and motivation within this group. These managers were geographically dispersed and their numbers and roles were reduced constantly at a time when people problems were serious (cf McGovern, 1999). Line managers were measured by their sales targets, not by their people management practices, and were therefore left with few incentives to perform the two people-orientated roles in Ulrich’s model. Analysis of the qualitative data showed that some of the discomfort and distress of particular managers resulted from their feeling of being torn in two. They wished to spend time in employee champion roles showing concern for staff and enabling them to manage change but had to neglect these activities in favour of attaining business targets. CONCLUSIONS The HR department’s focus on the employee commitment aspects of HRM came too late. The failure to recognise the criticality of Ulrich’s (1997) employee champion role was a mistake. The assumption that line management could and would fulfil that role was flawed. The case has shown ambiguous performance outcomes where financial performance is positive and human outcomes are negative. The damage caused by these negative aspects can be related to the longer-term damage to the financial performance of the organisation. The decline in business performance of the bank casts doubt on the wisdom of the overall strategy adopted and shows that HRM, as well as contributing to organisational performance, can under certain conditions be a driver of both firm economic decline and employee alienation. The conflict of simultaneously balancing both a process-orientated and a people-orientated role resulted in the HR department siding with management, and largely neglecting relations with employees by making this the responsibility of line management. The identification of this fundamental conflict raises serious questions about the role of the HR function. Is it possible for the function to meet both employee and business needs by operating simultaneously in all four segments within Ulrich’s model? Or is Ulrich’s model at best based on a unitarist perspective and at worst overly naive about the nature of organisational life as lived by the people researched in this case? 64 HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 15 NO 3, 2005 Veronica Hope Hailey, Elaine Farndale and Catherine Truss Although this study has addressed previous limitations highlighted within the HRM and firm performance literature, it is of course restricted itself in that this is a single case study and it is therefore difficult to generalise the findings outside of the setting described. However, the depth of investigation in terms of the longitudinal, multi-respondent and multi-method data collection present a detailed exploration of HR department roles and the link with firm performance. Further research of this nature is required in different contextual settings to expand further our knowledge in this arena. 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