People in the Equation

For HR strategy to influence the bottom line, it has to intermesh with other changes.

by Richard Reeves
Last Updated: 31 Aug 2010

There are three things that everyone who has not been living in a cave for the past three decades knows for certain. Flared trousers always come back into fashion eventually; socialism does not; and, of course, People are Our Most Important Asset.

The idea that organisational success depends in large part on the skills, attitude and evergy of its constituent people is not exactly in the E=mc class. It is closer to a truism than a truth. Nonetheless, the increasing economic importance of the 'people factor' is well proven, at both institutional and national levels.

Gordon Brown's much-derided admiration for 'post neo-classical endogenous growth theory' was based on the sound evidence that countries with higher levels of skills deliver better economic growth rates. This is a lesson most governments - not least in the Far East - took to heart in their education and training policies.

But at the level of organisations, translating the people-performance link into tangible changes has been patchy. All cliches are more often spoken than implemented, but the gap between iteration and influence has surely never been higher than for Pomia (People are Our Most Important Asset).

Organisations have bought the notion that people are a vital asset. The trouble is, they have percious little idea how to invest in them. It may be that the language of assets has been unhelpful. At a recent conference on 'A Good Day's Work' organised by the Guardian and consultancy Penna, Lynda Gratton from London Business School offered instead the image of employees as investors. Employees invest time, energy and ideas into their firms - and they want a return, or else they might take their capital elsewhere. This world would look different indeed if companies paid as much attention to their employee investors as to the shareholder variety.

But organisations - and the HR profession in particular - still need a clearer idea of what they should actually be doing. The holy grail of research in the HR field has been evidence that spending time and money on more progressive HR policies leads to improved business performance. Lots of institutions, not least the Chartered Institute for Personnel Development, have spent lots of money on the search - but so far the frail is still at large. Sure, successful firms have more progressive people policies. But there is no compelling evidence that the policies came first; or that even if they did, that they were indeed the key element.

The few studies to have looked at the performance of organisations over time find little evidence for a causal link between employment practices and performance. A study by Sandra Black and Lisa Lynch published in the Economic Journal showed that training, diversity, profit-sharing, benchmarking and unionisation made no difference to changes in labour productivity. The only finding in favour were that use of computers and 're-engineering' had a positive effect, while labour turnover had a negative one.

All of which offers little succour to the HR profession, anxious to become more focused on the bottom line. All is not lost, however. Some clear trends are emerging from the plethora of research studies, of which two stand out.

First, people are the means by which organisations release the value of other assets. So the success or failure of an investment in net IT depends on the people using the kit. Work by Erik Brynjolfsson of MIT shows that investment in ICT can be wasted if it is not combined with simultaneous, aligned changes in organisational practice, people policies and culture. The value of ICT is unlocked by those using it, or not at all.

Similarly, mergers and acquisitions fail most frequently because of insufficient attention to the people side of the change process. Billions of pounds are wasted every year by firms buying other firms without the parallel investment in culture and people. So investments in people may not reap direct rewards in terms of organisational performance, but only in association with other investments.

So HR interventions are most likely to influence performance when they occur in a co-ordinated and consistent fashion. Bundling together training, performance appraisal, reward, diversity and flexibility policies makes the whole much greater than the sum of the parts. Sadly, this is the opposite approach to the one taken by most organisations, which adopt a pick-and-mix approach, trying new flavours, fads and suppliers every month or so. The result is a cat's cradle of HR policies, as often as not working against each other rather than in concert.

HR professionals are at a critical point. They have persuaded corporate leaders that people are vital to success: Pomia is in the lingo. But they have failed to convince them that HR is equipped to act on that knowledge; hence the absence of the function from most boardrooms.

In last years's CIPD survey, 56% of HR professionals said they wanted to be seen as a 'strategic business partner'. To stand any chance of achieving this ambition, they need to be more honest about the limited evidence for a direct line from HR policies to profit margins, more thoughtful about the interaction between people and other investments, and more consistent in the application of existing policies. Otherwise 'strategic HR' will continue to live only in the textbooks, and fantasies, of a fading profession.

Find this article useful?

Get more great articles like this in your inbox every lunchtime