Chartered Institute of Personnel & Development

PEOPLE MANAGEMENT AND PRODUCTIVITY: UNLOCKING THE BLACK BOX

The government is clear: productivity in the UK continues to lag behind the US, Germany and France. Closing the so-called productivity gap is a national imperative. It is a preoccupation of employers and unions alike and the Achilles heel in our long-term economic success.

Productivity is a key issue in UK economic policy and to this end the Department of Trade and Industry recently commissioned Harvard professor Michael Porter to investigate the state of UK competitiveness. Professor Porter concluded that the old approach to economic management had reached the limits of its effectiveness and that companies needed to "rethink their strategies". In the public sector, there is similarly intense pressure to deliver on the government's commitment to improve public-service delivery.

This performance challenge sits at the heart of everything we do at the Chartered Institute of Personnel and Development (CIPD). People management is our stock in trade, and highlighting its pivotal role in boosting UK productivity and competitiveness is part of our mission. We know that the companies higher up the value chain are much more reliant on the willing contribution of the people who work for them. It is their human capital, allied to the leadership capability within the organisation, which represents the primary source of competitive advantage.

It is often assumed that people management and all its facets - training, recruitment, performance management, reward and so on - are concerned with managing 'soft issues' within organisations. In fact, people management is a discipline based on an ever-increasing body of knowledge, is learnable, can be systematically applied and is an increasingly critical organisational activity.

We have been able to demonstrate the powerful statistical impact of people-management practices on organisational performance. Our research over the past ten years proves beyond a shadow of a doubt that how an organisation manages its people is inextricably linked to performance outcomes across a range of variables, including productivity and profitability.

We have just unveiled a major piece of research, undertaken by Professor John Purcell and his team at the School of Management, University of Bath, which looks at the extent to which people-management practices affect overall performance and reaches a number of critical conclusions. This three-year study of 11 leading organisations unlocks the HR 'black box' to demonstrate how and why such practices impact on performance.

It includes organisations from both the private and public sector - including Selfridges, Norwich Union, the Royal United Hospital (RUH) Bath, and Tesco. We followed it with a specific study of six public-sector organisations including the National Blood Service and the Inland Revenue. This research shows that in each organisation performance can be clearly linked back to four fundamentals.

Understanding the People and Performance Link: Unlocking the Black Box, the most in-depth study of its kind to date, confirms the powerful relationships between HR practices, employee commitment and operating performance. It tracks organisational performance over a three-year period and puts HR under the spotlight. Where effective HR practices are not in place, levels of employee commitment are up to 90 per cent lower.

So what did we find?

The big idea
An organisation needs a clear direction and purpose that goes beyond the bland mission statement or generic goal of financial returns, and which engages, enthuses and unites people. At the Nationwide Building Society this is a commitment to mutuality. At the RUH Bath it is saving lives. This 'big idea' appears essential in motivating and directing people behind the strategy of the organisation.

The big idea is essentially those values which are embedded in organisational practice and is strongly linked to how employees are managed, their responsibilities to each other and to customers or stakeholders. This link between HR and the organisation's customers - in other words, between internal and external - means that values are consistent and mutually reinforcing between functions such as HR and marketing.

In the highly customer-facing organisations such as Selfridges and Tesco, the 'employee-customer-profit' chain is very evident - and all employees understand and live the logic. Our research described the big idea as the "glue binding people and processes together".

Benchmarking and measurement
High-performing organisations invariably employ some form of balanced performance scorecard or methodology, be it the stakeholder value model employed at Selfridges, the six-sigma methodology at Jaguar or the EFQM framework at the Court Service; this demonstrates the importance of different stakeholder groups to the organisation's success, and links individual and corporate goals.

And, to illustrate another important point about measurement, as well as using targets and measures as 'sticks' to drive performance improvement, and to monitor progress, in the companies in our case study they also played an important role in helping to build and predict performance.

Interestingly, the report showed that, where too many measures are in place, they often pointed in different directions, so that no clear message emerged and each function championed its own data sources. Some of the current performance-measurement targets in parts of the public sector might do well to reflect on this.

Tailored practices
The research confirms that there is no universal 'best HR practice'. It is all about having a broad and integrated 'bundle', tailored to the needs of the organisation. For example, the practices employed at technology company AIT would be unlikely to go down well on the production line at Jaguar or the Inland Revenue.

The kinds of practices that support performance success are around recruitment, training and development, job design and reward. When effectively developed and implemented, they give the organisation the ability to elicit the willing contribution of employees, a contribution characterised by innovation, efficiency or what many of us recognise as 'going the extra mile'.

But these HR practices do not operate in a vacuum, as an automatic link with performance. They work through their impact on people: their ability, their motivation and their opportunities (AMO). In business and service organisations today, this kind of discretionary behaviour can mean the difference between organisational success and failure. It could mean a frontline employee who is dealing with customers 'smiling down the phone' or using knowledge to solve a customer problem. Such behaviour can be withdrawn very quickly - particularly if the individual believes the "organisation no longer cares about me, my future or my opinions".

The effectiveness of HR policies therefore depends on how they are perceived and their impact on people. They help develop positive attitudes or feelings of satisfaction, commitment and motivation - which all translate into performance-driving behaviour.

The critical role of line managers
But there is another crucial intervening variable on the people policy and performance links: management. It isn't just what you do, it's the way that you do it. Our research shows that the exercise of employee discretion is crucially affected by the way in which managers exercise their own discretion in managing people. The most carefully thought-through HR strategy is a waste of time unless it is embraced by line managers who have the skills and understanding necessary to implement it effectively and therefore to engage and motivate employees.

In other words, it is not only the HR policies that are the source of competitive advantage, but also critically the way that these policies are implemented. It is the implementation processes, and how well they are honed to suit the organisation, that are the key to performance improvement.

For example, at Tesco, where 88 per cent of staff feel loyal and share the company's values, a typical section manager described his role as "mobilising the team with a goal, motivating people". And building management capability is a core component of the Inland Revenue's HR strategy.

Another example in the research came from the nursing staff at the RUH Bath describing the change after a new ward manager worked with her HR colleagues on a range of new policies, such as flexible shift working and 360-degree appraisal. Comments include: "I'm much more motivated now, there's training, the atmosphere's totally different"; and "When I came here it was unsettled. Now we have a strong team … you want to do the job to the best of your ability". The high level of staff turnover in the ward has since fallen to almost zero.

In another of the retail-sector case studies, performance in one location was well below average. Staff perceptions revealed a lack of involvement and a dictatorial management style. The management was subsequently changed to replicate the high levels of commitment and performance evident in the company's other sites.

The organisations in our study show us how transformation is possible, providing a very clear way forward for all those organisations who find themselves struggling to deliver. They have achieved what for many seems impossible: they have been able to elicit the willing contribution of their employees to boost performance and productivity.

A final point from the research is that developing yet more HR policies may be a waste of resources. We found that improving the way existing ones work was more likely to pay dividends. This is good news for employers - and it means that many are already on the starting blocks - as, by focusing attention on implementation, their chances of success are extremely high.

Such an approach lies at the heart of corporate sustainability too - what might be more commonly described as the ability to 'stick around'. A commitment to making people central to success means moving away from short-term approaches to change. It doesn't happen overnight, but in the end, as the organisations and employees in our study will tell you, it's worth it.

Supplied by courtesy of Geoff Armstrong, Director General, Chartered Institute of Personnel and Development (CIPD)