Michael West is Professor of Work and Organisational Psychology at the Institute of Work Psychology, the University of Sheffield and co-Director of the Corporate Performance Programme of the Centre for Economic Performance at the London School of Economics. He has authored, edited or co-edited eight books; written more than 100 articles for scientific and practitioner publications, and chapters in scholarly books. His research interests are in innovation and creativity at work; team and organisational effectiveness and mental health work.
Malcolm Patterson is Project Manager of the Sheffield Effectiveness Programme at the Institute of Work Psychology, University of Sheffield. His current research interests include examining relationships between management practices, employee attitudes and organisational effectiveness. Rebecca Lawthom is a Research Fellow at the Institute of Work Psychology, University of Sheffield. She has collaborated with the co-authors on the Sheffield Effectiveness Programme for five years. Her research interests are in organisational climate, organisational effectiveness and gender at work.
Stephen Nickell has been Professor of Economics and Director of the Institute of Economics and Statistics at the University of Oxford since 1984. A Fellow of The Econometric Society since 1980 and of the British Academy since 1993, he has written extensively on unemployment and the labour market. Preface Managers know that people make the critical difference between success and failure. The effectiveness with which organisations manage, develop, motivate, involve and engage the willing contribution of the people who work in them is a key determinant of how well those organisations perform.
Yet there is surprisingly little research demonstrating the causal links between people management and business performance. Many studies describe particular management practices and styles which are claimed to lead to more motivated, or satisfied, or productive employees. However, there are few that apply rigorous, comparative analysis over time to the individual elements of management activity and measure the contribution they make to performance. When the IPD commissioned such an analysis from the Institute of Work Psychology at Sheffield we did not know what the results would show.
We were however aware that in the course of a major ongoing study the Institute had built up extensive and detailed information about a large number of manufacturing companies. This includes material based on lengthy interviews with senior managers about a wide range of company activities, the findings of employee attitude surveys and economic performance data. The study shares some of the characteristics of recent US research in that it focuses on measuring the relationship over time between people management and other managerial inputs, and business performance outputs.
However, it also has some distinctive features: for example, companies are predominantly single site and single product operations, so as to increase the relevance and comparability of the data collected. The measurement framework is also extremely comprehensive. It is necessary to spell out this background because the results of the study are so remarkable. They show decisively that people management practices have a powerful impact on performance.
Whether performance is measured in terms of productivity – which might be expected to have stronger links with the way in which companies manage their people – or profitability, in both cases the effect is substantial. Even more dramatic are the comparisons with other management practices, including use of competitive strategies, quality focus and investment in research and development. None of these other management practices appear to have anything like the same effect on performance as people management. The study looked additionally at employee satisfaction and commitment, and organisational culture.
The findings here underline the general message that it is how companies manage their employees that is crucial to business success. In the Institute’s view these findings deserve the widest possible audience. They are not just relevant to people management practitioners but also to line managers, boards of directors and investors. What should companies do to raise their performance? The answer strongly suggested by this research is to look first at how they manage their people.
There is of course no single model of good practice that all firms should adopt: this research does not imply that there is. The list of practices identified and measured in the course of this study ranges from selection and recruitment through appraisal and team working to incentive compensation systems. However, the findings do show two ‘clusters’ of practices that are particularly significant:
- acquisition and development of employee skills (including selection, induction, training and use of appraisals);
- job design (including skill flexibility, job responsibility, variety and use of formal teams).
These factors would generally be seen as important elements in ‘progressive’ or ‘high performance’ work practices. Are such progressive people management practices the only route to enhanced business performance? It is a fact of life that some companies are profitable despite making little or no use of such practices. These companies may possibly be in production sectors where jobs require little input from the employee other than sustained effort; or in small service operations competing on price rather than quality.
However, where businesses face international competition; where they are committed to excellence and quality standards; where creativity and innovation are essential to moving the business forward – employee commitment and a positive ‘psychological contract’ between employer and employee are fundamental to improving performance. This message emerges loud and clear from the findings of this report. This research is not the end of the road in terms of researching the link between people management and business performance.
Essentially, this study relies on statistical techniques to paint a picture which has wide validity. Other approaches, such as case studies, will be needed if we are to put flesh on the bones and get a better understanding of the casual links between practice and performance and how they work in specific contexts. The findings of this study deserve a wide audience. They should be of interest to all those concerned with raising the performance of organisations in the United Kingdom, and with increasing our national competitiveness.
What factors most influence company performance? In the latter half of the twentieth century, a litany in many companies has been ‘our employees are our most valuable resource’. This rhetoric has been so often repeated that it is now a cliche. Despite this, many small and medium sized enterprises still neglect to invest resources, time and creativity in the management of people within organisations (West, Lawthom, Patterson and Staniforth, 1996). But the two assumptions of this position need to be carefully tested.
These are: that people are the most valuable resource of an organisation, and that the management of people makes a difference to company performance. In this report, we address these assumptions directly. But rather than focusing simply on the traditional question of whether and which human resource management practices most affect performance, we ask four central questions: 1 Is there any relationship between employee attitudes (job satisfaction and commitment to their organisations) and the performance of their companies? Does organisational culture predict the subsequent performance of organisations?
Do human resource management practices make a difference to company performance and, if so, which of these practices appear most important? How do other managerial practices, such as competitive strategies, emphasis on quality, investment in research and development, and investment in technology, compare in terms of their influence upon company performance with the influence of human resource management practices? Our fundamental aim in this report is to aid managers in determining where to direct their efforts in order to have most impact upon the performance of their companies.
We have drawn upon data gathered from an intensive ongoing tenyear study of over a hundred small and medium-sized manufacturing enterprises in the United Kingdom. These data provide a clear picture of the links between various managerial practices and company performance.
Question 1: Do employee attitudes predict company performance? Job satisfaction explains 5 per cent of the variation between companies in change in profitability after controlling for prior profit. Organisational commitment also explains 5 per cent of the variation. In relation to change in productivity, job satisfaction explains 16 per cent of the variation between companies in their subsequent change in performance. Organisational commitment explains some 7 per cent of the variation. These results demonstrate the relationship between employee attitudes and company performance. The results demonstrate that the more satisfied workers are with their jobs the better the company is likely to perform in terms of subsequent profitability and particularly productivity.
Question 2: Does organisational culture significantly predict variation between companies in their performance, and if so, which aspects of culture appear most important? Cultural factors accounted for some 10 per cent of the variation in profitability between companies between the two periods measured during the study. The variable which most explained change in profitability was concern for employee welfare. In relation to change in productivity, the results were even more striking. We can explain some 29 per cent of the variation between companies in change in productivity over a 3 or 4 year period in human relations terms. This is clear confirmation of the importance of organisational culture in relation to company performance. Concern for employee welfare was by far and away the most significant predictor.
Question 3: Do human resource management practices explain variation between companies in profit and productivity? When we examine change in profitability after controlling for prior profitability, the results reveal that human resource management (HRM) practices taken together explain 19 per cent of the variation between companies in change in profitability. Job design (flexibility and responsibility of shopfloor jobs) and acquisition and development of skills (selection, induction, training and appraisal) explain a significant amount of the variation. This demonstrates the importance of HRM practices. In relation to productivity, HRM practices taken together account for 18 per cent of the variation between companies in change in productivity. Job design and acquisition and development of skills explain a significant proportion of the variation. This is the most convincing demonstration of which we are aware in the research literature of the link between the management of people and the performance of companies.
Question 4: Which managerial practices are most important in predicting company performance? Given that most of the analyses that we have conducted indicate very strong relationships between employee attitudes, organisational culture, HRM practices and company performance, it is reasonable to ask ‘What factors do not account for significant variation between companies? . Another way of putting this question is ‘which managerial practice are most important in explaining variation between companies in performance? In order to answer this question we identified four areas of managerial practices which have traditionally been thought to influence company performance. These are business strategy, emphasis on quality, use of -x- Prelims. p65 10 16/06/03, 15:27 advanced manufacturing technology and research and development investment.
The results reveal that strategy explains 2 per cent of the change in profitability in companies and less than 3 per cent of the change in productivity in companies. These results are not statistically significant. Emphasis on quality explains less than 1 per cent of the change in profitability within companies over time and less than 1 per cent of the change in productivity. Of course it may be that these factors explain more of the variation between companies over a longer period of time, but as yet we have no data which bear upon this.
Emphasis on, and sophistication of, technology explains only 1 per cent of the variation between companies in change in productivity over time, and 1 per cent of the variation between companies in change in profitability. Expenditure and emphasis on Research and Development accounts for 6 per cent of the variation in productivity, though this is not a statistically significant finding. It also accounts for 8 per cent of the variation in change in profitability between companies. Compared with these four domains (R&D, technology, quality and strategy) HRM practices, which explain 18 per cent of the variation in productivity and 19 per cent of the variation in profitability in companies, are the more powerful predictors of change in company performance.
Overall, these results very clearly indicate the importance of people management practices in predicting company performance. The results are unique, since no similar study has been conducted which compares the influence of different managerial practices upon performance. The results suggest that, if managers wish to influence the performance of their companies, the most important area they should emphasise is the management of people. This is ironic, given that our research has also demonstrated that emphasis on HRM is one of the most neglected areas of managerial practice within organisations.