NECESSITY TO EVALUATE HUMAN RESOURCE MANAGEMENT IN COMPANIES OF LATVIA

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1 NECESSITY TO EVALUATE HUMAN RESOURCE MANAGEMENT IN COMPANIES OF LATVIA Līga Peiseniece 1, Tatjana Volkova 2 1 BA School of Business and Finance, Latvia, 2 BA School of Business and Finance, Latvia, Abstract For successful management of companies managers need not only to organize and to manage basic activities and to ensure the appropriate supporting functions, but they also need to evaluate these functions. One of the most important systems of conduct of a business is Human Resources management (HRM). The necessity to evaluate HRM in companies of Latvia was proved by analyzing current practice of HRM and HRM evaluation in large companies of Latvia in a crisis situation. The authors have analyzed the data of primary and the secondary surveys and have come to the conclusion that many companies in time of crises have been under the necessity of doing the following activities: cutting back on recruiting, company events, bonus payments, trainings and laying off temporary and full-time employees etc. The realization of many of these activities requires the analysis of different HR metrics and costs. Keywords: Human Resource Management, evaluation of HRM, large companies, Latvia. Introduction The human resource is the one of important resources for successful development of every company. Several researchers L.Pickett (2000), P.Sparrow, R.Schuler, S.E.Jackson (2000); P.Evans, V.Pucik, J.Barsoux (2002),J.C. Hayton (2005) have proven convincingly, that HRM is one of the most sensitive and important fields of action for the future success. As American HRM researcher J.J.Phillips (1999) considers as human resources represent a significant costs of an organization, the effectiveness of the function can influence an overall success or failure of an organization. C.Scholz and H.Böhm (2008) consider that the role of HRM in the European companies has become more significant since 2000 when European Commission adopted Lisbon strategy. The purpose of the strategy is to develop Europe as the most competitive economy in the world based on knowledge. The strategy has stimulated the concentration of the society to human resource management (HRM), competencies of people and leadership. With the increasing demands of today s business environment, the HRM is under pressure to demonstrate its contribution to the organization and its stakeholders (Ulrich, 1997). Wherewith the issue of HRM evaluation becomes topical. Companies do not pay sufficient attention to such comparatively expensive direction of management as HRM and especially to its effectiveness and efficiency in the time period when priorities of many companies of Latvia are to increase productivity and maximize utilization of all kind of resources. The objective of the paper is to justify the necessity to evaluate Human Resource Management in companies of Latvia. Research methodology the research was conducted by using the analysis of academic literature, the data of primary and the secondary surveys. The authors have reported views of different researchers about the evaluation of HRM and the necessity to carry it out. On the basis of the selected theoretical findings an original questionnaire was conducted in 42 large companies of Latvia with aim to clarify the methods of HRM evaluation used in these companies. The authors analyzed additionally data of the secondary survey about the priorities of HRM in companies of Latvia in Originality/Value The paper is the first attempt to ground the necessity to evaluate HRM in companies of Latvia. The paper consists of three parts. The first two parts provide the theoretical background of research methodology. The next part reveals methodology and findings of empirical researches carried out in companies of Latvia. Discussion and conclusion as well as reference section are concluding the paper. The authors have provided the review of theories of HRM evaluation in the next chapter. 698

2 Methods of HRM evaluation Human resource management is a relatively new discipline which has existed for slightly over 50 years. Therefore the methods of HRM evaluation have developed gradually improving each other. Developing HRM in practice and theory there appeared the necessity to evaluate the effectiveness and efficiency of HRM. According to J.Bratton (2007), the evaluation of HRM is a process, where the entire HRM and its separate functions are evaluated. There are several approaches how to evaluate HRM. J.J.Phillips (2005) has come to conclusion that development of HRM evaluation could be divided in to three periods where each of these stages is characterized by its own approach to HRM functions. Figure 1 reflects HRM evaluation approaches development from 60s to nowadays. Attitude/ Compliance HR Auditing HR Case Studies Employee Attitude Surveys Management by Objectives Benchmarking/ Tracking Competitive HR Benchmarking HR Cost Monitoring Key HR Indicators HR Satisfaction Surveys Value Add/ Impact HR Profit Center HR Macro Studies ROI methodology Balanced Scorecard Human Capital Measures 1960s-1970s 1970s-1980s 1990-Present Figure 1. Approaches to human resource management evaluation for the time period of 1960 to present (Phillips, 2005) J.J. Phillips (1999) has also given the comparison of methods of HRM evaluation. Table 1 summarizes and compares these methods. Method Surveys HR Reputation HR Accounting HR Auditing HR Case Studies HR Cost Monitoring Competitive Benchmarking HR Key Indicators HR Effectiveness Index HR Management by Objectives HR Profit Centers HR Return on Investment Table 1. Comparison of methods to measure HR contribution (Phillips, 1999) Evaluation focus Attitudes/Perceptions Attitudes/Perceptions Value of Skills/Capabilities Efficiency/ Existence of Practice Qualitative Description with Data Program/Function/Behavior Costs Performance Measures/Practices Program/Function/Behavior Measures Multiple Key Indicators Goal Settings for HR Performance Measures Profit Contribution of Programs/Services Benefits vs.costs S. Gibb (2000) has concluded that four methods of HRM evaluation could be connected with effectiveness of HRM and they could be included in a united model. The model units are such methods as Best Practice Models, Fit with Business, Benchmarking with excellence, Manager and Staff Views. Figure 2 shows a map of perspectives on evaluating HRM effectiveness. 699

3 Objective Factors External Orientation Best Practice Model Benchmarking with excellence Fit with Business Managers and Staff Views Internal Orientation Figure 2. A map of perspectives on evaluating HRM effectiveness (Gibb, 2000) Promoters of talent management J. W. Boudreau and P. M. Ramstad (2003) have provided different views how to measure HR and HRM. Alternatives of HR measurement are represented in Table 2. Measurement Approach Efficiency of HRM operations HR activity and best - practice indexes HR dashboard or HR scorecard Causal chain Subjective Factors Table 2. HR Measurement Alternatives (Boudreau, Ramstad, 2003) Examples Measures Cost per hire, time to fill, training costs. Ratio of HR staff to total employees. Human capital benchmarks. Human capital index. How the organization or HR function meet goals of customers, financial markets, operational excellence, and learning. Models link employee attitudes to serve behavior to customer responses to profit. J. W. Boudreau s and P. M. Ramstad s classification of HR measurement is supported by W. F.Cascio who considers that HRM evaluation must improve important decisions which are linked with talents. The next chapter of this article describes the necessity of HRM evaluation from theoretical aspect. Scientists Views on the necessity of HRM evaluation The nature of HRM itself has created the necessity to evaluate HRM. The development of HRM is influenced by the following changes in views and practices of management -organizational changes (team work, quality management system), improvement of flexibility and productivity of workforce, elaboration of HRM strategy, increase of HR significance and increase in the role of employees as partners. J.Bratton (2007) assumed that these changes in practice of management have determined the necessity to evaluate HRM and to define added value of HRM practice. J.Fitz-Enz (1995) has reported more detailed characterization of contribution of HRM evaluation in company s activity: Evaluation provides good economic comprehension. Every HR program should provide an appropriate return on the investment. It provides good comprehension to show a program s value by providing convincing evidence that can only be obtained through a formal measurement and evaluation process. Evaluation provides the proof of results. The HR staff needs to see the results of their efforts. Results of evaluation encourage the HR staff to focus on important activities. Evaluation brings into focus those activities that will make a difference in the contribution to organizational effectiveness. 700

4 Data collected for evaluation isolate the causes of problems. A formal measurement and evaluation effort provides data necessary to clearly identify the causes of problems and to measure progress toward problem resolution when the problem can be corrected by HR. Results from measurement and evaluation can lead to additional resources. As the HR function continues to make contributions, additional resources are needed for new programs, services and policies. One of the most effective ways to justify additional resources is to show the results from previous programs through the evaluation process. Evaluation increases personal satisfaction and position. An important sense of personal satisfaction comes from seeing the results of one s work. Evaluation allows the HR staff to judge their success. The necessity to evaluate HRM was also determined in several international surveys. The surveys which were conducted by European Association of People Management and the Boston Consulting Group from 2006 to 2009 indicate necessity to carry out HRM evaluation for achievement of different goals. In 2006 it was indicated that one of the top future challenges is transforming HR into a Strategic Partner. For achieving this goal researchers suggested that the HR department must measure its performance against qualitative, quantitative, and financial metrics. Besides, in 2008 report the researchers emphasized, that many executives today have dashboards on their computer desktops that provide a quick picture of their company s traditional financial and business performance metrics. These dashboards should also highlight quantitative and qualitative HR metrics. Until top executives do not have a fuller and more accurate view of HR activities, the HR function will not achieve its proper role within the corporation. The survey which was conducted in 2009 proved that many companies in time of crises have been under the necessity of doing the following activities: cutting back on recruiting, company events, bonus payments tied to company and individual performance, individual and functional trainings and laying off temporary and full-time employees etc. The realization of many of these activities requires the analysis of different HR metrics and costs. The authors analyzed the data of primary and the secondary surveys to clarify the necessity of HRM evaluation in companies of Latvia. The next chapter provides the analysis and the interpretation of these surveys. The evaluation of HRM in large companies of Latvia The theoretical model of empirical research was developed on the basis of Phillips (2005).On the basis of theses theoretical findings an original questionnaire was conducted by the authors in This survey was carried out with the aim to clarify the methods of HRM evaluation used by large companies of Latvia. The number of large companies employing over 200 people in Latvia is relatively low. In accordance with data of Commerce Register of the Republic of Latvia, there were registered approximately 393 companies on December 31 st, The large companies were chosen for the survey because researchers N.P. Vokic and M.Vidovic (2008) argue that only companies with more than 200 employees have HR policies, programmes and activities developed enough to be surveyed. 42 companies (37 private companies and 5 state companies) with over 200 employees participated in this survey. The companies represented different fields, but most of them were from wholesale and retail trade (10 companies from 60 companies), manufacturing (8 companies from 94), information and communication (7 companies from 12 companies). The results of the survey showed that 93 per cent of respondents evaluate Human Resources Management. The fact, that 7per cent do not use any method of HRM evaluation, confirms that a part of large companies does not consider Human Resources Management about significant component of companies management which would be necessary to evaluate and to improve. Figure 3 reflects methods of HRM evaluation used by respondents. 701

5 HR Key Indicators 74 HR Cost Monitoring 60 Management by Objectives 40 Employees Satisfaction Survey 81 HRM Auditing 29 Line Managers Satisfaction Survey 17 ROI in HRM Processes Per cents Figure 3. Usage of HRM evaluation methods (n=39) The results of the survey showed that mostly large companies are using Employees Satisfaction Surveys. Employee opinions can be used to diagnose specific problem areas, identify employee needs or preferences, and reveal areas in which HR activities are well received or are viewed negatively. But this method does not supply information about contribution of HRM to company s activities. The second more often used method is HR Key indicators. The usage of this method provides with quantitative and qualitative indicators which characterize different trends of HRM in a company. Many large companies are also monitoring HR costs. This analysis is necessary for sufficient allocations to realize HRM goals. Comparatively more rarely is the use of following methods by the companies: Management by Objectives, HR Auditing, Line Managers Satisfaction Surveys and determining return on investment in HRM. As Figure 3 reflects only 25 per cent of respondents are using the method - Management by Objectives. The authors consider that only these companies are realizing target-oriented HRM Only some companies are estimating HRM from different aspect, conducting internal clients satisfaction surveys, HR audits and realizing management by objectives and analyzing different rates and costs of HRM. The analysis of the methods of HRM evaluation used by large companies in Latvia gives understanding of the level of HRM evaluation development. Large companies are primarily executing attitude approach and benchmarking approach for HRM evaluation. Only a few companies are interested in determining of HRM added value. The authors consider that large companies in Latvia have narrow approach how to evaluate HRM. They evaluate only some aspect of HRM and do not obtain systematic view to HRM. To prove the necessity of HRM evaluation the authors analyzed additionally data of the secondary survey about the priorities of HRM in companies of Latvia in The survey was conducted by Latvian Association of Personnel Management and Latvian Association of Business Consultants. 233 organizations participated in this survey, 65 of them were large organizations (private and state companies, government institutions). The results of survey showed that 70% of HR managers of large companies are involved in strategic management of their organizations and 80% of companies are taking into consideration issues of HRM in the process of strategic management. The authors assume that the involvement in strategic management requires comprehensive information about progress in HRM. Such information could ensure by evaluating HRM from different aspects. Nowadays HRM in many companies is influenced by economic crisis. Such HRM functions as planning and monitoring of HR budget, management of structural changes in an organization, development and management of reward system, HR planning are becoming more important in 2009 in comparison with

6 previous period. Decreasing costs and strategic changes have impacted in great extend also HRM functions. These phenomena clearly show that companies must use such methods of HRM evaluation as HR monitoring, HR Auditing, HR Key Indicators, Employee satisfaction surveys and others. The survey also provided information about HRM evaluation in organizations. Only 2/3 from organizations are carrying out the evaluation of HRM as the main methods used mentioned the following: Management by Objectives (58%), Employee satisfaction surveys (36%), Analysis of finance measures of an organization (30%), Managers Surveys (27%), Client s Surveys (26%) and HR Auditing (18%). These results reflect a gap between current and necessary practice of HRM evaluation. Discussion Since there is a lack of empirical data on HRM evaluation in general there is also a lack of research on determining of necessity of HRM evaluation. This article is the first attempt to ground the necessity to evaluate HRM in companies of Latvia. The necessity to evaluate HRM in companies of Latvia was proved by analyzing current practice of HRM and HRM evaluation in large companies of Latvia in a crisis situation. The research which could be focused on establishing of HR and CEO opinions about the necessity of HRM evaluation could be further researched. Such research could be also revealed the HR and CEO understanding of importance of HRM evaluation. Present research demonstrated that many HR managers are not using appropriate methods for evaluation of HRM. Large companies are primarily monitoring different rates and costs of HRM and are oriented to get information about results of HRM in past. The authors consider that it is very important to analyze return on investment of each HR function and after that to make decisions how to improve it or to outsource. Using research method presented in this paper the research could be extended to the broader sample in different countries for benchmarking, e.g. the Baltic countries. Such research could give more detailed information about the usage of methods of HRM evaluation and convergence and divergence on the necessity of HRM evaluation in the Baltic countries. The results of this research could be also used by other researchers for comparison of data. The authors consider that findings of their research could be used by executives, HR managers, and academic staff for the development of HRM. Conclusions The results of primary research disclosed the following gaps of HRM evaluation in companies of Latvia: 1. Companies use only a few methods of HRM evaluation. 2. Companies mainly execute attitude approach and benchmarking approach for HRM evaluation. The secondary survey proved that the necessity of HRM evaluation is stated by the following factors: 1. Large part of HR managers participates in strategic and business planning of their organizations. 2. Large part of organizations takes into consideration matters of HRM in the process of business planning. 3. Such HRM functions as Planning and monitoring of HR budget, Management of structural changes in an organization, Development and management of reward system, HR planning became more important in 2009 if compared with previous years. 4. Cost minimization and changes in the strategy and goals of organizations have impacted changes in HRM functions. 5. A small part of organizations uses services of HRM outsourcing. 6. Only part from organizations carry out the evaluation of HRM, the main methods used are Management by Objectives, Employee Satisfaction Surveys, analysis of finance measures of an organization, Managers Surveys, Client s Surveys and HR Auditing. References 1. Boudreau, J.W., & Ramstad P.M. (2003). Strategic HRM Measurement in the 21st Century: From Justifying HR to Strategic Talent Leadership. In HRM in the 21st Century. New York : John Wiley 2. Bratton, J., & Gold, J. (2007). Human Resource Management: Theory and Practice. Palgrave Macmillan, New York, NY. 703

7 3. Cascio, W. F., & Boudreau J. W. (2008). Investing in People. Financial Impact of Human resources initiatives, Pearson Education 4. Evans, P., & Pucik, V., & Barsoux, J. (2002). The Global Challenge: Frameworks for International Human Resource. New York. 5. European Association of People Management, the Boston Consulting Group report The Future of HR in Europe/ Key Challenges Through (2006). Retrieved September 21, 2009, from 6. European Association of People Management, the Boston Consulting Group report Creating People Advantage. (2008). Retrieved September 21, 2009, from 7. European Association of People Management, the Boston Consulting Group report Creating People Advantage in Time of Crisis (2009). Retrieved September 21, 2009, from 8. Fitz-enz, J. (1995). How to Measure Human Resource Management, 2nd. New York: McGraw-Hill 9. Gibb, S. (2000). Evaluating HRM effectiveness: the stereotype connection. Employee Relations, 22, Hayton, J., C. (2005). Promoting corporate entrepreneurship through human resource management practices: A review of empirical research. Human Resource Management Review, 15, LBKA un LPVA pētījums Personālvadības loma un aktuālie uzdevumi organizācijā (2009). Retrieved December 15, 2009, from 12. Phillips, J. J. (1999). Accountability in Human Resource Management, Butterworth Heinemann. 13. Phillips, J. J., & Phillips P.P. (2005). Proving the Value of HR: How and Why to Measure ROI, Society for Human Resource Management, USA. 14. Pickett,P. L. (2000). People make the difference. Industrial and Commercial Training,, 32, Scholz, C., & Böhm, H., (2008). Human Resource Management in Europe/ Comparative analysis and contextual understanding, Routledge, Abingdon 16. Sparrow, P., & Schuler, R., & Jackson, S.E. (2000). Convergence or divergence: human resource practices and policies for competitive advantage worldwide. Readings and Cases in International Human Resource Management, Scarborough, Vokic, N.P. & Vidovic M. (2008). HRM as a Significant Factor for Achieving Competiveness through People: The Croatian Case, International Advances in Economic Research, 14, Ulrich, D.(1997). Human Resource Champions: The Next Agenda for Adding Value and Delivering Results, Harvard Business School Press, Boston, MA 704

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