Claire Logan and Lee Kearns explore the benefits of applying a ‘systems thinking’ approach to people performance to find the cause and effect links between employee engagement and business performance.

Academics and HR professionals alike have been trying over the years to prove the value HR functions and people management activities add to organisations. A variety of attempts to pinpoint the connection between the way people are managed and organisational performance have failed to deliver.

Increasing pressure to justify investment on people management activities

With the economic screws tightening, organisations are scrutinising resources and budgets with renewed vigour; the return on investment for each activity is being thoroughly questioned.

This poses a challenge for people managers and HR professionals to justify spend based on the data that is available to them – typically fragmented and disjointed. Organisations invariably have an overwhelming volume and range of data to potentially consider, from customer and staff surveys to internal processes such as exit interviews, as well as commercial management information. However these data sources (albeit valuable) are rarely pulled together in a way that provides meaningful insight.

As a result, management decisions are (still) too often based on anecdotal evidence, instinct and assumptions – a worrying approach when funding is tight. During a recent seminar held by PA Consulting Group, HR professionals met to discuss how to go beyond data and employee engagement surveys to truly understand which people management activities are most valuable.

Building the foundations – academic research

The first real academic attempt to prove the connection between people activity and performance was completed by Mark Huselid (The impact of human resource management practices on turnover, productivity, and corporate financial performance, AMJ, 1995). Further thinking in this area followed, however the breakthrough was moving beyond the value of HR functions to consider the wider benefits of effective people management.

This research, funded by the CIPD in 2003 and led by Professor John Purcell of the University of Bath, studied 12 companies with excellent reputations over three years to show how employees responded to HR practices, culture, values and line management leadership. It looked for the impact on attitude and commitment, leading to employees ‘going the extra mile’ for their employer.

Professor Purcell attended PA’s seminar and explained that traditional methods of measuring performance (such as profit) are too far removed from a time perspective (for instance, profit is a lag indicator as it happens after the interventions have taken place). It is more interesting for organisations to identify the lead indicator – what exactly to do to make the difference, not just measure the response.

The key learning point from Purcell’s study was to choose appropriate KPIs and see how they flow through to profit. The ‘Bath People and Performance’ model was developed as a result of this study, in which performance is empirically identified as a direct consequence of ability, motivation and opportunity.

Making it real for organisations

Research has shown that the Bath model is robust. However, for it to be useful to organisations, it needed to be ‘operationalised’.

To challenge the view that return on investment for people initiatives could not be proved, PA worked with Professor Purcell to build on the Bath model, applying a systems thinking approach. Systems thinking is a powerful yet pragmatic analytic approach to address complex business issues; it identifies causal relationships and interactions in any environment over a period of time. This differs from conventional analysis as it identifies the dynamics between topics – in this instance competence, engagement and attrition.

It also enables data from many sources to be combined: productivity analysis; staff engagement surveys; quality scores; and performance ratings supplemented with qualitative information gained from interviews with key business and HR personnel.

By considering the interdependencies between data, organisations can gain significant insight. Vodafone has been using this approach in its call centre operation to gain a fuller understanding of how to increase their business performance through better customer service levels and employee advocacy. This latter trait, the willingness of an employee to recommend the service their organisation provides to others, is critical in an increasingly competitive marketplace such as telecoms.

For Vodafone, bringing quantitative and qualitative information together in this way gave revelations about its operations that it was not formerly aware of. It was able to identify three specific career phases in the life cycle of its employees where aptitude, engagement and commitment to the organisation varied dramatically in each.

Proving the value

Applying academic thinking to such a complicated area can be fraught with challenge. However, the practical approach used at Vodafone was easy to implement, utilising existing data sources to identify the key people activities that lead to greater organisational performance.

Richard Ellwood, formerly the senior market research manager at Vodafone, shares his views: “A research programme can only go so far. This analysis helps Vodafone to better understand the areas for us to focus on to be most effective in driving a positive employee experience.”

In today’s economic climate, it’s imperative that HR can make fundamentally better, fact-based decisions to ensure its contributions to both strategic organisational direction and the bottom-line are on the same footing as other data-driven departments.

Claire Logan is a managing consultant and Lee Kearns is a consultant at PA Consulting Group, a leading management, systems and technology consulting firm.