HR professionals need to understand that their primary contribution to competitive advantage is by creating and sustaining effective organisation, writes Wayne Brockbank

Within Inside HR during 2015, I laid out the case for HR professionals to focus primarily on creating competitive organisations while also developing individual talent. I reviewed the empirical research and the conceptual logic from economics, organisational behaviour and human resource management. At the beginning of the New Year, we turn our attention to a more detailed examination of the questions, “What is organisation?” and “What are the HR implications for the alternative answers?”

In general, “organisation” is the means by which the efforts of otherwise disconnected people are co-ordinated to produce collective results. There are four basic organisational forms through which human activities are co-ordinated to produce collective outcomes.

First, internal labour markets allocate and co-ordinate human capability to create shared results. Internal labour markets assume that the value of individual contributions is contained in the price that is paid to individuals for a given set of activities. If a person in division A would be paid more in division B, it is because that person is perceived to create greater value in the latter; this means labour can be efficiently allocated through internal pricing mechanisms. Individuals respond to the economic incentives of being paid more by seeking to work where they can create the greatest value. HR’s job is to reduce the role that politics or business unit self-interest plays in allocating internal labour. Rather, they help to ensure that pricing mechanisms are used to allocate human capabilities to locations where they can do the most good.

“Individuals respond to the economic incentives of being paid more by seeking to work where they can create the greatest value”

Second, when people think of “organisation”, they traditionally think of specialised structures of work, layers of management and so on. In hierarchical organisations, work is directed and evaluated by layers of management and administrative staff (e.g. HR, internal audit and accounting). Such hierarchical organisations come into existence because the value of certain categories of work cannot be captured solely by internal pricing structures. Work is organised around specialised groupings to optimise on economies of scale. Once the structure is organised around specialised lines, the specialised units must then be reintegrated into an organisational whole that is greater than the sum of the parts. Incentives for work integration occur through measurements that are made by supervisory or administrative oversight. HR professionals must have expert understanding about how to divide up the work for optimal efficiency, provide clear and robust measurements and establish integrating practices that bring the differentiated organisation back into a unified whole.

Third, an alternative mechanism for creating unified work outcomes is the application of interpersonal networks (e.g. departments or teams). Some types of work require that individuals contribute through their involvement in integrated team efforts. This type of work is found in software development, team-based manufacturing, or in most consulting projects. The challenge of effective teamwork is the perennial problem of the free-rider effect in which each team member wants everyone else to work hard but individually, she or he may want to take it easy and not work so hard. Of course, when all team members think that way, the team fails to produce. Teams provide social incentives through the allocation of social rewards (i.e. status, prestige, leadership, praise) or punishments (i.e. isolation, criticism and exclusion). HR professionals play an important role in this kind of organisation by ensuring that teams have clear targets, optimal information, collective incentives, within-team feedback processes and a clear understanding of what constitutes effective teamwork.

“When a set of individuals share the value of the collective output, they are more likely to collaborate, contribute discretionary effort, and commit to high quality work”

Fourth, a final form of organisation through which collective outcomes may be achieved is through common values, purpose or culture. When a set of individuals share the value of the collective output, they are more likely to collaborate, contribute discretionary effort, and commit to high quality work. The incentives for such work are the personal and shared emotional rewards from the accomplishment of the institution’s collective purpose. Such collective outputs can be found in the culture of public sector institutions such as the Red Cross and religious organisations, as well as in the culture of some private sector companies such as Medtronic and Pixar. The role of HR in value-based organisations is to enunciate a compelling but not contrived statement of value-based purpose, to ensure its communication through leadership communications and actions, and through enveloping employees with stories about how the fulfilment of institutional purpose has enriched the lives of its intended recipients.

5 action items for HR

  1. HR professionals need to understand that their primary contribution to competitive advantage is by creating and sustaining effective organisation.
  2. They need to understand that there are four primary types of organisation: internal labour markets, hierarchical structures, networked teams and integrated cultures.
  3. They need to understand the incentives that drive each form of organisation.
  4. They need to be expert in creating and sustaining the appropriate organisation form under the appropriate conditions.