PRACTICE OF EVALUATION OF HUMAN RESOURCE MANAGEMENT IN LATVIA

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1 PRACTICE OF EVALUATION OF HUMAN RESOURCE MANAGEMENT IN LATVIA Līga Peiseniece Tatjana Volkova BA School of Business and Finance, Latvia Abstract Purpose The aim of the paper is to identify connection between the strategic role and the evaluation of human resource management in large companies of Latvia. Design /methodology/approach The methodology of the study is based on the research works carried out by Phillips and Gibb. On the basis of the selected theoretical findings an original questionnaire was conducted in 42 large companies of Latvia. Findings The main findings of the empirical study show that there exists connection between the strategic role of human resource management and the presence of evaluation of human resource management in the company. Research limitations/ implications The research could be extended to the broader sample in different countries for benchmarking, e.g. Baltic countries. The results of this research could be used by other researchers for comparison. Practical Implications The findings can be used by executives, by HR managers for the development of human resource management, so that it consequently becomes strategically important for the company. Originality/Value The paper is the first attempt to find connection between the strategic role of human resource management and the evaluation of human resource management in large companies of Latvia and to emphasize the significance of HRM evaluation for the company. Key words: Evaluation of human recourses management, Strategic role of human resource management, Strategic management. Paper type Research paper Introduction The main tasks of the companies to increase its value by using all kind of resources effectively and efficiently. Companies in Latvia do not pay sufficient attention to such comparatively important and expensive direction of management as human resource management (HRM). As priorities of many companies of Latvia currently are to increase efficiency, quality, to ensure innovations and high degree responsiveness to the market and client needs. A small number of publications in mass media in Latvia, incomplete information about the evaluation of human resource management in academic and scientific literature, lack of HR benchmarking indicators, which would be widely available, are proving that there is small attention being paid to this important field of company management. It has been argued that human resource management is one of the most sensitive and important field of action for future success of companies (Pickett, 2000; Sparrow/Schuler/Jackson 2000; Evans/Pucik/Barsoux 2002; Hayton, 2005). With the increasing demand of modern business environment, human resource management is under pressure to demonstrate its contribution to the organization and its stakeholders (Ulrich, 1997). The evaluation of human resource management has become an important process of HRM both in worldwide practice of business and research. Methods of HRM evaluation According to Bratton (2007), the evaluation of HRM is a process, where the entire human resource management and its separate functions are evaluated. The effectiveness, efficiency, productivity and organization of HRM and its functions are evaluated. The evaluation of HRM and its impact is essential for following reasons. First, by evaluating HRM contribution and showing its value to company, the HR function might increase credibility and legitimacy. Second, by evaluating HRM it is possible to manage and improve it (Ulrich, 1997). Third, the evaluation of

2 HRM provides the top management and HR managers with the feedback on the practices and programs they have introduced, wherewith it is possible to determine potential problems and deficiencies. According to Mordovin (1999) in order to realize the evaluation of HRM in a company it is relevant that HR specialists understand the necessity of HRM evaluation. Besides, the authors of this article consider that the top management s and executives perception of HRM role in a company is of more relevant significance. Consequently the opinion of top management concerning the HRM importance in a company determines whether the HRM evaluation is conducted in a company. The opinion of authors is based on Shetty and Buller (1990) that there exist several important factors which influence significance of HRM however the most important is understanding of the management about human resource management. Phillips (2005) has come to conclusion that development of HRM evaluation could be divided in to three periods where each of them is characterized by its own approach to HRM functions. The closer bonds between HRM and achievement of the company where being searched in the period of HRM evaluation development. Figure 1 reflects HRM evaluation approaches development from 60s to nowadays. Figure 1. Approaches to human resource management evaluation for the time period of 1960 to present (Phillips, 2005) Attitude/ Compliance HR Auditing HR Case Studies Employee Surveys Management by Objectives Attitude Benchmarking/ Tracking Competitive Benchmarking HR Cost Monitoring Key HR Indicators HR Satisfaction Surveys HR Value Add/Impact HR Profit Center HR Macro Studies ROI methodology Balanced Scorecard Human Capital Measures 1960s-1970s 1970s-1980s 1990-Present Several methods of HRM evaluation could be linked with effectiveness of human resource management. Gibb (2000), while summarizing view of different authors about HRM evaluation, has concluded that four methods 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. Figure 2. A map of perspectives on evaluating HRM effectiveness (Gibb, 2000) Objective Factors External Orientation Best Practice Model Benchmarking with excellence Fit with Business Managers and Staff Views Internal Orientation Subjective Factors

3 Gibb (2000) has created the model by observing HRM effectiveness in two dimensions. One dimension of map is considering the extent to which a concern with HRM effectiveness involves an internal, organizational orientation or an external, general standards orientation. The other dimension is concerned with the extent to which the value of either an objective or a subjective framework for operationalizing HRM effectiveness is adopted. Besides, the strategicness was studied by inquiring the role of the head of HR function, the HR manager s involvement in the strategy development process, and the existence of written HR strategy, in the research Converging human resource management. A comparison between Estonia and Finnish HRM which was conducted by Vanhala, Kaarelson and Alas in These researchers concluded that in one Estonian organization out of three HRM is strategic when using three criteria. The percentages of private companies are higher than those in the public organizations in all three criteria of strategic human resource management. The same approach of determining of HRM strategicness will be used in this research. The authors of this article consider that HRM evaluation is possible and conducted in companies, where HRM has the dominant role of the strategic partner. The evaluation of HRM in these companies reveals whether HRM is connected with company strategy and what is HRM contribution in company s activity. Since the research where links between the role of human resource management and HRM evaluation have been looked for has not been carried out, these connections will be analyzed in the empirical part of this article. The evaluation of Human Resource Management in large enterprises of Latvia In 2009 the authors of this article conducted a survey in large enterprises of Latvia where 42 enterprises (37 private companies and 5 state companies) with over 200 employees participated. The number of 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 320 companies on December 31 st, The response rate was 13 per cent. As authors of similar surveys recognize, the problem of non- response is difficult to avoid in company- level surveys, and in the most cases the problem remains. The large changes in companies, which were connected with economic recession was as an additional reason for refusal to participate in the questionnaire. The changes were also connected with the downsizing of employees and the unsteadiness of HR managers themselves concerning the possibilities to continue working in a company. The authors consider that the evaluation of HRM is not conducted in several companies and this circumstance did not motivate HR managers to participate in the questionnaire. Wherewith it could be affirmed that, this survey discloses trends in HRM in large companies of Latvia, but it does not discover causal relationships between different features of companies and its human resource management. 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). 50 per cent from respondents were foreign companies, 38 per cent - domestic companies, 12 per cent state companies. The structure of the questionnaire and the questions were developed by the authors based on theoretical findings and the interviews of 8 HR managers in different companies concerning the practice of HRM evaluation. The authors used the questionnaire to reveal what kind of methods and indicators large companies of Latvia use for evaluation of human resource management. The results of the survey showed that 93 per cent of companies evaluate human resource management. Figure 3 reflects the methods of HRM evaluation used by large companies of Latvia. Mostly companies use employee satisfaction surveys; more than 80 per cent of respondents carry out it. As scientist Mathis (2000) considers 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. The second more often used method is HR Key indicators. Turnover rate is the most often analyzed rate (72%) almost all foreign companies analyze this rate (90%). The rate describes work climate, thus judging,

4 whether the trends of turnover changes have been positive or negative. However this rate alone cannot provide information about the effectiveness or the efficiency of human resource management. Comparatively more rarely is analyzed absenteeism rate (34%) which characterizes work climate. Figure 3. Usage of HRM evaluation methods (n=39) 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 Over a half of companies monitor HR costs (60%). Comparatively more rarely is the use of following methods by the companies: Management by Objectives (40%), HR Auditing (29%), Line Managers Satisfaction Surveys (17%) and determining return on investment in HRM (9%). Only the companies, where the quality management system has been fully or partly established, are using HRM auditing for analysis and improvement HRM processes. This method is not applied in other companies. Respondents mentioned other methods of HRM evaluation: annual appraisal interviews, negotiations with management group; analysis of HR key indicators, costs and other quantitative data. Wherewith it could be affirmed that the most part of companies use attitude approach and benchmarking approach for HRM evaluation. Only some companies estimate 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 fact, that 7 per cent do not use any method of HRM evaluation, confirms that a part of companies does not consider HRM about significant component of companies management which would be necessary to evaluate and to improve. When analyzing companies, which do not use any methods of HRM evaluation, according to different features a size, a field, a form of property or competencies of HR manager, it was not possible to distinguish any separate group which would be characterized unambiguously. Estimating theory and analyzing the results of the interviews the authors posed several hypotheses. Effectiveness and efficiency of HRM H1: Large companies of Latvia more often evaluate the effectiveness than the efficiency of human resource management. To prove the hypothesis the authors for establishing how frequently companies use the evaluating methods of HRM effectiveness used the list of the methods which was discovered by Gibb. In order to establish the frequency of usage the evaluating methods of HRM efficiency by companies they determined both the existence of HRM strategic objectives and monitoring the expenses for achieving these goals.

5 In order to evaluate HRM effectiveness and efficiency it is important to clarify whether the strategic objectives of the company and human resources management are defined and whether the strategic objectives of human resource management are linked with the strategic objectives of the company. The answers of the respondents to the question Does your company have developed company strategic directions for next 3-5 years? are distributed as following: its defined in 45 per cent, it is not defined in 41 per cent of companies and 14 per cent of respondents are not informed about it. The authors link the small number of companies with the strategic objectives defined to the considerable changes in company s activity and the incapability of companies to formulate the strategy of companies in a crisis situation. The strategic objectives of human resource management were found in 60 per cent of companies. After analyzing the results mentioned above it could be concluded, that both the strategic objectives of a company and HRM are not always defined. In 14 per cent of companies the strategic objectives of a company exist, but the strategic objectives of HRM do not. In turn, the defined company strategy and the undefined HRM strategic objectives were found in 12 per cent of companies. Consequently the company strategy and HRM strategic objectives are defined only in one out of three companies. Wherewith it could be affirmed that only these companies can evaluate the HRM contribution in achieving the common strategic objectives as well as to determine the efficiency and the effectiveness of human resource management. The question about the coherence of HRM strategic objectives with company strategic objectives is not of minor importance. The respondents estimated the coherence of HRM strategic objectives with company strategic objectives using 10 point scale where 1 is strong disagreement and 10 strong agreement. The assessment of coherence varies from 7 to 10. Data is homogenous and mean is 9.14, which would be assessed as a high rate. Wherewith it could be affirmed that in 14 per cent of companies, with both company and HRM strategic objectives, defined they are coordinated. The companies of this group use different evaluation methods of HRM effectiveness (see Figure 4). Figure 4. Usage of evaluation methods of HRM effectiveness (n=14) Management by Objectives 14 Employees Satisfaction Survey HRM Auditing 6 10 Use Do not use Line Managers Satisfaction Survey 3 0% 20% 40% 60% 80% 100% Most of companies that were described above use Management by Objectives and Employee s satisfaction surveys. Each of these companies uses at least one method of evaluation of HRM effectiveness. Wherewith it could be affirmed that 33 per cent of 42 companies evaluate the effectiveness of HRM. In order to determine the frequency of HRM efficiency evaluation, respondents were asked to indicate fields of human resource management in which strategic objectives are formulated and are expressed quantitatively and to indicate expenses which companies analyze. 21 per cent of respondents pointed out HRM fields. The authors analyzed every answer and determined the percentage of expenses linked to the achievement of HRM strategic objectives. The authors concluded that only seven out of nine companies analyze the expenses of achieving the HRM strategic objectives completely or partly. Wherewith it could be affirmed that only 17 per cent of 42 companies carry out the evaluation of HRM efficiency.

6 Consequently the hypothesis - large companies in Latvia evaluate the effectiveness more often than the efficiency of HRM has been confirmed. Strategicness of HRM and evaluation of it H2: The effectiveness and efficiency of human resource management are evaluated in companies, where HRM is strategically relevant. The strategicness of HRM was determined by three criteria the participation of the HR manager in the board of the company, the HR manager s involvement in the strategic development process, and the existence of written HR strategy. Only 14 per cent or one out of seven respondents are the member of the board. Wherewith it could be affirmed that only a small part of companies utilize the competencies of HR manager completely, as well as their acquired information about the motivation and mood of employees and their willingness and interest in achieving the goals of the organization. There are defined the strategic objects of company and human resource management in the companies, where HR manager is a member of the board. The empirical data about HR managers involvement in the process of strategy development are not homogeneous. The assessment of involvement varies from 4 to 10 where 1 is strong disagreement and 10 strong agreement with the statement HR manager is involved in the formulation and implementation of the strategy of the company. Empirical distribution has one extreme (see Figure 5). Figure 5. HR managers involvement in the process of strategy development (n=6) HR manager is involved in the process of strategy development % 20% 40% 60% 80% 100% Wherewith it could be affirmed that only five out of six HR managers members of the board are involved in the formulation and implementation of the strategy of the company and HRM is of strategic significance only in these companies. According to the authors, 5 out of 42 companies or one out of eight is a relatively low result. Comparing these data with results, which were described in the article Converging human resource management. A comparison between Estonia and Finnish HRM (Vanhala, Kaarelson, Alas, 2006), where one out of three companies acknowledged HRM as strategically significant. It could be recognized that large companies in Latvia do not appraise the significance of HRM in company s activities. Figure 6 shows the methods of evaluation of HRM effectiveness and efficiency that are used by companies, where HRM is strategically significant. The results prove that all companies, where HRM is strategically significant, use the methods of HRM effectiveness and efficiency evaluation. Only 2 HR managers - members of the board - evaluate HRM from different aspects - satisfaction of internal clients; audit of HRM processes and analysis of different HR rates. Consequently the hypothesis - the effectiveness and efficiency of HRM are evaluated in companies, where HRM is strategically relevant has been confirmed. It is essential to emphasize that 11 companies, where company strategy is nonexistent, but HRM strategic objectives do exist, use some method of HRM evaluation. Besides 10 companies, where company strategy exists but HRM strategic objectives do not, use some method of HRM evaluation.

7 Figure 6. Usage of evaluation methods of HRM effectiveness (n=5) HR Cost Monitoring Management by Objectives Employees Satisfaction Survey HRM Auditing Use Do not use Line Managers Satisfaction Survey 0% 20% 40% 60% 80% 100% According to the authors it means that companies evaluate HRM but it is not targeted and linked with further progress of the company. Activities after HRM evaluation Respondents were also asked to reveal what kind of activities was realized after HRM evaluation. Figure 7 reflects more frequently realized activities after HRM evaluation and absolute frequency of answers. Figure 7. Activities after evaluation of HRM (n=39) Improved processes of HRM 64 Reported analyses to management 51 Determined new functions of HRM dep. 31 Reviewed HRM goals 28 HRM evaluation is not conducted 26 Increased number of HRM employees 13 Increased finance resources provision of HRM 10 Decreased number of HRM employees 8 Decreased finance resources provision of HRM The most frequently companies have improved processes of HRM (60%) and reported analyses to management for making decision (48%). A third of respondents answered, that they had determined new functions of HRM department or reviewed HRM goals. The results of the survey prove that a part of companies improves processes of HRM and increases or decreases the number of HRM employees or costs, based exclusively on the results of surveys of turnover or employee s satisfaction. The results of the survey clearly show the existing problem many companies of Latvia do not perform HRM evaluation or perform it partly. As the authors consider the lack of knowledge of management about HRM evaluation is one of the most significant obstructive factor. Per cents

8 In order to use the possibilities offered by HRM evaluation more often in companies of Latvia the authors of this article consider that it would be necessary to realize different efforts in many levels the companies, high education and society. At the companies level HR manager should master and apply different methods of HRM evaluation, in order to evaluate HRM from every point of view and obtain necessary information for improvement of human resource management. HR manager should also inform management of the companies about advantages of HRM evaluation and practice in other companies of Latvia and come to an agreement with management about necessity to realize HRM evaluation. At the high education level it would be necessary to include topics about HRM evaluation in the course Human Resource Management for students in programs of business administration. Programs of resource management should include courses about evaluation of HRM and practical studies of usage of HRM evaluation. At the society level it should be necessary to organize educational seminars, to publish articles about HRM evaluation and to continue research on practice of HRM evaluation. Discussion The research could be extended to the broader sample in different countries for benchmarking, e.g. Baltic countries. The results of this research could be used by other researchers for comparison. The findings can be used by executives, board members, HR managers for the development of company and human resource management, so that it consequently becomes strategically important for the company. It brings evidence that by not recognizing these links opportunity costs of company are rather high. The paper is the first attempt to find connection between the strategic role of HRM and the evaluation of HRM in large companies of Latvia and to emphasize the significance of HRM evaluation for the company. Conclusions The fact that 93 per cent of respondents evaluate HRM could be positively estimated. However the results of the survey show that companies often do not evaluate HRM homogeneously. Mostly companies conduct employee satisfaction surveys. Employee s satisfaction surveys are as significant as the analysis of HRM indicators; they supply information about effectiveness of different HRM processes. Summarizing results of the survey it could be affirmed that companies are mainly focused on determining satisfaction of internal clients (employees, line managers) in evaluation process of HRM, wherewith organization of HRM processes and their effectiveness from the point of view of company s management are not evaluated. Comparatively more rarely companies use following methods: Management by Objectives, HR Auditing, Line Managers Satisfaction Surveys and determining return on investment in Human Resources Management. According to the authors it confirms that HRM is not targeted in many large companies in Latvia. Only few respondents evaluate HRM from different aspects - satisfaction of internal clients; management by objectives, auditing of HRM processes, determining of ROI of HRM functions and different HR rates and costs. Using Phillip s qualification it could be affirmed that large companies in Latvia use the approaches of attitude/compliance and benchmarking/tracking in HRM evaluation. Only several companies use the approach of value add/impact. The hypotheses - large companies of Latvia more often evaluate the effectiveness than the efficiency of HRM and the effectiveness and efficiency of HRM are evaluated in companies, where HRM is strategically relevant - have been confirmed. A part of large companies does not consider HRM as a significant component of management and does not evaluate and improve it systematically. Consequently it could be affirmed that there exists a gap for improvement of HRM in large companies of Latvia, using different methods of HRM evaluation.

9 References Bratton, J., Gold, J. (2007), Human Resource Management: Theory and Practice, Palgrave Macmillan, New York, NY. Evans, P., Pucik, V., Barsoux, J. (2002), The Global Challenge: Frameworks for International Human Resource, New York, NY. Hayton, J. (2005), Promoting corporate entrepreneurship through human resource management practices: A review of empirical research, Human Resource Management Review, Vol.15 No.1, pp Gibb, S. (2000), Evaluating HRM effectiveness: the stereotype connection, Employee Relations, Vol. 22. No.1, pp Mathis, R.L., Jackson, J.H. (2000), Human Resource Management, South-Western Pub, USA. Мордовин С.,К. (1999), Управление человечискими ресурсами, ИНФРА, Москва. Phillips, J. J., (2005), Proving the Value of HR: How and Why to Measure ROI, Society for Human Resource Management, USA. Pickett, L. (2000), People make the difference, Industrial and Commercial Training, Vol.32 No.6, pp Shetty, Y.K., Buller,P.F. (1990), Regaining Competitiveness Requires HR Solutions, Personnel, July. Sparrow, P., Schuler, R., Jackson, S.E. (2000), Convergence or divergence: Human resource practices and policies for competitive advantage worldwide, International Journal of Human Resource Management, Vol.5 No.2, pp Ulrich, D. (1997), Human Resource Champions: The Next Agenda for Adding Value and Delivering Results, Harvard Business School Press, Boston, MA. Vanhala, S., Kaarelson, T., Alas, R., (2006), Converging human resource management. A comparison between Estonian and Finnish HRM, Baltic Journal of Management, Vol.1 No.1, pp Biographic notes: Līga Peiseniece is assistant professor of Business Administration Department, in BA School of Business and Finance. Tatjana Volkova is Rector of BA School of Business and Finance, Professor of Business Administration Department, President of Rector s Conference of Latvia, Member of Board of Baltic Management Development Association (BMDA), National Editor of Baltic Journal of Management.