Highperformance work system implementation in small and medium ...

HIGH-PERFORMANCE WORK SYSTEM IMPLEMENTATION IN SMALL AND MEDIUM ENTERPRISES: A KNOWLEDGECREATION PERSPECTIVE B R I A N S . K L A A S , M AT T H E W S E M A D E N I , M A L AY K A K L I M C H A K , A N D A N N A - K AT H E R I N E W A R D While it is well established that high-performance work systems (HPWSs) affect firm-level outcomes within large, complex organizations, less is known about how they create benefits for firms within the small-business sector. Using a knowledge-creation perspective, this study examines the impact of HPWSs in small and medium enterprises and examines whether the impact observed depends on the small-business leader’s capacity to obtain additional HR knowledge from an external expert, as well as the leader’s HR background and knowledge. Archival and survey data were obtained from 294 small-business organizations, with survey responses obtained from both the small-business leader and an HR consultant assigned to the small business. Findings suggest that leader perceptions of HR effectiveness are positively related to the use of HPWSs and that this relationship is moderated both by the communication patterns between the small-business leader and the HR consultant assigned to the firm and the small-business leader’s HR knowledge. © 2012 Wiley Periodicals, Inc.

Keywords: entrepreneurial/small business, human capital, strategic HR

Introduction he impact of high-performance work systems (HPWSs) on individual behavior and organizational performance has been examined extensively, with much evidence suggesting that

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positive effects are observed in association with the use of HPWSs (Arthur, 1994; Benson, Young, & Lawler, 2006; Bowen & Ostroff, 2004; Chadwick, 2007; Fulmer, Gerhart, & Scott, 2003; Lepak & Shaw, 2008; Sun, Aryee, & Law, 2007; Takeuchi, Lepak, Wang, & Takeuchi, 2007). Further, research has also

Correspondence to: Brian S. Klaas, Moore School of Business, University of South Carolina, Columbia, SC 29208, Phone: 803.777.4901, E-mail: [email protected] Human Resource Management, July–August 2012, Vol. 51, No. 4. Pp. 487–510 © 2012 Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com). DOI:10.1002/hrm.21485

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shown that the impact of HPWSs varies with characteristics of the organization and the organizational environment (Batt, 2000; Datta, Guthrie, & Wright, 2005; Delery & Doty, 1996). Interestingly, however, most work examining the HPWS has done so within the context of large, often complex organizations. By contrast, little research has examined the impact of human resource systems within the small-business sector—conventionally defined as including firms with fewer than 500 employees (Cardon & Stevens, 2004; Headd, 2000; Heneman, Tansky, & Camp, 2000). This is important because the smallbusiness context is likely to be quite distinctive both in terms of the HR challenges faced and in terms of how HR practices are actually implemented and This article used. Within larger firms, HR proexamines the grams are often designed and immoderating role plemented by a staff of HR professionals with the involvement of played by the smallgeneral managers, many of whom are likely to have acquired signifibusiness leader’s cant exposure to HR processes familiarity with and through prior managerial responsibilities or interaction with senior understanding of HR managers with a greater understanding of HR processes. Within issues and also by smaller firms, responsibility for the leader’s capacity HR matters is likely to fall to the business leader or an assistant to use external operating under his/her close supervision (Kotey & Slade, 2005). relationships to Further, the business leader most typically will not have prior proobtain additional fessional experience within the knowledge HR function (Cardon & Stevens, 2004). Beyond this, there is likely regarding the to be substantial variation across small-business leaders in the implementation of amount of exposure they have HR processes. had to the professional use of HR practices and processes. While some may have had the opportunity to observe experienced managers effectively implement HR processes and policies, others may have been in roles or organizations that afforded them few such opportunities. Given the central role played by the small-business

leader with regard to HR, this variation in background and exposure is likely to be a critical element in determining the role played by HPWSs within the small-business context. Much knowledge regarding how to address HR challenges is tacit (i.e., unarticulated, rule of thumb, intuitive) in nature, and, thus, cannot be easily codified and transmitted. As such, responses to HR challenges will, at least in part, be determined by tacit knowledge possessed by the smallbusiness leader when confronted with such a challenge. The tacit nature of much knowledge regarding HR policies also highlights other attributes of the business leader within the small-business context. Because of the tacit nature of much knowledge within this arena, the capacity to acquire knowledge as HR challenges are being faced is likely to be critical. The transfer of tacit knowledge is thought to depend on some level of personal contact and trust, and small-business leaders are likely to differ in the degree to which they have the relationships required for obtaining tacit knowledge regarding HR (Connor & Prahalad, 1996; Grant, 1996; Subramanian & Venkatraman, 2001). Thus, given the central role played by the small-business leader in the execution of HR programs and policies, this capacity to obtain knowledge as problems and challenges are being confronted is likely to be highly relevant. While much work has examined the impact of HPWSs within large firms, little attention has been given to HPWSs within the small-business setting. Further, no prior work to our knowledge has examined the role played by the small-business leader in determining how the HPWS affects outcomes within the firm. This study is designed to contribute to the literature by examining the impact associated with the HPWS within the small-business context and, further, by examining whether the impact associated with the HPWS is moderated by attributes of the small-business leader. Specifically, this article examines the moderating role played by the small-business leader’s familiarity with and understanding of HR issues and also by the leader’s capacity to use external relationships Human Resource Management DOI: 10.1002/hrm

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to obtain additional knowledge regarding the implementation of HR processes. This article further contributes to the literature by drawing on a knowledge-based perspective, one that includes a focus on knowledge creation (Nonaka, 1994). While not typically used within the existing work on HPWSs, this knowledge-based perspective allows for an exploration of whether tacit knowledge possessed by a third party (external to the organization) can be accessed, absorbed, and ultimately recreated for application in a unique environment.

Theory and Hypotheses Much research has examined the effects on firm performance associated with HR systems, or bundles of interrelated HR practices. While scholars differ in the operationalization used to study HR systems (Lepak, Liau, Chung, & Harden, 2006), there is substantial commonality in terms of the focus on HR practices that target talent acquisition and development, information sharing, participation, fairness and equity, and the alignment of interests between employees and management (Cappelli & Neumark, 2001). Consistent with a number of prior studies, we define HPWSs as HR systems that incorporate the aforementioned interrelated practices (Datta et al., 2005). Many labels, such as high-commitment work systems, high-involvement work systems, and high-performance human resource management, have been applied to the concept of HPWSs (Gittell, Seider, & Wimbush, 2010). Regardless of the name, arguments concerning this construct assume that a firm can attain higher performance when various practices are adopted that recognize and utilize the value of employees. Boxall and Macky (2009) state that “the notion of HPWS constitutes a claim that there exists a system of work practices that leads in some way to superior organizational performance” (p. 4). In other words, a cluster of chosen HR practices produces systemic or synergistic effects in which the benefits exceed the costs; however, the measurement of this cost-effectiveness varies across the research literature. While Human Resource Management DOI: 10.1002/hrm

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some studies measure outcomes at the firm or organizational level (e.g., Huselid, 1995), others argue that cost-effectiveness should concern the work outcomes that are linked as closely as possible to the affected group of employees (e.g., MacDuffie, 1995). Essentially, HPWSs are thought to be effective because of their positive influence on employees (Boxall & Macky, 2009). According to Takeuchi, Chen, and Lepak (2009), the presence of an HPWS indicates that the organization values its human capital as a key source of competitive advantage. In this case, the key question is, “do the benefits to workers . . . exceed their costs?” (Boxall & Macky, 2009, p. 6). Since the current study is concerned with small businesses, our dependent variable spans these two extremes; we examine the effectiveness of HR outcomes from the view of the small-business leader, which involves the outcomes of a small group of affected employees as well as firm-level effects. Findings within the HPWS literature suggest there is a posiFindings within the tive relationship between HPWSs HPWS literature and both individual and firmlevel outcomes (Collins & Smith, suggest there is a 2006; Lepak et al., 2006). For example, Sun et al. (2007) found positive relationship that HPWSs enhanced productivbetween HPWSs ity and decreased turnover through their impact on serviceand both individual oriented citizenship behaviors. Huselid (1995) also found that and firm-level productivity and turnover medioutcomes. ated the relationship between HPWSs and firm performance, as measured by Tobin’s q and the gross rate return on capital. Takeuchi et al. (2007) showed that HPWSs enhanced firm human capital and the degree of social exchange among employees, thereby leading to increased performance relative to other firms in the same field. Chuang and Liao (2010) demonstrated that HPWSs enhance market performance relative to competitors because they create an organizational environment of concern for employees and of concern for customers, which lead, respectively, to increased cooperation among employees and with customers.

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In sum, published research has consistently highlighted how HPWSs can positively impact employees, in terms of attitudes and behavior, which, in turn, leads to changes in organizational outcomes such as productivity and overall performance (Bowen & Ostroff, 2004; Chadwick, 2007; Datta et al., 2005; see Boxall and Macky [2009] for a more thorough review). Several arguments exist as to how this causal chain occurs: It is argued that human capital and skill are the more prominent mediators between HPWS and performance (Becker, 1975; Gibbert, 2006); that motivation and commitment are the key drivers (Bowen & Ostroff, 2004; Osterman, 1988); and that it is the relationships among the employees that serve as the primary HPWS/performance link (Collins & Clark, 2003; Collins & Smith, 2006; Delery & Shaw, 2001; Gittell et al., 2010). While studies have shown that effectiveness does depend on factors such as industry (Datta et al., 2005), business strategy (Sun et al., 2007), and cultural norms (Gittell et al., 2010), HPWSs are generally viewed in the HR literature as a resource for maximizing a firm’s overall competitive advantage (Guthrie, 2001; Huselid, 1995; Sun et al., 2007; Takeuchi, et al., 2009). While much of the available evidence regarding the impact of HPWSs is from research conducted in large firms, much of the theory used to explain the positive effects observed is also relevant in smaller organizations. Admittedly, large, complex firms may face coordination and communication challenges that small firms do not. However, firms both large and small are confronted with the need to identify, attract, and retain talent; reward and motivate performance; ensure the equitable treatment of employees; and elicit cooperation and commitment. Thus, many of the same processes thought to be critical in terms of how HPWSs generate positive effects in large firms would also likely be relevant within smaller organizations, consistent with findings of Kerr, Way, and Thacker (2007). Within small businesses, HR systems that incorporate—in a complementary fashion— valid selection processes, investments designed to develop and retain employees, systematic processes for evaluation and

reward, and procedures designed to encourage communication and equity have the potential to affect HR effectiveness in terms of improving employee skill level, motivation, retention, performance, and absenteeism. While we argue that HPWSs are beneficial for both large and small firms, it is important to note that the particular set of HR practices needed by small firms may differ somewhat from what is needed most by larger organizations. Smaller firms are likely to be more organic in nature and less dependent on mechanistic processes for coordination, communication, and the allocation of resources (Davil, 2005). It may be necessary for firms to become more mechanistic as they grow in size and complexity (Ouchi, 1979), and they may need HR practices to compensate for any resultant adverse effects. As such, within larger firms, HPWSs are likely to include practices that emphasize formal practices associated with communication, employee participation, and job design (Boxall & Macky, 2009). By contrast, in small organizations, there is much potential for direct and informal communication, and there are fewer levels within the hierarchy, placing the business leader in a central role for much decision making about employee relations. Within this context, practices such as newsletters, formal systems for participation, and formal appeal processes may be less relevant, making it less likely that they would be part of an HPWS within a small organization. We suggest, as can be seen in Figure 1, that usage of an HPWS will be positively related to HR effectiveness from the view of the small-business leader. Here, we are interested in the leader’s perceptions of immediate HR outcomes, and thus analyze the direct link between HPWS implementation and the leader’s view of employee attraction to the firm, turnover, skill, motivation, performance, and absenteeism. We are interested in perceptions of HR effectiveness as a more proximal outcome of HPWS implementation, rather than looking to the more distal system outcome of firm performance. In other words, this study is concerned with the effect that HPWSs have on the employees from the view of the leader, rather than examining the less Human Resource Management DOI: 10.1002/hrm

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Strength of leader’s HR background

Use of highperformance work systems

Perceived HR effectiveness

Leader/consultant communication patterns

FIGURE 1. Hypothesized Relationships

direct HPWS/firm performance link. While a global assessment of HR effectiveness has the potential to be affected by leader expectations, it is also likely to be determined by the leader’s familiarity with turnover experienced by the firm, employee behavior demonstrating commitment to the firm, obvious skill deficiencies within the workforce, and levels of employee attendance. Hypothesis 1: The use of high-performance work systems will be positively related to perceived human resource effectiveness. The relationship hypothesized above is well established within the existing literature, at least among larger organizations. Within the context of small organizations, however, this relationship is likely to be moderated by attributes of the business leader. We focus on the small-business leader in particular due to his/her typical role in relation to the execution of HR processes and programs. Because economies of scale typically do not allow small firms to employ full-time HR professionals, small-business leaders are likely to be largely responsible for the strategic decisions regarding HR. They are also likely to be responsible, either personally or via direct supervision of an assistant, for the implementation of HR programs and services (Cardon & Stevens, 2004; Kotey & Slade, 2005). Even when HR services are obtained from third-party vendors, it is the small-business Human Resource Management DOI: 10.1002/hrm

leader who is largely responsible for coordinating services, monitoring vendor performance, and strategic decision making. As can be seen in Figure 1, we hypothesize that two small-business leader attributes play important moderating roles. The importance of these attributes can best be seen through use of a knowledge-based perspective, particularly as it relates to the distinction between tacit and explicit knowledge. We follow Nonaka (1994) in suggesting that individuals are the prime movers in the organizational knowledge-creation process and that organization-specific knowledge is created by a continuous dialogue between tacit knowledge, or “knowledge that is unarticulated and tied to the senses, movement skills, physical experiences, intuition, or implicit rules of thumb” (Nonaka & Von Krogh, 2009, p. 635); and explicit knowledge, or knowledge that can be written, spoken, or otherwise explained (Nonaka & Von Krogh, 2009; Song, Van der Bij, & Weggeman, 2005). Through personal experience and observation and/or close interaction with those possessing tacit knowledge, organizational members develop or access tacit knowledge and then often attempt to convert that tacit knowledge into explicit knowledge that is useful—perhaps in unique ways—for the organization. With regard to HPWSs, codified knowledge exists regarding many technical aspects of the component HR programs. However, the effective use of HPWSs also depends heavily

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on tacit knowledge relevant for the actual application and implementation (Kang, Morris, & Snell, 2007; Kogut & Zander, 1992; Wright, Dunford, & Snell, 2001). Application and implementation relies on the ability to combine technical knowledge with knowledge acquired through experience (Connor & Prahalad, 1996; Subramaniam & Venkatraman, 2001). Through experience and observation, individuals acquire an implicit understanding of how and when to make use of different HR techniques and concepts, as well as an understanding of how characteristics of the individual employee, manager, and organizational context affect how to use and combine Close, frequent different HR techniques and procedures. interaction will likely While tacit knowledge canallow the leader and not be readily codified, it can, under some conditions, be parconsultant to better tially accessed through other individuals (Reagans & McEvily, understand one 2003). Where there is open and regular communication between another and further parties, the potential exists for develop any existing one side to a relationship to access tacit knowledge possessed by shared mental the other (Reagans & McEvily, 2003). Also, mechanisms have models concerning been identified that allow for one party to share tacit knowledge the HR processes with another (Subramaniam & involve. Venkatraman, 2001). Often such transmission occurs when one party observes the party with tacit knowledge perform tasks that require this knowledge and then is able to communicate openly and regularly as the task is being performed (Connor & Prahalad, 1996; Grant, 1996). While small-business leaders, to varying degrees, may well possess tacit knowledge regarding HR matters, important gaps in tacit knowledge regarding the use of HPWSs are likely to exist. Thus, small-business leaders will often need to access tacit knowledge possessed by those outside of the firm and convert that knowledge into useable knowledge for the firm itself. Where leaders have greater capacity to access and convert tacit knowledge,

benefits from use of an HPWS are likely to be more substantial. Within the context being examined here, all of the small businesses being studied have a contractual relationship with an HR vendor and have been assigned a consultant to coordinate services and provide expertise. It should be noted that many of the small businesses formed this contractual relationship primarily to obtain transactional services (e.g., payroll and/or benefits administration). As such, substantial variation exists in the attention given to the relationship with the HR consultant by the small-business leader. Nonetheless, within the context being examined, one potential way to access tacit knowledge is through interaction with the HR consultant that is assigned. This highlights the importance of communication patterns between the business leader and the consultant, with both frequency and openness of communication being important (Somaya, Williamson, & Zhang, 2007). We argue this, in part, because social exchange theory suggests that an exchange relationship evolves when the two parties in the relationship take risks in sharing potentially sensitive information, and that this evolution is dependent upon frequent, open communication (Blau, 1964; Ring & Van de Ven, 1992). Moreover, social network theory suggests that a strong tie, referring to a relationship between two parties that is characterized by close and frequent interactions (Granovetter, 1973, 1982; Hansen, 1999), will more likely lead to trust than a weak tie, and that this trust, in turn, predicts useful knowledge transfer (Levin & Cross, 2004). Finally, close, frequent interaction will likely allow the leader and consultant to better understand one another and further develop any existing shared mental models concerning the HR processes involved (Nonaka, 1994). Thus, we expect that a small business is more likely to benefit from an HPWS when the leader communicates regularly and openly with the HR consultant. Specifically, we expect that leader/consultant communication will moderate the relationship between HPWS implementation and perceptions of HR effectiveness. When the frequency Human Resource Management DOI: 10.1002/hrm

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and openness of communication is low, knowledge (whether tacit or explicit) is less likely to be transferred effectively, leading to questionable implementation and substandard outcomes. When communication is strong, the business leader is more likely to be able to make effective use of expertise available from the HR consultant, allowing for improved outcomes from the HPWS and, thus, perceptions of greater HR effectiveness. Hypothesis 2: The relationship between the use of high-performance work systems and perceived human resource effectiveness within small and medium enterprises will be moderated by communication patterns between the firm leader and the HR consultant assigned to that firm. Where open and regular communication patterns are observed, the relationship between the use of highperformance work systems and perceived human resource effectiveness will be stronger. As can be seen in Figure 1, strength of the leader’s background relating to HR is likely to also play an important role as a moderator of the relationship between HPWS implementation and perceptions of HR effectiveness. Strength of background in HR refers to the extent to which the leader’s experiences allow him/her to understand the relevant HR programs and policies and the complexities associated with their use and implementation. Where the small-business leader’s HR background is weak, it is likely that he/she will face barriers to making effective use of the programs and policies that are incorporated in an HPWS. While much technical knowledge regarding specific HR practices and programs have been codified, incorporating those programs and practices within an HPWS is still likely to require tacit knowledge. Tacit knowledge is likely to be needed to adapt programs and policies to fit the particular needs of the organization and to integrate different components of the HPWS. Technical information regarding appropriate use and implementation of HR services and programs may often fail to incorporate tacit knowledge regarding contingencies that are likely to affect appropriate action. It is within this context, then, that the strength of the Human Resource Management DOI: 10.1002/hrm

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small-business leader’s background is likely to be important. When a leader has a stronger background, he/she is more likely to possess the tacit knowledge required to appropriately interpret and utilize codified material regarding HR practices when implementing them within the context of an HPWS. The importance of the small-business leader’s background relating to HR is also suggested by the absorptive When smallcapacity literature. When implementing HPWSs, small-business business leaders leaders inevitably will attempt to acquire and use new knowledge acquire new for the benefit of the firm, as the information leader would only rarely possess all knowledge required to impleregarding the ment an HPWS. From the perspective of the absorptive capacity litimplementation erature, an organization must have of HR practices prior related knowledge to assimilate, transform, and exploit new that constitute an knowledge effectively (Cohen & Levinthal, 1990; Schmidt, 2010; HPWS, that new Zahra & George, 2002); this is parinformation, even ticularly relevant to HPWS implementation, as only part of this when it is codified knowledge is readily and easily codified and transmitted. At the and more readily individual level, new information is more readily acquired and more transmitted, is easily utilized when one can link likely to be more the information to related objects, concepts, and patterns that are alinstrumental ready stored in memory (Bower & Hilgard, 1981). As such, when to effective small-business leaders acquire new implementation information regarding the implementation of HR practices that when the leader constitute an HPWS, that new information, even when it is codipossesses a fied and more readily transmitted, is likely to be more instrumental stronger background to effective implementation when relating to HR. the leader possesses a stronger background relating to HR. Similarly, individual-to-individual knowledge transfer should occur more smoothly when the parties involved have similar mental models concerning the information to be shared. Individuals often reshape

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new information to fit with an existing schema. If the relevant existing mental models are similar between the two individuals, less adjustment is needed and, thus, information is transferred more smoothly (Nonaka, 1994). In the case of small businesses, it is the existing mental model of the firm leader that should be of greatest concern. Where the leader’s background and experience in HR is stronger, he/she is more likely to be able to absorb knowledge from those with greater expertise. Where the recipient has substantial experience relevant to the subject of the message, the recipient may grasp even without codified instructions the contingencies implicit in the message (Collins & Smith, 2006; Connor & Prahalad, 1996). It should be stressed that when smallbusiness leaders attempt to obtain knowledge as they implement HPWSs from those with more expertise, they will be attempting to access knowledge that is readily codified as well as knowledge that is tacit. Where shared mental models exist, the sharing of tacit knowledge is likely to be particularly enabled, thus allowing the leader to more easily access and develop knowledge useful to his/her firm regarding the effective implementation of HPWSs. While information lost is likely to be substantial when efforts are made to transmit tacit knowledge (Kogut & Zander, 1992), the language used to capture that knowledge may be more accurately interpreted by the small-business leader when he/she has more experience relating to the subject of the message and, thus, some shared mental model with the consultant. We suggest, then, that where a smallbusiness leader has a stronger background relating to HR, his/her capacity to effectively implement an HPWS will be greater. As a consequence, where a leader possesses a stronger background, it is likely that more beneficial outcomes will result from the use of such a system, leading to perceptions of greater HR effectiveness. Hypothesis 3: The relationship between the use of high-performance work systems and perceived human resource effectiveness within small and medium enterprises will be moderated by the

strength of the firm leader’s background with regard to HR issues. Where the leader’s background is stronger, the relationship between the use of highperformance work systems and perceived human resource effectiveness will be stronger.

Method Data for this study was obtained by surveying small businesses that were clients of a consulting firm that provides HR services to firms within the small-business sector. The consulting firm works with nearly 10,000 client organizations. The authors had no relationship with the consulting firm prior to the initiation of the project and received no compensation from the consulting firm for conducting the study. We surveyed 1,453 clients using stratified random sampling, with stratification based on client size. Stratified random sampling was employed because a substantial portion of the firm’s clients were relatively small, and we needed our sample to contain a sufficient number of firms at all points of the size distribution within the small-business sector. A random sample of 375 firms was obtained from the client list for each of the following size categories: (a) less than 10 employees; (b) 10–19 employees; (c) 20–29 employees; and (d) 30 employees and above. Incomplete or inaccurate addresses existed for 47 firms, resulting in a final sample of 1,453. For each client in the sample, a survey was sent to the owner or CEO by the researchers. Given the size of the firms, the owner or CEO is likely to be the individual within the firm that is best positioned to serve as a key informant regarding practices and attributes of the client firm. Completed surveys were mailed directly to the researchers. Clients were informed that only aggregate results would be provided to the consulting firm. Individual responses would remain confidential. We received responses from 404 clients, resulting in a response rate of 28 percent. In addition to using follow-up mailings to encourage participation, business leaders were informed that a nominal contribution would be made to a charity of their choosing in their honor in gratitude for their participation. Human Resource Management DOI: 10.1002/hrm

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Information on client size, pay level, and SIC classification was available through archival records maintained by the consulting firm. Each client organization had been assigned a specific HR consultant. The consultant was responsible for helping a client make effective use of a broad range of available HR services. While the consulting firm had traditionally focused on providing more transactional services (e.g., payroll and benefits administration), it had recently expanded the range of services provided to include strategic HR services (e.g., training programs and performance management systems). Because the change to the firm’s service model was relatively recent, there was limited variation in the length of the client-HR consultant relationship. Individual HR consultants were surveyed about any client to which they were assigned that had responded to the client survey. After follow-up mailings, we received 294 completed surveys from HR consultants, resulting in a response rate of 73 percent. We had responses from both the small-business leader and the HR consultant for 21 percent of the original sample. No significant differences were observed between respondents (firms where both the small-business leader and the HR consultant participated) and nonrespondents on number of full-time equivalent employees ( p .56), start date with the consulting firm ( p .18), and average salary within the client ( p .11). We followed Flannagan and Deshpande (1996) and Headd (2000) in classifying a firm as small if it had fewer than 500 employees. The largest firm in our sample had 374 employees (with the mean number of employees equaling 29). Client firms were located in 15 different states in the South, Southwest, Midwest, and Northeast United States and in California. In terms of industry representation, the largest number of firms were from the service sector (22 percent of the sample); followed by firms in professional services (20 percent); retail and wholesale trade (17 percent); finance, insurance, and real estate (14 percent); durable goods manufacturing (8 percent); nondurable goods manufacturing (5 percent); construction (3 percent); mining (2 percent); and agriculture (1 percent). Human Resource Management DOI: 10.1002/hrm

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Dependent Measure Perceived HR Effectiveness The dependent variable was operationalized by the firm CEO or Using the owner responses to the Client Satisfaction with Human Resource executives’ Outcomes Scale, developed by Klaas, Gainey, McClendon, and perspective, rather Yang (2005). HR systems are than that of the thought to affect firm performance through HR outcomes employees, to relating to workforce skill and employee behavior and contribudetermine positive tions (Huselid, 1995; Sun et al., HR outcomes is 2007). In this study, we focus on such intermediate outcomes because they are more directly linked appropriate because to HR systems (Way, 2002). Vari“while employees ous HR researchers (Han, Chou, Chao, & Wright, 2006; Mitsuknow what they hashi, Park, Wright, & Chua, want, they may 2000; Wright, McMahan, Snell, & Gerhart, 2001, among others) not know what is have examined executives’ perceptions of HR effectiveness as a best for the firm,” dependent variable. Using the exsince the firm’s ecutives’ perspective, rather than that of the employees, to deterexecutives “are in mine positive HR outcomes is appropriate because “while employthe ideal position ees know what they want, they to make decisions may not know what is best for the firm,” since the firm’s executives regarding how to “are in the ideal position to make decisions regarding how to bal- balance the desires ance the desires of and returns to of and returns shareholders, customers, and employees” (Wright et al., 2001, to shareholders, p. 113). For small firms, therefore, the business leader’s perspective customers, and should be appropriate to capture the positive or negative nature employees” (Wright of the outcomes of the HPWS. et al., 2001, p. 113). Klaas et al.’s (2005) scale captures small-business leaders’ satisfaction with the following HR outcomes: employee performance, motivation and morale among employees, employee skill level, the level of employee turnover, the level of absenteeism, and the ability

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to attract new employees. For each of these six outcomes, satisfaction was rated on a five-point scale, ranging from very satisfied to very dissatisfied ( = .85). This scale and the other scales used in this study are shown in Appendix A. This client satisfaction scale was used because recordkeeping issues within the small-business sector are likely to limit the validity of direct measures of turnover, absenteeism, and the ratio of applicants to openings.

Independent Measures High-Performance Work Systems Our overall strategy for measuring HPWSs was based on the measurement approach utilized by Datta et al. (2005), Guthrie (2001), and Huselid (1995). In this work, respondents (in our case, the CEOs or owners) were asked about the proportion of the firm’s workforce that was covered by different HR practices thought to be associated with HPWSs. However, significant modifications were required because of the small-business context. For example, while providing various benefit programs (e.g., health insurance) is not typically seen as part of an HPWS, given the low proportion of smaller firms that provide health insurance, providing such a benefit may lead to greater commitment and also to a higher-quality workforce. In addition, there may be HR practices that are critical for large, complex organizations but less relevant for the small firm. Formal appeal processes are less likely to be relevant in smaller firms. Most managerial decisions are made by the small-business leader, which leaves little opportunity for appeals to others within the organizational hierarchy. Modification to existing scale items may also be required because of differences in how terminology is used among HR executives compared to small-business leaders. Because of these issues, we modified existing scales regarding HPWSs in an effort to address the distinctive nature of the small-business context. Toward this end, we interviewed 15 smallbusiness leaders and 15 small-business HR

consultants. Interviewees were asked to think about small businesses that were highly effective at attracting, retaining, developing, and motivating employees. The small-business leaders and consultants were asked to review all of the items found on measures used by Guthrie (2001) and Huselid (1995). They were then asked to indicate whether there were any practices critical to being effective in managing HR in the small-business context that were not addressed. They were also asked to indicate where there was potential ambiguity regarding how an item would be interpreted by a small-business leader. Where there was ambiguity, further explanation was provided. Following this, interviewees were asked about whether the use of this “clarified” practice was critical to being effective in the smallbusiness context. Finally, interviewees were asked about whether any of the practices addressed were not likely to differentiate between effective and ineffective management of HR in the small-business context. We added new items when more than 60 percent of the interviewees cited a practice that was not included in existing scales. We eliminated practices when 60 percent of the interviewees indicated that it was not critical to distinguishing between effective and ineffective practices in the small-business context. Finally, to ensure that we used terminology appropriate for small-business leaders, we rephrased practices when more than 40 percent of the sample indicated potential confusion for those within the smallbusiness sector. The resulting scale asked respondents about the proportion of the workforce for which practices in the following areas were used: selection, rewards, benefits, employee participation, information sharing, procedural-justice-related policies, and training and development. Only one factor emerged from factor analysis, justifying use of the 14 items as a single scale ( .90). The changes made to revise this scale may reflect some of the differences between small and large firms.1 However, when comparing the scale used in the current study versus that of previous studies (e.g., Guthrie, 2001; Huselid, 1995), it can be seen that the dropped or altered items are those that, in their original Human Resource Management DOI: 10.1002/hrm

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form, are inapplicable to small firms. For example, one item from Huselid (1995) asks respondents, “What is the proportion of the workforce who are included in a formal information sharing program (e.g., a newsletter)?” Formal information-sharing programs are redundant for small firms because information can be shared more quickly and easily through more direct means. An example item that captures this change in the current study’s measure is “provide regular updates regarding developments in the business.” This reflects a method of information sharing that is applicable to the small firm. We expected that, had we listed items such as that concerning the formal newsletter, little variance would exist between respondents. We therefore believe that the HPWS scale adapted for the current study is more appropriate to use to examine their implementation in small firms than is the original scale, and it is not likely (based on the responses from participants in our scale adaptation procedure discussed earlier) that important information was lost in translation. Human Resources Knowledge and Background The HR knowledge and background of the client leader was measured by a five-item scale completed by the HR consultant assigned to the client ( .92). This scale was adapted from Mayer and Davis’s measure (1999) of employee perceptions of top management ability and focuses on understanding and experience relating to HR programs and issues. The items are phrased in the present tense (see Appendix A), such that responses reflected the consultants’ perceptions of their assigned clients’ knowledge at the time that services were being rendered. This is neither at the very beginning nor at the very end of the relationship and thus reflects the knowledge of the leader as he/she is in the process of absorbing (or failing to absorb) the consultant’s expertise. Communication Patterns Communication between the client and the vendor was measured by a five-item scale ( .89) adapted from Klaas et al. (2005). Human Resource Management DOI: 10.1002/hrm

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This scale was completed by the HR consultants assigned to the client, and it assessed the amount and nature of communication between the client and vendor. Modifications were made to the existing scale because it focused on client ratings of communication patterns, whereas we measured the vendor’s assessment of communication behavior with the client.

Control Variables Three control variables were measured using data obtained from archival records provided by the consulting firm. Firm size, operationalized as the number of full-time-equivalent employees employed by the firm at the time of the survey, was included because size may impact the effect of the HPWS on the firm. For example, an organization with five employees may have less benefit from systems involving selection than one with 40 employees, as turnover would be less of an issue. Size is associated with the use of more sophisticated HR practices (Guthrie, 2001; Jackson & Schuler, 1995), which may thus skew results if not included in our analyses. Average pay within the client organization was included, as this may impact employee attraction to the firm, turnover, and performance in the firm, which, in turn, can affect the leader’s view of HR effectiveness. We controlled for industry classification, using dummy codes for each industry, due to the moderating effect of industry on the HPWS/productivity relationship (Datta et al., 2005). We did not control for the type of HR services included in a client’s contract with the consulting firm. This is because a standardized service package was used across clients. Clients received payroll and benefit services, advice and counsel from the consultant regarding employee relations issues, and access to standardized systems, instruments, and policy manuals that could be modified by the client for needs of their firm.

Interrater Reliability and Common Method Bias Considerations It should be noted that we used a key informant to measure key variables. Prior research

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raises important questions about the reliability of single key informants in providing information on HR practices in large, complex organizations (Gerhart, Wright, McMahan, & Snell, 2000). However, in this study, key informants were asked to provide information about practices within organizations that had, on average, 29 employees. Because key informants were asked to provide information about relatively small firms, rating accuracy is more likely. Also, we were able to assess agreement between the leader’s assessment of outcome variables and HPWSs with the assessment of a second respondent in the firm for a portion of our overall sample. For 33 small businesses in our sample, we were able to obtain a second respondent in addition to the We were able to firm’s leader. Mean levels of rwg were all above .80. assess agreement Because both the dependent between the leader’s and independent variable were measured using responses from assessment of the small-business leader, consideration must be given to the issue outcome variables of common method variance and HPWSs with (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). It is widely acthe assessment of a knowledged that common method variance can threaten the ability second respondent of researchers to interpret the relain the firm for a tionship between an independent and dependent variable (Podsaportion of our overall koff & Todor, 1985). However, attention has also been given to the sample. need to interpret the magnitude of this threat in light of several questions about the research setting, the research design, and patterns of relationships observed in the data (Conway & Lance, 2010; Spector, 2006). The first question relates to whether using the same source for the dependent and independent variable was unavoidable in light of the research question and/or setting (Conway & Lance, 2010). In this study, our focus was on small organizations. Given the average size of the firms within the sample, the business leader was the best positioned to address questions about both the use of HR programs and also HR effectiveness. Indeed, given the size of many of

the firms in the sample, the small-business leader likely would have been the only individual qualified to provide such an assessment regarding some of the items assessed in our dependent and independent measure. Further, while consideration was given to the potential for using archival data for some HR outcomes (e.g., turnover), many firms within the sample do not make systematic use of HR databases, thus limiting the ability to obtain reliable data from archival sources. A second question relates to whether, if the same source was used for both the independent and dependent measure, appropriate steps were taken to minimize the impact of common method bias (Podsakoff et al, 2003). In this study, we designed the questionnaire to ensure that questions regarding HR practices were separated from questions about HR effectiveness by items not directly related to HR—items relating to organizational and industry characteristics. Moreover, we strove to minimize the potential for item overlap by focusing the independent measure on the usage of specific practices and focusing the dependent measure on satisfaction with employee behavior, contributions, and quality. A third question relates to whether it is possible to assess, after data has been collected, the degree to which common method bias is affecting the relationships observed. In this study, we followed the suggestion of Conway and Lance (2010) by specifying key elements of the nomological net for both the independent and dependent measure. The goal in doing so was to identify variables that, for example, would be expected to be related to the independent variable but not the dependent measure. If the results suggested that both the independent and dependent measures were related to the variable in question, it would suggest that either the nomological net was improperly specified or that common method bias may be affecting the relationships observed. By contrast, if a relationship is observed with the independent but not the dependent measure, concern regarding common method bias is reduced. In this case, we suggest that many of the practices used within an HPWS would be Human Resource Management DOI: 10.1002/hrm

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TABLE

I

OF


Means, Standard Deviations, and Correlations of Small and Medium-Sized Clients Variable

N

M

SD

1

2

1. Perceived HR effectiveness

293

3.60

0.80

2. High-performance work systems

293

3.01

0.89

3. Communication patterns

290

3.87

0.96

0.26***

0.16**

4. HR knowledge and background

290

3.18

1.16

0.23***

0.13*

3

0.24***

0.16**

*p .05; **p .01; ***p .001.

used more frequently when a firm needs to rapidly acquire and develop human capital, when the demands placed upon human capital are greater due to the need for flexibility required by environmental uncertainty, and when the firm employs a differentiation strategy and, thus, requires greater employee skill level and commitment to meeting customer needs. However, these same factors would not necessarily lead to perceptions of greater HR effectiveness. They relate to a firm’s human capital needs as opposed to HR effectiveness. Consistent with what would be expected based upon the nomological net, usage of HPWSs was positively and significantly related (p .01) to: (a) growth orientation (as measured by a four-item scale [ .83] developed by Brown, Davidsson, and Wiklund [2001]); (b) environmental uncertainty (as measured by a five-item scale [ .80] developed by Miller and Droge [1986]); and (c) a differentiation strategy (as measured by a four-item scale [ .78] developed by Dess and Davis [1984]. Also consistent with what would be expected based upon the nomological net, a statistically significant relationship was not observed between perceptions of HR effectiveness and growth orientation, environmental uncertainty, and use of a differentiation strategy. This pattern of relationships is relevant in assessing concerns regarding common method bias. If responses to our independent and dependent measures were heavily contaminated by common method issues, it is unlikely that we would have observed this pattern of results. If common method bias was more severe, it is likely that both perceptions of HR effectiveness and use Human Resource Management DOI: 10.1002/hrm

of HPWSs would have been related to the variables identified above. In assessing whether common method bias affected the relationships observed, it should also be noted that we were able to obtain a second respondent qualified to provide responses for the independent and dependent measure for a small subset of the sample. While this was done primarily to assess interrater reliability, these responses can also be used to assess the magnitude of the common method bias problem. Specifically, for this sample of firms, we examined the relationship between the responses provided by the second respondent on the independent measure to the responses provided by the first respondent on the dependent measure. The relationship observed was positive and statistically significant (p .01), providing additional evidence designed to alleviate concerns regarding common method bias.

Results Means, standard deviations, and correlations among the independent and dependent variables are reported in Table I. The level of correlation among the independent variables was positive and relatively modest, with the highest correlation being observed between communication patterns and HR knowledge and background and between communication patterns and HPWSs. The HPWSs mean was 3.01 (SD 0.89), corresponding roughly to the “50 percent of the workforce” anchor used on the HPWSs scale. The HR knowledge and background mean was 3.18 (SD 1.16), corresponding most closely with the “neither

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TABLE

II

Regression Analysis Results Predicting Perceived HR Effectiveness Model 1

Model 2

Model 3

␤

SD

␤

SD

␤

1.93

0.29

1.94

0.28

1.85

0.28

High-performance work systems

0.14**

0.05

0.16**

0.50

0.16**

0.05

Communication patterns

0.17***

0.05

0.15**

0.05

0.17***

0.05

HR knowledge and background

0.11**

0.04

0.12**

0.04

0.09*

0.04

0.18***

0.05 0.18***

0.04

Constant

SD

Independent

Interactions HPWS and communication HPWS and HR knowledge and background Controls Firm size

–0.0002

0.001

–0.0004

0.000006**

0.000002

0.000005**

Industry 1

0.67

0.35

0.50

0.35

0.69*

0.34

Industry 2

0.10

0.28

0.12

0.28

0.17

0.28

Industry 3

–0.08

0.23

–0.11

0.22

0.05

0.22

Industry 4

0.17

0.30

0.20

0.30

0.20

0.29

Industry 5

–0.01

0.20

–0.02

0.20

0.09

0.20

Industry 6

–0.18

0.21

–0.18

0.21

–0.09

0.21

Industry 7

–0.03

0.20

–0.04

0.20

0.03

0.19

0.02

0.20

–0.03

0.20

0.09

0.19

Average pay

Industry 8 Number of observations R2 R

284 0.19

2

F

4.82

284

0.001

–0.0004

0.001

0.000002 0.000005** 0.00002

284

0.22

0.24

0.03

0.05

5.63

6.33

*p .05; **p .01; ***p .001.

agree nor disagree” anchor on the scale. The mean for perceptions of HR effectiveness was 3.60 (SD .80) and the mean for the communication patterns variable was 3.87 (SD .96), indicating that the most typical response to items on these scales fell between the “neither agree nor disagree” and “agree” anchor points. Table II presents the results of three regression models estimated to examine our arguments. Model 1 estimates the effect of HPWSs as well as the control variables on perceptions of HR effectiveness. We suggested that, as in

research concerning large firms, HPWSs in the current sample would be positively related to perceptions of HR effectiveness (e.g., Kerr et al., 2007). As can be seen in Model 1, the coefficient for HPWSs is positive and significant ( p .01), supporting the hypothesis that perceptions of HR effectiveness are greater when firms make greater use of HPWSs. With regard to the control variables examined in Model 1, only average pay within the firm was significantly related ( p .01) to perceptions of HR effectiveness. Model 1 also estimated the main effect for the moderator variables examined Human Resource Management DOI: 10.1002/hrm

THE IMPACT

in Hypotheses 2 and 3. As can be seen, the main effect for communication patterns and for HR knowledge and background was positive and significant (p < .001 and p < .01, respectively). Models 2 and 3 present the results from the moderated regression equations estimated to examine Hypotheses 2 and 3. Model 2 estimated the impact of the interaction between HPWSs and communication patterns, and Model 3 estimated the impact of the interaction between HPWSs and HR knowledge and background. Mean-centering was used to create the interactions in Models 2 and 3. The likely importance of being able to acquire knowledge regarding HR programs led us to suggest in Hypothesis 2 that communication patterns between the small-business leaders and the HR consultant assigned to them would affect the role played by HPWSs. As can be seen in Model 2, consistent with our hypothesis, the interaction effect between communication patterns and HPWSs was significant (p < .001). Further, the R2 increased from .19 in Model 1 (containing only direct effects) to .22 in Model 2 (containing both direct effects and the hypothesized interaction effect). Given the likely importance of tacit knowledge in determining the impact of HR programs, we suggested in Hypothesis 3 that the knowledge and background of the small-business leader would moderate the impact associated with HPWSs. As can be seen in Model 3, consistent with our hypothesis, we found that HR knowledge and background significantly moderated the impact associated with HPWSs (p < .001). Further, the R2 increased from .19 in Model 1 (containing only direct effects) to .24 in Model 3 (containing both direct effects and the hypothesized interaction effect). Figure 2 displays the interaction plots, which were created using procedures outlined by Aiken and West (1991). The interaction plots show the effect of HPWSs when the moderating variable is one standard deviation above and below the mean, demonstrating that the effect of an HPWS was stronger when client-consultant communication was stronger and also when leader HR knowledge and background was stronger. Human Resource Management DOI: 10.1002/hrm

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Discussion Small businesses face very different HR challenges than do large, complex firms (Cardon & Stevens, 2004). The distinctive nature of these challenges raises questions about the likely role of HPWSs within the small-business sector and about the factors likely to determine the impact of HPWSs. Within large firms, size and complexity have the potential to create organizational dysfunctions— dysfunctions that many HR programs are designed to address. If smaller firms are less likely to experience these organizational dysfunctions because of their more organic structure and processes, what role are HPWSs likely to have? In this study, we found that even among small businesses, HPWSs affected perceptions of HR effectiveness. Whether the mechanism by which HPWSs affect outcomes is the same within small firms as it is within large firms remains unclear, however. In suggesting that HPWSs would be likely to affect firm-level outcomes in small firms, we argued many of the processes, such as selection and training, that are critical to the success of HPWSs would likely be relevant within smaller organizations, as well (Kerr et al., 2007). Because HPWSs include initiatives designed to rationalize and systematize decision making about HR issues, they may well have the potential to improve the quality of HR decision making and also how HR decisions are perceived, even in small firms. While the results obtained here do not allow us to determine the mechanism by which HPWSs affect outcomes within small businesses, our results do highlight the potential for such systems to benefit firms within the small-business sector. We also argued that the small-business context would affect what factors play a role in determining whether HPWSs actually impact firm-level outcomes. Within the context studied here, a key factor determining the leader’s ability to obtain knowledge relates to communication behavior between the smallbusiness leader and the HR consultant assigned to them. While tacit knowledge is difficult to transmit, mechanisms do exist by

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5.00 4.00 3.00 2.00 1.00 0.00

HPWS-L Communication-L

HPWS-H Communication-H

FIGURE 2A. The Moderating Effects of Communication Patterns on the Relationship Between HighPerformance Work Systems (HPWSs) and Perceived HR Effectiveness

which one party can access, at least to some degree, the tacit knowledge possessed by another (Subramaniam & Venkatraman, 2001). If one party communicates regularly and openly with a more knowledgeable partner as they perform a task, the regular exchange between parties may allow for sufficient feedback to allow for at least partial transmission of both codified and tacit knowledge (Szulanski, 1996). Our findings support this argument in that communication patterns between the small-business leader and the HR consultant were found to moderate the impact of HPWSs.

We suggested here that effective design and implementation of HR programs depends on both codified and tacit knowledge. Within large, complex organizations, mechanisms often exist for the development and transmission of both codified and tacit knowledge (Connor & Prahalad, 1996). As such, within larger firms, opportunities exist for those with responsibility for implementation of HR programs to obtain the required tacit and codified knowledge. Within the small-business sector, the small-business leader is often responsible for the implementation of

5.00 4.00 3.00 2.00 1.00 0.00

HPWS-L HR Knowledge-L

HPWS-H HR Knowledge-H

FIGURE 2B. The Moderating Effects of Human Resource Knowledge on the Relationship Between HighPerformance Work Systems (HPWSs) and Perceived HR Effectiveness Human Resource Management DOI: 10.1002/hrm

THE IMPACT

many HR programs and initiatives. Even in organizations where there is reliance on third-party expertise, it is the leader or owner who must implement programs and expertise made available by the third party (Klaas et al., 2005). Given that barriers are thought to exist in the transmission of tacit knowledge between vendors and clients (Somaya et al., 2007), the small-business leader’s knowledge and background relating to HR issues is likely to be critical in determining whether they will be able to make effective use of HR programs and services. Consistent with this, we found that ratings of the small-business leader’s HR knowledge and background significantly moderated the impact associated with HPWSs. This finding supports the idea that both codified and tacit knowledge is necessary in effectively implementing many HR practices. It also supports the idea that within the small-business sector, it is knowledge possessed by the smallbusiness leader that is likely to be critical to the effective implementation of HR systems. Even in settings where the leader has access to third-party expertise, it appears that knowledge possessed by the SME leader remains critical to effective implementation. Where the SME leader possesses greater HR knowledge and background, efforts by the third party to transfer knowledge are likely to be facilitated by a shared vocabulary and understanding (Somaya et al., 2007). Further, where the small-business leader possesses greater knowledge regarding HR issues, he/she is more likely to be sensitive to contingencies implied in codified instructions and more prepared to modify practices in response to contingencies that arise during implementation. While knowledge possessed by the small-business leader is likely to be critical to determining the impact on HR practices, the small-business leader’s ongoing capacity to obtain knowledge is also likely to be important. Overall, our findings highlight the potential for HPWSs to affect firm-level outcomes in the small-business sector. Further, they highlight the critical role played by the SME leader in determining how these practices actually affect outcomes, with both the knowledge Human Resource Management DOI: 10.1002/hrm

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possessed by the small-business leader and their capacity to obtain knowledge found to be important. We would also argue that the findings obtained here raise important questions. While a relationship was found here between HR effectiveness and HPWSs in small businesses, the mechanism underlying this relationship was not examined. Further, the mechanisms by which HPWSs affect outcomes within the small-business sector might well be different than within large, complex organizations. To understand the mechanisms by which HPWSs might affect outcomes within the small-business sector, it is necessary for theory and research to first examine how Overall, our findings HR needs vary across different highlight the types of small businesses. Such work might contribute to efforts to understand the mechanisms by potential for HPWSs which HPWSs can affect firm-level to affect firm-level outcomes in the small-business sector. outcomes in the Another issue raised by our small-business findings relates to the issue of HR knowledge among small-business sector. Further, leaders. Because our findings highlight the importance of they highlight the knowledge possessed by smallcritical role played business leaders in determining the impact of HR practices, it is by the SME leader important to understand how HR knowledge develops among small- in determining how business leaders. For example, these practices does it result from having previously worked in larger firms where actually affect there were more opportunities to acquire tacit knowledge though outcomes, with working with senior managers? Or does it result from the execu- both the knowledge tive observing the consequences possessed by the of his/her own decisions while operating the small business? And if small-business it is the latter, what factors facilitated the leader’s capacity to learn leader and their from this operational experience? capacity to obtain Questions for future research are raised by the moderating role knowledge found to played by communication patterns. In this setting, communication patbe important. terns were important, presumably

504


because they affected knowledge flow in the vendor-client relationship. However, questions exist about the conditions under which small-business leaders will be able to obtain both codified and tacit knowledge through relationships with third parties. Another interesting finding in this study is that average pay significantly predicted perceptions of HR effectiveness in all three models, with all other factors controlled. Research suggests that pay is significantly correlated with job satisfaction (Judge, Piccolo, Podsakoff, Shaw, & Rich, 2010) and such human capital factors as education and experience (Schumann, Ahlburg, & Mahoney, 1994). If higher-paid employees thus represent a more satisfied and higher-quality workforce, While the consultant our results suggest that this workforce itself may lead to is well positioned more satisfactory HR outcomes. to evaluate the In other words, satisfied, quality employees may give the knowledge and owner a stronger impression of success from new policies and background of the procedures concerning recruitsmall-business ing, selection, development, and maintenance of their emleader, the potential ployees. This evokes new questions, such as: Are HPWSs more exists for the effective or simply redundant measure to be for a workforce that already consists of satisfied, highercontaminated quality employees? Is a satisfied, quality workforce more by the quality of motivated to appreciate the efforts of a business that implethe relationship ments HPWSs or to absorb the between the vendor additional training and feedback that such systems proand client. vide? Future studies should be developed to address these issues.

Limitations In interpreting the results obtained here, it is important to give consideration to the limitations in this study. First, while HR outcomes are an important intermediate

outcome (Way, 2002), we did not examine the impact of HPWSs on firm performance. Examining financial performance is more challenging within the small-business context because of the lack of published data on financial performance and the reluctance of small-business leaders to reveal financial data in survey research (Way, 2002). However, our understanding of the impact of HR practices within the small-business sector would clearly benefit from efforts to link practices to financial outcomes. Second, all of the firms within this sample worked with the same vendor to obtain HR services. As such, it is unclear how representative this sample is of the small-business sector. This sample does not allow us to examine firms that do not implement any HPWS or those whose leaders have no contact with a consultant and implement HPWSs on their own based on knowledge gained from professional associations, short courses, workshops, or general experience. In addition, business leaders in this sample may have been drawn to the same consulting firm due to extraneous factors they have in common, such as financial means or interest in HR. These common factors may skew the leaders’ interpretation, implementation, or satisfaction with the recommended systems. The clients in this sample were exposed to the consulting firm’s new service model; while this does allow for greater control in the study (as clients received similar services), it also reduces the generalizability of the study and further biases the sample. Third, data on HR outcomes and HPWSs were obtained from the same key informant. While use of this key informant approach is supported by interrater reliability evidence, it is important to acknowledge the potential for common method variance (though steps were taken to prevent and analyze potential bias, as described in the Method section). Fourth, our measure of the small-business leader’s HR knowledge and background was based on ratings provided by a third-party consultant. While the consultant is well positioned to evaluate the knowledge and Human Resource Management DOI: 10.1002/hrm

THE IMPACT

background of the small-business leader, the potential exists for the measure to be contaminated by the quality of the relationship between the vendor and client. Fifth, by using business leaders and HR consultants as participants in our HPWS scale adaptation procedures, we may have biased the relationship between this and the dependent variable. Future research should use lowerlevel employees and other HR professionals to provide additional voice to the validity of this measure.

Implications for Management and HR Practice The results of this study present a variety of implications for small firms. First, results support Kerr et al.’s (2007) finding that small firms should not avoid the formalities of an HPWS. Those small firms that tend to rely solely on informal processes, or simply “muddling through” (Cardon & Stevens, 2004; Davil, 2005), are likely missing out on this opportunity to produce satisfying HR outcomes. The main effect of HPWSs on perceptions of HR effectiveness held across all industries and sizes, suggesting that even owners of the smallest firms, regardless of industry, should see some benefit from HPWS implementation. Results also suggest that the chances of perceiving HR effectiveness as a result of HPWS implementation may be increased with greater communication between the leader and the HR consultant. As seen in Figure 2A, there is very little relationship between HPWSs and perceptions of HR effectiveness when communication is low; rather, significant benefits are seen only when communication is frequent and open. In other words, efforts to implement HPWSs may be futile when communication channels between the leader and consultant are closed. The small-business leader should make all possible efforts to communicate with the HR consultant as frequently and openly as possible during HPWS implementation. Under ideal circumstances, availability for communication Human Resource Management DOI: 10.1002/hrm

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should be written into the consultant/client contract. In addition, the HPWS/HR effectiveness relationship is benefitted by higher business leader HR knowledge and background. In fact, Figure 2B shows that when leader HR knowledge and background is low, there is a negative relationship between HPWS implementation and perceptions of HR effectiveness. This suggests that, when the business leader is not knowledgeable of HR, HPWS implementation may be detrimental to the firm. The firm may waste time and valuable resources attempting to implement systems that are not sufficiently adapted to the firm’s particular needs, thereby failing to produce positive outcomes or resulting in human capital losses. For example, employees may lose faith in a small-business owner’s competence when s/he implements a training program that is of little use to the employees in its current form. A small-business owner with a strong HR background may understand how such programs should be altered to address the needs of his/her employees, whereas one who is lacking such knowledge may not see how or where adaptations must be made. A leader with little-to-no HR background may not understand why or how HPWSs have their effects, and may thus implement them incorrectly or without the appropriate changes. Therefore, the small-business leader should assess his/her own HR knowledge and background and seek out additional information, for example, through academic or other certification programs. S/he should also look to those around him/her for an outside perspective concerning his/her HR knowledge and background, and/or look to the HR consultant for advice concerning outside education on particular topics of relevance if lack of sufficient knowledge is apparent.

Note 1.

We thank an anonymous reviewer for this observation.

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BRIAN S. KLAAS is a professor of management and senior associate dean in the Darla Moore School of Business at the University of South Carolina. He also serves as the director of the Riegel & Emory HR Center. He received his PhD from the University of Wisconsin-Madison, and his work has been published in such journals as Personnel Psychology, Industrial Relations, the Academy of Management Journal, the Academy of Management Review, Industrial and Labor Relations Review, the Journal of Management, the Journal of Business Venturing, and the Journal of Applied Psychology. His research has been funded by grants from the Upjohn Institute, the SHRM Foundation, and the Gevity Institute.

MATTHEW SEMADENI is an associate professor of strategy in the Kelley School of Business at Indiana University. His research interests include competitive strategy, corporate strategy, knowledge, and top management teams, and his work has been published in the Strategic Management Journal, the Academy of Management Journal, Organization Science, the Journal of Business Venturing, and the Journal of Management. Semadeni received his PhD from Texas A&M University, and prior to coming to the Kelley School he was on the faculty of the Moore School of Business at the University of South Carolina.

MALAYKA KLIMCHAK is an assistant professor of management at Winthrop University. Her research interests include strategic human resource management, career mobility, and organizational attachment, and her work has been published in the Journal of Business Venturing and the Journal of Vocational Behavior. Klimchak received her PhD from the Moore School of Business at the University of South Carolina.

ANNA-KATHERINE WARD is a PhD candidate in the Moore School of Business at the University of South Carolina. Her research interests include cross-cultural communication, employee voice, influence, status, and impression management, and her work has been published in the Journal of Management and the Journal of Business and Psychology. She expects to graduate in May 2013.

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APPENDIX A

Perceived HR Effectivenessa 1. 2. 3. 4. 5. 6.

Your firm’s ability to attract new employees The level of employee turnover in your firm Skill levels among your employees The motivation and morale among your employees Overall employee performance in your firm The level of absenteeism in your firm

High-Performance Work Systemsb 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Provide formal performance evaluations Provide frequent performance feedback Provide regular updates regarding developments in the business Provide formal training programs Use incentives and bonuses Use recognition and reward programs Solicit input on how to improve the company Provide health insurance plans Provide retirement plan options Use selection tests or other formal screening methods when hiring Use pre-employment drug testing Use background screening for job candidates Use written guidelines when dealing with an employee that doesn’t meet expectations Use formal procedures to set pay levels

HR Background and Understandingc 1. 2. 3. 4. 5.

Executives at this client have good experience in areas related to HR Executives at this client understand how to implement HR programs and policies Executives at this client know how HR programs and services work Executives at this client have a strong background in human resources Executives at this client understand how to manage people

Communication Behaviorc 1. 2. 3. 4. 5.

I talk with this client even when there is no immediate problem I have frank and open discussions with this client I talk with this client frequently I have limited contact with this client (reverse-coded) I can be candid with this client

Notes a

Degree of satisfaction with outcomes listed (five-point scale, very dissatisfied to very satisfied).

b

Proportion of workforce for which approach or program is used (five-point scale, 0 to 100 percent).

c

Degree of agreement with statements listed (five-point Likert scale).

Human Resource Management DOI: 10.1002/hrm