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Exploring the potential of high performance work systems in SMEs

Ian Drummond
Small Business Service, Shefeld, UK and Durham Business School, Durham, UK, and

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Received 19 February 2006 Revised 10 April 2006 Accepted 16 May 2006

Ian Stone
Centre for Entrepreneurship, Durham Business School, Durham, UK
Abstract
Purpose Aims to explore aspects of employee relations in rms included within The Sunday Times list of the UKs Best Small Companies to Work For, focusing in particular on the use of high performance work systems (HPWS), and the way they impact upon performance in these businesses. Design/methodology/approach The research is based upon a postal survey supplemented by detailed face-to-face interviews with CEOs in 60 per cent of the ranked rms. Findings The SMEs studied are found to be highly successful in terms of sales and employment growth. Our analysis suggests that the common explanation for enhanced business performance in terms of HPWS (coherent bundles of human resource management practices that function synergistically and thus have more effect than might be expected from the sum of the parts) is a valid but partial. The bundles employed in these businesses are synergetic, but the enhanced outcomes produced need to be understood in terms of the system as a whole, not just the more concrete practices that are normally considered. Research implications/limitations While there is a need to explore further some of the ndings through larger scale qualitative research, we contend that the deeper understanding of HPWS emerging from this approach is important to the formation of effective policy in relation to the small business sector. Originality/value It is suggested that the cultures, values and norms established within the businesses are necessarily part of the system and that they play a fundamental role in shaping, empowering and reproducing the practices used. Keywords Business performance, Small to medium-sized enterprises, Training, Human resource management, Organizational culture Paper type Research paper

Introduction High performance work systems (HPWS) have been a subject of academic interest for a number of years and there is now considerable evidence that such systems tend to be associated with enhanced business performance (see, for example, Appelbaum et al., 2000; Sheppeck and Militello, 2000; Den Hartog and Verburg, 2004). However, the signicance of this relationship is not uncontested. Evidence for the causal signicance
Employee Relations Vol. 29 No. 2, 2007 pp. 192-207 q Emerald Group Publishing Limited 0142-5455 DOI 10.1108/01425450710720011

The authors are grateful to Dr Graham Dietz for his helpful comments on a draft of this paper. Ian Drummond also expresses his thanks to Grey College/the Holgate Trustees for awarding the Fellowship that enabled him to work at DBS on this project during Spring 2005.

of HPWS is limited and some analysts have argued that observed competitive advantages simply reect the direct effects of elements of good practice and the effective deployment of human resources rather than a system per se (see, for example, Harley, 2002; Danford et al., 2004; Ordiz-Fuertez and Fernadez-Sanchez, 2003). Godard (2004) similarly suggests that claims of superior performance may be unwarranted and that the problems of these systems run deeper than proponents assume. Based on a critic of conventional explanations, he argues that more consideration needs to be given organisational context in which HPWS operate. Even less consideration has been given to how generally relevant or transferable such systems are in practice, particularly in relation to SMEs (Whiteld and Poole, 1997; Barnard and Rodgers, 2000; Ramsey et al., 2000). Despite this, a signicant proportion of the literature on HPWS suggests, either explicitly or implicitly, that such systems are transferable and can purposively be established in businesses. Sung and Ashton (2005, p. 3), for example, dene HPWS as work practices that are deliberately introduced with the purpose of improving business performance. It is also clear that policy makers in the UK and elsewhere are making similar assumptions. In this paper, we begin to assess how valid these assumptions are by exploring how such systems came about and how they underpin productivity gains and growth in 30 highly successful SME businesses in the UK. A widely accepted denition sees HPWS as sets of complementary work practices covering three broad areas or bundles of practices. In Sung and Ashtons (2005) report, 35 work practices are identied in the three areas: (1) high employee involvement practices, including self-directed teams, quality circles and sharing of company information; (2) human resource practices, covering sophisticated recruitment processes, performance appraisals and mentoring, etc.; and (3) reward and commitment practices, embracing nancial rewards, family friendly policies, job rotation and exible working. However, a key distinguishing feature of HPWS is that the system is more than the sum of its parts. The argument is that sets of practices act synergistically to provide for additional positive outcomes beyond those that might be expected from the individual elements. These bundles are variously described in the literature as necessarily being internally consistent, congruent cohesive and coherent (Whiteld and Poole, 1997; Appelbaum et al., 2000). Most analysts argue that HPWS enhance business performance through a two-stage process (Harley, 2002). First, the use of HPWS improves employee orientations to work, which in turn, typically has a number of effects, including a reduction in staff turnover and greater exibility in work practices. The AMO model (Appelbaum et al., 2000) specically cites improvements in ability, motivation and opportunity to participate which result in higher productivity and better overall organisational performance (see also Miller and Le Breton-Miller, 2005). However, few published studies of HPWS have unpacked this process in real depth. Causal explanation of why and how the bundle should produce more than the sum of its parts is generally lacking or supercial. Moreover, while the literature stresses that bundles must be coherent, there is little discussion of how this coherence is established and maintained in practice. While the notion of a complementary and self-reinforcing

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bundle of practices, and indeed constructs such as the AMO model, provide for some explanation of how HPWS function, there is relatively little consideration of just how synergetic effects are created. As Ramsay et al. (2000, p. 504) observes: It is this logic of interdependent effects that makes the HPWS argument distinctive. It entails a causal path in which worker outcomes mediate between HPWS practices and performance. Yet though these connections are crucial to the argument, the linkages from HPWS to employee outcomes and thence to organisational performance remain almost entirely untested. Similarly, Preuss (2003, p. 590) argues that the mechanisms through which high performance systems shape critical outcomes have been poorly dened and have rarely been examined directly (see also Becker and Gerhart, 1996; Wright and Gardner, 2003). Beyond this, there is also the generally unrefuted possibility of reverse causation within which high performing businesses tend to employ HPWS rather than the system causing success (see, for example, van Veldhoven, 2006). Our understanding of these issues is particularly limited in relation to small businesses, which have only been a specic concern within a limited number of studies (Ordiz-Fuetez and Fernadez-Sanchez, 2003). We believe that a deeper understanding of why and how HPWS function is signicant not just because of its academic interest, but also because of its relevance to the formation of policy in this area. This paper argues that considerable signicance attaches to a distinctive set of cultural norms and values that is readily observable in businesses. We suggest that the core cultures and values of these businesses play a fundamental role in shaping and ceding coherence to the bundles of practices being utilised, and thus that they are an important and necessary part of what makes HPWS effective in practice. Empirical research: Sunday Times 50 best small companies to work for In this paper, we present results from an intensive study of 30 highly successful small-and medium-sized businesses conducted by the authors institution on behalf of the Small Business Council and Small Business Service. The businesses studied were all drawn from The Sunday Times list of the 50 Best Small Companies to Work For[1] (hereafter ST50). The objective was to discover more about how the rms train and promote learning among their staff, and the extent to which these activities, and the wider context of a generally rewarding working environment for employees, impacts upon business performance. In-depth face-to-face interviews, in most cases with owner directors, supplemented by pre-interview questionnaires, produced detailed information on 60 per cent of the rms in the Sunday Times, 2004 list. Employees are the principal source of points determining an organisations Sunday Times ranking, although this is also inuenced by external evaluation of company policies, programmes and culture (including in particular, holiday entitlement, maternity benets, childcare assistance, appointment of women to senior positions, staff retention, provision of a nal salary pension scheme, and private medical insurance for employees and their families). The SMEs included in the 2004 ST50 are diverse in a number of respects. In employment size they are mainly in the lower part of the 50 to 250 range. Some 46 per cent were concentrated at one site; others had up to six sites. A total of two-fths were relatively new (founded in the last 5-15 years), but a similar proportion date back 15-35 years and some much more. They are less diverse spatially (almost two-thirds in London/the South East, and few from peripheral UK regions) and sectorally (services,

especially retailing and nancial and business services, dominate, but do include a few companies in manufacturing or construction). Female workers are well represented (54 per cent on average) and workforces tend to be relatively young (in 60 per cent of rms, half or more are under 35). Staff typically have signicant interaction with clients. The number holding degrees was often noticeably high, though not uniformly so. While on average just over 25 per cent of staff were earning above 35,000, the proportion ranged from 8 per cent to 60 per cent. Firms were generally content to participate in the study, helping the researchers to achieve a broadly representative sample of ST50 businesses, in terms of employment size, age, sector, gender of owner and location. The study was designed to move beyond establishing that some form of statistically signicant relationship exists between the sets of practices used in these businesses and the outcomes they have experienced. Rather, it focused on how these systems were developed and maintained and how they actually serve to produce enhanced performance in practice. The study revealed that the businesses are not only popular with their staff, but also highly successful in their performance. Indeed, they are successful in both absolute and relative terms: most of them clearly outperform typical businesses in their sectors. FAME-based (See www.bvdep.com/fame.html) data on sales performance of the 2004 Top 50 SMEs suggests a strong average performance over the previous three years: 71 per cent recorded an annual growth in sales of over 10 per cent. Net growth in the number of employees in the companies contacted was found, in aggregate, to be 35 per cent over the three-year period 2002-2004. Indeed, in 85 per cent of the rms examined employment performance was above that of the relevant (four-digit SIC) sector as a whole, and two-thirds of the rms recorded employment growth that was ten percentage points or more above that of the (SIC) sector overall. Philosophy and practice Our ndings suggest that despite their high levels of business success, prot and growth are generally not paramount in these organisations. Few respondents recognised any signicant external coercive pressures to behave in particular ways (Bacon and Hoque, 2005). Rather, the founder-directors mostly described their objectives in terms of: creating the kind of business that I would like to work in as an employee; building a great place to work in and to do business with; and establishing a place that we and our staff can work in and make a living, but enjoy the process at the same time. One CEO expressed a recurring sentiment when outlining his goals for the business: the creation of an enjoyable work environment . . .we are not just focused upon the bottom line. These views were typically formed not through reference to management gurus so much as through founders experience of working for other companies either negative experiences in the case of rms that were ghastly in their treatment of people or positive ones from those that gave to their staff and from which there was something to be learned. Respondents characteristically suggested that workforce management practices were ultimately dened by the customer needs, and that immediate prot objectives should not dictate decision-making. Most were also clear that operating on the basis of high levels of trust between management and staff ultimately yields a return in terms of motivation, teamwork and effectiveness. Indeed, it was the strong contention of many interviewees that their system, because it allowed them to realise the potential

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creativity and energy of their employees, enabled them to outperform other rms in conventional terms as well as in relation to their own criteria. Enthusiastic, inspirational, and (in some cases) charismatic leadership is a distinguishing feature of the ST50 rms. This leadership, almost invariably, embodies a more or less distinctive philosophy that denes both a clear mission for the business and the ways in which this should be achieved. In the vast majority of the businesses investigated, the emergence of this philosophy was neither accidental nor passively accepted by the owner managers. Almost invariably, it was consciously established by these individuals. In one or two of the rms, the occasion of management or employee buy-outs provided the opportunity for change; there were also some examples among the longer-established rms of change being deliberately induced by directors through specic CEO appointments of targeted individuals. However, in the majority of rms established since the 1980s, these leaders individuals and partnerships are still in place, often supported by a cadre of senior managers who have been employees at the rm since the early days, and who are committed to the value set. This provides reinforcement and continuity of the culture and assists importantly in embedding this throughout the enterprise and sustaining it through time. However, it is also clear that in most of these businesses, the culture has become embedded to an extent that its inuence extends beyond that articulated directly by one or two managers; it has become part of the nature of the business. The underlying philosophy of the ST50 businesses is typically articulated through a culture and set of shared values that not only sets the organisational goals, but also identies how those goals are to be achieved (identied by Purcell et al. (2003) as the Big Idea). In accordance with their governing philosophies and cultures, these businesses tend to operate open and inclusive approaches to management, stressing routine and unmediated communication between managers and workers, at hierarchies, autonomy, trust and teamwork as crucial. However, while correspondence with an overarching philosophy implies some commonality, it was observed that each business nevertheless adopts a distinct bundle of workforce related practices, based upon its own perceived needs and priorities. In this sense, the business philosophy has a broad and inclusive signicance governing both external and internal interactions. Although the guiding philosophy may be endogenous, these businesses do not isolate themselves from the environment in which they operate; indeed they are very aware of, and responsive to, external factors and tend to develop trust-based and principled relationships with outside contacts clients, collaborators and suppliers as well as with their workforce. Market realities are clearly embodied in the thinking behind the practices deployed, as demonstrated in the comments of two CEOs: We have a culture that puts people rst recognising simply that our only assets are our people, and also that people need to be happy to release discretionary effort; We are not seeking to establish a kibbutz here; we need always to be realistic in what we do. In itself, recognising that these businesses have distinctive philosophies is not a sufcient basis for understanding how they function or why they are so successful. More important in this respect is appreciating the fundamental role that these philosophies play in shaping structures and ways of working within the businesses and why and how these are causally signicant to the outcomes produced.

Linking practices to organisational performance Although very few of the ST50 rms would recognise this, the research found that many practices, and indeed sets of practices, operated by the sampled rms correspond closely to those widely associated with HPWS. The research did not seek to achieve quantitative measures of the incidence of particular practices among the SMEs investigated. However, as far as the most commonly used practices found by Sung and Ashcroft (2005) are concerned, it revealed similarly high levels of adoption. For example, annual appraisal was used by all the rms investigated, and the vast majority also used structured induction training, annually reviewed employees training needs, systematically circulated information on organisational performance and strategy, and sought formal feedback on job performance. Qualitative tables, giving examples by individual rm of the practices under each of the three main HPWS areas, are included in the research report. However, in this paper we are not primarily concerned with the precise details of these typologies. Rather, our aim is to better understand the nature of practices involved and how these serve to produce atypical levels of business performance. The impact of these practices upon the way their rm operated in relation to its market and its performance success within this context was explored with interviewees. Whilst we recognise that denitive explanations that isolate the impact on overall performance of specic factors will require more research than was possible within this study, the management observations and practical examples that were acquired are nonetheless informative. In general terms, our ndings support established explanations of HPWS that describe a two stage process involving improved employee orientations to work resulting in higher productivity and better overall organisational performance. More specically, our research identied ve mechanisms that were widely reported as underpinning performance within the STT50 businesses. Engagement and commitment. Interviewees stressed that, however skilled or well-organised a rms workforce are, staff orientation and behaviour are key elements in performance, and that these are signicantly inuenced by the commitment and motivation generated through the way employees are treated. In the words of one CEO: We have the total loyalty of our staff members, who exhibit phenomenal engagement with the company. Such engagement underpins approaches to dealing with customers and clients and also has indirect benets in terms of the degree and quality of support individuals give to colleagues, and their willingness to devote their energies to creativity and innovation within the rm context. The idea that a happy and committed workforce helps in terms of client relationships was a common perspective. The identied practical benets this brings to company performance included: higher rates of client retention and growth, the ability to make higher charges, and advantages of closer working relationships with clients. Flexibility and creativity. Behavioural exibilities, including preparedness to accept organisational and work practice change, were identied as having signicant benets for the organisations. A number of interviewees stressed that their practice of encouraging staff routinely to look outside the box is effective in terms of nding creative responses to business problems and opportunities. One of the roles of training, in the words of one interviewee, should be to take people out of their comfort zones make them think and react, and most of the rms could readily identify examples of

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innovative behaviour impacting upon their service or product and on sales volume. Staff, rather than managers are often the best people to make the decisions relating to their work, one CEO observed, So we give them the support and sense of responsibility to do so. Appropriate and effective skills development. People-based management practices clearly impacted upon both the process and outcomes of skill formation within the sampled rms. Skills development, it was found, is generally deeply embedded and extends signicantly beyond levels dened by technical competence needs in the market. The range of skills existing in these rms tends to be broader than those found elsewhere, with particular emphasis upon soft skills (such as those relating to internal communication, effective team-working etc.). Moreover, the ST50 rms were found frequently to provide individuals with skills development exceeding that related to current responsibilities, in order to facilitate their possible progression within the organisation. Indeed, it was noticeable how readily many of the rms respond to training requested by individual staff some even making available a xed amount per employee for use on any type of training they choose (a scheme called, in one rm, the make yourself more interesting fund). The ST50 businesses generally use such means to enhance specic and general skill levels, increase employee commitment, and reassert the core values of the business through creating more internal promotion opportunities. Many of these rms have created an environment that values and facilitates continuous learning by employees as part of the routine work pattern, thus normalising skills development and embedding it within day-to-day operations. Continuous development is also a means by which the outlooks and behaviour of staff members are rmly oriented towards creativity and innovation characteristics very much stressed within the rms surveyed. Demonstration effects (by leaders), participation in project teams, mentorship arrangements, formal recognition and rewarding of ideas (at all levels), high levels of employee autonomy, etc. all provide the context for encouraging creativity. It is very difcult to demonstrate quantitatively (for example, in terms of measures such as training budgets, average annual hours of formal training, etc.), that the skill levels of staff in the surveyed rms are higher than those prevailing in similar but more traditional competitor rms. Even comparisons of qualications are complicated by the multi-dimensional skill sets existing in the ST50 businesses including a signicant tacit element and a broader than usual range of soft skills. All the interviewees, however, stressed that such skill sets crucially underpinned their organisations methods of operation and expressed a high degree of satisfaction (supported by qualitative and anecdotal evidence) with the performance of the employees. Staff retention. Many of the businesses are in sectors and/or locations where there is much competition for staff, especially key workers such as fee-earning consultants. All the interviewees stressed that, as a result of their culture, the business reaped signicant benets in terms of attracting good staff and being able to hold on to them even in the face of higher salaries on offer from larger companies. As one interviewee put it, employees receive benets from working in this culture which quite simply go beyond salary. Achieving a low turnover of labour is, of course, particularly important in high performance work organisations. This is because of the length of

time and cost involved in fully replacing staff members who leave, not least because high-involvement work practices place great stress upon specic tacit knowledge. Such specialised know-how takes time to acquire, making such employees not easily replaceable (Guthrie, 2001), so that, in the words of one MD interviewee, When people leave it is hugely disruptive to the organisation both management and work colleagues and to clients. Another typical respondent pointed out: This is one of the reasons why we have tried to produce an environment where virtually nobody leaves. Our retention rate is higher than our competitors, and this, in turn, helps in retaining clients in this business, departing staff often take clients with them. Higher value-added product/service. Many of the interviewees acknowledged that their system was, in fact, by no means inexpensive to operate. For example, the more intensive recruitment procedures associated with HPWS are costly in terms of time and resources. No doubt we could increase prots by rippin 32 g out costs, conceded one CEO, but our goal has been growth, which has been achieved we are now the largest supplier in this part of the market. Another interviewee, while not entirely certain as to how cost-effective our system is, had no doubt that we benet from a signicant productivity of staff advantage compared to other places. There is clear evidence among many of the rms interviewed that the system they operate is relatively high cost, but such that it enables them to offer a premium service and to obtain a good price for it. Questions of relevance and transferability The SMEs researched in this study are highly successful and they do apparently employ sets of practices that conform quite closely with established denitions of how HPWS are constituted. This makes them quite atypical in terms of both their performance and their approach to HRM. Although there is a substantial body of evidence supporting the effectiveness of HPWS generally, and we are clear that the systems employed in the ST50 businesses do play a role in their success, evidence for the effectiveness of HPWS does not in itself testify to the general relevance or transferability of such systems. Despite this, a signicant proportion of the literature on HPWS suggests, albeit sometimes implicitly, that such systems can be effectively inserted into businesses generally (see, for example, Delery and Doty, 1996). It is also apparent that policy makers in the UK and elsewhere assume that this universalistic assumption is valid. We question the validity of these suppositions, particularly where it is assumed that the system is simply a bundle of specic management practices. Few, if any, of the ST50 businesses set out to purposively construct HPWS or to deliberately implement an externally dened set of practices. Indeed few if any of these businesses recognise what they do in terms of HPWS. Beyond this, our research with the ST50 rms, and the literature, suggest that there are a number of reasons why the insertion of externally dened models of HPWS may well tend to be problematic and unsuccessful in practice. These include: . The HPWS literature includes an ongoing debate as to whether there is one best system that will be appropriate and effective for all organisations (Danford et al., 2004; Appelbaum et al., 2000). Although there are key common elements in the systems operating in the businesses included in this study, there is also signicant variability. This nding supports the increasingly widespread view

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that no one such system is possible (Sung and Ashton, 2005). While this is hardly a barrier to the establishment of a HPWS in a business (it may simply be that, as Becker and Gerhart (1996) propose, the bundle requires more or less customisation), it does suggest that the importation of such a system may not be as straightforward as is sometimes assumed. A related area of contention in the literature concerns the relative efcacy of bundles that are essentially dened within the rm and those that are predominantly shaped by the external environment (see, for example, Becker and Gerhart, 1996; Wright and McMahan, 1992). The results of this study provide at least a partial commentary on this point; the systems in place in these businesses are, without exception, endogenous they were all developed within the rm. Moreover, our ndings suggest that the systems currently being operated in these businesses are so effective in large part precisely because they are essentially internal to the rm (see also Wood, 1999). A further potential problem with importing HPWS to businesses is related to the notion that the effectiveness of these systems depends, crucially, on the bundle being internally consistent and coherent (Wood, 1999). Our ndings support this view: the systems in place in the ST50 rms were invariably closely related to the nature of the rms, and their sustained effectiveness over a number of years suggests that they must have been coherent. This posits the issue, largely unaddressed in the literature, of just how the coherence of the bundle is constructed. It is possible to envisage externally dened bundles that are inherently coherent as sets of non-conicting practices, but these are unlikely to be consistent with pre-existing structures within the rms concerned. The ndings from this study also suggest that the systems in place in these businesses were far from static. They had evolved progressively as the rms grew and changed. Indeed the logic of HPWS suggests that such systems, if they are effective, are necessarily transformational; the effective operation of HPWS engenders growth-related and other changes to the nature of the rm. This implies that if an imported system is to remain effective through time it must be capable of evolutionary change, and capable of maintaining its coherence and relevance throughout these changes. This is important, because it is not clear that this necessary and ongoing process of evolutionary change to the system can be managed in an ad hoc manner. Whilst it is not a feature of the ST50 businesses, there is evidence to suggest that there may be widespread cultural barriers to the adoption of HPWS. Certainly, there is evidence that shows many business owners are concerned not to relinquish direct person control as the business grows (see, for example, Tomer (2001).

Although these issues are not necessarily fundamental barriers to the effective importation of externally derived models of HPWS into businesses, in concert at least, they do highlight the problems likely to be associated with such attempts and cast serious doubts on the effectiveness of imported systems in practice. Certainly, it is possible to promote adoption of elements of management best practice, or even sets of such practices, and for rms to benet from their implementation. What is less clear is

whether it is possible to establish and maintain an externally-dened HPWS producing more than the sum of its parts. Whilst it is easy enough to understand why HPWS may appear attractive to policy makers charged with promoting productivity gains and employment growth, and indeed to small and medium-sized businesses that wish to grow, it is not clear that these systems are well enough understood for the formulation of effective policy or the development of practice. Indeed, the problem is almost certainly wider than our limited understanding of precisely how HPWS are established and function. For example, in so much as growth is a key element of the rationale for promoting and engaging with HPWS, the lack of real knowledge of just how such systems function is compounded by a similar lack of depth in thinking about how growth occurs in SMEs. As Vinnell and Hamilton (1999) explain small business development is complex; the result of an idiosyncratic and unstable process involving the interplay of the local environment and features internal to the business (see also Scarpetta et al., 2002; SBS, 2003). Arguably, this deciency is further compounded by a tendency for the policy formation process to privilege reductionist rationales for intervention. Although the notion of evidence based policy is a pervasive mantra in government (Cabinet Ofce, 1999; Campbell, 2002), interpretations of what constitutes evidence are constrained by both precedent and the inherent problems of developing and articulating policies that address the heterogeneity and complexity of the real world. Thus, while policy makers are apparently willing enough to accept, for example, that the causes of small business growth are complex and subtle (SBS, 2003), it is less clear that government is willing or able to grasp this nettle in practice. Albeit for understandable reasons, rationales for policy, and particularly for specic initiatives such as the promotion of HPWS, tend to be reductionist and the policies themselves often lack both grounding and power. Within this, policy makers, and other organisations concerned with supporting growth in SMEs, tend to assume that because a system has worked in one situation, it will work in others. Furthermore, it is also often assumed that the system, or usually the more tangible components of the system, can be transposed in quite instrumental ways. In this case, the tendency is to assume that the system is simply a list of management practices that have been shown to be effective in other businesses. However, as this study has begun to show, properly understood, HPWS cannot be simply dened in these terms. The ST50 rms do utilise the practices commonly cited as being components of HPWS, but they also have distinctive and, we believe, causally signicant cultures and values. The systems in use in these businesses are not simply sets of particular HRM practices; there are other, perhaps less obvious but nevertheless crucial components. Policy initiatives that fail to recognise this are unlikely to be successful. Understanding the origins, regulation and reproduction of HPWS Theorising about the central signicance of culture and values to organisational performance is not new. Den Hartog and Verbung (2004) position that successful rms distinguish themselves from less successful ones through their clearly articulated and shared norms and values regarding organisational functioning. Guest (1994) suggests that through selection, socialisation and training procedures, HRM can contribute to both the emergence and maintenance of shared patterns of behaviour, norms, values and informal rules within organisations. More recently, Ordiz-Fuertez and

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Fernadez-Sanchez (2003) speculate about direct causal signicance of organisational cultures, resting them more on strategies based on the potential cultural development, that is, on the values and ways of thinking that will constitute differentials difcult to replicate in the short term. Thus, HR practices are inextricably linked to organizational culture. However, while there may have been some recognition of the potential signicance of these factors, to date, policy makers and some analysts have proceeded as if they are inconsequential. Our analysis suggests they are, in fact, crucial to understanding how HPWS come about and are maintained and thus to how they can be successfully incorporated into policy. While there is differentiation in the sets of practices used in the ST50, there are signicant elements of commonality elements that generally correspond closely with established denition of HPWS. In unpacking the reasons why particular bundles have come to be used, there is little evidence that the respondents purposively set out to construct a high performance work system per se. Rather, the businesses in this study assembled sets of practices primarily because of their relevance to the specic goals, culture and operational environment of the business. Whilst most of the businesses are well enough informed about aspects of management good practice, and there is a general recognition that these are businesses that tend to perform well, most owner-managers clearly do not conceptualise their current set of practices as systems, certainly not as systems that correspond to some externally dened model. This nding would appear to be somewhat anomalous; while interviewees did not specically refer to high performance concepts during interviews and do not understand what they do in these terms, they have nevertheless created such systems. This is important, because whilst respondents claims regarding the loyalty, motivation and commitment of their staff and the effects of these may be exaggerated, the cohesion of the systems in place is apparent and both theoretically and observably signicant. This begs the question of how the coherence of the bundle, which the literature stresses as being crucial, was achieved. As Whiteld and Poole (1997, p. 746) point out, it is necessary to consider the genesis of effective cohesion in the enterprise, the reconstruction of the normative order and the facilitation of strong and cohesive organisational cultures. This research has begun to suggest how coherence has been realised in the businesses studied, and in doing so, it has begun to show what is truly distinctive about them. Although it may vary in its specicities, many of the businesses investigated in the study share a relatively distinctive philosophy; a set of values and goals that shape what the business does and how it does it. While incrementalism and experimentation contribute to the evolving nature of individual practices and sets of practices within each rm, the key point of reference for them is not so much a system per se; they have not purposively modied well-tried HR techniques and installed them in a specic context to achieve best productive effect. Rather, they have created in situ and organically, a set of mutually supporting practices that are consistent with the founders philosophy and the underlying ethos of the business. This philosophy and the associated set of values is the unifying element through which the bundle is shaped and coherence is dened, achieved and reproduced. In the ST50 rms, the systems that emerged achieved coherence not because this was planned for and managed, but because the specic practices used were dened by and consistent with the cultures and values of the businesses owners and

subsequently with those of the businesses. Because each of the practices that ultimately constituted the HPWS bundle were all selected, empowered and mediated through a single and enduring set of core cultures and values, the individual practices tended to be consistent and coherent. In this sense, it is clear that the processes operating in the ST50 businesses do not simply reect the agency of the entrepreneurs concerned. Certainly, individuals have been instrumental in establishing and developing these businesses, but to see their actions as being fundamentally causally signicant, as some of the literature has assumed in the past, can hardly be valid. The agency of entrepreneurs is part of the explanation for why these rms are so successful, but only part. In many respects, understanding how HPWS have been sustained through time is as important and informative as understanding how they were initially developed. The ST50 businesses have tended to expand rapidly, and the sheer growth in numbers of staff has given rise to challenges in respect of key elements of workforce management approach communications, access to management, etc. As one MD remarked, We used to all go to the pub on a Friday afternoon; now weve grown we cant all t in, and in any case I cant get round to talk to every one! Informality of systems commonly, therefore, has to give way to more formal practices as a rm develops, although there is a strong inclination to retain the personal touch, or elements of it, wherever possible. In the same way as the respondents in this study did not deliberately establish HPWS in their businesses, they equally did not purposively manage the ongoing development and adjustment of the practices being used as contradictions emerged with the system or the context in which the business operates changed. Despite this, it is clear that the systems have persisted despite the transformational and countervalent pressures inherent in the growth process. Given that these systems have persisted, it follows that they are, to a large extent at least, capable of adjusting themselves, more or less organically, as contexts change and contradictions emerge. More than this, however, because changes are made through reference to the core cultures and values of the business, coherence is also maintained through this development. In practice, many of the ways in which these businesses operate are normative; they are shaped by deeply embedded and resilient structures constituted through the cultures, values and behavioural norms of the rm. Thus, because both strategic and day-to-day elements of the businesses are shaped by these structures, the need for close and ongoing control is largely negated. In this sense, the development and operation of HPWS in these businesses can be understood as a structuration process involving interplay of both structurally dened causality and the agency of the key actors involved (see, for example, Giddens, 1984). These actors play a role, albeit not always a direct or purposeful one, in establishing the nature of the businesses and hence in establishing key structures within the rm, but they seldom directly manage the system. Indeed, it is far from clear that such management is possible. However, it may not be necessary; if we accept that structures related to the organisations culture and values are such that they will always tend to produce and reproduce both particular ways of working and particular types of outcomes in terms of performance, they negate the need for constant and direct control of specic practices. From this perspective, although these structures may appear less substantial and less

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consequential than the more concrete practices observable with HPWS, they are causally signicant and indeed fundamental parts of the system. Towards a basis for policy formation The empirical basis of this study has been relatively modest, and it would be pretentious to suggest that our analysis provides a comprehensive model of new approaches to promoting HPWS in small and medium-sized businesses. However, we believe that it both complements much of the existing literature and, in so much as it begins to suggest a way forward, adds to established thinking in this area. We have suggested that purposively establishing HPWS in SMEs is necessarily a challenging activity with uncertain prospects of success. Within this, we have argued that the effective establishment and operation of HPWS depends not just on understanding the nature and composition of the bundle, but equally on appreciating the roles and signicance of a range of less tangible, but nevertheless crucial, features of the system as a whole. Effective policy formation necessarily depends on a fuller understanding of how HPWS function and what it is that gives them coherence and resilience. In this regard, we see a central signicance to the organisational culture, shared values and norms of behaviour that exist in the ST50 businesses. Because of this, we are sceptical of policies based on the premise that HPWS, dened as bundles of specic practices, can implanted in an instrumental manner without regard to other factors. Our analysis suggests that HPWS are necessarily wider than has sometimes been assumed. The system is more than a bundle of practices; there are deeper structures within these businesses that cede coherence to the bundle and activate and empower the mechanisms that underpin the outcomes achieved. To date, analysts and policy makers have normally either not recognised this broader perspective or assumed that it is inconsequential. If, however, our assessment is valid, policies to promote the more widespread use of HPWS are unlikely to be successful unless these higher order elements of causation are addressed alongside attempts to implement the more tangible components of the HPWS bundle. Indeed, in so much as these higher order causal factors were both common throughout the ST50 rms and closely associated with the more or less spontaneous development and the unmanaged reproduction of the systems these rm operate, it may well be these factors that should be the primary focus of policy. The need now is to explore these parts of the system more fully. Our analysis could be extended and strengthen in a number of ways; not least by the inclusion of more detailed and extensive data on employees views to provide a more rounded and complete view of the organisations being analysed. More generally, the challenge is two-fold. First, it is necessary to appreciate the scope of what needs to be better understood. Second, we need to consider how these issues are best explored. In this paper we have posited the causal signicance of the particular philosophies apparent in the ST50 rms; arguing that these transcend the agency of the actors involved to shape, empower and sustain mechanisms that underpin the observed success of these businesses. More evidence of precisely how these processes operate is needed. In part, it is needed because our analysis only begins to examine the causal signicance of the processes through which HPWS function and the organisational and cultural contexts in which they operate. This is important because a deeper understanding of these processes can provide better evidence that outcomes produced

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really are caused by the application of HPWS rather than the reverse. Indeed, in addition to dispelling concerns over reverse causation such analyses can potentially capture the multi-level and complex causal factors that surely are involved. More statistically based studies, such as those that have thus far predominated in this area, will not produce such understanding. The need is to complement the existing body of evidence with rigorous, intensive studies, designed to provide deeper and fuller explanations than we currently have. One potentially viable way forward would be to adopt a critical realist approach to developing a multi-layered explanatory model that encompassed the system as a whole rather than just the more concrete components that have been the concern of most research to date. Such an approach might well focus rst the mechanisms that link structures within businesses to the outcomes produced and second on the conditions in which these are activated and mediated (see, for example, Sayer, 1987; Pratt, 1995). This would be a challenging agenda, and perhaps one that policy makers would nd difcult to accept, but it might nevertheless prove to be a way beyond the impasse at which thinking in this area is currently stalled.
Note 1. The Sunday Times list of the UKs 100 Best Companies to Work For has, since 2003, been supplemented by an additional list relating to SMEs (companies with 50-250 employees); initially a list of the best 50 rms in this size category, extended to 100 rms in 2005. The lists attempt to identify the best employers in the country recognising and highlighting companies applauded by their employees for providing a good work environment. To be eligible, companies have to be at least seven years old. As well as commercial businesses, the ST50 list includes a number of established non-prot-making concerns, government agencies and cooperative organisations. The Sunday Times lists are compiled in conjunction with Best Companies Ltd.

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Tomer, J. (2001), Understanding high-performance work systems: the joint contribution of economics and human resource management, Journal of Socio-Economics, Vol. 30 No. 1, pp. 63-73. van Veldhoven, M. (2005), Financial performance and the long-term link with HR practices, work climate and job stress, Human Resource Management Journal, Vol. 15 No. 4, pp. 30-53. Vinnell, R. and Hamilton, R.T. (1999), An historical perspective on small rm development, Entrepreneurship Theory and Practice, Vol. 23 No. 4, pp. 5-18. Wood, S. (1999), Human resource management and performance, International Journal of Management Review, Vol. 1 No. 4, pp. 367-413. Wright, P.M. and Gardner, T. (2003), The human resource-rm performance relationship: methodological and theoretical challenges, in Holman, D., Wall, T.D., Clegg, T.D., Sparrow, P. and Howard, A. (Eds), The New Workplace: A Guide to the Human Impact of Modern Working Practices, Wiley, Chichester. Wright, P.M. and McMahan, G.C. (1992), Theoretical perspectives for strategic human resource management, Journal of Management, Vol. 18 No. 2, pp. 295-320. Whiteld, K. and Poole, M. (1997), Organizing employment and high performance: theories, evidence and policy, Organization Studies, Vol. 18 No. 5, pp. 745-64. Further reading Felstead, A., Jewson, N. and Walters, S. (2003), The New Ofce: The St Lukes Experience, Centre for Labour Market Studies, University of Leicester, Leicester. Guest, D. (2005), High performance working: HRM and performance, paper presented at the Sector Skills Development Agency Conference, Making Skills Pay: The Contribution of Skills to Business Success, Manchester, 14-15 March. Guest, D., Michie, J., Conway, N. and Sheehan, M. (2003), Human resource management and corporate performance in the UK, British Journal of Industrial Relations, Vol. 41 No. 2, pp. 291-314. Hogarth, T., Shury, J., Vivian, D., Wilson, R. and Winterbotham, M. (2004), National Employers Skills Survey 2003, Learning & Skills Council, Leicester. Haskel, J. and Hawkes, D. (2003), How much of the productivity spread is explained by skills? discussion paper, Centre for Research into Business Activity, London. Tamkin, P. (2005), The case for skill development, Employment Studies, Vol. 1, pp. 4-5. About the authors Dr Ian Drummond is a Senior Research Ofcer in the Small Business Service and Visiting Fellow at Durham Business Schooll, Durham, UK. He is the corresponding author and can be contacted at: ian.drummond@sbs.gsi.gov.org Professor Ian Stone is Head of the Policy Research Team in the Centre for Entrepreneurship, Durham Business School, Durham, UK.

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