Dr. Na Fu, Professor of Human Resource Management at Trinity Business School, explores the specific nature of professional service firms and how high-impact HR bundles catalyze their success.
The impact of effective HR practices in professional service firms by Tom Gamble. Related research: How High Performance Work Systems Operate in Professional Service Firms: Examining the HPWS-Resources-Uses-Performance Linking Mechanisms by Professor Na Fu, Trinity Business School, and her research team including Profs. Patrick Flood and Janine Bosak, Dublin City University; Denise Rousseau, Carnegie Mellon University; Tim Morris, Oxford University; and Philip O’Regan, University of Limerick.
What makes a firm a champion?
What do Apple, Alphabet (Google), Microsoft, Samsung, Walt Disney, Alibaba, Facebook and JPMorgan have in common? Well, all of them are champions, featuring in the top 20 best-performing companies worldwide. They also, in their various ways, perfectly fit with their customers’ needs – be it quality, status, practicality, usefulness, friendship, emotion or a combination of these. And one final, though non-exhaustive, characteristic, is that they all make highly effective use of the resources they have. This is where the VRIN concept kicks in – a set of criteria that argues that a firm’s competitive advantage lies primarily in resources that are Valuable (outperforming its competitors or reducing its own weakness), Rare (scarce and not easily taken by every firm), Imperfectly imitable (not easy to copy), and Non-substitutable (superior and protected).
These resources can be tangible or intangible, such as raw materials, robotized production lines, technology and people, as in the first instance, or, as in the second case, brand recognition, goodwill, trademarks and knowledge. And as intangible resources such as knowledge are more difficult to imitate, it’s therefore essential for firms to maintain them. Moreover, many believe the intangible resource of knowledge as the most strategically significant resource of the firm. And it can come in myriad ways, embedded and vehicled through individuals, relationships, organisational processes, databases and systems.
It’s not what you do, but the way that you do it
What underpins these precious resources? And what enables them to be used so effectively to produce the outstanding results and performance of the industry leaders above? The old adage ‘it’s not what you do but the way that you do it’ could well apply. Or more specifically in this context: it’s not what use you put the resources to but how you use them. Prof. Na Fu of Trinity Business School, Trinity College Dublin, believes the key lies in HPWS (High Performance Work Systems), a bundle of HR practices positively related to organisational performance and which enhance employees’ skills and knowledge, strengthen internal relationships, support organisational processes, databases, and systems in such a way that the firm’s resources are created to gain sustainable competitive advantage. These practices might include staffing, training, pay, performance control, communication or information sharing. While substantial research has shown that HPWS have been found to positively relate to outcomes especially in manufacturing firms, Prof. Na Fu contends that investigation has been lacking in another, key sector – that of professional service firms.
Let’s return to our champion companies. How about a second illustrious list that may count among them McKinsey & Co, BCG, Bain & Company, Deloitte, PWC, Ernst & Young, Accenture, KPMG? Such organisations are professional service firms – management consulting, accounting expertise, and legal services – and they differ from traditional manufacturing firms in how they operate and in their resources. Typically, PSFs are knowledge-intensive, made up of highly educated and professionalised workforces that provide clients with customized expertise and solutions. Moreover, to be successful professional service firms depend on three essential resources: Human capital, social capital, and organisational capital.
The first, human capital, is both built up through formal education – most consulting firms recruiting from top universities and business schools – and on-the-job training through daily assignments. For example, to become a qualified chartered accountant in some jurisdictions, a trainee needs to have at least three and a half years’ training in an accountancy practice (or 3 years for a master’s student). The second – social capital – is the knowledge that is embedded in relationships among individuals in the firm and because most of the work carried out in a consulting-type organisation occurs through teams, good relationships between team members facilitate the knowledge exchange and sharing process and, as such, improve both individual and collective efficiency. But this social capital is not only confined to internal ops. Developing and maintaining relationships with clients is also important – for not only does a consultant’s service require his or her own knowledge and expertise, it also needs the input of the client to achieve high-impact results. In addition, word-of-mouth once again proves the best possible form of publicity: much new business is won through existing clients introducing the consulting firm to new clients. The third resource, organisational capital, refers to knowledge embedded in organisational processes, routines, databases and systems. Indeed, Professionals play an important role in forming efficient organizational routines and building organizational databases and systems that facilitate knowledge exchange and sharing within firms. As such, there is a logical linkage between practices – the High Performance Work System – resources, uses, and resulting performance. In a nutshell, human resources constitute the most critical asset of professional service firms – or PSFs.
Effective HR practices can make all the difference in firms
For Prof. Na Fu developing and implementing high performance work systems made up of effective HR practices is a key factor in differentiating a champion professional service firm from merely a good one. The human capital – a highly professionalized workforce – helps PSFs build a good reputation by signaling that the professional service firm has the potential to provide more efficient solutions for its clients. And clients are likely to choose PSFs with higher level human capital because they believe that smarter people would provide better solutions. Upstream, higher level human capital also helps PSFs to attract more talent and brighter graduates from top institutions. Building these high levels of human capital, PSFs need to identify, attract, and retain their employees and this can be achieved through HR practices such as demanding selection and recruitment processes, training, and skill-based pay. As such, HRM in the guise of a high performance work system package may promote and maintain socially complex relationships characterized by trust, knowledge sharing, and teamwork. Employment practices foster organizational internal social capital and that organizational social capital creates value for firms. In other words, organizational social capital mediates the HRM practices and organizational performance relationship. HPWS improve organizational financial efficiency and organizational flexibility through their impact on organizational social structure development.
Merely having resources is insufficient for success. Only when these resources are utilized effectively can firms achieve high performance. In her research, Prof. Na Fu identifies two means to effectively utilize human, social, and organizational capital to help firms efficiently exploit, transform and explore knowledge. The importance of both resources and the uses of these resources requires managers in PSF to promote HR systems that create resources and also enhance the uses mechanisms which include exploration and exploration, or so called organizational ambidexterity. For example, managers need to pay more attention to these two means to use their resources. They can then check whether their HR systems are playing the correct role in facilitating them. If they find that the firm needs to leverage more knowledge from seniors to juniors, they may need to enhance mentoring systems in the HPWS.
To build internal social capital, PSFs can provide training programs to improve professionals’ teamwork and communication skills, compensation policies such as group-based pay and bonus sharing plan and open vertical and horizontal communication channels for professionals sharing and exchanging knowledge within the firm though the use of employee suggestion systems. To build external social capital, PSFs can provide professionals with external training opportunities and reimburse them for developing networks with potential and existing clients. Effective teamwork is also a key factor for consulting firms’ success, not least due to the fact that they have compress their work into a much shorter time frame. As one partner from a consulting firm said: “[we need to] compress six months’ work into a three-week assignment.” This means that the PSFs must be able to form teams quickly based on knowing each other’s expertise (which also implies networking) and using these teams effectively in encouraging knowledge exchange and combination. ‘The bottom line is that professional services firms with extensive utilization of HR practices bundled in High Performance Work Systems will experience increases in firm performance,’ asserts Prof. Na Fu, while pointing to one crucial determining factor: ‘But it’s the firm’s “uses” that will ultimately effect – either positively or negatively – the relationship between resources and performance obtained.’
Professor Na Fu
- View Dr.-Prof. Na Fu’s academic profile
- Link up with Prof. Na Fu via LinkedIn
- Explore the programmes at Trinity Business School
- Download this article and others in Global Voice magazine #11, Responsible Leadership and Sustainable Business Practices.
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