Financial Implication of Human Resource Management - Case Study Example

Financial Implication of Human Resource Management Table of Contents Introduction 3 Importance of Human Resource Management 3 Background of John Lewis Partnership’s Operations 3 Human Resource Management of John Lewis Partnership 4 Outcome of the HR policies 6 Conclusion 8 Reference 9 Introduction Every organization needs human labour force to run a business operation. The labour force is as important as any other resources of the organization. Just as the management spends financial capital to purchase assets, likewise it also spends a considerable amount of money as the salaries of the employees and workers, who are essential to the seamless operation of the business process (Bratton and Gold, 2010). The Human resource management was developed to manage the human work force of an organization, by making certain policies for their recruitment, compensation, and retention. Often times, the human resource management (HRM) department is considered inferior to other departments like finance and marketing, as it does not contribute to the revenue generation of the organization directly (Davis, 2011). This paper focuses on the financial aspect of the human resource management as it discusses its importance in the organization. It highlights the fact that HRM department is wrongly underrated, because it also contributes to the revenue of the firm. In this study, the case of John Lewis Partnership has been highlighted to point out the financial importance of the HRM in an organization. Importance of Human Resource Management The human resource management (HRM) is described simply as proper allocation of human capital in the right time and in right place. By the proper allocation of the work force in all the departments, an organization is able to increase the overall efficiency of the firm (Lundy, 2008). The increased efficiency eventually leads to higher revenue generation and avoids resource wastage by inefficient usage. Thus it is clear that the financial importance of the HRM lies in the efficient use of human resources in such a manner that the financial investment made in the HR department gives proper return. The return on investment of the HR department is determined by the financial output of all the other departments and the organizational output as a whole (Price, 2011). Background of John Lewis Partnership’s Operations According to Woods (2012) John Lewis partnership (JLP), unlike any other retail firm, is run by the employees who pose as the partners of the business operation. The management is run by a trust which operates on behalf of the employees. JLP has put the HR department in the in the centre of the management decision making. The HR department is prioritized so much that Andy Street, one of the personnel director made his way to the position of Managing Director (Cunliffe and Craik, 2014). The concept of partnership allows the employees or partners to enjoy benefits from the company’s profitability. The job satisfaction of the partners is given top priority, which is the key factor behind the success of the organization. The higher effectiveness of the employees is due to the fact that they are highly satisfied with the work environment and with working with other colleagues. Thus it can be stated that The HR department has successfully taken care of the partners so that they can work efficiently and add to organizational value (John Lewis Partnership, 2014a). Woods (2012) also added that previously the company never paid much attention to the importance of the HR department, but now the company is working its way to create an integrated management system where the human resources are prioritized to build synergy among the company’s different value chains. Human Resource Management of John Lewis Partnership The 2007 business review of the company revealed that the HRM department of JLP had a lot of implications to the development of the company. The overseas business expansion needed new recruitment in the firm. The employees working in smaller outlets complained about not receiving similar facilities as those of the larger stores. JLP’s communications and priorities differed across stores, and as a result the employees were more concerned about their rights and neglected their responsibilities (case study). These issues were addressed by making certain amendments in the human resource policies. The HR department tried to bridge the gap between the line managers and the partners so that they maintain a good relationship with each other. New recruits were chosen carefully based on their skills and abilities and also their compatibility to work in the company’s environment. The flexibility of work life balance was also given full attention. As a result, the employees stared to take their responsibilities seriously, by providing the better services and experiences to the customers and thus generating more profit for the company (The Telegraph, 2013). The human resources or the employees are considered as partners in the business operation. The management makes sure that all the partner’s interests are met and they are fully satisfied. The HR department has designed its strategies to make sure that the partners are always motivated to stay in the company and the management also ensures that the partners feel like they are part of a family. The Annual bonus program of the company dictates that there will be no individual bonus based on the performance of the employees, rather they will be awarded based on the profitability of JLP and also based on their qualifying pay (Cunliffe and Craik, 2014). This way the partners will be obliged to work with more sincerity to increase the profitability of the company. In order to ensure fairness, the HR department has decided to award the partners irrespective of individual store’s profit or loss (Street, 2006). The company has also mentioned that each staff is a customer on its own. Almost 95% of the company’s recruitment is seasonal in nature, where the new recruits work for a particular period of time. JLP makes sure that all the candidates carry a good brand image when they leave, so that this perception is further carried forward to the potential customers. The HR department makes sure that each and every staff, whether he/she is permanent or temporary, is given proper attention and their interests are fulfilled (HR Review, 2013). The company has structured its policy in such a way that any form of conflicts between the financial goals and the partner’s interests can be avoided. In order to do so, the HR policies has incorporated the profitability with the individual partner’s activities. Unlike other companies, where the relationship among the company, customer and profitability is depicted as a straight line, JLP’s model follows a circular pattern among the partner, customer and profit making (SkyNews, 2013). Figure: The Partner-Customer-Profit circle of JLP. Source: (Street, 2006) The circular pattern shows a greater financial success of the company owing to the partner’s share of the profit. This circular trend drives the partners to commit themselves to bring more profitability to the company, which in turn adds up to individual pay. The partners are given market leading benefits and they are also provided with competitive pay scale, to make the partners more ambitious, which is termed by the company as “Employer of Distinction”. The motivational reward for hard working comes in the form of monetary reward, which varies depending on the individual’s performance (Street, 2006). Outcome of the HR policies According to Street (2006), the democratic culture of JLP has been working out successfully for over 75 years. The company has attained a high level of staff retention, because the staffs feel like being part of a family, where each individual is taken care of by the properly designed HR policies. The low attrition rate and low absenteeism allows the company to have a higher level of workforce momentum which in turn translates into higher revenue generation and low resource wastage. A closer look at the company’s financials clearly reflects how JLP’s investment on its human resources adds up to the revenue generation. Particulars 2014 2013 Revenue (£m) 9027.8 8465.5 Gross Profit (£m) 3018.9 2825.4 Wages and Salaries (£m) 1272.1 1162.3 Social Security costs (£m) 97.1 88.5 Partnership Bonus (£m) 180.2 187.4 National insurance on Partnership Bonus (£m) 22.3 23.4 Other pension costs (£m) 175.7 137 Leave costs (£m) 7.5 5.4 Partner Discount (£m) 63.3 57.4 Total cost of Partner Benefits (£m) 1817.2 1661.4 Source: (John Lewis Partnership, 2014) From the above table, it can be stated that the company has spent a significantly higher amount of capital on the Partner benefits than the last year, in order to keep the partners satisfied. The company has made hikes on expenditures like wages and salaries, social security costs, pension costs, etc. The increase in expenditure is reflected as a positive impact in the revenue and profit of the company. The rise of partner benefit expenditure from £ 1661.4 m to £ 1817.2 m has resulted in rise of revenue from £ 8465.5 m to £ 9027.8 m and rise in gross profit from £ 2825 m to £3018.9 m (John Lewis Partnership, 2014). Conclusion The unique business model of JLP has allowed the employees to enjoy partnership privileges and other financial perks. The employees are treated as members of a family and utmost care is taken so that their interests are met. The HR policies are designed in such a way that the partners receive a portion of the profitability of the company; this as a result increases their motivation to work even harder and thus adding more value for the company. The circular relationship model of the company portraying a close relationship between the partners, customers and profit making, explains why this business model has brought success for the company. Thus it can be stated that prioritizing the human resources, by spending more capital and attention on them do not pose as an added cost to the company, but rather this has helped JLP to increase its revenue and improve its brand image. Reference Bratton, J. and Gold, J., 2010. Human Resource Management: theory and practice. 4/e. Germany: Grin Verlag Cunliffe, P. and Craik, D., 2014. Employee ownership is key to John Lewis success story. [online] Available at: < http://www.express.co.uk/finance/city/471308/Employee-ownership-is-key-to-John-Lewis-success-story > [Accessed at 14 December] Davis, A., 2011. The Definitive Guide to HR Communication. 4/e. London: Palgrave Macmillan HR Review, 2013. John Lewis shares the lessons of its retail recruitment revolution. [online] Available at: < http://www.hrreview.co.uk/supplier-news/supplier-recruitment/john-lewis-shares-the-lessons-of-its-retail-recruitment-revolution/42793 > [Accessed at 14 December 2014] John Lewis Partnership, 2014. John Lewis Partnership Plc Annual Report and Accounts 2014. [online] Available at: < http://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/financials/annual%20reports/JLP-annual-report-and-accounts-2014.pdf > [Accessed at 14 December] John Lewis Partnership, 2014a. Employee ownership. [online] Available at: < http://www.johnlewispartnership.co.uk/csr/our-employees/employee-ownership.html> [Accessed at 14 December] Lundy, O., 2008. Strategic Human Resource management. 4/e. London: Palgrave Macmillan Price, A., 2011. Human Resource Management. 4/e. Hampshire: Cengage Learning SkyNews. 2013. John Lewis: Profits And Bonuses Rise Strongly. [online] Available at: < http://news.sky.com/story/1061359/john-lewis-profits-and-bonuses-rise-strongly > [Accessed at 14 December] Street, A., 2006. Releasing profits to partners at John Lewis Partnership, Strategic HR Review, 5(4), pp. 12 – 13. The Telegraph, 2013. Staff at the heart of the John Lewis success story. [online] Available at: < http://www.telegraph.co.uk/finance/comment/9916763/Staff-at-the-heart-of-the-John-Lewis-success-story.html > [Accessed at 14 December] Woods, D., 2012. Interview with Tracey Killen, group personnel director at the John Lewis Partnership. [online] Available at: < http://www.hrmagazine.co.uk/hro/interviews/1020648/interview-tracy-killen-personnel-director-john-lewis-partnership > [Accessed at 14 December] Read More