JILPT Research Eye
Valuing Internal Human Resource Development in the U.S. Companies

October 18, 2016
(Originally published on June 10, 2016 in Japanese)

Ken YAMAZAKI

Senior Researcher, International Affairs Department

Signs of a shift to internal human resource development

Should companies develop and foster internal human resources, on the assumption of long-term employment? Or should they hire external human resources already equipped with the necessary skills when needed? These two conflicting approaches have been discussed as ways of improving corporate competitiveness.

The ways in which companies utilize human resources are an important element in boosting their market competitiveness. The superiority of US-based multinationals in making flexible use of external human resources has often been pointed out, in contrast to the internal human resource training practiced by Japanese companies. On the other hand, there have also been calls for a re-appraisal of Japanese-style human resource development through in-house career development premised on long-term employment.

But does it really come down to a straight choice between these two alternatives, i.e. whether to train human resources in-house or to procure them externally, with a view to raising corporate competitiveness? Over the last few years, I have been involved in some surveys on the use of human resources by US-based multinationals, and have started to think that things aren’t quite so simple.

One such survey provided some interesting results on this question. The survey was conducted by Spencer Stuart, Inc., which periodically surveys the ratio of internal CEO promotions in Standard and Poor’s 500 companies. Over the four years from 2012 to 2015, the ratio of companies with internally promoted CEOs rose to 74%. Since this ratio between 2004 and 2007 was 63%, it has clearly risen year on year. This would seem a surprising result in view of the generally assumed image of the U.S. companies.

Although having said that, some may think that this is just a trend limited to employees with CEO or other executive status. Behind this would lie the following assumptions of employment styles in the U.S. companies:

"Elite earmarked for promotion to executive posts first obtain an MBA at a famous university, then are given special education on the entire corporate activities in general. In exchange for work with unlimited scope, considerable responsibility and long working hours, they can enjoy salaries at high levels far exceeding those of ordinary employees. Conversely, ordinary employees have limited scope of work, therefore their salaries are not so high and working hours are also not so long. This makes it easier for them to be replaced by external recruits. As a result, ordinary workers repeatedly change jobs after short tenures because they are only hired when needed, and in the numbers needed, in line with the company’s needs."

Overseas ventures by Japanese companies and changes in employment management in European and American companies

However, a completely different image emerges from existing research and the actual situations in companies that I have surveyed.

In the 1990s, the U.S. research group conducted an international comparative survey on changes in employment management. The results were compiled in Converging Divergences – Worldwide Changes in Employment Systems. This made it clear that there is diversity in the employment practices of the U.S. companies, and that this diversity has been influenced by Japanese companies. The motivation behind the survey was to ascertain how the employment practices of Japanese companies, which gained considerable competitiveness in European and the U.S. markets in the 1980s, have influenced employment management in other countries.

Starting in the 1980s, in the U.S. and elsewhere, there was a boom in research on the source of Japanese companies’ market competitiveness. This in itself shows how threatened markets in other countries were by Japanese companies. That was the motivation for the research. As a result, it became clear that Japanese companies excelled in organizational efficiency. The cause of this lay in close sharing of information and collaboration between and within departments, and this was the fruit of employment management. In response, companies in other countries started making efforts to maximize their organizational efficiency. However, this did not necessarily mean a convergence of methods on the single model of the Japanese style. This is what is meant by the “Converging Divergences” in the title.

The survey results were broadly divided into two groups according to whether a labor union had been organized or not. On that basis, the two were further classified into three patterns in terms of source of competitiveness. The first was absence of change in conventional methods (Ford System), the second low cost, and the third organizational strength.

In fact, none of these correspond to the stereotype of the U.S. companies’ employment practices as seen from Japan’s perspective. That is, they only fit in some aspects, but not in others. Thus, rather than comparing to the stereotype, it might be better to say that they present a different image overall.

From Japan’s perspective, the employment practices of the U.S. companies have generally been understood as follows: they are mainly focused on mid-career hiring, strictly defined job description with narrow scopes, job-based pay across the market, performance-based evaluation, and expertise-oriented promotion, as well as ability development based on workers’ own self-responsibility, short years of service, and manpower management tailored flexibly to total payroll cost and business strategies of the company. This understanding is not necessarily mistaken when each of these elements is taken in isolation. However, Converging Divergences – Worldwide Changes in Employment Systems made it clear that, by means of the combination of these elements and the operation of the system, these practices have changed to systems of employment management not totally different from those of Japanese companies when it comes to competitiveness. Japanese companies have had an even bigger influence on global employment management than was previously thought.

Patterns based on maximizing organizational efficiency as the source of competitiveness have been classified as the “joint team-based type”, the “human resource management type” and the “Japanese-affiliated company type”. What is common to these three types is that they broaden the scope of each individual’s work, as well as introducing remuneration systems that stimulate independent teamwork and skill development, guarantees of long-term employment, well-developed employee welfare, etc. Some of these systems partly resemble those of Japanese companies, while others do not. However, the important thing about the systems is not whether they resemble those of Japanese companies, but their very essence. It should be noted that, by encouraging motivation in each individual employee, these systems stimulate collaboration between workers who belong to some kind of team, and this leads to enhanced organizational efficiency.

Human Resource management in terms of maximizing organizational efficiency

Examining how individual companies increase their corporate competitiveness leads us to discover the essence lying behind each individual system. In Japan also, employment management changes according to the business environment. Focusing on hiring, a difference emerges depending on whether companies mainly hire mid-career employees or new graduates. The same is true of the U.S. companies.

The important thing is to discover where the source of corporate competitiveness lies, rather than differences between systems and customs.

This may be easier to understand if we compare it to a sporting event like the football World Cup.

World Cup squad of each country has different characteristics, ranging from average height, stamina or agility, to the social environment, lifestyle habits and method of communication. Tactics also differ. National teams use different formations and different combinations of forwards, midfielders and defenders, with tactics appropriate to each. But they all have one thing in common. They all need to score more goals and concede fewer goals than their opponents. And toward that common objective they are all making efforts to increase their organizational strength.

For that, “teamwork” between the players is an essential element. Specifically, players will move outside the limits of their own positions to help teammates; defenders will attack the opponent’s goal when appropriate; and conversely, forwards will defend their own goal when under attack. “Teamwork” is harder to achieve if the players all stick to their own positions. They have to look beyond their positions and focus on the direction of the team as a whole. And to this end, they not only repeatedly practice “teamwork”, but also try to increase each player’s ability to master a wide range of roles. Individual skills cannot be improved overnight, nor can “teamwork”. The more intense the competition, the higher levels of individual skill and “teamwork” will be required, and tactics will also continue to evolve.

The same could be said of a company. Amid a rapidly changing business environment, methods of boosting organizational strength will also change. And for that very reason, a certain amount of time should be devoted to fostering the human resources that form the core of the company.

Strategic human resource management and advances in ICT

Some twenty years have passed since Converging Divergences – Worldwide Changes in Employment Systems was published. How has employment management by American companies changed since then? To answer that, I will introduce some facts collected from company surveys in which I have been involved over the last few years.

The biggest changes over these twenty years are the advance of globalization and the growth of information and communications technology (ICT). Globalization has intensified cross-border competition between companies. To address these developments, companies have started to employ strategic human resource management. And behind this lies the advances in information and communications technology.

Let me explain this a little more simply.

Models of employment management that were classified in the 1990s – the “joint team-based type”, the “human resource management type” and the “Japanese affiliated company type” – were ways of encouraging collaboration and raising organizational efficiency by stimulating motivation in each individual employee. These are known as human resource management methods. When business strategies are superimposed on these, they will be strategic human resource management.

Globalization led to competition by the maximization of organizational efficiency by a number of corporate groups, based on cross-border M&As and partnership relationships. This trend accelerated in the first decade of this century, and it involved the formation of corporate groups on a global scale. What made it all possible was information and communications technology. As a result, companies anywhere on the planet and workers living anywhere could now be linked together.

Here, “corporate groups” refers to both those formed through horizontal tie-ups in relationships of equals, and others formed through vertical tie-ups that could be called contractor-subcontractor relationships. Companies form corporate groups through partner relationships for short-term projects or outsourcing designed to reduce costs, etc., while keeping core parts indispensable to execute their business strategies inside.  The aim was to maximize organizational efficiency within these horizontal and vertical tie-up relationships, respectively.

Business strategies are created as part of the whole picture of the corporate group. Strategic human resource management is to be superimposed over these business strategies. Maximization of organizational efficiency through horizontal and vertical tie-up relationships was added to human resource management, which was designed to maximize organizational efficiency by stimulating motivation in each individual employee and encouraging collaboration. As a result, human resources that were expected to play core roles were kept inside the company, while others were sourced from outside.

Let me now identify the difference between the two.

Teamwork and collaboration are demanded of human resources that are expected to play core roles. The aim is to maximize organizational efficiency through these. To this end, while making each worker’s scope of work vaguer and broader, wide-ranging inter-departmental transfers and the accumulation of specialist knowledge are promoted. This cultivates experience and knowledge that can give an overview across the whole of the organization. This is not limited only to top management in executive positions. When production sites play a core role in terms of business strategies, it also includes blue collar workers.

By contrast, human resources responsible for short-term projects within horizontal partnership relationships, and routine work leading to cost reductions rather than core work, are sourced from outside the company. In other words, by outsourcing human resources with specialist skills that are needed in the short term and human resources responsible for work of a limited nature, companies aim to maximize the organizational efficiency of the corporate group as a whole.

Talent-oriented jobs and task-oriented jobs

How are workers in charge of core roles trained and managed? The answer is well expressed in a phrase I heard during interview surveys with the U.S. companies.

That phrase is “talent-oriented jobs”.

“Talent” is a composite expression of an individual’s latent ability, contribution to the team and attainment of targets. Companies have started to make individual workers’ scope of work vaguer in order to introduce “talent-oriented jobs”. On top of that, they are separating employee evaluation from their job descriptions. In the U.S.  companies, there is a job description stipulating each individual’s job category and work content. In the past, companies used to evaluate individual workers based on this job description. There has appeared a change, however, in the form of breaking down the one-to-one relationship between this job description and evaluation.

Let me explain this in a little more detail.

Workers are evaluated annually and quarterly. To do this, a discussion is held between immediate superiors (line managers), mentors, human resource representatives, managers of the relevant division, and others. This discussion mainly revolves around assessing how greatly the employee has fulfilled the role expected of him or her. The evaluation is aimed not so much at the content of the job description but rather at work duties over a broad scope, latent ability, contribution to teamwork and other activity.

Latent ability means knowledge or ability that is not needed in the employee’s current duties but will be needed in future, while contribution to teamwork refers to duties that overlap with those of coworkers, training of juniors, etc. This is not so much a question of how well the content of the job description has been performed, but how far the activity expected by the company has been carried out.

During such evaluation, consideration is also given to personnel transfer, including the desirable department or section to which the worker being evaluated should be transferred. It is often thought in Japan that personnel transfers in the U.S. companies are based on the wishes of the individual concerned, not on orders from the company. And this is certainly true if we only look at the system superficially. This is because a person cannot be transferred unless he or she wishes to be. In reality, however, it is difficult for workers to flatly refuse a career plan presented by the company. And so, although it looks as though the individual concerned ultimately has the right to decide, he or she is encouraged to go along with the company’s intentions.

This may be easier to understand if we think of talent-oriented jobs as compared to the contrasting employment practice of “task-oriented jobs”. “Task” refers to work duties limited to the content of the job description. This is closer to the general Japanese perception of the U.S. companies’ employment practices. Evaluation is limited to the job description, and neither latent ability nor contribution to teamwork is taken into account. Evaluation is targeted solely at actualized ability as the necessary ability actually exhibited in order to fulfil the job description. With this employment practice, there is no prospect of stimulating an individual’s motivation or encouraging collaboration.

For sure, task-oriented jobs were the conventional working style in American companies. Today, however, many companies are attempting to switch to talent-oriented jobs.

The companies visited for the survey, though not necessarily using the word “talent”, all showed a similar trend. Just as the “joint team-based type”, “human resource management type” and “Japanese affiliated company type” were found twenty years ago, change had already started to happen then.

The age of strategic human resource management

Now that we have entered the age of strategic human resource management, changes have appeared in various aspects. The move to increase quota for hiring new graduates from specific universities through partner relationships is an example. Though little known in Japan, many US-based multinationals have been hiring new graduates through specific universities, albeit on a limited scale. Their aim is to accelerate the selection and training of human resources that are expected to play core roles by strengthening such relationships.

Companies with labor unions are also in the process of change. Agreements on introducing talent-oriented jobs for blue collar workers are already being concluded with labor unions. This has reinforced the maximization of organizational efficiency of companies where their source of competitiveness is in production sites.

Relationships with human resource service providers are also changing. Although most hiring has conventionally been undertaken through existing connections and human resource service providers, these were often transient relationships. But now some human resource service providers are starting to form long-term partnership relationships that will last ten years or more. The aim of this is to share the image of human resources who are responsible for core roles in the partner companies. In other words, they introduce human resources that have the “talent” appropriate to the company. Just as when two companies build a long-term partner relationship, long-term employment relationships are also expected of the human resources hired.

The education and training provided by companies are also changing. An awareness has arisen about how to enhance “talent.”

On the other hand, moves to outsource task-oriented jobs are also accelerating. This involves the appearance and rapid expansion of “sharing economy”, a business model that links service providers to users through smartphone applications. Here, core roles are borne by human resources that develop business models or build entire systems. These people are managed in the framework of talent-oriented jobs. Meanwhile, the direct providers of services are the people responsible for task-oriented jobs. Such service providers are individually contracted workers. In relationships with companies, they are positioned in vertical teamwork, i.e. the contractor-subcontractor relationship. On that basis, since they are contracted labor, they are positioned outside social security including public health insurance and pensions, labor standards such as working hours and minimum wages, and the right to organize labor unions and negotiate labor conditions with the company. Workers placed in such a situation are rapidly increasing, and this is now highlighted as a social problem.

On the one hand, management with emphasis on human resources responsible for core roles is progressing, while on the other, horizontal and vertical collaborations are also progressing, which involves problems of individual contracted labor and social security. Here again, it must be noted that the human resources responsible for core roles are not a handful of elite but are human resources that take care of important divisions, in terms of business strategies. As such, of course, they may sometimes include blue collar workers.

These developments in the US are not irrelevant to Japan. They are happening on a global scale. For that very reason, we need to conduct multi-angle surveys and research on subjects including horizontal and vertical teamwork and differences in educational systems, culture and customs, involving more than just one company. In the process, we must always bear in mind that the previously assumed employment practices of the U.S. companies are no longer what they once were.

References

• Joann S. Lublin [2016] More CEO Jobs Are Going to Inside Candidates, The Wall Street Journal, March 8, 2016, online edition.
• Katz, Harry C., Darbishire, Owen, [2000]Converging Divergences – Worldwide Changes in Employment Systems, ILR Press.
• Spencer Stuart [2016] 2015 CEO Transitions, Spencer Stuart website.
• Kuroda, K., Yamazaki, K. (2012) Furekishiburu Jinji no Shippai (“The Failure of Flexible Personnel Management”), Junposha.

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